• No comps: I’m buying an updated four-unit complex in the trendy Montrose section of Houston.  There basically are two types of properties that you find in the comps: teardowns and new construction.  The building that I’m buying was originally built in the ‘30s, but has been updated with new wood floors, central air conditioning, a raised outdoor deck, and a number of amenities that make it a rare building.  Which means: there’s nothing to compare it to. Which in turn means: you have to trust your numbers because there’s really not much of a “market”. 
• Time pressures: The sale side of the 1031 was triggered by my selling the property to the tenant who I was renting to.  This was fortuitous in that I avoided vacancy, sales commissions, and all of the other hassles and expenses that are associated w/ marketing a property, but it also happened a bit quicker than I had expected – which meant that  I needed to be expeditious in my search in order to identify a replacement property within the IRS mandated 45 day window. But nothing like a deadline to keep you from getting paralyzed by the analysis. 
• Challenging negotiation: The goal of a negotiation is to efficiently reach a wise agreement in an ethical way.  This is easies when there is some alignment of the goals of the two parties and they negotiate directly. Well in this case the “alignment” part was potentially there. But the other elements weren’t. First: both the sellers and I were using agents – that in itself injects two additional degrees of separation into the negotiation, which makes effective communication more difficult. Add to this the fact that the seller was not a single individual; the property was owned by a group of three physicians who had teamed up on the investment, and who, based on their disjointed and confusing responses, had conflicting agendas. Messy. Once I get this deal tied up I’ll write about how some of the Getting to Yes principles helped keep the deal from stalling. 

But...looks like we're close to the finish line on this deal.  And appropriately, the deal is set to close on Friday the 13^th.  Not that I'm superstitious or anything...

...well not exactly tax free, but tax deferred at least.  Earlier in the year I mentioned a resolution that I'd declared for myself - to sell a high-end property that had built some equity via appreciation and re-invest in a multi-family via a 1031 tax deferred exchange. 

Here's a quick overview of how a 1031 works. 

A 1031 is an IRS code that allows investors to build wealth by exchanging properties while deferring taxes.  Any property may be exchanged for a "like kind" property.  Most real estate transactions fit this definition.  A rental property, for example, could be exchanged for a commercial or farm property. 

You'll need a "qualified intermediary" in order to execute a 1031 exchange.  In lay terms:  when you sell the property you're not allowed to touch the cash, otherwise the tax man is going to come knocking. 

When you sell the property, title is transferred to the buyer via the intermediary, and the proceeds of the sale are delivered to the intermediary.  At this point you have 45 days to identify replacement properties.  Within 180 days of the original closing you'll have to close on the purchase that you're making to complete the exchange.  

Here's the key: 45 days will go by like a flash.  If you haven't started the process of identifying the replacement property or properties before you close the sale of the property that you're relinquishing then you might find yourself in a squeeze. 

I'll talk a bit more about this in the near future....and discuss a project that I now find myself in the middle of.

It’s January 20th and I’m just now rolling out with my New Year’s resolution.  Seems like procrastination, but to me it’s a strategy.  See if I hit the gates with the rest of the masses and proclaim my goals on the first of January then inevitably right about now I end up realizing that my vows to hit the gym more frequently and to get my life more organized are unlikely to pay dividends.  Resolutions (promises) made in the heady first days of the New Year are usually doomed by an excess of optimism – and sometimes by the remorse of a champagne headache. 

So I get around to ticking off some to-do’s for the year towards the end of January, which ends up prompting me to set some boring but do-able goals that take me a few steps closer to where I’d like to be at the end of the year. 

And this year’s goal is to start practicing what I preach in two areas:

• First: Don’t hoard equity in an investment, and
• Second: Don’t  fall in love with a property.

These are good rules to live by, and ones I’ve talked about in the past in my writings.  And they’re also two rules that I’ve violated in one particular investment.  I own a townhouse loft in the Montrose district of Houston.  Towering floor to ceiling windows.  Acres of hardwood floors.  Street lined with majestic live oaks.  And, I happened to live there…and I happened to be living there when I met the woman who would later become my wife.  Fond memories.  So when we moved out I held on to it. 

It hasn’t done badly, all things considered.  Montrose is hopping, builders are building, and prices have started to tick up.  So it’s time to get rid of it, fond though I might be of the property.  Cashflow-wise the property does ok, but that’s because I bought it before the price ran up.  Now it’s time to put that equity to work. 

The graphic shows my plan: take the $130k in equity that’s sitting uselessly in this property and turn it into six multifamily units that will pay me $5,000 per month in rental income (vs. the $2,100 that the loft is generating).  And do it through a 1031 deferred tax exchange that will allow me to avoid paying capital gains tax on the profit. 

So now that I’ve publicly declared my resolution perhaps I’ll feel more compelled to stick to it.  I know a lot of investors have equity squirreled away in properties that have run up in value.  I’d love to have other investors join me in resolving to put that equity by pulling it out and investing it in bigger properties. 

…and , I trust someone will call me out in December and see if I’ve stuck to my goal.  We’ll see…

I'll write a post soon on the ins and outs of the 1031 exchange - the key to making this work.