How do I do a 1031 Exchange?

First - What is a 1031 Exchange? The Internal Revenue Service allows a tax deferment strategy called a 1031 exchange. For the purposes of this information, we speak about using it for an investment property, but it can be used in the sale of other items too, such as machinery.

The idea behind this strategy is that after you have held a property and decide to sell it, it will sell for a profit above what you paid for it. But you don’t want to pay taxes based on the gains from that sale when you can re-invest that capital into another investment (and hopefully more earnings down the road).

Here are the basic steps in order to accomplish a 1031 exchange.

what is the most important part of the hard money application?

hard money or private money has different requirements than conventional or bank money

Because hard money lenders have a different focus than bank money, the weight of different elements of the application is varied.

A hard money lender wants to focus on the deal - tell us about the property. This is a part of the application that the lender will want you to be an expert on. It will give them pause if there are questions you have not thought about or you don’t know. Things to consider:

1. Purchase Price or Maximum Offer Price

2. After Repair Value - what will it be worth after you improve it?

3. Exit Strategy

   1. will you be fixing and flipping the property? your exit strategy is the sale.

   2. will you be improving and renting the property? your exit strategy may be a refinance.

   3. are you expecting another property to sell or a large cash inflow? you may be planning to pay off the loan direct with the lender.

4. What are your planned improvements on the property? And what will that cost?

   1. are you adding square footage?

   2. replacing appliances?

   3. repairing structural issues - like roof or foundation?

   4. if you are improving vacant land, have you met with the building authority for what they will require and what entitlements will cost?

   5. based on the comparable properties surrounding the area, what do the improved homes have that your home needs?

5. Do you have reserves for if things are more expensive or go wrong? any built-in contingency plans? are there things you can save on without affecting the future repair value?

You can make your future lender feel more comfortable by being an expert on your deal. They will place less weight on your personal financial picture. If you don’t know an answer, just make sure that you can get that information to your lender in a timely fashion. Do not make up an answer if you don’t know it. If there is a problem on the property in the future, your honesty will be very important to your lender. This will make for a much better working relationship.

What is Hard Money Lending?

you’re looking to invest in real estate and keep hearing about hard money lending or private money lending, but what is it?

What Types of Real Estate Investments are There?

you’ve heard all of the quotes…they’re not making any more land…how many millionaires have been created by real estate investments, and now you want in. Where do you start?

If you are looking to actively invest in real estate, there are different ways to do it. Often, investors specialize in a certain type of real estate investing.

Consider Remodeling a Condominium Unit

condo remodel - aurora

Pros: Lower Risk. When purchasing a condo unit, you’re remodeling the interior of the space, so you normally will not have to be concerned with the building’s integrity. Although, you should always investigate the building’s issues and the ability of the owner’s association’s ability to work through it. Condominiums are often less expensive than houses, so there is an easier entry to purchase.

Cons: The HOA mentioned above can often be expensive. Because they insure the building and often provide additional services like utilities, trash, amenities. These add to your holding costs should the unit take a while to renovate or stay on the market. The upside is more limited than single family. It isn’t possible to add square footage or improve the exterior which often lead to higher profits in other types of real estate investing.

single family

Remodel

Looking for more risk, but possibly more reward? Consider Remodeling a Single Family Residence

Pros: As stated above, there are more possibilities for making a higher profit. A distressed property can be improved in many ways

Cons: generally, you have more money invested than condos which could lead to less capital available or more holding costs. Fixes are also generally required on the exterior and interior of the home in order to improve value.

new construction

Single Family

Build a Single Family Residence

Pros: Potential buyers have interest in new construction homes, especially today when inventory is very low. There is a significant potential for profit when you create something that the market needs. There are some controls that can be made when designing a home to make things less expensive vs. having to work with whatever mystery problems arise in fixing an existing home.

Cons: There is more risk to building a new construction home than remodeling an existing home. Lenders are looking for investors with more experience and capital in order to finance a new construction home. Holding costs are substantial. There are often more liability risk in building new construction should there be defects. Insurance and code requirements are more strict as well.

multi-family rentals

Own a Multi-Family Building

Pros: Often there are opportunities to finance the building where you can live in one unit and rent out others. Multiple tenants are in one area for ease of management and maintenance. You control a building rather than owning one unit in a building where you must vote or agree as owners or as part of an HOA to fix or improve things.

Cons: Multi Family buy and hold projects are desirable and more expensive. Generally when things break in a building, it will require more capital as multiple issues arise.

commercial buy and hold

Owning Commercial Property

Pros: There is a potential for more professional tenants. Tenants also normally want to stay longer term than residential tenants, because they want to establish their location, invest in its improvement and not move to hope their customers follow them.

Cons: These properties are more expensive and lenders are generally looking for more experienced investors in order to finance you. While the market is much larger to find a residential tenant, there are fewer commercial tenants.

residential lot

for future development

Land Speculation

Pros: If you are just purchasing land and not improving it right away, the costs can be lower than improved property. If you’re able to purchase unimproved land, the potential value increase could be quite large, especially if you were to improve the land yourself by annexation, platting or building.

Cons: Most believe that Land Speculation is some of the riskiest of investments. You could have to hold land for a long time in order to it to be in the path of development and raise the value. In this time, there are holding costs. Many lenders do not want to provide more than 50% LTV against vacant land.

We hope this provides you some helpful information. We would love to hear from you for what types of projects you are interested in investing in!

Hard Money Lending Myths

Case Study - Thornton Heights East Fix n Flip

BEFORE

New Investor’s First Flip

Basics

Purchase Price $248,000

Rehab Budget $40,000

Sold Price $366.000

Deal Profit over $30,000

Repairs Made

• Structural

• New Roof

• New Flooring Throughout

• Finished the Basement

• Replaced Furnace & A/C

• Added Landscaping and Improved Front Steps

Savings Idea

Investor was originally going to get new Cabinet Fronts or New Cabinet Systems, but decided that the cabinets were salvageable and instead painted the cabinets and fronts to save substantial money in the rehab budget.

AFTER!

progress photos below:

What is ARV?

ARV is so important to flippers, but what is it?

DIY Projects You Can Do in Your Rentals

If you are an active real estate investor, it is likely you have rental properties.

When getting your rental properties to cash flow, you need to save money whenever you can. If you are just starting out, it is possible to do quite a few things yourself to save on your maintenance costs. Below are some of the things we see real estate investors self perform:

Drywall Patches Between Tenants

Painting

(while certainly not a fun gig, if you have the patience, it can save you quite a bit of money)

Mini Bathroom Remodels

If you’re looking at ways that you could possibly look to increase rental rates, consider some upgrades. A little can go a long way to what a renter is seeing.

Carpet Cleaning

Renting a carpet cleaning machine from a local vacuum store or big box like Home Depot or Loewe’s.

Minor Landscaping

Curb Appeal like adding mulch can make your rental property more desirable to tenants

Replacing Light Fixtures

We hope that these ideas get your mind working to see how you could possibly save money by self performing some improvements to your rental properties between renters.

what is an accredited investor?

As you are getting started real estate investing, you might be seeing offerings for passive investment.

Some of these investment offerings require their investors be accredited. So what does that mean?

The full requirements are linked here:

Electronic Code of Federal Regulations

For an individual to be considered an accredited investor:

• their net worth (not counting their primary residence) is $1,000,000 + OR

• they make $200,000/year in gross income in the past 2 years OR

• they make $300,000/year in gross income filing jointly with a spouse in the past 2 years

These rules exist to help protect investors who could be “duped” by investment offerings, hoping that investing in these types of offerings wouldn’t be catastrophic for the average individual.

It is still very possible to invest in real estate without being accredited, but certain offerings are only available to those individuals.

Do I Need to Become a Real Estate Agent to Invest?

At TABS, we meet many new investors who frequently have questions about how to get started in real estate investing. A frequent question we receive is “Should I become a Real Estate Agent?”

Our Answer….it depends (I bet you didn’t see that coming)

Here are some pros

• automatic access to MLS

• access to view properties without scheduling with a real estate agent

• saving on paying commissions to a real estate agent

With that, there are some cons

• In Colorado, you are required to “hang” your license under someone for a period of 2 years. That company will likely have requirements that they be paid sometimes a monthly fee in addition to a cut of all sales. They will probably also have sales requirements.

• You’re new. So you would be learning two new trades rather than relying on the expertise of an experienced real estate agent. An experienced agent can help you navigate a decent deal, can offer up suggestions on what repairs buyers are looking for, can appropriately help price a home. They also have contract and negotiating experience that could be of help.

• There is more potential for liability with a license. A license requires insurance, which can create a target if someone is looking to sue

We hope this helps you make your decision.