1031 Exchanges & Investment Properties

One of our superstar agents, Will Dean , has tons of experience with rentals and in property management.

Will is seeing more 1031 exchanges (see definition below) and people using property as investments or Airbnb both on the buy and sell side. Nationally, CoreLogic reported that investor purchases accounted for 26% of all home purchases in the 3^rd quarter of 2021, a new record amount. Many from the northeast and elsewhere are moving or exchanging to Florida. There are a multitude of reasons for this. Florida rental laws are advantageous, favor the landlord (although on Friday Lake Worth passed a law stating that rental increases needed to be given 60 days in advance), and we have no state income tax.

Even Wall Street is moving to Florida!

Hedge funds with deep pockets and experience in managing thousands of single-family homes at scale are investing in Single Family Homes to rent.

View the story by WPTV and Jeff interviewed by WPTV on Florida Homeowners getting Squeezed by Investment Firms.

Single Family And Multifamily Rentals Will Remain Strong

For sale home prices rose 19.5% in 2021, and are expected to rise another 11% in 2022, despite the probability of higher mortgage rates. This red-hot market is pricing many young families, who would prefer a single-family home, out of the market. Enter the single-family rental (SFR) sector. Driven by large institutions that see a long-term investment opportunity, a niche sector that had typically featured one-off mom-and-pop rentals is now seeing a surge of professionally managed portfolios of homes. One of the largest real estate investors in the country, Blackstone, is sponsoring a new REIT focused on single-family rentals. This is no longer an interesting side play. SFRs look like a trend that is here to stay, as evidenced by the fact that 18% of the single-family homes sold in Q3 2021 were sold to investors.

The National Association of Realtors forecasts that the vacancy rate will further tighten to 4.8% in 2022 (5.1% in 2021) and rent growth to average at 10% (7.8% in 2021). One of the main forces behind the rental market upswing is the Covid-driven work-from-home trend. Once workers realized they could work from anywhere, many took advantage of the flexibility to move out of high-cost-of-living markets to more lifestyle-friendly parts of the country.

(Source) https://www.forbes.com/sites/forbesbusinesscouncil/2022/03/14/three-real-estate-investing-trends-to-watch-in-2022/?sh=6f8b5c29674e

What is a 1031 Exchange?

It’s a provision in the Internal Revenue coding which allows owners of investment property or a business to defer federal taxes for exchanges of real estate.

The provision is used by investors who are selling one property and reinvesting the proceeds in one or more other properties. It is not available to buyers or sellers of personal homes for their own use. It is not available to someone who just wants to use their primary home for a 1031.

If you are interested in a 1031 or investment property, there are lots that you must be aware of….

Analyzing property

Community Rental restrictions, such as having to own a property for 6 months, 1 or 2 years before may rent or no renting at all. We know one story that will give a better idea as to why this is important. The rental agent of this property didn’t know the restrictions. The tenants turned homeless. https://www.youtube.com/watch?v=E89cslpzCcc
Pet restrictions can be different for owner and renter and that limits prospective tenants
Property Tax, HOA or Condo fees, Insurance, AC maintenance, Dryer Vent, Pest Control, Filters, Replacement of major systems, budget
ROI, Return on Investment
Cap Rate or Capitalization rate is a valuation measurement to compare different investments. It’s important to know as it shows your return on investment if your property is rented.
Cash on Cash return. This measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year.
Vacancy rate, generally 5-10%
Capital expenditures otherwise known as Capex Funds required to maintain asset/ property, physical assets such as AC, Hot Water Heater, Dishwasher
Some are minor like a leaking toilet that needs a plumber and others like roof replacement are much more.

With annual increases on rent and expenses mentioned above, what can you expect? In a normal market 3-5% increases are typical.

If you are exchanging property, here is what you can expect….

1031 Exchange Important Points to Understand

Property Qualifications – the properties involved in a 1031 Exchange must be held for business or investment purposes. Any type of real property qualifies for 1031 exchange, Residential or Commercial, and they are all interchangeable with each other.
Tax Deferral – to defer 100% of the tax liability you will need to (a) reinvest all of your net proceeds (b) purchase property equal or greater in value and (c) acquire and equal amount or greater debt. In lieu of debt, offset debt with cash or a combination of both.
Timeline – the 1031 exchange must be completed within 180 days.
Identification – potential replacement property must be identified on day 45 of the exchange. After Day 45, no changes can be made to ID Letter, so please plan accordingly.

Property management is a value provided that few Realtors have.

Determining the right rental rate
Reduced landlord risk, below bullet points
- Understanding fair housing laws
- Discrimination
- Emotional support animal laws
- HOA/ COA rental rules and restrictions
- Florida Statute 83, The landlord tenant act
- Personality management, ice cubes are never cold enough at 3 o’clock in the morning:). True story!
- Rent collection, paid to landlord via ACH debit
- Emergency and regular Maintenance oversight
- Qualified vendors ready to respond on quick notice
- Preventive maintenance “recommendations” to reduce cost long term
- How to maximize cash flow through creative lease terms, think repair deductibles and advanced notice to renew or vacate.

Jeff Lichtenstein is owner and broker of Echo Fine Properties, a luxury real estate brokerage selling real estate in Jupiter and homes in Palm Beach Gardens, Florida. He has 20 years of real estate experience, has closed over a 1,000 transactions, and manages over 50 agents in a non-traditional model of real estate that mimics a traditional business model. Some publications he has been quoted in.

Feel free to ask him a question directly at [email protected].