I’m Four Months Into a 1031 Exchange—Now It’s All About Finding the Best Deal in the Haystack

We are less than a month away from listing our Brooklyn, New York condo, which we bought for $375,000 back in 2004, the same week we got married. 20 years, two kids, and one chocolate lab later, we are selling the condo for something close to $1 million and then flipping the profits into a new investment via a 1031 exchange. (New here? Catch up on the last few monthly missives!) 

As a reminder, we haven’t made much cash on this property over the past 20 years. The growth has been all equity—and now’s the time to cash in!

So far, we’ve locked our Brooklyn sell team and had some great meetings with developers and realtors in our top five markets, which include:

1. San Antonio
2. Dallas
3. Cleveland
4. Jacksonville
5. Tampa/St. Petersburg

Deal Flow

We’ve started to see deals trickle in. But we realized last month that we just weren’t seeing enough properties to make good decisions, so we re-doubled our efforts to widen the deal fire hose even more. We went to BiggerPockets Agent Finder and searched for agents in our target markets. Then, I spent the next week or so having live conversations with each of them, sharing our buy box and desire to see more great options. That certainly did the trick: Now, my email inbox is full of potential multifamily deals, ripe for underwriting.

Getting Good at Underwriting 

We made a goal this month to underwrite at least 50 properties that could be real contenders. We’re not there yet, but this has already helped us in multiple ways:

1. It got us much better at underwriting.
2. It allowed us to see patterns so we could easily eliminate properties by glancing at the initial numbers without going all the way through full underwriting.
3. It gave us a much, much better sense of the lay of the land.
4. To sleep better at night, we realized we wanted to be conservative with our estimates across the board.

Targeting New Builds

One thing we learned doing this is that if we want a turnkey, newbie-friendly new build, at least for the first few years of ownership, we probably won’t be able to hit our 5k cash flow/month goal in every target market. 

New builds have advantages and disadvantages: They often mean less headache initially and certainly less spent on capex and maintenance. In some cases, they also mean purchasing directly from the developer, who can buy down interest rates—an amazing advantage in this environment. 

They also have drawbacks. When you close, they are, of course, empty. All that underwriting and those cash flow per month calculations don’t come true until you fill the thing with tenants. You hope that happens in a few months, but you never know. Likewise, rents are unproven. You can and do take your best, data-backed guess, but until your first tenant signs that first lease, you just never know. And, of course, you pay closer to top dollar for new builds since the work has all been done for you.

We had to decide what new builds were worth to us.

We’ve also been looking at older buildings with existing tenants (and presumably existing building issues) with better cash flow. But we continue to be wary about taking on too much for our first big out-of-state purchase.

Here’s One Of The New Build Deals We’ve Been Circling:

• Brand new, eight units, 2.2 million purchase price (we should have around 850k cash to put down).
• Units are 3/2.5.
• Medium to high appreciation market (we have been using 2%/year in our calculations, but it should be much higher).
• The developer is buying down the rate significantly.
• Opportunity for MTR (medium-term rental) if we have issues getting LTR tenants.
• We worked property management into the analysis.
• Cash flows about 4k a month after stabilization.

It may not be a home run, but it could be a solid base hit to get us started. What do you think?

Our 1031 Journey So Far:

January: Selling our Condo, the Beginning

February: Getting the sell side situated

March: Is a 1031 Exchange Really Worth It?

This 1031 diary will be a monthly series through 2024, chronicling our journey to a (hopefully) successful and profitable 1031 exchange kicking off in May. We’ll share everything—all the numbers, the analysis, the good decisions, what we wish we’d done differently, the big mistakes (hopefully not many), and everything in between. Have questions? Got advice? What are we missing? Share in the comments below!

Find the Right Agent, Find the Right Property

Step #1: Use Agent Finder to match with top investor-friendly real estate agents to help you find, analyze, and close your next deal.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.