1031 exchange - Posted by Angie

Posted by ray@lcorn on July 07, 2002 at 12:30:10:

Angie,

You don’t bypass single family residential regulations. They don’t apply to multi-family, so there is no need to bypass anything.

I suspect your relationship with BoA is in the form of several loans on SFRs? If so, that isn’t what I mean by relationship. I have found that banks like BoA are not suited for my business needs. I use primarly local independent banks, and I deal with the commercial lending side rather than the mortgage folks.

To do that you need a business plan showing what you’ve done and where you want to go, a financial statement of your present holdings, and a projection of how you will accomplish your goals and what your financial condition will look like along the way. Your pending deal with re-investing the 1031 proceeds is a great place to start. Take the time to think through what you want to do. Write it down. Then take the time to research a strong, business oriented local bank and its personnel. Contact the person in the highest position you can get to, even the President if you can. Then buy them lunch and use the opportunity to lay out your needs. After hearing you out, that officer is likely going to refer you to someone in the bank that will do the legwork necessary to get the accounts established. But because you started at the top, that puts them in the position of being overseen by their superior in how they handle you.

Lenders are in the business of selling money. We’re in the business of using money. There is a mutual interest there when the parties can establish that each knows what they are doing. Your job is to convey the fact that you know what you’re doing and where you want to go.

You might contact Ed about helping you with establishing a credit line. While that’s not the end all and be all of investing success, it is often the first step toward establishing a relationship with a lender on the basis of being in business rather than a passive investor.

ray

1031 exchange - Posted by Angie

Posted by Angie on July 05, 2002 at 17:55:57:

I am about to exchange a property that I have been told will sell for $70,000. I am unclear about what you think is best to exchange for, and how to structure the financing. I have other rental property that I have similar equity in, and would like to start a trend. Some things I read say go commercial, but I’ve never done any commercial real estate, and am ambivilent about this.

Could you give me some ideas as to what you would do with the 60+ thousand dollars if it were you.

Thanks,

Angie

Re: 1031 exchange - Posted by ray@lcorn

Posted by ray@lcorn on July 05, 2002 at 22:47:12:

Angie,

If you are that unsure about getting into commercial real estate then it is probably best to stick with what you know. Especially if the deal is already in progress, If you are doing a 1031 exchange then the time limits to complete the exchange are strict and canot be extended. That puts pressure on you to not only find a property and get it under contract, but at the same time you’ll have to learn enough about the property type to be comfortable with the deal. That’s a lot to tackle under a deadline.

As for the financing structure, if you are exchanging then you must trade equal or up in both equity and debt. I assume that since you have $60T in cash coming from a $70T property, there is $10T in debt? If so, then the replacement property must have at least $10T in debt and $60T in equity. You cannot touch any of the cash.

In practice, you would pyramid the equity into a larger property. For example, using the sixty thousand and garden variety 75% loan to value financing, you could leverage a residential rental property worth $240,000 with $180,000 in debt. That satisfies the requirements of the 1031, gets you up in scale of property, and keeps you with what you know.

For more information on the 1031 requirements see my article at http://www.creonline.com/art-159.html

ray

Re: 1031 exchange - Posted by Angie

Posted by Angie on July 06, 2002 at 09:28:05:

Thanks, Ray. No, the property is free and clear, but I expecting some closing costs.

I know the requirements of a 1031, but appreciate the insight about learning something new. I guess my question wasn’t phrased properly about the financing. I am concerned about getting financing in time to do the 1031. Most mortgage company’s require so much paperwork and are all concerned about your loan to debt ratios. Since we have other properties, we are always catching flack about this. We have great credit, but are just scared about the time restraints.

Thanks again for your post, Ray. We have always enjoyed and appreciate your information.

Re: 1031 exchange - Posted by ray@lcorn

Posted by ray@lcorn on July 06, 2002 at 10:11:24:

Angie,

Thank you for the kind words… sorry I misunderstood your needs.

I’m not sure what you mean by “loan to debt ratios”… do you mean “debt to income ratio”?

If so, then that tells me you are dealing with a residential mortgage lender. If you are going to leverage into a larger property you’re going to have to either deal with the commercial department of a bank or with a loan broker that can place financing for an income property.

You need to decide what direction you’re going. If you want to use the funds to keep doing what you are doing, then sit down with the bank that you presently have a relationship with (you do have a relationship, right?:slight_smile: and explain what you want to do. They should be able to issue you a preliminary commitment subject to appraisal and whatever other documentation is needed. Remember the three property rule when you identify the replacement property, and make any offers contingent on appraisal and financing. The shortest time trigger is on identification, not closing. You’ve got 180 days to do that.

ray

Re: 1031 exchange - Posted by Angie

Posted by Angie on July 07, 2002 at 09:09:45:

Yes, I do have a relationship with Bank of America, and yes we are dealing with residential lenders. How do you bypass the residential regulations when we are trying to buy multi-family residences? All the lenders I have contacted (mortgage brokers included) have told me that they cannot make a commercial loan on rental property.

And yes I guess I did mean debt to income ratio. That thing they do with allowing only 75% of rental income but all of the expenses of the property. It seems very unfair to me.

Thanks, Ray for all your help. It is so nice of you to take your time and help us this way. We really appreciate it.

Angie