Re: $600K to 1031 into ??? - Posted by ray@lcorn
Posted by ray@lcorn on March 06, 2006 at 20:41:12:
Sheila,
Couple of thoughts… but first, congratulations on a successful investment! having $600,000 in equity to place is a high-quality problem! It sounds like you have yet to pull the trigger on the sale, so it’s good that you’re exploring the options ahead of time.
I completed a 1031 last year and will probably do another this year. Chief among my concerns is to always improve my position in cash flow and value potential when exchanging, a goal sometimes easier said than done. It takes a lot of looking, a lot of thought, and careful examination of every alternative.
If your only option is to look in another state I would strongly suggest you not invest in multi-family. Long-distance ownership is hard enough, but a residential property is the most demanding of all property types and you wil have to rely on fee management. Every experienced investor will tell you about the problems and pitfalls of that scenario. For absentee ownership, there are other property and deal types that don’t cause as much brain damage.
Which brings up TICs. You’ve done a great job of understanding the benefits and drawbacks. I’m in the same camp as your CPA… the drawbacks of no liquidity, no exit strategy independent of the sponsor’s buyback, and zero control are enough to offset the attractions. And to top it off, the returns are terrible as well. Like frozen food, you pay dearly for the convenience. But honestly, it depends on where you are in your investment life. For those winding up positions and with no need for further growth or diversification TICs can be the perfect match. If you’re still in the process of building wealth, they probably aren’t the best vehicle.
Retail NNNs are the current hot product for 1031 downlegs. As you have determined, these properties usually have little appreciation potential due to long leases, cheap buildings and sky-high valuations. You can travel a ways out the risk curve with lesser credits and find some decent returns, but be careful to do thorough due diligence. (For more detail about NNN deals, see my article at http://www.real-estate-online.com/articles/art-286.html)
Don’t forget, appreciation is only one of the four ways to profit. Don’t overlook deal structures and property types that allow maximum tax benefits along with cash flow and equity growth, especially when there is little or no debt to replace. Future depreciation schedules depend heavily on the basis in the relinquished property, and with careful juggling of the property divisions you may be able to increase sheltered losses.
In a low- or no-debt scenario you may consider raw land with development potential. That’s the classic strategy to force appreciation, especially in tight markets. I like to find land on the next ring of growth outside existing population centers. Using local comprehensive plans can be a tip off to proposed infrastructure expansions and extensions that are the precursers for growth.
Also consider NNN office and industrial deals. As the economy cools there will be more and more firms looking to tap into the value of their real estate. Sale-leasebacks can be a lucrative niche for large firm locations in tertiary markets.
As you can see, there are lots of options before you have to settle for a long-distance romance with a property manager!
ray