4 Things we learned from our 1st two 1MM+ 1031 Exchanges - Part 1: Deeply Consider the Asset You Are Exchanging Into.

In the 2nd exchange, the properties available on the market that fit our exchange criteria looked very different. The considerations below helped us make a decision.

❓Here are some of the questions we asked ourselves

- How sustainable is the current use of the asset we are buying?
- How sustainable is the physical condition of the asset we are buying?
- How hard is it to sell the asset we are buying?

I prefer a longer term outlook for a 1031 exchange asset. I would rather not expose the gain that I just deferred to taxation again so we put more weight on the first two bullet points in the hopes of exchanging into a property that has a higher cap rate with the tradeoff that it may be harder to sell in the future.

Some features that make the properties we chose harder to sell:
🏢Greater than 3 stories
⬆Elevators
🚰Pumps 
👨‍🔧Large Diameter Pressurized Piping
❄Commercial Grade HVAC
🏗Repair work involving Scaffolding/Cranes

These features are capital intensive and require sophisticated management to maintain but we have experienced a smaller market of buyers for properties like this which have allowed us to get better pricing. Additionally, buyer competition on your 3 identified options is dangerous for your exchange.

- How sustainable is the current use of the assets we purchased?

I am optimistic about the long term future of downtown markets but even the downtown pessimists agree that it is difficult to disrupt multifamily real estate.

- How sustainable is the physical condition of the assets we purchased?

Both assets we purchased were redeveloped into multifamily from their previous use (Hotel and Office) using historical tax credits and other incentives. This puts the construction process under more scrutiny than usual and we believe this provides the best of the old and the new.

🏛 Best of the Old
- Timeless Charm, if properly maintained the property can still look and feel great many years after new construction multifamily has lost its luster.
- Reinforced concrete and Steel structures that are no longer - financially feasible for midsize property
- High Quality building materials that are not financially feasible new multifamily property

🏘 Best of the New
- New layouts reusing the building floor plates as efficiently as possible
- Updated MEP (mechanical, electrical, plumbing) by licensed contractors following drawings created by an architect
- Modern finishes and comforts for residents

I am open and happy to discuss this topic and would love to hear any commentary or other perspectives.