Real Estate Investing is a great way to build your net worth – and it is something that most people can easily understand since shelter is one of our core needs.
Smart rental real estate purchases follow these three basic buy and hold principles: (1) rental income pays for the investment; (2) it generates cash flow (or is at least cash flow neutral) and; (3) you leverage your money by capturing the appreciation based upon the full value of the property, not just the amount of cash you invested, when you sell the property.
Here are a few reasons why a 1031 Exchange might be the right next move for you:
Increase Your Cash Flow.
Consider selling the single-family home that is renting for $2,000/month and buy a triplex that has three units that are renting for $1,500/month. A tri-plex also mitigates the risk of cash flow interruption due to vacancies since a single house is rented or not – a triplex usually has at least two of the units rented.
Investor Tip: Consolidating single family homes into multi-plex properties can also save you time and money maintaining properties at multiple locations.
Vacation Home Planning.
Want a vacation home in the sun or in the mountains? Sell your local rental home, buy the home you want in your dream vacation destination, and rent it for at least 24 months. After that you can decide if you want to continue to rent it some or all of the time, or convert it to your vacation home.
Investor Tip: In areas where short term rentals are allowed, there is often increased demand over hotels based upon COVID-19 concerns.
Alternative to Children Moving Back Home.
It is all too common right now that a child needs to move back in with their parents for a variety of reasons. A nice rental home in the area where they have a job or are looking for a job, might be just the ticket for family harmony. Just make sure they pay fair market rent – and yes, you can gift them the money for rent.
Investor Tip: This can also be a good solution for elderly parents that need housing assistance.
Current Rental Has Been Fully Depreciated.
You have purchased a rental property by the college that your child is attending, they have been living there paying fair market rent, and now they are preparing to graduate. That same child is going to graduate school in another city, or another child will be going to a different college and needs housing, or you just want to have a rental that is closer to where you live.
1031 Exchanges allow you to defer capital gain taxes by redeploying the equity that would have been used to pay the capital gain taxes into the purchase of a larger replacement property or properties.
Need to know more? Make sure you work with a Real Estate Broker who has the expertise, informational resources and a team of service provider experts available to help you make fully informed, great decisions. If you’d like to explore your buying or selling options, contact Ashley Farrington at www.AshleyFarrington.com.