When searching for a 1031 exchange property, the term “like-kind” can be confusing. There are many different property types, and we will be looking at a few in detail to study their pros and cons. First we need to define what a “like-kind” property is.
Like Kind Property
In short, just about any real property owned for the purpose of investment can be considered like-kind, since it is held, sold, and purchased for the same reason. For example, if you own a 2 story office building you can exchange it for vacant land, leasehold property, farm property, tenant in common property, a beneficial interest in a DST (Delaware Statutory Trust) link to dst page, or just about any other real property held for investment purposes.
Single Family Homes
Single family homes are easy to manage, highly liquid, and generally are easy to finance. Of course, they don’t commonly provide the level of positive cash flow that many 1031 exchange investors are looking to attain. Because of their simplicity however, single family homes can make good purchases for beginning investors.
Duplexes, Triplexes, and Quads
Multifamily properties included residential real estate that was built to house 2-4 separate families. These larger investments are more expensive but will often provide higher positive cash-flows than single family homes. These units require a high level of management and maintenance, and with more units comes a higher risk of vacancy.
Small Apartments
Small apartments are generally comprised of five to fifty units and are more difficult to finance than smaller residential investments since they rely on commercial lending standards instead of residential ones. These investments bring in a significantly larger cash-flow, but also require a much higher level of management, and sometimes even a management company is required to maintain such an investment. Prices are based on income valuation rather than comparison, and therefore have added value when rents are increased, expenses are decreased, and effective management is in place. Competition in this area of residential real estate is low due to the fact that most novice investors are unable to obtain such a property, and professional REITs are focused on larger investments. DSTs are the preferred method for most individual investors.
Large Apartment Complexes
Large apartment complexes contain 50 or more units and might contain pools, workout rooms, full time staff, and high advertising budgets. Prices for these investments range in the many millions of dollars but they create large, stable returns, and require a low level of personal involvement. Many large apartment complexes are not owned by a single investor. Investors can pool their funds and create syndications to purchase such a property. DSTs are the ideal method for investing in large apartment complexes.
Real Estate Investment Trusts
A REIT is similar to a stock mutual fund. Individual investors pool their resources to form an REIT. The REIT can then purchase large real estate investments such as skyscrapers, large apartment complexes, or shopping centers. Profits are then distributed to the investors. This is the least involved investment and requires practically zero management from the investor’s standpoint, but the returns might be less than those of a more hands-on investment. REIts are not suitable for 1031 exchanges.
Commercial Real Estate
With many various sizes and shapes, commercial real estate can vary greatly from investment to investment. It is mainly held to rent or lease to businesses, and it can be difficult finding tenants. Some commercial real estate can sit for months or even years vacant. Other properties held in a highly populated area might not take long to lease. Some commercial leases allow the property owner a percentage of the leasing business’ revenue, which can be lucrative if the business does well. Commercial real estate is complicated, and not recommended for novice investors, however, for those who have experience and know how to crunch the numbers properly, a commercial real estate investment can be just the thing for someone looking for a high positive cash-flow. DSTs are the preferred method for investing in commercial real estate.
Vacant Land
Vacant land can be improved upon, which can add value to the investment. Of course there are costs associated with this such as demolition of existing improvements, clearing and grading, and construction of utilities, streets, sidewalks, sewers, etc… Once improvements are built, however, they can be leased or rented, creating cash-flow. Common issues with purchasing vacant land for investment include insufficient finances to built improvements, not planning for contingencies, and analysis paralysis. Few investors are able to morph vacant land into a development, but those who are able to do so can create extreme wealth for themselves without risking much of their own capital. Some land can be held without building improvements upon it in hopes that it will increase in value as property around it is developed and improved. These are usually pooled investments such as LLCs. This category offers the highest risk and return potential.
We have information regarding everything from small real estate investments to commercial real estate and DSTs. Please contact us to speak with a professional about your next investment.
