Today, we’re not looking at a typical deal analysis. Instead of the normal trading up that investors do with a 1031 exchange, we’re analyzing a move from one fourplex to two single family homes. Jeff White joins me to talk about why he made this move and how it helped his portfolio.
- Listen to the podcast “#408: Trading Down to Increase Cash Flow: Why Jeff Sold a Fourplex to Buy Two Single Family Homes” Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Stumbling on a Great Property
About 1.5 years ago, Jeff got his real estate license. He wanted to go look at nearby properties to get a feel for the market and see different options for house hacking rent by room properties. One day last June, he went to see a larger single family home that was only two blocks from where he was living at the time.
The property was great. Built in 1999, it was relatively new. Its layout of five bedrooms/four bathrooms in over 3000 sq ft would make for a great rent by room investment property. Plus, it had a new roof and siding, was repainted, and the sewer line and deck had already been replaced. He showed his wife Suleyka and she suggested he buy it.
Buying the property hadn’t crossed Jeff’s mind because they were only a month into their current house hack. They used an owner-occupant loan, which meant they wouldn’t be able to move out for another year. Instead, Suleyka suggested he sell one of his worst properties in order to buy the house.
Identifying the Worst Property in His Portfolio
Jeff’s mindset quickly changed from all the reasons he couldn’t buy the house to how to make it possible.
His biggest headache property was his first house hack, a fourplex he bought in 2017. It was the most expensive property to maintain because it was dated and needed renovation. Two of the units had undermarket rent because they needed to be updated, and he got calls about issues at least once a month.
On the plus side, though, he had $200K in equity in the home.
Selling off the property became a no-brainer, and he started to form a gameplan.
1031 Exchange Process
A 1031 exchange is a great way to defer capital gains when selling a property. The catch is that the replacement property needs to be greater in value than the relinquished one. In this case, the fourplex was worth $763K and the single family home was worth $610K. So, Jeff decided he would also buy a three bedroom/two bathroom condo in east Aurora for $240K. The combined value of the condo and the house exceeded the multifamily property and he was able to proceed with the 1031 exchange.
For both the house and the condo, Jeff put a contingency in his offer that he would have to sell his fourplex in order to buy the properties. Even though the market was very hot at the time, both of his offers were accepted.
The company he was working with to handle the 1031 exchange suggested he close on all three properties on the same day. Because of the timing, he had to use a reverse 1031 exchange. This was a little more expensive, but it was worth it to purchase those properties.
In hindsight, Jeff would have given himself a few days’ breathing room between closing on all the properties.
Analyzing Jeff’s Portfolio
Jeff’s main goal when it comes to real estate investing is cash flow. The idea of going from a multifamily property to two single family properties didn’t feel like a downgrade because he actually increased his cash flow.
When it comes to leverage and cash flow, Jeff is doing better now than when he owned the fourplex. His cash flow increased by $20K and his cash on cash return doubled from 5.5% to 10%.
So, Was Trading Down Worth It?
A year later, Jeff can see that this move was definitely worth it. Aside from the better returns, his headaches have also decreased. Between the two properties, he’s only received one phone call from a tenant in the past year.
Even though on paper most investors would balk at trading a multifamily property for single family homes, Jeff put himself and his portfolio in a much better position.
He advises other investors to regularly review their portfolios to find opportunities like he did.
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