Trading up with a 1031 Exchange into a $330,400 New Build
It’s no secret the market is giving homeowners the gift of appreciation, but what’s the best way to tap into it? In this deal analysis, Jenny explains to Chris how her clients used a 1031 exchange to trade their older townhome for a new build, paying only $10K out of pocket. Listen to the episode to hear the details and find out why this was a great deal for both the sellers and the buyers.

Today, we’re looking at a new build townhouse in Colorado Springs, near Peterson Air Force Base.  My clients took advantage of equity in an older property by utilizing a 1031 exchange and buying a new build townhome with the proceeds.  This is a great example of investors making the most out of the current market’s gift of appreciation.

Three Learning Options!
  1. Listen to the podcast “#95: Trading up with a 1031 Exchange into a $330400 New Build” on the Colorado Springs Real Estate Investing Podcast
  2. Watch the YouTube video (at the bottom.)
  3. Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.

Investor Profile

These investors bought a townhome investment property about 1.5 years ago for $190K with 15% down.  In that time, the townhome appreciated substantially and these investors also bought another property that was a new build.  They really liked not having to worry about maintenance on the new build, so they decided use the equity they’d gained to sell the older townhome and buy another new build.

They ended up selling their older home to some other Envision Advisors clients who were able to raise rent and get great returns.

Investment Property Details

My clients decided to do a 1031 Exchange to sell their property and replace it with a new build. 

Appealing Features of the Property

This townhome is in a great location, right by Peterson AFB.  Other Envision Advisors clients have since bought in this development and found these properties make great rentals.

Because my clients bought in the first section of the new development, they’ll get built-in appreciation as the other sections finish. 

Property Contract Details

Contract

They were able to purchase the property for $330,400, and the appraisal came back at $350K.  Since then, other clients have bought properties in this development that appraised at $360K. 

Inspection Issues

This was a brand-new townhome with no inspection issues.

Property Financing Details

I used the Rental Property Spreadsheet to run the numbers on this home.

Property Overview

Property Overview Spreadsheet Screenshot

The clients were all in for $92K, and used the proceeds from their 1031 exchange to pay the majority of that.  They only needed to pay $10K out of pocket.  Their interest rate is 4.125%, but it would be higher if purchased today.

The rental rate is $1900 a month.  Since this is such a popular area for rentals, they ended up with two highly qualified applicants.  They asked if one of the applicants was willing to wait to move in, and they were able to fill two of their vacancies at once. 

Property Operating Expenses

Monthly Operating Expenses Spreadsheet Screenshot

Because these clients live fairly close by in Parker, they decided to self-manage. 

The new build comes with a 1-year warranty, so they’re budgeting 5% for maintenance and only had to buy a washer and dryer.

The clients are paying the land rate in taxes, so we’re estimating the tax rate based on when that will jump up.

First Year Returns

First Year Returns Spreadsheet Screenshot on 1031 Exchange into New Build

Their annual cash flow is $2664, and their cap rate is 5.1%.  These are great numbers for Colorado Springs, and we don’t typically see such a high cap rate with a new build in this area.

If this property were purchased with today’s interest rate, the returns would look like this:

Adjusted First Year Returns Spreadsheet Screenshot of 1031 Exchange into a New Build

With an interest rate of 6%, the cash flow would drop to negative $752 for the year. I consider any cash of less than $1000 in either direction to be breakeven.  Even with the higher interest rate, they’d still get a 23.1% overall return. 

Conclusion

As interest rates rise, our clients are getting more creative with their strategies.  Some of them are putting down more money, while others are trying out medium term rentals.  It’s a good idea to play around with different numbers and strategies and see what will work best for your lifestyle and long-term goals.

Connect with Us

As inflation picks up, real estate remains a great hedge and solid place to park your money and ride the wave.  If you want help finding a rental property or refining your strategy in this market, reach out to us for a free investment consultation.

YouTube Video

Using a 1031 Exchange to Buy a $330400 New Build

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Investor Friendly Realtor | Investor | Host of the Denver Real Estate Investing Podcast
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