Can I Refinance My 1031 Exchange Property?

Many investors engage in a 1031 exchange to defer the total amount of their capital gains taxes and depreciation recapture. However, to do this, you must follow strict IRS guidelines. While no specific rule prohibits refinancing a property when engaging in a 1031 exchange, doing so could jeopardize your tax deferral.

The Potential Problem with Cash-Out Refinancing

Under IRS guidelines, to receive a full tax deferral through a 1031 exchange, investors must reinvest the total sale price from the relinquished property – reduced by allowable exchange expenses - into a replacement property of equal or more excellent value. The investor also must not have any “net debt relief,” meaning that the debt on the replacement property must be equal to or greater than the amount paid off when the relinquished property was sold. However, debt on the abandoned property can be replaced with cash on the replacement property.

If you take out cash at closing, these funds are considered “boot.” Similarly, the IRS has determined that refinancing in anticipation of a sale is similar to pulling money out at a close. As such, cash received at close or as part of refinancing before the conclusion may be subject to capital gains tax, depreciation recapture, state income taxes, and net investment income tax.

Refinancing a Relinquished Property Before Closing

If you plan to relinquish a property with a high amount of equity and low or no debt, the 1031 exchange rules would require you to reinvest all the proceeds and match the debt.

Refinancing the property before selling it would allow you to pull out cash and pay off the current mortgage loan, replacing it with a new, larger mortgage. This also means that going into closing, you would have more debt and lower cash proceeds. When you purchase your replacement property, you will have a lower required investment amount, extra cash in your pocket, and total tax deferral.

While this may sound like a win, unfortunately, the IRS looks unfavorably upon it. Doing a cash-out refinance before selling a relinquished property is considered a step transaction, which is prohibited. Essentially, this means that if you can’t do something directly, such as taking cash out at closing, you cannot do it by taking additional steps to circumvent the rules. However, this doesn’t always mean that the transaction would be taxable.

You may get a full 1031 exchange if you can show that the refinance was not done in anticipation of engaging in a 1031 exchange. In this case, the more time between the refinance and the property sale, the stronger your claim may be. Typically, you’ll want to wait at least a few months.

You may also be able to show that you had “independent business reasons” for the refinance. For example, this may apply if the property needed structural repairs or your business had cash flow problems.

Refinancing a Replacement Property After Closing

If you follow all the rules for a full 1031 exchange and later decide to complete a cash-out refinance on the replacement property, this should not impact your tax deferral. In this case, you’re taking out cash but still must repay the debt, so the transaction does not result in a net increase in wealth. For this reason, the IRS does not typically disallow post-exchange cash-out refinances.

While there is no required waiting period before you can do a cash-out refinance on a replacement property, it’s still a good idea to make sure it’s not done concurrently with the purchase or to prearrange the refinance before the purchase. Otherwise, the IRS may question your intent.

Some Final Thoughts

Refinancing a property before or after a 1031 exchange can create potential tax issues. Every situation is different, so it’s essential to consult with your tax, financial, and legal advisors before executing a cash-out refinance about a 1031 exchange.

 

Source: Can I Refinance My 1031 Exchange Property?

https://www.creconsult.net/market-trends/can-i-refinance-my-1031-exchange-property/

1120 E Ogden

Retail / Office Space For Lease | 3,674 SF | $20/SF NNN
1120 E Ogden Ave, Suite 101 | Naperville, IL 60563
Broker: Randolph Taylor rtaylor@creconsult.net | 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/?wpo_all_pages_cache_purged=1

Renters dig deeper…into their pockets: Chicago experiences fifth-highest monthly rent growth among largest cities in U.S.

One thing that Chicagoans know all too well is that renting in the city comes at a price, and in recent months, rent prices have continued to increase. Apartment List’s May 2023 Rent Report breaks it down:

Chicago Rents Up 1.7% Month-Over-Month; 5.2% Year-Over-Year
The median rent in Chicago increased by 1.7% in April. This represents a total increase of 5.2% year over year, similar to the state average of 5.9%, but far outpaces the rest of the country by a considerable margin, with a national average increase of just 1.7%.

But it’s worth noting that the market had remained relatively stable, despite the ongoing effects of the pandemic, as the metro’s current growth rate of 4.2% is similar to that experienced at this point last year when rents had increased by 4.3% from January to April 2022.

Chicago is the 52nd Most Expensive Large City in the U.S.
The current median rent stands at $1,333 for a one-bedroom apartment, $1,446 for a two-bedroom apartment, and $1,434 across all bedroom sizes (i.e., the entire rental market), ranking 52 among the nation’s 100 largest cities, based on the report. By comparison, the median rent across the country is $1,162 for a one-bedroom, $1,332 for a two-bedroom, and $1,355 overall.

The median rent in Chicago is 5.9% higher than the national average.

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Across broader Chicagoland, the median rent is $1,413, meaning that the median price in the city is 1.5% greater than the price across the metro. But this trend is not unique to Chicago. Rent prices are increasing throughout the region—including in the suburbs.

The annual rent growth for the whole metro is 5.6%, slightly above the rent growth rate within just the city. Apartment List revealed that Elmhurst is currently the most expensive city, with a median rent of $1,904, while Waukegan is the most affordable, with a median rent of $1,275. The fastest annual rent growth is occurring in Mount Prospect, with a growth rate of 13.9%, while the slowest is in Naperville, with a growth rate of 3.1%.

 

Source: Renters dig deeper…into their pockets: Chicago experiences fifth-highest monthly rent growth among largest cities in U.S.

https://www.creconsult.net/market-trends/renters-dig-deeperinto-their-pockets-chicago-experiences-fifth-highest-monthly-rent-growth-among-largest-cities-in-u-s/

What Multifamily Real Estate Brokers Want You To Know

If you’re new to the multifamily real estate sector of the commercial market, you may find that it is vastly different from other real estate niches you have previously invested in.  While sometimes trying new things can appear daunting, in this case, there are lots of great reasons to pursue the opportunity to expand your portfolio to include multifamily property.  There is, however, a lot of valuable information to be aware of before you decide whether or not to move forward.  We’ve put together a list of tips multifamily real estate brokers think you should know!

First and foremost, prior to diving headfirst into a multifamily real estate investment opportunity, you should have a very clear picture of what multifamily is.  Multifamily property refers to any building or cluster of buildings within a particular complex that are intended for the use and inhabitation of more than one family.  This might be pertaining to an apartment community, duplexes, quadruplexes, or even townhomes.  Each different sub-genre will come with its own set of requirements and expectations from you, the property owner, so do your homework before commencing a search to determine what type of property makes the most sense for your particular situation.

Know What Makes a Good Market

It’s important, also, to acknowledge that different sectors of commercial real estate will flourish under different circumstances.  The ability for a multifamily real estate market to thrive will be dependent on a few factors.  You will want to pay attention to the employment rate in a given area, as well as the average rental rates, the current vacancy rates, and the level of construction and growth happening within it to determine whether or not it is a good place to invest.  Up-and-coming markets (where employment rates are rising and vacancy rates are declining) are prime spots to begin your search, since both of these factors indicate a growing population and, thus, a growing need for quality, affordable housing.

Crunch the Numbers

In order to determine whether or not a particular multifamily property is a good investment or not, there are a few particular pieces of information you will need.  For one thing, you’ll need to determine your Net Operating Income (NOI).  This is done by looking at prior years to determine the expected income (from rents, storage and parking fees) as well as the expected average expenses (repairs, maintenance, insurance, etc.) associated with the property.  The difference between your income and expenses is your NOI.  Next, you’ll need to figure out how much cash flow you stand to gain from the property using your NOI and subtracting from it the cost of your monthly mortgage.  The last critical piece of financial information you’ll need is your capitalization rate (or cap rate).  This number will give you an idea of how long it will take to get a return on your initial investment.  To obtain this, take your monthly NOI and multiply it by 12 (number of months in the year) and divide your answer by the total mortgage amount.  A cap rate somewhere between 5-10% is usually indicative of a sound investment, while going too high beyond that typically denotes a higher risk.

Know Your Risk Factor

The multifamily real estate market also offers a level of stability that’s not necessarily consistent with other real estate sectors.  With more units paying rents on a regular basis, you are covered should any of those units become vacant for an extended period of time.  This ensures that your cash flow is only minutely affected in such a case.

Understand the Effects on Your Portfolio

Investing in multifamily real estate is also a great way to diversify and grow your portfolio simply and in a relatively quick amount of time.  In the single-family market, it would take a lot of time, money, and energy to acquire and maintain a multitude of, let’s say 30 properties, but in the multifamily sector, one good acquisition (let’s say a single building with 30 individual units) can have the same effect on your portfolio without the headache of purchasing, inspecting, and securing funding for 30 separate spaces.

Know What Makes a Good Multifamily Real Estate Broker

Not every multifamily real estate broker is created equally!  Finding the one who will work best for you comes down to understanding what sets a quality broker apart.  A top broker has experience, not only in the commercial field, but with expertise in this particular niche.  They will understand the fluctuations of the local market and, therefore, be able to more effectively help you to find the investment opportunity that is best for you.

 

Source: What Multifamily Real Estate Brokers Want You To Know

https://www.creconsult.net/market-trends/what-multifamily-real-estate-brokers-want-you-to-know/

Selling an Apartment Building FAQ's

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Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

• You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
• Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

• Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
• Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

 

Source: Selling an Apartment Building FAQ’s

[/ux_text] https://www.creconsult.net/market-trends/selling-an-apartment-building-faqs/

How Do I Get A Multifamily Loan?

One of the most common questions I get is, “How Do I Get A Multifamily Loan?” The simple answer, “Be Prepared!”

One of the most common misconceptions in multifamily investing is a bank will lend you money strictly on the properties performance and NOT look to the buyer for any guarantees. This is known as a non-recourse loan and it does exist, for properties of institutional quality, typically well over 100 units. For smaller properties and newer investors, forget this loan product exists, for now.

We’re going to focus on how to get a recourse conventional loan product from a local community bank. Most community banks will hold their loan products in house and not sell them to the secondary mortgage market so this gives them the flexibility to make in house decisions.

The Property

The lender will want to see the last 3 years of property performance in the form of profit and loss statements or Schedule C tax returns if the sellers are an entity or Schedule E if they’re an individual. They will ask for a current rent roll, want to see all the leases and ask for proof of security deposits.

Typically you will need to get a new alta survey, lenders title insurance, termite and pest inspection, appraisal which will be ordered by the lender, and if the property is older than 1978 you will need a lead based paint disclosure. If the property is in a coastal county or in tornado alley, you may be required to get a wind binder in your insurance policy and an earthquake binder if the property is in a seismic zone.

The Borrower

If you really want to make a statement then you should put together kick butt executive summary. This should include the acquisition strategy including any repairs and upgrades you’re planning, a budget for the first of operations, a cash flow analysis for the holding period and any interior and exterior images of the property. If this is a re-position then before and after shots of previous projects and property performance will go along way.

You may be required to provide a balance sheet, 3 years of tax returns and a credit score. If you have partners then the bank may require the same from them. If you have passive investors from a small equity group then they may even require a guarantee from them as well. I have seen this more and more lately.

You may want to go ahead and start the process for setting some kind of entity, such as an LLC. This will help protect you and your partners personal assets. This doesn’t have to be done prior to getting the loan process started but you will want to have it completed prior to closing so you can assign the contract to the new entity. Consult an attorney on how to setup an entity for investment properties.

The Lender

If everything is in place and looks good and you make it through the initial underwriting, the lender you first meet with before he sends it to the board, then the board should present a term sheet with their offer of financing. This is typical for larger loans, but don’t be surprised if you see it on all commercial transactions.

A typical loan product for smaller multifamily properties will have an interest rate about 50 to 75 basis points above what you would expect a home owner could get. This means if you have good credit and can get a house at 3.8% then expect a commercial loan product to come in around 4.5%. Depending on the age of the property you will probably see a 20-25 year amortization. If your property is more than 30 years old then expect 20 years and in some cases if deferred maintenance is high they may only go 15 years.

The loan amount will be based on the lower of of two things, debt service coverage ratio (DSCR) and loan to value ratio (LTV). A typical DSCR is 1.2 to 1.3. This means that the net operating income (NOI) should be 20 to 30% higher than the annual debt service. The LTV will typically be 75% but can be adjusted up or down based on the strength and experience of the borrower and the properties past performance.

Most lenders will ask for a loan term shorter than the amortization period. This is known as a balloon payment or loan maturity. The most common time frames are 5, 7, and 10 years. When this period expires the remaining loan balance must be paid in full or renegotiated for a longer term. You will want to negotiate this depending on your investment strategy and holding period.

Being prepared and knowing what to expect will help you get your multifamily loan approved. As you gain experience and invest in more multifamily properties this will become second nature and the relationship you build with your lender will go a long way in your success.

Source: How Do I Get A Multifamily Loan?

https://www.creconsult.net/market-trends/how-do-i-get-a-multifamily-loan/

163 E Lincolnway

Just Listed - 23 Unit Multifamily For Sale
$425,000 | Heavy Value-Add | 20.5% Cap Rate (Proforma)
631 E Lincolnway | Morrison, IL 61270
https://www.creconsult.net/for-sale-heavy-value-add-23-unit-multifamily-property-morrison-il/