The First Rule of the 1031 Exchange

Plan Ahead!

The most difficult and vital part of any real estate exchange is acquiring the next property, your “replacement” property. The time-worn adage, “You make your profit when you buy real estate”, is true. Anyone who acquires a replacement property without knowing what they are going to get out of it is at the mercy of chance.

Plan for the Future

More sophisticated investors plan for the future. They know the profit they must earn to reach their investment goals. With this in mind, they attempt to calculate how much profit they will earn in the next investment, what they must do to earn that profit and when they will take their profit. They plan for the resale before they close escrow to buy their replacement property. These plans take into account potential changes in the economy and the financial markets as well as trends and valuation methods. To a knowledgeable investor, being “stuck” in a property long after it has peaked may be a disaster.

What You Can Do

Although it is difficult, if not impossible, to emulate the methods used by the most successful investors, there are a few steps every investor can take to meet his/her investment objectives:

1. Develop an investment plan. Know what your investments must accomplish for you over your investment life.

2. Ask yourself how the proposed investment fits your plan. What profit or return is it going to give you? If it does not fit your plan, it shouldn’t be purchased.

3. Develop a resale plan before you make a purchase offer. The various terms and conditions of the purchase offer may affect the resale. Can you obtain seller financing with unlimited and unrestricted assumptions? In the event of long-term seller financing, is there a provision for an extension if the financing market is soft when the note comes due? How can the purchase help to prepare this property so that the next buyer will find it attractive?

4. Develop a management plan. Write down all of the facts you reviewed and were told that led you to believe that the property would produce a certain profit or cash flow. If the property is supposed to increase in value to meet your investment objectives, how is it going to do that? If rents are to be raised, write down how much and when. Write down the profit you must make, when you intend to take that profit and how you will operate the property to meet your objectives. The more detailed you can be, the better able you will be to see if the replacement can actually meet your objectives.

– Ronald C. Stasch, CCIM, NAC

Ron Stasch was our Investment and Exchange Mentor in the late eighties and early nineties and he remains active in Real Estate today.

Conclusion

Simply answer three questions before making any investment:
1. What will I make?
2. How will I make it?
3. When will I make it?

These three questions and their answers will provide the foundation to successful investing. The great thing about Real Estate is that you do not have to merely bank on a property’s appreciation, with proper planning and hard work you will reach your investment objectives.

Always remember: Exchange, don’t sell!


 

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