Using the 1031 Exchange as an Exit Strategy
The TIC (Tenant in Common) segment of the real estate market has performed better than expected in the current recession, with the multi-family sector being more resilient than any other asset type. Financing for multi-family is relatively favorable, since Fannie Mae and Freddie Mac still provide some liquidity to the multifamily housing market, although they have tighted underwrtiting standards recently. In addition, lenders continue to view apartment projects as having lower risk than either commercial retail or office properties.
Anne Baber, a real estate broker with the Apartment Owners Association, Commercial Brokerage Division, who has over 20 years experience in apartment house brokerage, wrote an article that was published on www.aoausa in April. In it, she details her favorable expectations for this market segment and her recommendation that taking advantage of the 1031 Exchange into TIC investments will provide an attractive retirement vehicle.
Although there are fewer TICs being offered than in recent years, those that are available have higher capitalization rates and better cash flow. The current tight lending environment means that properties are examined more carefully, thus for those that are approved, this usually means that the project has stellar fundamentals. Underwriting requirements have tightened, and the LTV ratios are down to 50-60%.
It is noteworthy that there are markets in the U.S. that have fared better than the national average during the current downturn. Some examples are Dallas, Austin, San Antonio, Colorado and the Carolinas. These regions are poised for growth when conditions improve.
The prospect for multifamily housing is good because some consumers will be precluded from the mortgage market, due to stricter loan requirements and the reduced availability of financing. Finally, demographics favor the multi-family sector, as rental housing demand is anticipated to rise with the 5,000,000 “echo boomers” entering the key 18-24 year-old category in the near future. Combine this rising demand with the reduction in newly built inventory, and it becomes evident that areas of the multi-family market will increase in value in coming years.
For these reasons, Ms. Baber states that it is still an excellent time to take advantage of the 1031 Exchange to sell and move into Tenant in Common Investments. She believes that positioning your portfolio for the next up-leg in real estate will produce positive returns for your retirement funds.
She sites the following advantages to TIC Ownership:
- Flexible transaction size to match your needs;
- pre-arranged financing;
- no management hassles;
- potential increased after-tax cash flow;
- economies of scale;
- transactions can be identified and closed in a timely manner; and
- investments can be diversified into more than one property and/or location.
So don’t give up your gains to our current Socialist government, use the tax law to lock in your profits and keep growing your principal.
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Craig Higdon, “The Insider”
www.ExcelsionMortgage.com, www.InvestmentPropertyInsider.com, www.CommercialLoanCoach.com
Craig Higdon has over 16 years experience in financing commercial loans, small business loans, construction loans, and land loans. He owns Excelsion Mortgage, a commercial mortgage direct lender offering a wide range of commercial lending resources to investors and commercial real estate service providers.
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