What to look for before you commit your hard-earned capital gains!
When you are actively searching for 1031 up-legs, and have closed your down-leg, you only have forty five days to identify the right exchange or you will suffer the tax consequences! you should have been actively searching before your down-leg closes and writing contingency offers on as many potential deals as possible, but that program can be daunting not knowing if your down-leg will even close. Working closely with your broker at all stages of the process can save you time and money but there are key milestones that a paramount and one wrong move, or missed opportunity, can be devastating to your portfolio.
Consideration #1: when to start writing offers? while it may seem like you are fishing for deals before you have closed your “down-leg” It is highly recommended that you begin searching for your exchange the moment you open escrow on the sale of your property or have an eye on something before you even contemplate selling. You can write offers and send letters to property owners with the 1031 doctor™ assistance well before your buyer has completed his due diligence or gone “nonrefundable” on the deposit. I would also suggest that you make your deal subject to your finding an appropriate exchange, but that is a hard deal to get past your buyers discriminating broker or advisor, as well, that buyer may be under 1031 exchange constraints himself. This is the first hill to climb and therefore the first consideration.
Consideration #2: Location, Location, Location. You’ve heard this credo before and its extremely germane however, so has everyone else, and you are not the only one in a 1031 exchange! there are over 350,000 1031 exchanges every year and 70% of those are seeking the same type of NNN investment you are looking at. The AAA locations and high credit tenants are in high demand and there is significant competition to acquire one of these deals and often there are bidding wars and a “beauty contests” involved, and certainly having the right broker, like the 1031 Doctor™, with decades in the business can be very helpful to give you that edge. keep in mind that the cap rates are going to be VERY low on these deals due to the risk profile and you will just keep up with inflation, if you’re lucky, but the investment will be highly liquid in case you find something opportunistic in the future to jump into.
Consideration #3: Tertiary locations. Secondary locations can be great investments, or they can become your worst nightmare depending on the situation. Small towns, highways deals, low traffic intersections, redevelopment areas, blight, economic obsolescence and low growth initiatives can stunt the potential for appreciation of your investment. These locations are risky and should be carefully vetted by the 1031 Doctor™ before you invest. Each deal is unique and each market has its winner and losers, and it basically comes down to two things! SALES V RENTS and the risk profile / cap rate if your tenant is making money hand over fist, and your investment is cash-flowing year after year 8% or higher, you can safely rely on the exchange as a long-term investment, but keep in mind it is not as liquid. Also, always keep in mind that there are competitors also looking at that business and seeing how they can take some of it by disruption or direct competition. This is where the 1031 Doctor™ comes in and does a deep dive into the business and the areas potential issues. That gas station on the opposite corner may start a price war with your gas station tenant, or there may be a big player that comes into the market and takes all! you have to go visit the planning department in that area and get a clear picture of what’s going on before you invest!
Consideration #4: The LEASE! Not all leases are created equal. GO Dark clauses, RENT Holidays, Cancelations options, Condemnation language, Percentage Rents, Limited Guarantees, Deposit Burns, are only some of the clauses that you need to fully understand before you invest. Having the right lawyer who cares about protecting his client’s interest is extremely important. These deals live or die based on the lease agreement and fully vetting them and understanding all the terms are YOUR responsibility in the end. The 1031 Doctor™ has worked with the best of the best over decades and can refer you to great lawyers in your area.
Consideration #5: The Business Not all businesses are created equal, and many businesses come and go and many wind up protected under chapter 11 bankruptcy laws which allow a judge to cancel leases you thought were bullet proof! There was a time when Block Buster Video deals were selling like hotcakes! or Kmart deals, 99c only stores, CVS Drugs, the list goes on and on. The internet has disrupted many retail brick and mortar stores and artificial intelligence can and will disrupt more! Federal minimum wage is currently destroying the fast-food industry in California and inflation is cutting into profits on every level of business. What you think will work today will not work tomorrow! I happen to like the automotive industry for some of these reasons, the internet cannot disrupt and people will need and want personal transportation for many years to come! I like tire stores, carwashes, gas stations, and quick lube deals, and will also endorse certain auto parts stores, window repair, and body shop tenants.
Before you invest your hard-earned, hard-fought capital gains, let the 1031 Doctor™ professionally review the deal before you pull the trigger!
www.1031Doctor.com