While many real estate investors use the 1031 Exchange to move from a less valuable property to a more valuable property, some investors use the 1031 Exchange to transition their real estate holdings from a large, underperforming property to several premium properties that offer a better cumulative yield and better market-resistance. Here, we will discuss:
- The benefits of diversifying your real estate portfolio.
- The exchange process for diversification.
The Benefits of Diversifying Your Real Estate Portfolio
There are three primary reasons investors diversify their real estate portfolios:
- Market Resistance. When the local real estate market in which a property is located inflates or deflates, this can affect both the equity and occupancy of a property. In the case that an entire portfolio exists within a single market, the entire portfolio is dependent upon the condition of that local market. When holdings are diversified across multiple markets, this enables owners to leverage the equity and occupancy of more stable markets in order to take higher risk in pursuit of opportunities in less stable markets.
- Occupancy Buoyancy. Property occupancy can sometimes be hindered by reviews, reputation, or building repairs. When a single property has low occupancy, it can be difficult to boost that occupancy when working with a single asset. With multiple properties, more stable occupancy buildings can float under-performing properties until they are either optimized or exchanged.
- Tax Advantages. Owners who diversify their holdings to different marketplaces can take advantage of different tax opportunities in different municipalities so that each division of the portfolio can have the greatest number of advantages in its local market, as opposed to a single property that can only fulfill one purpose at a time.
The Exchange Process for Diversification
In order to diversify your real estate portfolio with a 1031 Exchange, property owners must first identify their single property as the property they wish to relinquish. According to your strategy, you would then identify all potential properties which the funds from that property could cover – either fully as a cash offer or in cooperation with financing increase the overall value of the portfolio while maintaining an approximately equal debt-to-income ratio.
Use the information provided here to make a more informed decision about the best way an exchange can serve you. Use the information here to identify ways an exchange could serve your portfolio, and schedule a consultation with one of our qualified professionals to better strategize how a 1031 could improve your real estate investments.