Use the strategies included here to leverage loan products to maximize the profitability of a 1031 exchange. While most investors know how to use the 1031 Exchange in order to save tens of thousands of dollars in taxes, few know how to leverage loans to turn those savings into many more tens of thousands of dollars in profits. Here, we will discuss three strategies for using loans to make an exchange more profitable:
- Acquire a better property with more financing.
- Convert multiple low-performing properties into a single high-earning property.
- Upscale your acquired property with improvement financing.
Acquire a Better Property with More Financing
By adopting a loan-first approach in your 1031 Exchange, you are able to extend the exchange funds from your relinquished property to property that only needs this value as a down payment. Investors who leverage loans for their exchange have the advantage of identifying potential replacement properties in a higher revenue class than investors who use only exchange funds for their replacement property.
When performing a standard exchange, this process is made easier by virtue of the funds for the replacement property being made available by the closing of the relinquished property, reducing the borrowed amount at any given time (learn more about how to leverage a loan for a standard exchange).
Convert Multiple Low-Performing Properties into a Single High-Earning Property
When consolidating your real estate portfolio, you can use a loan to perform the same strategy mentioned above, but in this case pairing a loan not merely with the exchange proceeds from one relinquished property, but with multiple relinquished properties.
In this case, the borrowed amount can be reduced greatly or the revenue class can be significantly increased when multiple relinquished properties are sold in order to increase overall exchange funds. A loan is significantly more likely when consolidation is paired with a reverse exchange, since the loan will have to apply for a period of time to the full value of the replacement property (learn more about how to use a loan to increase the value of your reverse exchange).
Upscale Your Acquired Property with Improvement Financing
When investors pair consolidation and borrowing with the improvement exchange, then they are not limited merely to identifying higher-value replacement properties, but can look for opportunities among lower-priced properties that leverage the full amount of borrowed and exchanged funds to improve, add on to, or construct a high-earning property (learn more about using a loan with an improvement exchange).
Investors who learn how to leverage loans to improve their real estate portfolios are converting tax savings indirectly into equity, boosting their overall holdings valuation and improving their overall yield percentage with a higher quality property that contains more revenue potential, whether through price, consolidation, or improvement. Schedule a consultation with one of our loan experts to build a profitable loan strategy for your 1031 Exchange.