Many real estate investors who are already familiar with the 1031 Exchange may still be unaware that a loan can be profitably used with a reverse exchange. In a reverse exchange, an investor will purchase a property first and later sell the relinquished property. In this case, then, the loan amount would be greater for the property up-front, but will be greatly reduced when the relinquished property’s tax-free profits and equity are applied by the qualified intermediary to the acquired property (minus any remaining mortgage payments and fees on the relinquished property). Here, we will three actions to take when leveraging a loan for a reverse exchange:
- Identify a property 5x the value of your relinquished property’s equity.
- Exchange multiple properties to reduce the overall borrowed amount.
- Get a loan built specifically for a reverse exchange.
Identify a Property 5x the Value of Your Relinquished Property’s Equity
Identify a property that can make the most of your the funds you can extract from a relinquished property by using it as a way to calculate a 20% down-payment. For example if, after paying off the remaining loan balance, the sale of your relinquished property yields $500k, you can search for opportunities up to $2.5M using only exchange funds. The appreciation and rent from that building would yield hundreds of thousands of dollars more than your previous property over the next several years..
Exchange Multiple Properties to Reduce the Overall Borrowed Amount
To increase the potential value of the acquired property, you may relinquish multiple properties and use the proceeds of all funds collectively to contribute to the down payment on a mortgage for a building that is far more valuable than the sum of your current portfolio.
Get a Loan Built Specifically for a Reverse Exchange
Instead of using a traditional loan product, instead use a loan that was built for the 1031 Exchange, including the reverse exchange. Plenti Financial offers this special type of financing that is built to boost the profitability of your real estate portfolio.
When you follow these three steps — identifying a property around 5x the value of the relinquished property’s equity, exchanging multiple properties to reduce overall loan amount, and using a loan product built for the reverse exchange — you enable your new acquisition to yield maximum profits with minimal interest and liability. Schedule a consultation with one of our loan experts to build a profitable loan strategy for your 1031 Exchange.