Investment Property | 1031 Exchange

Income and investment properties are measured accurately against the market by using the concepts of "gross rent multiplier" and "capitalization rate."

GRM:  Total gross annual rents/purchase price = GRM
Cap Rate:  Net operating income/purchase price = Cap Rate 
The most common investment pitfall in this category are when owners use single family homes, town homes, or condos as income properties.  Even when cash flow is positive, single family residential properties inevitably carry a lower cap rate and therefore offer lower net income returns.  In these situations, the guarantee of realized returns should be analyzed against future price growth potential, then balanced with the goals of each property owner. 

We offer a powerful yet simple investment property calculation spreadsheet that allows clients to quickly and easily view the cap rate, GRM, and all other estimated financial details of any investment property.  This will confirm you are receiving the best possible income with your next investment purchase.


A "1031 Exchange" allows real estate investors to defer capital gains taxes by reinvesting proceeds from a sale of one investment property to another.  IRS code 1031 only applies to investment property, and not your individual home.  

While the mechanics of a 1031 exchange are somewhat complex, they are relatively easy to understand for the individual investor.  First, your existing property (down-leg) must be exchanged for a "like kind" property, or another piece of real estate (up-leg).  To avoid paying tax (boot) the up-leg must both be the same or greater price, and have the same or greater debit on the property.  Basically, this means you can't partially cash out without paying boot.  A third party "accommodator" is used to keep the money at arms length from the investor, which typically costs around $500-600 dollars.  Your down-leg depreciated cost basis will transfer to the up-leg when the process is successfully completed.

There are a few other factors to consider to successfully accomplish a 1031 exchange, including property identification and closing timelines, as well as reporting requirements.