The executive Real estate investing Show
Finding the Bigger Picture: 1031 Exchanges with Anna Myers
This week on The Executive Real Estate Investing Show, host Michael Holman talks with Anna Myers. As Chief Operating Officer at Grocapitus, Anna Myers takes a data-driven approach to finding potential development projects. And it was her obsession with numbers and keeping her share of profits from real estate sales that led her to discovering the joys of a 1031 Exchange. A 1031 is a great way to defer taxes by selling investment property and immediately purchasing more property that is valued higher. And it works for single family, commercial, even multi-family syndication.
Listen now as Anna walks us through the ins and outs of a 1031, and how you can use a 1031 Exchange to passively invest in real estate.
Focus on What’s Important
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Welcome to The Executive Real Estate Investing Show. This podcast is for you, the busy business owner or executive looking to create generational wealth. Here, we’re going to show you how to do that through real estate investing from multifamily to industrial and everything in between. You will become a real estate investing expert. And now, here’s your host, Michael Holman.
Michael Holman: Hello, everyone, and welcome to another episode of The Executive Real Estate Investing Show. As always, I’m your host, Michael Holman. Today, we have a fantastic guest with us. Honestly one of my very, very good friends, we’ve done a lot of deals together, we probably talk, at least once a week or every other week together. That is Anna Myers with Grocapitus. She is just a wealth of information. Grocapitus has done over a billion dollars in Real Estate, exciting and like I said, she’s a very, very dear friend of mine, we’ve spent a lot of time together over the past three or four years.
So excited to bring her on, she’s really, good at 1031 Exchanges. And that’s what we’re going to dive into 1031 Exchanges, everything you wanted to know, one of the most exciting things that we’re going to talk about is how you can merge and take a 1031 Exchange and a syndication and how you can invest in the same project together and relieve a whole lot of stress and difficulties that come through the normal 1031 Exchange process.
So excited to get into that. As always, though, want to make sure, go ahead. If you are listening to this show, leave us a rating and review on Apple podcasts on Spotify, we’d really appreciate that. Also check out the website www.ExecutiveREIShow.com. You can see all the amazing stuff that’s going on including today’s show that is up there with all of the show notes, be sure to check that out.
Lastly, today’s executive tip is to focus on what’s important. This comes really from the show, and the business advice that Anna gives at the end of this. The best business advice she was ever given. It’s profound and has its own meaning in itself. But one of the things that I took away from that was the thing that I love about what she said about that advice is there’s often multiple layers in things. Let’s just take you know, a simple example. Let’s say you’re selling I don’t know widgets, I’m from accounting, everything was a widget and accounting. So say you’re selling widgets on a on a website.
Oftentimes, there’s multiple things that people track. How many people visit the website, how many people click on the widgets page, how many people add it to their cart, how many people purchase? Oftentimes people get so focused on the thing that doesn’t really matter. In that transaction what matters? Somebody buying the widget, if they don’t buy the widget, it doesn’t matter what else happens. People don’t buy it, you don’t get any money, and you’re not any better off. A lot of times people get focused on well, I have all these website visitors, it’s fantastic.
We’re killing it. But you’re focusing on the wrong thing. Website visitors that can be a part of everything. But really what matters is selling widgets, and everything that goes into selling widgets. And sometimes people get stuck only up here. So go ahead, make sure you listen all the way to the end because the business advice Anna gives is fantastic and really lays into this executive tip. But, without further ado, here’s the interview with my good friend Anna Myers.
Hello everyone and welcome to another episode of The Executive Real Estate Investing Show. I am here today with my good friend Anna Myers. Anna has been a great friend we met oh my goodness, probably three, four years ago now. We’ve done multiple deals together. Anna is the Chief Operating Officer over at Grocapitus. They are doing a crazy amount of stuff over there. We’re really excited to have her with us, Anna, welcome to the show.
Anna Myers: Thanks, Michael. It’s great to be here with you. On another zoom session. It seems like we’re always living on Zoom.
Michael Holman: That is very true. I know.
Anna Myers: We live on Zoom sessions. We have regular project meetings. We’ve got multiple projects together. It’s been a great relationship. I think Michael and I were both very numbers driven. We’ve just from the very beginning, really had a strong connection. My underwriting brother.
Michael Holman: I will never forget going through the rigors of those first deal where we just had to get comfortable and understand what each other were doing on the underwriting. Those were some good times Anna and yes, we do spend a lot of time on Zoom together. So it’s fun to have you on the show. Anna for anybody who’s listening who might not be as familiar with you or Grocapitus or what’s going on, can you just introduce yourself for everyone?
Anna Myers: Sure. As Michael said, I’m the CEO at Grocapitus. My business partner and fellow partner in Real Estate is Neil Bawa, together, we run, Grocapitus Investments, which currently has 1 billion under assets. We are both acquire existing value adds, as well as build and develop new construction. Garden style apartment buildings, as well as fourplexes and townhouse communities. We are on both sides of the value add and creating extreme value through new development and new construction.
We do partner with some people. Strong people, like Overland is one of our partners on three separate deals. We have some other key partners, but we also do our own projects. We are all about data, and we’re about the data of our markets, we’re about the data of how we process our properties. Michael knows, we are always bringing lots of spreadsheets to the mix. That’s one thing our investors really love about us is our data driven processes and the way we just live through data.
It’s born very well through our portfolio through these ups and downs, the pandemic, we have been able to deliver extremely great results to our investors, check it out on our website, we have seven exits, very strong numbers much higher than projected.
That’s all about the data. When you invest using data, you have like this extra thing going on that as the market goes up and down you got padding. It’s our secret sauce because you got padding. If you’re investing in a market where you don’t have population growth, and you don’t have job growth, and unemployment is above, then you’re going to get hit harder when things happen, because markets go up and down. So we’re all about the underlying fundamentals of the market and that’s why our portfolio has really thrived through the different market cycles.
Michael Holman: I love that and I can fully attest to all of that. Not all markets are created equal, which is something you need to understand. So I love this data mindset. Anna I’d love to understand because obviously I know you and Neil very well, and we talk all the time, I understand your background on why you’re so data driven, but what led you guys to say, hey, we need to be data driven, where did that come from? Because most of us Real Estate sponsors, you look at me as a Real Estate developer, there’s certain data that I look at, but I don’t look at it in the same way that you’re looking at it.
Anna Myers: Both Neil and I are technologists as our background. I came into Real Estate, I was not a full time Real Estate investor until 2018. But before that, I had a long period as a programmer and then became a systems architect. I’m always numbers driven. I’m always all about the systems and processes. That’s just how I think, that’s just the way I’m made. Neil as well as a technologist as his background. So when I saw Neil speaking at a conference, and he was all about the data and the market, I was just like, that guy, I really get that, because I was the spreadsheet queen. Like every market, I had all the data on everything.
That’s how I process and that’s how I analyze, and sort and filter. Neil and I were just kind of a very natural match, because of our backgrounds and because of the way we want to approach Real Estate. I know a lot of people are data driven now, but back in 2018, that wasn’t really what was happening. So it was a little bit unique. But it’s very authentic, in terms of that’s our DNA makeup of both Neil and I. It’s better than just being about numbers. It’s not just the math. The Real Estate really has to have extreme systems and processes and so that is where, my systems architect background comes in, where we’re creating the ways not only to find, but even more important to run, manage and build these communities.
Because once you acquire it, that’s just that gun going off at the race. Now you’ve got to run, now you got to run that actual marathon. That’s extremely important. So having the systems and processes in place are critical. Anyway, that’s my background as a technologist, but how did I get into Real Estate? My grandfather was a Real Estate maverick in Los Angeles. He was a self-made millionaire, which meant something back then and it was all through Real Estate. He started by flipping houses in Southern California. He came from Florida saw what was going on.
Then he built up this empire and was eventually developing shopping malls. He passed when I was young, I’m the youngest of 16 grandkids. However, he was in his early 60s. But he created this estate of properties and commercial Real Estate, which was the big thing at that time, retail was very hot back in the 50s, and 60s. When his estate passed, I, as an adult, had the opportunity to do what’s called a 1031, in order to avoid paying taxes on that income to me and because he was so forward thinking he was able to create it. I think we’re going to talk about 1031 later. We’ll talk about what 1031 is. My first 1031, or my first introduction was I needed to take the money that was coming from this estate and buy Real Estate with it. It was a 1033, because he was able to get the property declared eminent domain, that it was going to be taken over. And that gave us a whole different set of rules that were very, very favorable, even more favorable than at 1031. That’s very hard to get. But that’s just how much he was thinking about how to pass on generational wealth to his family.
By doing that I acquired several units, that was in Portland, Oregon, and was able to replace that. And that’s how I became a Real Estate investor. Then I have those properties going. I learned how much savings I can get through taxes, the depreciation, everything that goes on with it. It was just a light bulb for me and that’s when I really switched in my mindset to becoming much more savvy about how Real Estate can impact your life and provide so much freedom to you.
Well, however else you’re making your income, you are going to be able to shelter and keep so much more of it. If you become Real Estate savvy and have a portfolio. It doesn’t mean you have to become a full-time Real Estate investor. You can love what you do and do what you do. But don’t let all of your income go where you don’t want it to go. Try to create wealth for your future. That is what 1031 allow you to do. Michael, back to what we’re here to talk about.
Michael Holman: Absolutely. That is exactly what I wanted to talk to you about. The reason I wanted Anna to get on this show so bad is she has a wealth of experience with these 1031 Exchanges, both on the sponsor side and the investor side. That being said, I want to just roll it back just a little bit for anybody who’s maybe a little bit unfamiliar with what a 1031 Exchange is and maybe we can just go through and describe a little bit about what is a 1031 Exchange.
Anna Myers: Awesome. Well, Michael, I’ve got some slides that might help us out a little here.
Michael Holman: I love it. Anna is the most prepared person I’ve ever met in my entire life. I would expect nothing less from you, Anna Myers.
Anna Myers: I’m going to throw up some slides here. We’re going to talk about what is a 1031 Exchange. Michael, can you see my screen?
Michael Holman: I can, which means everyone else can too.
Anna Myers: It is a very simple level. For those of you that aren’t watching this and are listening to it, I’m still going to talk through all the points. But you might want to catch the version on YouTube that has the slide so you can get all this good data. So basically, a 1031 is a section in the Internal Revenue Code and that section is called 1031. What it lets you do is its tax code that enables the taxpayer to sell an investment property note, it has to be an investment property, not your primary house unless you do some very tricky things, which we can talk about later. But it allows you to sell an investment property with little or no tax liability, on the profits that you’re making from that property.
Say you buy it at $200,000, you’re selling it much later, and it’s now $500,000 that you’re selling it for. It’s that $300,000 that we’re talking about. Are you going to pay taxes on that when you sell it? Well through a 1031 you can avoid paying that tax. Basically, it’s a wealth building loophole. I can definitely attest to that. If you are into building wealth for yourself, and for your future generations, you really, really need to learn and master the 1031. It is your friend, for sure.
Michael Holman: I can absolutely attest to this. I’m sure Anna has dealt with a number of investors just like this and I can think of just off the top of my head, three or four people that I personally know investors with us and partners with us that have literally built small fortunes. When you start adding up the math on paying taxes on that $300,000 that Anna was describing earlier, paying taxes now, or deferring that till later. It’s huge. It’s mind boggling. You don’t think about it really at the beginning, but it just becomes so mind boggling, the actual power of deferring those taxes later on.
Anna Myers: Would you like to see some numbers?
Michael Holman: I would absolutely like to see some numbers.
Anna Myers: As you know, we just talked about being numbers driven. What I’m showing on the screen here it’s very detailed, but what I want to show you is, it’s comparing a traditional investment, that is $1 million in capital gains, and if it was a traditional investment that you’re paying taxes on, versus a 1031 investment, there’s an ozy bucket here, what we’ll skip the opportunity zone part. But the bottom line is, if you have a capital gain of $1 million, and then your after-tax investment is $669 here, you would be paying taxes, federal and state taxes, this assumes you live in California, but you’d be paying taxes and out of that initial capital gain.
Your after-tax investment would be $669. Now with a 1031, you’re not paying those taxes. You’re a capital gain from 1 million, and you’re after tax to 1 million. The bottom line is, if you’re holding something for 10 years, you can have a net gain of $491,000 with traditional investment, or over $1.5 million if you did a 1031. A million-dollar difference. That is just huge. You always need to look at that. Where could you be, 1031 versus not doing a 1031.
Michael Holman: The amazing part about and I love that slide because it illustrates it so perfectly. But one of the amazing things about the 1031 and the power of it is that’s just one example, over a 10-year period, think of that over a 20, 30,40-year period. Think if you had to 1031, you’re tripling the amount of return that you can get in that example, over the same 10-year period. That really starts to compound quite frequently. I love that example, Anna.
Anna Myers: We’re going to talk a little bit more how to maximize that. But the first thing you do need to know about a 1031 is, it is not a tax-free strategy. What you’re doing is you’re deferring taxes, so you’re just not paying the taxes. However, if you do a 1031, and you defer those taxes, and then you sell that property, and you don’t do a 1031 with that property, then you have to pay all those taxes. You’re only kicking the can up the road, it’s very important to understand that. However, currently, and I don’t believe it’s going to change, you can pass the property on to your future, your kin, whoever your estate goes to.
At your death, I know it’s a little bit more of it. But this is the way it works, there’s a step up in basis. All of those capital gains that would have been paid, if you were to sell it, that goes away. So your future generations, they can sell it and all have that decapture, recapture, depreciation recapture. All of the capital gains that you would be taxed on, or they would be taxed on eliminated. It is a beautiful strategy. But you just have to know that you have to continue 1031 through multiple properties, if you’re going to do cyclical where you get your gains, you buy another property, you then buy bigger, then you buy bigger. There’s no limits on how many times you can 1031. That’s really, really key.
Michael Holman: Anna the CPA in me just got really excited every time you say step up basis, because that just means that taxes just disappear at that point. That’s what makes me happy. That’s my former life, right as an auditor Ernst and Young, we just get a little excited every time you hear something like step up basis, because that’s a huge deal.
Anna Myers: It is a huge deal. But we do need to know there’s a few very simple rules for 1031. One is that all of the cash proceeds from the sale of what you’re selling must be invested into what’s called the replacement property. Anything you don’t invest, you have to pay the tax on that difference. When you’re stepping up, what you want to do typically is buy a property that’s more expensive than what you just sold. The replacement property needs to be at least as much as the sales price or greater. The purchase of that replacement property, it needs to be the same, whatever the name is, you need to have that same.
If you sell a property and it’s in your name, you need to buy a property and it needs to be in your name. If it was in the name of an entity like an LLC that you’re holding, then the new property has to be in that same LLC. That is very important and sometimes that’s why people can’t just do a 1031 into a syndication without some special help.
We’re going to talk about that in a minute as well. The 1031 company that you’ll be working with, you get to exchange company and before closing on your existing property, this is super important. You can’t close on the property you’re selling, and then decide to do a 1031. You have to decide beforehand, and then you have to have it as part of your closing. Then you’re going to need to buy like kind property, Michael.
Michael Holman: I have to jump in there for one second and just to reiterate something for everybody listening, because I’ve seen this so many times. What Anna said earlier, you have to decide to do a 1031 Exchange and start that process before you sell your property. The important part is there’s this Qualified Intermediary, and that Qualified Intermediary, that’s a number of banks and other companies.
It’s essentially a person who’s licensed with the state or the federal government. They are the ones that handle this transaction. Because if the money comes to you, after you sell the property, you are no longer eligible for a 1031 Exchange. If it passes through your bank account, or something that you control, you’re no longer eligible. Doesn’t matter what…
Anna Myers: You have to pay taxes on that money. It has to be a hands-off transaction. Hands off for you. You have to engage this company in the index.
Michael Holman: I just want to reiterate that for everybody. If you have a property thinking about selling it, I 1,000,000%, recommend a 1031 Exchange. But you have to make sure that’s something you decide before the property is sold, and the money is in your bank account.
Anna Myers: Then you engage that company. What you have to do though, when you’re selling you have to buy what’s called like kind property. Unfortunately, there’s a long list of what is like kind property, this is that list. It’s single families, multifamily, commercial office, retail, industrial, you could buy vacant land. You can buy oil and gas interests, mineral interests, there’s some very interesting things that you can 1031 Exchange into. Delaware statutory trusts and lastly, tick property interests or tenant in common. We’re going to talk a little bit about that in a minute. But the timeline here is what you really need to know. Because when you do a 1031, you are on the clock. It’s a 180-day timeline.
From day one, that’s the day that you close escrow on the property that you’re relinquishing, the property that you’re selling. Hopefully, you started looking before day one. You have 45 days to identify your replacement properties. Day, 45 is critical, they’re not going to let you come in on day 48, or day 46 even. You can come in early day 20. But you have to provide a list to your 1031 Exchange.
QI the Qualified Intermediary, it’s a formalized list, it has to be emailed with a timestamp etc and you have to give them a list of the properties that you’re looking to exchange into. Then you have between day 45 and day 180 to close on one or more of those properties. There are no extensions, if you missed day 45 and you don’t get your list in it doesn’t work. If you get your list in but you don’t end up closing on a property on that list. Say it’s something else you found even no matter how great that property is, it doesn’t count.
Michael Holman: Anna a question that I get all the time related to this list. Because if you’ve never done a 1031 Exchange, people are like, am I just writing on a piece of paper, fold it up, email that to the IRS and hope that something happens. What is that that process that you’ve experienced? What is that list? Is it simple? Is it difficult? Does it take a lot of work or a little work? What does that mean?
Anna Myers: The major work is in finding the properties, that’s the hardest part. Writing down the list. Your Qualified Intermediary will give you a form that you fill out and most of them will accept it over email. Basically, you’re providing the address, the projected selling price that you’re going to be buying it you might not know the exact price. Hopefully you’re actually in contract. on one or more properties to put that list together. You should have good numbers. But writing the list is the easiest part, Michael, I would say because you should know the address, you should know the amount.
It really is getting those properties and that is what makes the 1031 Exchange so stressful. It can be hard to find the properties in the timeline that you have. Additionally, the market that you’re living in, or the market maybe that you’re selling from, they might not have deals that cash flow. Then you have to look out of state. I had that problem, where I had a 1031 when I was selling the properties in Oregon, after 10 years, the ones that I 1031 into for my grandfather’s estate, I was selling those properties, and I had to find something and it’s like, well, the world is your oyster, you can invest anywhere in the United States.
You can find your replacement property. But that’s a pretty big world. So how do you do that? And if you’re investing from out of state, how do you go in and check out the properties. You have to qualify for loans when you’re working with banks. If you sell a 1031 and you have debt on that existing property, you have to have debt on the new property as well. At least the same amount of debt or greater. You can always have a larger loan. But you can’t have a smaller loan. There can be a catch 22 for part time real estate investors. If you’re buying a property that you then want to do a value add where you want to renovate it and add value to it. So you’re not buying top of market, you’re buying it and building equity.
That’s a lot of time and money you’ve got to put into the property after purchase. Instead, you’re buying turnkey, meaning that you know the property is all built, and you can rent it out right away, you’re going to be buying top of market, so there’s no equity left in that deal. Hopefully it’ll cash flow, but now you have to just hope that the market is going to appreciate over the time that you hold it, and then the rents were hold. So this is really your choices, spend a lot of time and money on a value add or buy turnkey and hope that the market is working in your favor. However, for people that are super busy want to do 1030, there’s another option where you can get involved in a tenant in common scenario and you can 1031 into a syndication.
Where other people are buying the value add or building new development, new construction, and they are doing all the work and you are building the equity through their work. So very key thing. Remember earlier I said you have to invest in your same name. Say you are invested as Rose Tree LLC that was the company that you sold from and that’s your house that you sold your real estate investment was Rose Tree LLC. When you’re buying new, remember it has to be in that same name. The challenge with going into a syndication is a syndication is in an LLC in the name of that apartment building.
So we’ll call it Apartment LLC. Rose Tree is not buying. When you’re buying shares, you’re buying shares in Apartment LLC, that’s not a match. You can’t do that it doesn’t count as a like kind exchange. What you can do instead is Rose Tree LLC can come in under a tenant in common structure. It can come in as Rose Tree LLC within that tenant and common structure. So that’s how we get around in a beautiful way, the like kind exchange rules.
What is a tenant in common? Well, it’s basically an entity or it’s a group of one or more peoples that are living within kind of this umbrella called a tenant in common. Each person holds their undivided interest or their ownership interest in the project. It’s really a pretty great structure. Michael and I have done this many times with our lawyer, Julian Kelly and we can get into more of that. It’s kind of getting down into the weeds. But it’s basically like an operating agreement, just like the operating agreement for the LLC, where there’s rules that are laid out, about voting rights and various things. It’s straightforward.
Michael Holman: Anna, you bring up a really good point there. And yes, Anna and I have done this a number of times together with a number of people. The conversation is generally the same. What ends up happening is inevitably and I’m sure Anna, you can attest this. You get a call from an investor that goes something like alright, if I have to fix one more toilet at 2am in the morning, in my rental house, I’m just going to burn the house to the ground and call it good and walk away.
I am done with that. I don’t have time for this, I got another life to live, I am not there to fix these problems that always seem to exist. Even when you have a management company, that management company oftentimes needs your approval and authorization and as you get busy and busier, that’s just really, difficult to do. It usually goes something like, what options do I have? What can I do, what are my options? and this is honestly, in my opinion, the best maybe one of the best, if not the best ways to get kind of out of that active management role, and still get all the benefits. That’s kind of one of the things I wanted to point out is we kind of talked about this tick structure, what really are these pros and cons Anna? What’s the benefits, but everything has a catch, nothing’s perfect. What are the pros and cons here?
Anna Myers: Great that you ask because there are some significant benefits. One thing is your buying power. If you were buying with your, remember, we have the $200,000 you’re selling it for $500,000. You need to buy a property that’s $500,000 or greater. That $500,000 that you’ve got that you need to move forward, you might be able to buy a house somewhere, maybe if you were buying in a risky market, you might be able to buy a few houses, or you might be able to buy a duplex.
But if you were to take that$ 500,000, and you wanted to invest in an apartment building, a true apartment building in a great Metro, with strong property management and strong population growth, etc, you can go into a tenant in common and you’re able to buy a piece of a much larger, much more scalable asset. Oftentimes, the difference what tenant in common allows you to do, it allows you to get into commercial real estate. When you’re in the single-family world, you’re in residential real estate, and you’re not able to take advantage of the multiples that commercial real estate gives you, which is basically the value of the property is looked at as a mathematical formula. It’s the net operating income divided by the capitalization rate for that market.
As you drive the NOI higher with your skilled managers driving that net operating income, to become a better and better number, that’s how you drive value in commercial real estate. With single family, you’re just left to hope that the market is increasing. The market these days is increasing in a lot of places. But when you buy top of market, is it going to continue to increase? You don’t know, you don’t have any ability to manipulate that. When you’re buying commercial real estate and you’ve got the right management team in place. That’s when you hold all the cards. Not only increasing your buying powers, but being able to invest in a much larger, underlying scalable asset.
Michael Holman: I think that’s a really big point, Anna, that you just made. Because you can even start to see right now. We’re based out of Utah, and we’re starting to see with these rising interest, things were going gangbusters for a couple of years. You are jaw dropping on how big the increases in home prices, you could buy anything, and it was going to go up in Utah. What we’re starting to see now with the interest rates increasing, it hasn’t dipped, but there’s a lot more homes on the market now than there was even a month ago just with these rising interest rates that have happened just over the last little bit.
There’s really nothing you can do about it. If you have a rental property, that’s just a single-family home, your value is just dictated by basically what everyone else is selling their home for or what somebody is going to pay. You have no control. It doesn’t matter if that was a rental property, and you had a tenant that was paying four times more than what anybody else might pay or you have this awesome, awesome property. It just doesn’t matter. None of that. It’s just what is somebody willing to pay for that? Oftentimes things like your tenant, the rent, what people are paying for that, that’s not even a consideration.
Anna Myers: That’s right. Another benefit, Michael, is that as we were talking about before, it’s a passive investment. When you’re buying a tenant in common, you are not playing an active role in the management of this property. You’ve got property managers that are within the budget. So top notch property managers that are within the operating expenses budget of the property. You’ve got experts running it, and you’re able to diversify into markets that you may not know anything about, but your management team, they’re experts in that market. This one is big, Michael, you don’t need to qualify for financing. Remember, we talked about loans.
If you have a loan for your 1031, you need to have an equal or greater loan in your next 1031. What if you’re in a part in your life, where you’re just not going to qualify because you made some pivot in your life where you don’t have a lot of income, and you’re not going to be able to spread between your own mortgage and this new Real Estate investment, etc, it’s just not a good time for you. You are not on the loan, your background, your resume is not being looked at by the lender when you’re buying into a tenant in common. They’re looking at the guarantors of a loan, and the general partners that are basically working with a lender.
This is a huge deal that you don’t need to qualify for financing. It also dramatically decreases the risk and the stress of the 1031. Because you can identify this and add it to your list and it’s just like your ace in the hole there. The way a syndication is structured, when it has a tick, is you basically still have that investor LLC. Then there’s an additional tenant in common. You’ve got the two different buckets there. There’re two different entities and then you’ve got the multifamily syndication in the middle.
We don’t want to go too far into these org charts, Michael. I think that’s a pretty good framework to tell people about what is a 1031 and what are the benefits of a tick. We may want to talk about some of the other elements. When you’re involved in a tenant in common, what does that mean for you? There is some paperwork that you need to do.
The tenant in common agreement is one of them. That is penciled by the lawyer and that is something that typically you will have to sign. The reason you may not always have to sign is important is because you one of the paperwork you need to sign is a power of attorney or POA. Where you are giving the general partners of the project, the ability to sign in your name, to make certain decisions.
It’s something that they really need, because you would be a co-owner of this property, even if you’re like a half a percent co-owner. They can’t need you to sign every time that the property manager, something needs to happen on this, something needs to happen on that. If they didn’t have that POA, you’d need to be signing all day long, like every week, there’d be signatures that was needed from you over stuff that you don’t need to know or care about.
Because it’s just part of the mechanisms of running a property. The POA is really critical, and it makes it much more of a passive investment for you. Of course, you’re going to get reporting, you’re going to understand everything that’s going on in the project. But you don’t want to have to sign every little thing. The POA is an important document, the tenant in common. Michael, what are some of the other documents that are involved? He’s like my documents master.
Michael Holman: She’s pointing to me because we just closed on a construction loan. It was about a $51- $52 million construction loan, we had. Six 1031 Exchange investors are a part of that deal. You can get really detailed. But what Anna was saying is important, and I’ll get into all the documents. It’s very specific. The reason, a lot of sponsors and syndicators don’t do the 1031 is it takes a specialized knowledge, not only a 1031, but you have to understand the legalities of it, and you have to understand how lenders are viewing this.
The lending side of it is almost the bigger issue. Each lender has a specific set of what they want to see and what’s important to them. That’s generally going to include a lot of times the lender will want you to create, you have to have your same entity be the 1031. But you can have a disregarded entity in front of that. Let’s say you invested as yourself personally, Michael Holman did a 1031. You are allowed to go create a new LLC. It is disregarded, all of the same tax implications flow to the same person or the same person…
Anna Myers: Or the same social security number. It all flows to you.
Michael Holman: A lot of times you’ll have to create that SPE and with that comes the standard operating agreements, and what we do the reason that’s there is mostly for lenders. Because the lenders don’t want anything other than that 1031, that investment involved with their loan because you are a borrower. You are on title.
Anna Myers: We should mention that because we said that you don’t have to qualify for lending, however you are on the loan, and you need to be in order to fulfill your IRS obligations for debt assuming you have debt. You do need to sign but you are not responsible for the loan. If anything happens, you have no liability on you, it is the guarantors of the loan and it’s the asset itself, where the liability lays.
Michael Holman: That is the key, these are not the 1031. Unless you have a debt obligation, which we can usually carve out like a limited guarantee for you just for that amount. Other than that, though, there’s no personal guarantee from you. Every lender is a little bit different. Some lenders are there’s hot topics, not hot topics, but getting this all come together, it’s really our attorney that we use all the time, and the lenders attorney working together to figure out what documents need to be created to make everybody feel comfortable.
One of the big things that happen and it’s so important is the biggest concern of a lender, in general about doing a tick or having 1031 on an investment is going to be bankruptcy. Bankruptcy is huge because you are a borrower. Let’s say you might only own half a percent of an entire project. But if as a tick member, you declare bankruptcy, you can put that whole loan in default. There’s going to be certain documents and certain things that lenders are going to view to try and mitigate that risk. We’ve done it, like I said, multiple times, there’s a lot of different ways to do it, and a lot of different documents, and many different ways to skin a cat. But those are some of the documentations that you’re going to see. The biggest ones are going to be the operating agreement of an SPE, are going to be the…
Anna Myers: Purpose entity, SPE so he’s going into purpose entity.
Michael Holman: I am just zoned in right now. What you have on here Anna, that you just pulled up that trust deed is really, really important. That deed of trust is really the thing that proves to the IRS that you purchased an interest in the land, or that you purchased an interest in the actual real estate.
Anna Myers: You’ve got your real estate purchase contract, your REPC. That’s between the general partners, they carve that out. Basically, the amount that you need, and if you’re bringing debt to the project, there will be a promissory note and that identifies and carves out the amount of debt you need according to the IRS to fulfill your 1031 Exchange obligations. You would only be responsible for that amount of debt $100,000, $200,000, you’re not responsible for the $20 million loan on this gigantic project.
Your tenant in common agreement, and then we talked about the limited power of attorney as being an element as well. One thing, it’s always important to understand are what are the costs involved with coming into a 1031. Many people might be familiar with a syndication. If you were to invest $100,000 into a syndication, you generally don’t have any costs, you receive the K-1, because the project pays for everything and then becomes profits. An LLC investor receives a K-1 every year, typically and that’s how they file their taxes. But if you are a co-owner on the project, you’re not a shareholder, you’re a co-owner, you’re a participant on that project.
You are not going to receive a K-1. So you will have your own taxes to do. In the closing process, I’m going to step back one step. In the closing process for syndication, you have no closing costs. Those are all handled for you. But if you’re doing a 1031 Exchange, you do have closing costs because you are doing a real estate transaction and there is title costs and title insurance that we have nothing to do with that’s just between you and the title company in order to fulfill your obligation. There are costs involved in closing your tenant in common and then what are the ongoing costs? Well, the ongoing costs fall into two primary buckets.
It’s your annual fees that to maintain any of your entities which the lenders Michael was trying to say. Michael was saying the lender might require you to create a new entity, that’s a clean pure entity. Normally it’s oftentimes it’s out of Delaware and it is your responsibility to maintain that the cost of the entity. Every entity needs nurturing and caring and usually has an annual fee. The other ongoing fee would be the cost of your CPA or your accounting team because on a yearly basis instead of a K-1, you will receive the financials from the project, and you will know your percent of ownership and it would be your responsibility or your CPA’s responsibility to carve out from the financials, your responsibility and how that applies to your taxes. Those are basically the three things that are different from a syndication, being a syndication investor, and being a co-owner.
But I look at them as superpowers. Yes, there’s costs involved and they’re not huge costs. I want to say they’re not big, scary costs. But they are giving you the power of sheltering the profits that you brought into the tenant in common and brought into from your previous exchange. You are sheltering your taxes and then the best thing about it is when that syndication sells, you have the ability to 1031 out of it. All those other people that are in the syndication because they are invested through that member apartment LLC, they can’t 1031 unless the entire apartment LLC does a 1031, which can happen, it’s happened before, we’ve done it.
But it’s unusual, and it’s difficult. But when you are in a tenant in common, and you’ve got your Rose Tree, LLC that came into the tenant in common, and you’re still rose tree, LLC, when the syndication, when the property sells, you have the freedom to 1031 out and all of those profits that you just made with your professional management running it, the professional developers building the building, leasing it up, getting it all ready to sell, selling it, and you’ve got all those profits, and you can move them on. Again, defer taxes, it’s important, it’s not tax free, you’re going to continue to defer your taxes and move into a bigger and better property and keep going.
Michael Holman: Those costs that you mentioned, a few $1,000 in costs is minimal compared to those million dollars that you can save in that example we showed at the beginning. Anna, I want to switch gears because you personally. I know you personally, you’ve done, you’ve helped, you’ve been the sponsor, and help 1031 Exchanges into deals. We’ve done that together multiple times. You’ve also been the investor that had a 1031 Exchange that went into a syndication deal. I’d love to get your take on the different perspectives, and maybe any advice that you would give to people having that unique perspective of being on both sides. What advice would you give to people who might be interested in looking into this further?
Anna Myers: I’ve been involved also in looking for my own 1031. I think at this point, I have done eight 1031s in my life, and many of them are serial 1031. When I sold those properties in Oregon, I actually took that money, and I did a 1031 into Coyote Creek, which was our new development project in St. George Utah. It was awesome, because I didn’t have to run around the US looking for properties, because I knew exactly what I was going to do. So that really removed the stress for me. I know it, I’m going to do this. I know it’s a great market, there’s going to be a great team.
I also was part of the team that was handling it. But then from the investor standpoint, from the buyer standpoint, so I became a co-owner of that property. Yes, I had my 1031 Exchange company that I worked with, and they provided me with a form to fill out to identify my properties for the 45 days. I needed to find out the percentage and that was a little odd because it’s new construction. I needed to determine my percentage of ownership. When you’re 1031 into new construction, syndication, there’s no building there. What do I own air? No, what I did is I 1031 into the land. This is how we often do it with new development construction.
I was buying land. I had a percentage ownership in the land. Let’s just use a round number. Let’s say the land costs $2 million. My 1031 owns a percentage of that $2 million, but the actual project that we’re developing ended up being worth $20 million. I end up with two percentages in this case. I have the percentage of land ownership and then I also have the percentage of the future value of the building which is much higher. Then I’ve got my percentage of that $20 million. That’s a little interesting, and we have ways to help. We have a very straightforward Excel that helps the 1031 buyers know what their percentages are.
Your 1031 person will need those two numbers. When you’re buying a land, it’s a parcel, there’s no address because it doesn’t exist yet. It’s often like a crossroad, or it’s a parcel number, or a series of parcel numbers. We could be conglomerating multiple parcels into one day. It’s not put together yet. So there could be a whole bunch of parcels. That’s where things get a little interesting and it’s different from just buying a single-family home. But it’s just paperwork. The team will help you work with your 1031 Exchange intermediary to identify exactly as they need it. Everything has to be done to the tee, these are legal documents, you don’t want to just be like, well, I don’t know, it’s at this cross street and I think that’s much.
In order for it to be accurate and legally bound, you have to be on the spot. We understand that because we’ve done it so many times ourselves. We will help do that and then otherwise, there was straightforward paperwork that I had to sign. In terms of the loan part, I did carry a loan, so I had to sign a promissory note. That wasn’t a problem for me. I just had a little tiny car belt. But if anything went wrong, I would be responsible for that money, nothing went wrong, and it’s been great. In fact, the project is now fully built, fully leased up. I think it was originally Michael, was it $25 million, the original value? Recently we have offers at $38 million for that property. But we’re not selling it at that price, because we know it’s worth a lot more.
I have tripled my value of what I brought in for my 1031 has now been tripled in value in three years. When I do 1031 out of it, I will bring those profits and then put them somewhere else either with another syndication property, or I might have enough money coming out of that one to buy my own small multifamily. That’s what it’s about, tucking your money somewhere safe, letting other people create the value for you.
Yes, it takes some paperwork. But honestly, it’s been painless compared to what I went through with that original property. When it was in Oregon, chasing my property manager. There were all kinds of problems with tenants. I don’t have to worry about any of that with this property because the property management deals with all about, and I just get my monthly investor update reports. My quarterly webinars and I’m good. I know what’s going on with the property.
Michael Holman: There’s some unique perspective for everybody. Anna Myers, who’s been on both sides. She’s brilliant about 1031 Exchanges. I’m really excited we got to bring her on. Before we get to these last couple of questions. I just want to give you the opportunity, how can people get in touch with you?
Anna Myers: Sure, Grocapitus website is probably the best place that you can go. There’re two websites Grocapitus.com. If you go there, then you’ll see what we’ve got going on in terms of current deals. At this time, when Michael and I are now talking, we do have a 1031 syndication opportunity coming up. It’s in for a very mature project. So it’s very fortunate, we’re opening it up to a handful like maybe five people to come in very late in the construction cycle where we’re just about to go in for the construction loan. Much of the risk is off the table versus the early investors.
That project is called the Avondale Common. We will be launching in mid-June, we will have a webinar about that so please go to Grocapitus.com and you can look for that. You can also contact me directly Anna@Grocapitus.com. One other place I want you to connect to however, is our education portal. We do multiple webinars typically like three to four a month. They are completely free. It is free education for you. I either teach or host webinars, Neal Bawa, we have lots of webinars that he does. This is all brand new content that we are creating all the time as well as having industry experts come on and present their material.
But it’s always very high quality. That’s multifamilyu.com. You want to definitely engage with us on that so that you become part of the community that’s regularly receiving invites to these webinars. We have an upcoming webinar this week on interest rates and what that means for the real estate. I will tell you that Neil is recognized as one of the thought leaders in the industry and the research that we do to put together these webinars is incredible. About once a month, we’re not just regurgitating old content, we’re looking at the market, seeing what’s going on, and really doing our research to bring to our investors that dissected and boiled down information that they need to know, in order to understand what is going on in the macro-economic world and how does it apply to me as a real estate investor. That is the type of content that we are very commonly bringing out.
Michael Holman: I can very much attest to everything she just said those webinars are fantastic. Both Anna and Neil do a great job. The amount of research like she said, is just staggering. I’ve been behind the scenes on a number of those types of webinars with them and it is fantastic. Definitely check that out. Also, check out Grocapitus. Like Anna said, we do have a deal coming up that is eligible for 1031 Exchanges. So if you’re in that position, where you’re saying, hey, I’m about to sell a property or something like that, reach out, we will have webinars, we’ll have different things coming up where you can really get to know the process even better if you’re in that boat.
Anna Myers: The only caveat, Michael, which we didn’t say earlier on is typically when you’re going to 1031 into a syndication, syndicators are not interested in small amounts, because there’s a lot of paperwork. We mentioned, it’s easy for the 1031 participant, it’s not easy for the syndicator. Because there’s a lot of effort that goes on, especially around closing the construction loans. There’s a lot of work that goes on. So typically, is higher value 1031. If somebody’s looking to 1031 $30,000, $50,000, $150,000, those amounts are not typically eligible to 1031 into a tenant in common. But if you have larger amounts that you’re looking to 1031, then those are a great opportunity to look at a tenant in common structure as a possibility.
Michael Holman: Absolutely. All right, Anna, we’re going to end things with the two questions I ask every single person who comes onto the show. First question, what is the best business advice that you were ever given?
Anna Myers: That’s easy. The best business advice I was ever given came from my father, but it was from my grandfather, again, I was very young when my grandfather passed, which is basically, it’s not what you make, it’s what you keep. That has really stuck with me. No matter how much money I make, that’s not the point. The point is, how much of what you’re making, are you able to keep? And then of course, do with what you want or further invest. That’s always stuck with me and that has been a guiding principle for me. It’s very important that you’re aware of, how do you keep it and create structures on how to do that.
Michael Holman: That is fantastic advice. At the end of the day, that’s what matters. What that thing is doing is its laser focusing you on what is important. You get to some of these fallacies, where it’s like, look how many website visitors that I got, or something like that. Well, at the end of the day nobody’s selling anything, because you got website visitors. It’s how many people are purchasing your product, or how many people are doing something. I love that it focuses you on the important result that you’re looking for. Next question. What real estate investing advice would you give others?
Anna Myers: I definitely would say that 1031 is your best friend. As a real estate investor, if you’re looking to build generational wealth, and you’re looking to really scale, what you’re doing, then you must be looking at 1031. It is just a wealth generation loophole, basically, that allows us to avoid paying or defer paying taxes and then pass that value that you create over a lifetime to your future to whoever’s in your estate. Then they get the benefit of that. That’s really the beauty to me is you’re creating value all through your life, and then passing it on, and what a foundation that is for your future generations. 1031, 1031, 1031.
Michael Holman: That is fantastic advice. Well, Anna, thank you so much for being on the show. It was a pleasure. Like always. Thank you again for coming on.
Anna Myers: Thanks, Michael. It’s been great hanging out with you in zoom once again.
Thank you for listening to The Executive Real Estate Investing Show. Ready to learn more? Go to ExecutiveREIShow.com for more episodes and resources to help you create generational wealth through real estate investing. That’s ExecutiveREIShow.com.
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MENTIONED IN THE SHOW
You hear it in the intro every time we release a new episode of The Executive REI Show—we love real estate investing because it builds generational wealth! And one of the absolute best ways to do this is through utilizing 1031 Exchanges. They are a wealth-building loophole that lets you grow your real estate investments, keep more money, and build generational wealth for your family. To talk more about this topic, we invited Anna Myers
- As Chief Operating Officer at Grocapitus, Anna is an expert in finding, analyzing, and acquiring commercial properties. Along with her business partner Neil Bawa, Grocapitus currently has $1B under assets. “We both acquire existing value ads as well as build and develop new construction. Garden style apartment buildings as well as four plexes and townhouse communities.”
- Grocapitus is a partner with Overland on three projects, in addition to their own projects.
- Anna is a data-driven person and loves to gather as much information as possible during every phase of a project. “Michael knows we are always bringing lots of spreadsheets to them, and that’s one thing our investors really love about us is our data-driven processes and the way we just live through data. It’s born very well through our portfolio, through these ups and downs of the pandemic. We have been able to deliver extremely great results to our investors.”
- More on the importance of data: “When you invest using data, it’s our secret sauce, because you’ve got padding. If you’re investing in a market where you don’t have population growth and you don’t have job growth and unemployment is above average, then you’re going to get hit harder when things happen–because markets go up and down. So we’re all about the underlying fundamentals of the market and that’s why our portfolio has really thrived through the different market cycles.”
- Incredibly, Myers has only been a full-time real estate investor since 2018. Before that, she was a programmer and systems architect, which explains her love of numbers and data. “That’s our DNA makeup of both Neil and I. and so that is where my systems architect background comes in, where we’re creating the ways not only to find but even more important to run and manage and build these communities.”
- Anna found herself researching 1031 exchanges when her grandfather passed and left a huge estate of investment properties to her and her family. “My first introduction was I needed to take the money that was coming from this estate and buy some real estate with it, and I had the opportunity to do what’s called a 1031 in order to avoid paying taxes on that income to me.”
- A 1031 is a great way to pass on generational wealth, and it’s exactly how Anna got started. “I acquired several units in Portland, Oregon and was able to replace that and that’s how I became a real estate investor.”
- “It’s a wealth building loophole and I can definitely attest to that so if you are into building wealth for yourself and for your future generations you really need to learn and master the 1031.”
- Learning about the savings in taxes that a 1031 exchange can bring was “like a lightbulb going off,” and Anna switched her mindset to become more savvy about how real estate can impact your life and income. “However else you’re making your income, you’re going to be able to shelter and keep so much more of it if you become real estate savvy and have a portfolio. It doesn’t mean you have to become a full-time real estate investor.”
The Basics and Beyond of a 1031 Exchange
- 1031 is a section in the Internal Revenue Code that enables the taxpayer to sell an investment property with little or no tax liability on any resulting gain. “It has to be an investment property not your primary house.”
- A brief example. A traditional investment of $1MM held for 10 years would yield a net gain of ~$490K, because of Capital Gains taxes. But that same investment made through a 1031 exchange—because the taxes are deferred, would see a gain of over $1.5 million!
- It’s important to know that a 1031 is not a tax-free strategy. “What you’re doing is you’re deferring taxes. If you do a 1031 and you defer those taxes, and then you sell that property and you don’t do a 1031 with that [next] property, then you have to pay all those taxes. So you’re only kicking the can up the road.”
- But, “You can pass the property on to your kin or whoever our estate goes to, and at your death, there’s a step up in basis.” What that means is that any capital gains that would have been due if your family were to sell the property goes away. “So your future generations can sell it and all of that depreciation recapture and all of the capital gains that you would be taxed on or they would be taxed on are eliminated.” As long as the properties you are buying and selling remain in the 1031 cycle. There are no limits on how many times you can 1031.
Easy Rules for 1031
- “All of the cash proceeds from the sale of what you’re selling must be invested into what’s called the “replacement property.” Anything you don’t invest you have to pay the tax on that difference.”
- You typically need to purchase a property that is more expensive than what you just sold. “The replacement property needs to be at least as much as the sales price or greater.”
- The purchaser of the replacement property must be the same as the seller of the relinquished property, or be a “disregarded entity.” So if you sell a 1031 property under your name, the replacement property must also be purchased in your name. If the sell was done as an LLC, the replacement property must remain under the LLC.
- For safe harbor protection, the exchange funds should be held by a Qualified Intermediary. A. the 1031 exchange company must be assigned to your sale BEFORE CLOSING on the relinquished property. B. Funds from your sale are then held by the Q.I., and then transferred into replacement property. Michael stresses the importance of understanding this rule. The Qualified Intermediary is “a person who’s licensed with the state or the federal government. They’re the ones that handle this transaction, because if the money comes to you after you sell the property, you are no longer eligible for a 1031 exchange. If it passes through your bank account or something that you control, you’re no longer eligible. You have to pay taxes on that money.” It must be a hands-off transaction for you.
- The replacement property must be a “like kind” real estate that is intended to be held for rental, investment use, or use in business. This is a broad term with a lot of leeway. It includes single and multi-family, commercial office, retail, industrial, vacant land, even oil/gas/mineral/air/water rights. “Like kind” properties also include Tenants In Common property interests.
- With a 1031 exchange, you have 180 days to purchase/close on a replacement property. The clock starts ticking the day after escrow closes on the relinquished property. You must provide a formalized list of identified replacement properties that you are looking to exchange into to the QI by day 45.
Can You 1031 Into a Syndication? Yes! With Tenants In Common!
- If you have grown too busy to be able to manage your properties, you could get into passive investing and let syndicators purchase value-add properties or building new developments. “They are doing all the work, and you are building the equity through their work.”
- Remember that rule that 1031 exchanges must be in the same name that the property was sold as? This can make things sticky. Let’s say you have an LLC named Rose Tree LLC. “The challenge with going into a syndication is that a syndication is in an LLC in the name of that apartment building–so we’ll call it “Apartment LLC.” So when you’re buying shares you’re buying shares in Apartment LLC, and that’s not a match. That doesn’t count as a “like kind” exchange.
- A Tenants In Common (TIC) Structure avoids this. A TIC is ownership in which two or more people/entities own separate shares of the same real property. Each person holds an individual, undivided ownership interest. So in this example, Apartment LLC would sell Rose Tree LLC shares in the property. This would count as a “like kind” exchange, and still subject to all of the benefits of a 1031.
- Buying into a TIC syndication is a great way to enter into passive RE Investing. Michael: “In my opinion it’s one of the best if not the best ways to get out of that active management role and still get all the benefits.”
- One of those benefits is an increase in buying power. “If you are selling a property for $500,000 you need to buy a property that’s $500,000 or greater. Well that $500,000 might buy a house somewhere maybe if you were buying in a risky market you might be able to buy a few houses or you might be able to buy a duplex. But if you were to take that $500,000 and you wanted to invest in an apartment building–a true apartment building in a great metro with strong property management and strong population growth etc.–you can go into a tenant in common and you’re able to buy a piece of a much larger much more scalable asset.”
- Of course, a key benefit of investing with a syndicator is that you become a passive investor. No more phone calls about fixing toilets at 2 a.m.; no more headaches with tenant interviews (or worse) evictions. Professional Property Managers and Asset managers handle it all.
- And you don’t have to be an expert. Experts like Anna bring their data-driven approach to the deal. They’ve researched markets all over the U.S., which means you can invest anywhere in the country, even if you’ve never been there.
- With TIC investing into a Syndication, you do not need to qualify for financing. The financing is already secured through the previous sale of your property.
- What are the ongoing costs as a TIC participant? “Annual fees to maintain any of your entities. The lender might require you to create a new entity that’s a clean pure entity. And it is your responsibility to maintain that cost of that entity. Every entity needs nurturing and caring and usually has an annual fee. The other ongoing fee would be the cost of your CPA or your accounting team because on a yearly basis instead of a k1 you will receive the financials from the project and you will know your percent of ownership, and it would be your responsibility or your CPA’s responsibility to carve out the financials and to know how that applies to your taxes.”