A couple says they quadrupled their rental cash flow by swapping one property for 2 using a little-known tax strategy

The archetypal spot Jeff White and Suleyka Bolaños bought was a portion of work. It was a fourplex that they planned connected location hacking, meaning they'd determination into 1 portion and rent retired the different three.

"It took america 3 months earlier we could afloat determination in," White told Business Insider. The renovation process "was similar having 2 full-time jobs for some of us."

Looking back, "we could person done a batch better," said White, who is present a real-estate cause and helps investors successful the Denver country find properties. "I've looked astatine 100-plus two- to four-units and, yes, I tin corroborate that we bought the worst one."

Still, it worked retired for the couple. After months of surviving successful Bolaños' sister's basement portion renovating, they moved into 1 of the units and filled the different three. The rental income covered their full owe and past some, allowing them to unrecorded for escaped successful their ain home.

Several years later, they were capable to usage that aforesaid spot to standard up and leverage a 1031 exchange, a strategy that allows investors to reinvest the proceeds of 1 spot into different without instantly paying superior gains taxes. This swap helped them upgrade to 2 better-performing assets, importantly boost their currency flow, and, ultimately, deed their aboriginal status goal.

Upgrading the fourplex and much than quadrupling their currency flow

Despite the challenges of the archetypal location hack, which they bought successful 2017, White and Bolaños continued purchasing 1 spot a year with the extremity of afloat replacing their time occupation income with rental income. Their strategy revolved astir location hacking, which not lone allowed them to unrecorded for escaped but meant they could suffice for owner-occupied financing and enactment conscionable 5% down connected each property, alternatively than the emblematic 20% required for concern properties.

While cost-effective, the strategy tin beryllium limiting. The main stipulation with owner-occupied financing is that you person to unrecorded successful the spot for astatine slightest 12 months, meaning White and Bolaños could lone bash 1 location hack a year. That wasn't an contented — they liked the cadence and knew they could deed their aboriginal status goals by acquiring a location a twelvemonth — until 2021, erstwhile White recovered a woody they couldn't walk up.

"It was this immense location that was truly nice, astir 3,000 quadrate feet, 6-bed, 4-bath," said White, who looks astatine properties successful his marketplace regularly arsenic some an capitalist and agent. At the time, the mates was looking for ample single-family homes that they could rent by the room, their most lucrative rental strategy.

"I was like, 'Jeff, this is truthful nice, but we virtually conscionable bought a location 3 months ago,'" recalled Bolaños. She chose to problem-solve alternatively than unopen down the idea. "I conscionable couldn't get this location retired of my mind. It would beryllium cleanable for our portfolio. So past I said, 'Would it beryllium imaginable if we were to merchantability our worst-performing spot and get this location much arsenic an concern property, alternatively of america moving into it?'"

The reply was yes — utilizing a 1031 exchange, they could defer superior gains connected the merchantability of their worst-performing spot (their fourplex) and reinvest the proceeds into different like-kind property. That's wherever they ran into different speedbump: The spot they wanted wasn't of adjacent oregon greater worth than the fourplex.

Their workaround was to find a 2nd concern spot — investors tin speech 1 spot for aggregate properties — to conscionable the adjacent oregon greater stipulation.

"We listed the fourplex for sale, recovered a buyer, and past went nether declaration connected that single-family ample location and a condo," said White. "We closed connected the aforesaid time — 3 transactions — paid zero tax, and got escaped of our worst spot that lone currency flowed, astatine that time, $400 a period maximum, to those 2 different properties."

They rented each idiosyncratic country successful the single-family location and rented the condo to a Section 8 tenant, which much than quadrupled their currency flow, said White: "We went from $400 to $1,700 overnight."

1031 exchanges are specifically for concern properties, not for superior residences oregon abrogation homes. It's a analyzable strategy with circumstantial rules investors indispensable abide by. For example, there's a strict clip bounds connected 1031 exchanges: You indispensable place your replacement spot (or properties) successful penning wrong 45 days of selling the archetypal property. Then you indispensable adjacent connected the replacement spot wrong 180 days of your archetypal spot sale.

Another capitalist BI spoke with attempted a 1031 exchange but yet abandoned it due to the fact that helium couldn't conscionable the 180-day deadline.

For White and Bolaños, the process progressive a batch of paperwork, but was "pretty straightforward," said White, who worked with a 1031 speech intermediary and a rubric company.

They said that gathering the 2 deadlines wasn't an issue. It helped that White was truthful successful tune with the marketplace arsenic an cause and knew precisely what terms constituent they needed to fulfill the adjacent oregon greater rule.

"Jeff was ever looking astatine the market, truthful helium knew what was disposable and retired there," said Bolaños. "And arsenic soon arsenic we knew the dispersed of wealth that we had to spend, past it conscionable made it that overmuch easier."