Using a 1031 Exchange to Buy a Doorvest Property
One of the fantastic things about real estate investing is the tax advantages that come with it. The IRS allows you to sell a property and roll over the funds to purchase a different property without incurring capital gains taxes. In addition to depreciating the home and writing off its mortgage interest, there’s also the 1031 Exchange, which allows a property to be sold “tax-free.”
Adam saw the opportunity to sell his condo and swap it for a Doorvest investment property in Columbus, OH, by leaning on a 1031 exchange. Keep reading to learn more about his journey with real estate investing and how his 1031 transaction went.
How did you first get started in real estate investing?
I started this journey back in 2008 by purchasing a condo in Santa Clarita, CA, which I bought using an FHA loan. After living there for several years, I moved and converted the home into a rental property. The great thing about having income properties is that the debt on the condo did not count towards my DTI as long as I had a renter in place, so I kept rinsing and repeating. I left this home and did the same thing - rented it out and bought a new place.
Fast forward, it’s the end of 2022, and I got tired of managing the condo I owned; there were many issues arising, and I wanted to be mostly invested in single-family homes.
What made you decide on the 1031 exchange?
When I sold the condo, I had a few options:
Find a new investment property to do the 1031 exchange
Or
2. Pay the capital gain taxes that would have equated to tens of thousands of dollars (high 5 figures)
If I couldn’t find a new investment property that made sense to me, I probably would have paid the capital gains tax and moved on - especially since I had a limited amount of time to find a new property and move forward without the 1031 exchange.
How did you go about finding your swap property?
Well, I started looking in my local market in Southern California, but even then, the ‘best’ home I could find was in the $700,000 range and even then, it required renovations and rehabbing.
One day, I received an email from my 1031 exchange company, First American, about Doorvest and your value propositions sold me for three reasons:
Substantial renovations - gave me faith in the home’s longevity
Renovation guarantee - gave me confidence that Doorvest’s incentives aligned with mine
Rent guarantee - ensured me that my expected financials would not come with surprises
Did anything interesting happen during your experience buying this rental property?
It’s important to note that before I went ahead with buying through Doorvest, I actually vetted a few highly endorsed real estate agents in Columbus, OH - the market I was mostly interested in due to their growing economy backed by Intel’s $20B chip factory investment.
These agents sent me a lot of available options for homes, and after reviewing all of the available options, we narrowed it down to 2 homes that we considered putting an offer on.
I thought going with an agent over Doorvest would save me money, but when I evaluated the homes and the fees, the total costs would have been equivalent to Doorvest with a few cons.
The agent route would require a more traditional approach where there would be much more uncertainty:
Placing your offer and getting it accepted
Seller may have conditions that do not align with my approach
Then, I would have to find residents or a property manager on my own
Ultimately, the Doorvest home was a higher quality home, with more renovations that were already completed and within proximity to Downtown Columbus and the new Intel chip factory.
What was the overall transaction like between Doorvest and the 1031 Exchange Company?
It was a simple and smooth transaction. The Doorvest team made it easy, and there were no hassles. Though there was some paperwork, it was much less than I experienced going the traditional route, and Doorvest made it feel more like the click of a few buttons to own a rental home. Their consistent communication was key.
Anything in closing you’d like to share?
Yes. A question I think many clients, including myself, will find themselves asking is: “What if something happens to Doorvest after I purchase my home?”
And it’s important to note that the rental property belongs to the buyer - Doorvest does not own any part of the home after the purchase. They then are only responsible for providing property management services. If anything happens to Doorvest, I will simply need to find a new property management company.
My advice is always to do your research and educate yourself. Secondly, it really doesn’t hurt to have a conversation with a Doorvest Client Partner - they are warm and friendly, and I had a great experience working with my Client Partner. He did a great job in facilitating the transaction, and there was never any pressure.
What would you like to see from Doorvest?
I would love to see Doorvest continue to build robust analytics and reporting to share relevant home and financial data so that I can better understand my home’s ROI over time.