Acquiring a property through a 1031 exchange lets investors diversify their portfolio alongside some great tax deferral benefits. As an investor, you’ll naturally want an asset that matches your preferences and helps you achieve your financial goals. One popular option is an occupied duplex property, offering various benefits like immediate cash flow. Even so, there are some challenges to keep in mind to minimize issues.
In this occupied duplex 1031 exchange article, Realized 1031 discusses the pros and cons of such properties to help you get a better idea before committing to this kind of investment. Keep reading to learn more.
A duplex is a form of multifamily real estate that has two housing units within one structure. In this configuration, each unit shares at least one wall, ceiling, or floor. However, there are usually separate entrances, kitchens, and bathrooms for each unit.
With this setup, duplexes have several distinctive characteristics.
Investing in an occupied duplex for your 1031 exchange provides a few key advantages. Here’s what you can expect.
Given that there’s still a tenant, you can expect immediate rental payments upon acquiring the rental property. You won’t have to face a vacancy period, nor will you need to screen tenants. The immediate cash flow provides relief during the transition phase of the 1031 exchange.
Compared to vacant duplexes, an occupied one has more stability. Existing tenants are more likelyto be in long-term agreements, removing the need to find new occupants. The added stability is ideal for investors who want a smoother transition.
One core tenet of 1031 exchanges is that properties must be used for investment or business use. An occupied tenant already has a rental history, satisfying this IRS requirement. This benefit helps you avoid IRS scrutiny and maintain your tax-deferred status.
Existing leases and rental records provide valuable data on tenant behavior, rental rates, and property maintenance. This information can aid in future investment decisions, offering a clearer picture of the property’s performance.
While duplexes with existing tenants offer plenty of advantages, there are certain challenges you may encounter. Keep the following possibilities in mind to lower the chances of issues upon acquisition.
If the duplex has problem tenants, acquiring the asset means inheriting occupants with a history of delayed payments or property damage. Those who intend to evict these problematic tenants may also find complex lease agreements hard to untangle. As such, it’s important to assess the existing tenant quality and lease agreements thoroughly before finalizing the purchase.
When there are existing occupants in a duplex, conducting due diligence may be difficult. You may not be able to get a full picture of the property during inspections, leading to unforeseen issues in the future.
If you do find issues with the property before the acquisition, it may be challenging to perform repairs or renovations because of the existing tenants. Tenant disruption during improvements can also lead to conflicts and dissatisfaction.
Conducting a like-kind exchange for an occupied duplex has its advantages and disadvantages. A strategic investor would want to understand these opportunities and challenges before the swap to increase the chances of maximum returns and minimal headaches.
For more details about the 1031 exchange process, reach out to Realized 1031 today.
Sources:
https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx