Agents Building Cashflow

EP 161: Scale Your Real Estate Portfolio Via 1031 Exchanges with Scott Saunders

• Randal McLeaird

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In this episode, Randal sits down with Scott Saunders, Senior Vice President of Asset Preservation, Inc., to delve into the intricacies of 1031 exchanges and real estate investing. Scott shares valuable insights on how investors can defer capital gains taxes, preserve wealth, and maximize their investment strategies using 1031 exchanges. He also discusses common mistakes to avoid, the importance of strategic planning, and why this tool is an essential part of a savvy investor's toolkit.

Whether you're a seasoned real estate professional or new to investing, this episode provides a wealth of knowledge to help you make smarter financial decisions. Tune in to catch the full conversation and unlock expert tips on making the most of your real estate investments!

Key takeaways to listen to:

  • How to defer capital gains taxes with 1031 exchanges.
  • Key strategies behind maximizing real estate investments.
  • The importance of planning and preparation for successful exchanges.
  • Avoiding common mistakes that could disrupt your investment plans.
  • Discovering how 1031 exchanges can help preserve and grow your wealth.

About Scott Saunders

Scott R. Saunders is a Senior Vice President with Asset Preservation, Inc. Scott has an extensive background in IRC 1031 exchanges, having been involved in over 100,000 transactions during his 33 years in the exchange industry. Asset Preservation, a subsidiary of Stewart (NYSE:STC) is a leading national IRC 1031 Qualified Intermediary and has successfully completed over 200,000 1031 exchanges.

Mr. Saunders presents classes on advanced 1031 exchange strategies to accountants, attorneys, financial advisors, real estate brokers and principals. He is a presenter of 8-hour C.L.E./C.P.E. classes on 1031 exchanges arranged by Lorman Education and the National Business Institute. Mr. Saunders is on the Board of Directors for the Federation of Exchange Accommodators (FEA), the exchange industry trade association and served as President of the FEA in 2020. He has written over 180 articles on 1031 exchanges. He has been featured in the Wall Street Journal, Forbes, CNBC and U.S. News & World Report. Mr. Saunders received his bachelor degree in Business Economics from the University of California at Santa Barbara.

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[00:00:00] Scott Saunders: I was able to take equity in my home. And convert that into a source of cash flow for retirement, just on having a basement rented out a third of it, you know, so there's some, I think there's some interesting opportunities, particularly as people start to, you know, age up and they look to maybe move and relocate.

[00:00:17] Scott Saunders: How do you access that capital tied up in your home and the 4 walls? And maybe convert it into something that will produce cashflow. 

[00:00:24] Intro: If you're a real estate agent earning 200, 000 a year and you want to grow your passive income, this show is for you. Learn secrets other agents use and hear from experts in our field who will guide you on your journey to investing in assets like apartment communities so you can take your commissions and turn them into cashflow.

[00:00:44] Intro: Here's your host, Randall. 

[00:00:47] Randal McLeaird: Hey, hey, welcome back. Today's guest is Scott Saunders. We are going to talk about 1031 exchanges. He is the senior vice president for Asset Preservation, Inc. He's a national speaker. Guy knows his stuff. He used to be a [00:01:00] lobbyist in DC for taxes. And we go through and talk about some of the very cool things that he has seen with 1031s.

[00:01:10] Randal McLeaird: I learned something, even though we've had other guests on talking about this, I definitely got value out of the show talking to Scott because again, he just knows his stuff and he's seen some cool exchange ideas and provides a few that you can actually use for your primary residence as well. So if you're getting something out of the show, please go on rate and review.

[00:01:25] Randal McLeaird: Helps us a ton. Uh, as a reminder, we have the Ram capital fund, one that we were raising capital for right now. It is a single family or a note. Business that we're offering up to 10 percent preferred return for your invested dollars paid out quarterly. And that is happening now. So if you're interested in that go, there's a link in the show notes, or you can go to ridge line, ig.

[00:01:46] Randal McLeaird: com. Click on the offering stab and it will be in there as well. So let's jump into the conversation with Scott. Here we go. Welcome to the show. It's good to have you on today. First off, before you even get started, I want to ask you not 10 31. I want to ask you about your personal investing. So you just [00:02:00] told me just now you got 77 doors.

[00:02:02] Randal McLeaird: Is that right? 

[00:02:02] Scott Saunders: 77 assets. So yeah. Hey, Randall, great to be with you. Super excited to talk about 10 31 and. Yeah, I drank the Kool and I love real estate, right? So I buy assets. I exchanged my own assets. I'm at 77 now and trying to grow and scale that, you know, build it up a portfolio, primarily single family rentals.

[00:02:21] Scott Saunders: So just little small 

[00:02:23] Randal McLeaird: assets, typically in the Midwest. Okay. So your strategy since you're a 1031 guy, has it been just buy, roll, buy and roll? Like what's the strategy on the investment side before we get into the. 

[00:02:34] Scott Saunders: Yeah. Great question. I mean, 1031, as you know, is such a powerful way to kind of redeploy. So I've done a few exchanges where I'll take one asset and I'll exchange it for five more and add some leverage.

[00:02:44] Scott Saunders: So it's a great way to scale a portfolio. You take one asset that's gone up with some equity. Rather than selling it and paying Uncle Sam all the taxes, you just redeploy the capital. And a lot of times I'll leverage it up to get a better ROI, get a little bit better return on it. So that's 

[00:02:58] Randal McLeaird: what I've been doing.

[00:02:59] Randal McLeaird: [00:03:00] Nice. Okay. So again, talking strategy, just in general, is there a timeframe you typically wait, or is it an equity amount that you're waiting to see before you actually 1031 out? Great question. A couple of 

[00:03:12] Scott Saunders: things. One, it could be equity. I want to get substantial equity where I've got a few hundred thousand equity.

[00:03:17] Scott Saunders: Sometimes I'll redeploy if I bought an asset that just didn't meet expectations. So, you know, as you buy assets, you know, we all want about a thousand reality is none of us do. So sometimes the smartest thing you can do as an investor is look at an asset and go, Hey, look, I could goodbye at the time, but for whatever reason it's not performing, I'd want I rolled out of in Florida where the HOA fees kept going up.

[00:03:38] Scott Saunders: So my cashflow. But every time I'd bump the rent, the HOA fee would go up proportionally. And so I knew at the end of the day, I was never going to get more than three, 400 bucks a month out of this. You know, even though it performed, it wasn't going to really grow like my other assets. So I rolled out of that and happened to roll that into a four bedroom, two bath in Cleveland, that's doing way better on cashflow and [00:04:00] is 

[00:04:00] Randal McLeaird: appreciating.

[00:04:01] Randal McLeaird: Awesome. Okay. So again, You just mentioned you have two assets, two different markets. You're in Colorado yourself. So strategy wise, are you buying all over the place? Are you looking at short term rental? These things, what do you, you know, I'm 

[00:04:14] Scott Saunders: all long term. I got one midterm rental here in Colorado, up in the mountains.

[00:04:17] Scott Saunders: Everything else is a long term rental. So what I do is typically like a turnkey asset. So I've got relationship with some providers. Where they'll, they'll manage, uh, you know, the local portfolio for me. So I outsource all of that. I'm just focused on growing assets. I don't have the bandwidth to try and manage remotely.

[00:04:34] Scott Saunders: I'm happy to pay a little 8 percent fee to somebody else to take 

[00:04:37] Randal McLeaird: care of that for me. Yeah. So then how do you pick these markets? Are you going to Florida? You needed a vacation place for yourself or? You just, yeah, that was a long 

[00:04:45] Scott Saunders: time. I mean, I, right now I like the Midwest markets. I love like a Memphis, a little rock, uh, a St.

[00:04:50] Scott Saunders: Louis, Kansas city, you know, Jasmine Jacksonville. So, I mean, some of those markets are really good. I've got assets up in the Ohio Dayton and Cleveland. I [00:05:00] would say over time, I'm migrating a little bit more South. I just like the warmer weather. I prefer to get an asset that's like a slab on grade versus a basement, just a little less maintenance, things going wrong.

[00:05:11] Scott Saunders: I've dealt with enough flooded, leaky basements that, you know, I'll keep the ones I have, but I ain't going to go forward. I'm trying to upgrade and do slab on grade and just have a little more simplicity. 

[00:05:21] Randal McLeaird: Yeah. Yeah. Got it. Okay. All right. So that's on the investing side. Just kind of curious again, you, you kicked it off.

[00:05:26] Randal McLeaird: I'm like, hang on a second. We got, you got stuff going on all over the place that you're talking about your daughter working with you and managing all those things. So, I mean, we can go down that rabbit hole, but let's talk 10 30 ones for listeners who, who may have heard about it, but haven't heard either one of our prior episodes or heard exactly what it is.

[00:05:42] Randal McLeaird: Why don't you high level it. And then we'll kind of dive into some of the topics that we were talking about a second ago. 

[00:05:47] Scott Saunders: Sure. High level, a 1031 exchange just allows you to take any property held for investment or used in a business and exchange it and acquire what we call other like kind property held the same way.

[00:05:58] Scott Saunders: So, the most [00:06:00] simplistic thing, if I sell an asset and I get cash, taxable sale. If I have a property held for investment, I sell it in what's called a delayed exchange, I get back a like kind property. So, a sale. Property for cash exchange property for property and believe it or not, Randall, it's been in the tax code since 1921.

[00:06:17] Scott Saunders: So we're not talking about something that is this, you know, really creative out there strategy. This is something that has been through boom cycles, flat cycles, recessions. And it really is a tool that allows your average real estate investor to build and scale and grow a portfolio, right? You start with one asset, you go to two, you go to four, you go to eight.

[00:06:38] Scott Saunders: Then maybe you go from eight into a smaller apartment complex. And a lot of the investors that are in the commercial space today, they started with residential real estate and they just kind of exchanged their way up the food chain of assets until they got into commercial assets. 

[00:06:52] Randal McLeaird: Yeah. So the way to go.

[00:06:53] Randal McLeaird: So let's talk about the combo and. The strategy that you were talking about, because [00:07:00] a lot of real estate professionals, they work out of their house, they've got property that is there, they may sell their home and never think that they could 1031 any part of that. And so just hearing you talk about a second ago, I was like, okay, this definitely something we need to touch on.

[00:07:12] Randal McLeaird: So can you break down how that process works? And to me, I guess one of the questions would be, when does that actually make sense? And are you actually seeing enough of a benefit of the 1031 to actually do that? Right. So maybe break down that strategy. 

[00:07:27] Scott Saunders: Sure, so it's what I call a split treatment strategy.

[00:07:30] Scott Saunders: You've got one property, it's called a single family home, but you really have a couple of different uses. You live in it, but you also have an office or maybe somebody is there with an office, you know, I know people that are builders have a home office and then they use their entire garage to store construction materials.

[00:07:46] Scott Saunders: So it's a way to kind of rethink about an asset and think about how am I really using it? So if you've got an office or business use of a residential property. That would qualify for a 1031 exchange. So [00:08:00] Randall, the example I gave to you right now, I'm talking to you from the basement of my, my home. So the entire basement, which is one third of my square footage I use for business.

[00:08:11] Scott Saunders: I do things like this podcast in the main area. I've got several desks set up. My daughter has one. I have one. I've got an area where I've got all my files. I've got a conference table where I'll do business meetings. It's a hundred percent business use. So, to give a simple example, when I go to sell my house down the road, because the basement was used for business, and I depreciated it, just like I would any other business or investment property, when I go to sell it to one buyer, one third of the property I'll do a 1031 exchange on a third of it, and that just happens to be because that's the square footage allocated.

[00:08:47] Scott Saunders: I'll exchange it for another investment property. Then the main level in my upstairs, I live in. Section 121 applies, and most realtors know that. Just the primary residence rules if you live there 2 out of the 5 [00:09:00] years. You can exclude a quarter million if you're single, half a million married, filing jointly.

[00:09:04] Scott Saunders: So, I think there's a planning opportunity there for people to look at, particularly now, kind of post COVID, a lot of people have home based businesses where they've converted some of their home into legitimate side hustles where they've got an office, or maybe they've, you know, converted a basement or an exterior garage into something they use for business, woodworking, you name it.

[00:09:24] Scott Saunders: Kind of look at that asset and say, Hey, is this really just a home or is it a property they live in, but they also take a portion of it and use it for business. A real simplistic example would be what if I've got a fourplex, you know, I bought a fourplex. I live in 1 unit. Maybe fixed it up and made it a little nicer.

[00:09:43] Scott Saunders: I rent out the other three. When you go to sell that 75 percent of it, the three units that are rented, you can do an exchange, the one you lived in two out of five years, you pocket that money and the primary residence rules apply. And so I just think there are a lot of planning opportunities. I [00:10:00] mean, you can expand it from there.

[00:10:01] Scott Saunders: What about somebody with a ranch or farm? The dirt's worth 2 million bucks. But they live on a modest 400, 000 farmhouse, right? That farmhouse is the 121 portion, but the farm that they've been operating qualifies for a 1031 exchange because it's real property that they've been using in their business.

[00:10:21] Scott Saunders: So, you know, we do that with ranches, we do that with farms, lots of different applications. You could have a mother in law unit, right, and a detached garage that you rent out to college kids. It's an investment property, and so all that square footage, you can do an exchange on it. So, lots of opportunities out there, and I think real estate professionals might, you know, if they look through that lens, they might look at a house a little bit differently and look for some opportunities to maybe help their clients with taxes.

[00:10:47] Scott Saunders: Think of a place like California where properties have just popped up in value over the last 20 years. That 250, 000 exclusion, if you're single, doesn't really cover you that much. You're going to need some other tax strategies. [00:11:00] So look at that and say, Hey, is there a planning opportunity where some of that was legitimately used in a business?

[00:11:06] Scott Saunders: Maybe it was rented. You know, people do Airbnbs on a wing of their house, right? That's an investment property. So if you've got a dedicated couple bedrooms and a bathroom for Airbnb in your home, and maybe a little exterior entrance, you can do an exchange on that portion. 

[00:11:22] Randal McLeaird: Got it. Okay. So then when you are exchanging out, so take your house, for example.

[00:11:28] Randal McLeaird: You sell, you have a third that you are going to exchange. How does that work with the financing when you're going to buy a new property and some of the logistics. So you need all of that capital. Say, say you're selling, you need all that capital though, to go buy your new property. You're going to have a step up, right?

[00:11:43] Randal McLeaird: You have to. Spend more than what you sell for. On an, yeah, 

[00:11:48] Scott Saunders: correct. The real simple rules on that. There are two different rules you need to meet. Number one, you've got to reinvest all of your net equity or the net proceeds. Right. So kind of after closing costs, number two, [00:12:00] you've got to have the same or a greater amount of debt or mortgage.

[00:12:04] Scott Saunders: So. If I have a mortgage, let's just make it easy of 300, 000. One third of that mortgage would be with my investment portion. So I need to have a mortgage of a hundred thousand or more, and then take one third of those net proceeds and reinvest those, those are the basic rules. 

[00:12:20] Randal McLeaird: And in any exchange. Yeah. So again, when you're going to acquire the new property, if you're using not just your one 21, the proceeds that you got from the personal side, plus the business side, Again, how does that work?

[00:12:34] Randal McLeaird: You're just taking the tax benefit on the exchange portion, but you have to roll it in and you have to basically set up another one third of your, of your new home as your office. Is that correct? 

[00:12:46] Scott Saunders: Yeah, I, I see where you're going. If I have another home that I'm going to go into and I want to treat it that way, I would, but let's make it even easier.

[00:12:53] Scott Saunders: I'm in my late fifties. Let's say I want to downsize. I don't need as many bedrooms as I have now. Cause my kids have. Kind of [00:13:00] moved on, right? I might just go buy a home with the residence portion that's smaller. And then I might exchange for just one single family rental in Memphis, Tennessee. 

[00:13:09] Randal McLeaird: And I 

[00:13:09] Scott Saunders: just go ahead and I look at whatever one third of my property is and I just buy a standalone one single family.

[00:13:15] Scott Saunders: But just think of what I've been able to do there. I was able to take equity in my home and convert that into a source of cashflow for retirement just on For having a basement rented out a third of it, you know, so there's some, I think, there's some interesting opportunities, particularly as people start to, you know, age up and they look to maybe move and relocate.

[00:13:34] Scott Saunders: How do you access that capital tied up in your home and the four walls and maybe convert it into something that'll produce cashflow? So for a real estate professional, what a great strategy to at least talk to about their clients. I'm not sure every real estate professional is thinking of that and Maybe it helps somebody get a listing, right.

[00:13:51] Scott Saunders: Or build a client relationship, but that could be a game changer and make a deal, you know, make the difference of getting that deal and putting it together or not. So it could be a [00:14:00] cool tool. Definitely. 

[00:14:01] Randal McLeaird: I mean, it's something I've never thought of or heard of. So I'm sure there are other agents that are in the same boat.

[00:14:07] Randal McLeaird: You're also talking about like DSD, Delaware Statutory Trust and that sort of thing. Can we touch on that a little bit? And when you might use that and why? 

[00:14:16] Scott Saunders: Yeah, 

[00:14:16] Randal McLeaird: so there 

[00:14:17] Scott Saunders: are different things you can go into like kind property could be land in a single family, commercial, industrial, anything held for investment, but there's this category of what I call fractional ownership out there.

[00:14:28] Scott Saunders: So a Delaware statutory trust. Is one variation and others what's known as a tick or a tenant in common. These are unique programs and so they're very, very different. They're sold by securities brokers, people that have the appropriate securities license. So the SEC considers them a security, but they're qualifying as like kind property for a 1031 exchange.

[00:14:51] Scott Saunders: What these typically are is where somebody gets a larger commercial property. Let's say it's a 30 million dollar apartment complex. They're going to manage it. [00:15:00] So you and doing an exchange instead of. Going from your houses that you manage very active, you now want to go passive and have somebody else take on all the management responsibilities, vet the tenants and do everything.

[00:15:12] Scott Saunders: So a DST is a Delaware Statutory Trust, and you just get a little slice of that larger 30 million complex. So if you've got a million dollars equity, you get 1 30th of that. But it's, it's a really popular strategy now for people that don't want to pay the taxes, but they want to convert that equity into cash flow, but they don't want their management responsibility.

[00:15:35] Scott Saunders: So they started out back in 2002 and 10 in common ownership. Today, most of these are done in a. Delaware Statutory Trust. Now, it's not something everybody can access. You've got to be what's considered an accredited investor. So you've got to meet that standard. So that's what the SEC considers and what's known as a regulation de offering.

[00:15:57] Scott Saunders: So it's, it's for somebody that's a little bit more [00:16:00] sophisticated. They've got a little bit more capital. And if that investment doesn't perform, it's not necessarily going to blow out all their finances, but this is a very popular niche. There are billions of dollars of these happening every year and where they're kind of cool, Randall, what if you're doing an exchange?

[00:16:17] Scott Saunders: You know, we haven't talked about it, but when you sell, you've got 45 days to identify and a maximum of 180 days to close. What if you're sitting there on day 43 in your market and you can't find anything? Your stress levels going up because you're like, man, I'm going to be stuck with this big tax head and I only got two days.

[00:16:34] Scott Saunders: Because these are kind of this hybrid of a security and real estate, a lot of the sponsors that put these together, they might have an offering where you can call them up and say, look, I've got 452, 000 equity. I need 300, 000 debt and they go. Perfect. I got something right now. I'll carve it out for you.

[00:16:52] Scott Saunders: So a lot of times at the last minute, these can be a great way to kind of save an exchange, or maybe you're not finding any inventory that [00:17:00] meets your needs in the marketplace, but primarily people are doing them because they're going passive, they're sick of the management responsibilities. They don't necessarily want to go into like a triple net offering, which is fairly management, you know, free.

[00:17:13] Scott Saunders: And this is another alternative. And you know, one thing people do is you can still diversify. So if I've got a million bucks in equity. Randall, I could put in a third over in one DST, a third in another and over here. So now I can even diversify into different sponsors and different programs. So I don't have all the eggs in one basket.

[00:17:30] Randal McLeaird: Yeah. So we talk about this a bit and we've done some ticks and that sort of thing, but definitely if you're looking at doing that, then vet the sponsor before you do your 10 31, a hundred percent before you even start that 45 day sale, you don't want to be at day 43 and then you're like calling just Joe blow to, to throw some money at them.

[00:17:49] Scott Saunders: Yeah, super important point. I'm glad you brought that up. Look at their track record. There are a lot of new entrants right now. I don't know if they're good or not. There are companies have been doing this for 10, 15, 20 years. If it [00:18:00] were me, I'd rather go with a company that has been through some economic cycles.

[00:18:04] Scott Saunders: They've got some financial wherewithal doing it. So yeah, vet the sponsor because you're really entering into a long term relationship. You're going to be holding this asset for four to seven years with that company, that sponsor. So you want to, Do your homework on them, look at your offering, get a good tax advisor or financial advisor to look at it with you, you get what's called a private placement memorandum, a PPM, read it, study it, look at who's going to be leased in there, are there rent escalators, look at the risk, but you know, study it like you would any other investment, a lot of the company.

[00:18:35] Scott Saunders: Financial advisors that promote these, they'll talk about, you know, it's mailbox money. Well, that's great. You and I are in real estate industry and I know real estate, it fluctuates, right? It's not necessarily a hundred percent consistent. So you want to look at who you're going to get into that long term relationship with and that a great point.

[00:18:53] Randal McLeaird: Yeah. It's just one of those. I mean, we talk about a lot. So the other question I've got. Structuring it as a TIC compared to a [00:19:00] DST, like, again, when you have, maybe it's a 5 million raise and somebody has that million dollars, the sponsor can carve out a TIC, what's the difference in a TIC and a DST?

[00:19:12] Scott Saunders: They're fundamentally completely different structures. So at the end of the day, they're both fractional ownership. The TIC is governed by what's known as Revenue Ruling 2002 22. So I can have up to 35 investors in a TIC. A DST, I can have hundreds. So you got a little bit more flexibility right off the bat with the DST because you can accommodate a lot more people.

[00:19:33] Scott Saunders: So there's some other, you know, subtleties. I would tell you in the marketplace today. 95 percent of the deals are done as the DST structure as opposed to the TIC type structure these days. It's just, it gives a little bit more flexibility. Okay. 

[00:19:49] Randal McLeaird: Yeah. I've seen the TIC recently. I've not, I haven't on the, on the DS.

[00:19:53] Randal McLeaird: That's why I asked. I was like, okay, I don't, No, exactly. I've heard of it. I've seen it, but not as much, which is surprising. 

[00:19:59] Scott Saunders: [00:20:00] Yeah. Here's what I'll do for you, Randall. I've got a comparison, a little write up I did comparing a tick to a DST side by side, I'll email that over to you. If you want to include it in the show notes, that'll give everybody kind of a, a visual that'll show side by side what they're like, happy to do that.

[00:20:13] Scott Saunders: Yeah, that'd be great. I appreciate it. 

[00:20:15] Randal McLeaird: Okay. So you also mentioned something else. I'm kind of curious, just you're in it. You're a QI, right? Qualified intermediary. Okay. Yeah. 

[00:20:21] Scott Saunders: So, you know, I'm a senior vice president with asset preservation. We're a national qualified intermediary. Yeah. 

[00:20:26] Randal McLeaird: Yeah. So what are some of the most interesting types of exchanges that you have seen?

[00:20:33] Randal McLeaird: Because, I mean, you've mentioned a few that I haven't even thought of, and you've talked about air rights, water rights, that sort of thing. So, Are there some really interesting investments that you've seen come across because of what people are exchanging in or out of? Yeah, 

[00:20:46] Scott Saunders: boy, now you just asked me an open ended question.

[00:20:48] Scott Saunders: I can go all over the place. Let me share a few. This is kind of the cool part of exchanging. So think of it this way. As long as it's considered real property under state law, you could do an exchange on it. [00:21:00] So in Colorado, Water rights are considered real property. They're not in Washington or Oregon because water is plentiful.

[00:21:06] Scott Saunders: So a lot of the drier states, water rights are considered real property. And air right, we do these all the time. They're what's known as a transferable development right. And to give you a simplistic example, I'm in New York City. I got a 30 story building and I want to add 10 stories. I've been granted the right to do that.

[00:21:23] Scott Saunders: It's literally just a right to air to add 10 more stories. I can exchange out of that air right, TDR, and exchange right into an apartment complex. We do exchanges on all sorts of different easements. Here in Colorado, we did a conservation easement deal where land was in the family for 100 years. The city of Boulder wanted it.

[00:21:42] Scott Saunders: It was going to give them about 300 acres. Give them some hiking trails, a little train route, a watershed. So a lot of like recreational and also just, um, good for the environment things. They exchanged out of that, it was like an 8 million dollar deal, and exchanged into apartment complexes. But if they had to pay the [00:22:00] taxes on that conservation easement, they never would have done the deal.

[00:22:03] Scott Saunders: Uh, we do exchanges on, uh, if you ever heard a, it's a mouthful, a perpetual communication easement, it's a cell tower. The cell towers are purchased for somewhere between 200 grand, about a million five. So if you've got a cell tower and you want to hold on to your land, you can hold on to that. You just create a new perpetual communication easement for the cell tower, do an exchange just out of that into another asset.

[00:22:26] Scott Saunders: Oil and gas qualifies. There are certain oil and gas programs that are considered real estate. So you can go into mineral rights, oil and gas. One that I think is awesome and I'll share with everybody, it's great for real estate professionals, great for investors, a vacation home held for investment. There are some rules for that, but you can come out of your investment property and you can exchange into a property at a beautiful lake that meets a few basic requirements and that qualifies under section 1031.

[00:22:52] Scott Saunders: So what a cool way to take equity that was an investment plan. And now kind of converted into what I call a lifestyle asset down the road where the family can [00:23:00] hang out and enjoy it all without paying capital gain taxes. 

[00:23:03] Randal McLeaird: So what are the rules on that? Is that you have to put it in service or something?

[00:23:07] Scott Saunders: So it comes from something known as Revenue Procedure 2008 16, but the simple way to remember this is just to remember it as the rule of twos. You've got to hold onto the property for two years. So you've got a two year hold period. You have to rent it for two weeks in each year. Easy to do in our vacation area.

[00:23:25] Scott Saunders: The last one is the kicker. Everybody hates the last one. Your personal use can't exceed two weeks or 10 percent of the time it's rented. So let's just say you said you go to Breckenridge sometimes you've got a place in Breckenridge. You want to use it for skiing for the first two years. You got to keep yourself under that two week threshold.

[00:23:43] Scott Saunders: The beauty of it is after the 2 years are up, you can do whatever you want. You can use it as much personally, you can rent it as much, you can have it sit vacant. You just need to meet those 3 basic rules and then it's considered held for investment. So, all over the country, every state's got a [00:24:00] vacation property, right?

[00:24:01] Scott Saunders: I mean, you go to Minnesota, you got beautiful lakes. I'm in Colorado, you got the mountains. You go to Arizona, you got golf courses, you go to Florida, you got beaches. I mean, I can't think of a state out there that doesn't have some desirable recreational vacation property. I think this is just a dynamite approach to get something that maybe performs well as an investment.

[00:24:20] Scott Saunders: And you also get some personal perks out of it. You get to use it some of the time. All 

[00:24:24] Randal McLeaird: right. That's interesting. Okay. So let's talk about, I guess, some of the. Logistics, you know, the, the timelines we've already covered those, but cost wise, what does it typically cost and when does it make sense to do an exchange?

[00:24:36] Randal McLeaird: Yeah. 

[00:24:36] Scott Saunders: Yeah, cost for exchange, pretty nominal, right? Qualified intermediary, they step in the middle of the transaction, they prepare some paperwork. They're gonna hold the money, so that's really key. You can't get the money, you can't access it. You gotta set up an exchange before you close on your sale. You can't set it up after the fact.

[00:24:54] Scott Saunders: And that, a lot of people think they can do that. You gotta set it up before you close. So you don't have actual or [00:25:00] constructive receipt. Typical qualified intermediary fees can be somewhere between 900 to 1500 bucks, somewhere in that range. We charge 1250 allows you to sell one and buy up to three. So, you know, somewhere in that ballpark, when does it make sense?

[00:25:14] Scott Saunders: Let me kind of answer that question in another way. Like when does it not make sense? 

[00:25:18] Randal McLeaird: Yeah. 

[00:25:18] Scott Saunders: If you don't have any gain, don't do an exchange. And then the other one would be if you're going to get out of real estate. If you want to go invest in crypto or Google or Facebook, you probably don't want to do an exchange.

[00:25:31] Scott Saunders: But in my opinion, you know, especially real estate professionals that pick up deals that are good in the marketplace, most of us in real estate, we like real estate. We know how it works. We know how it's valued. If you're going to go buy more real estate, it never makes sense in my opinion to sell and pay the taxes when you're going to go out and buy more investment property.

[00:25:49] Scott Saunders: There's just, I can't think of a, of a really good reason to do that. If your goal is to Maybe you can't because of market conditions, right? Maybe inventory is so tight, you can't find anything. So [00:26:00] it's problematic, but you can always work on your purchase. When I do my exchanges, I'll actually get my purchases locked up before I even list the property I'm selling.

[00:26:08] Scott Saunders: So it takes a lot of the stress out. I know exactly what I'm getting out of, and I know exactly what I'm getting into. seamless transaction after that. 

[00:26:17] Randal McLeaird: Okay. So explain that process, the nuts and bolts of it. What are you putting in your contract that you're buying? Are you saying, Hey, this is predicated on me being able to sell this and we're going to have a long closing period or how does that look?

[00:26:29] Randal McLeaird: The ones 

[00:26:29] Scott Saunders: that I've done, so I'm a turnkey buyer. So I buy turnkey assets. I'll just work with a provider I know. And I'll say, Hey, I'm selling over here. It's going to sell for, let's say 400 grand. I need four assets that are going to equal this. Can you carve out some? And they'll line them up, take them out of their pipeline and just set them aside for me.

[00:26:46] Scott Saunders: Then I list my current property. I know what I'm going into. And then I, you know, I've only got then a few weeks between when I close on my sale and the purchases. If you're just doing it off the MLS, it's going to be a little trickier. Those are more relationships. You can [00:27:00] always get a property under contract, your contingent, right?

[00:27:02] Scott Saunders: I'm going to buy it, contingent upon my sale. I'll take your price and purchase it for the price you're asking, but I'm going to need you to be a little flexible on the sales side, the one when you're buying it, on the closing, right? Instead of closing it in a month or two, you might have to have it open for me under contract for a few months.

[00:27:18] Scott Saunders: Yeah. So I can get my sale property sold. So that's a typical way contingent offer, not as strong, but it happens all the time. 

[00:27:25] Randal McLeaird: Yeah. I think now it's probably a better time to do that than 22, 21, when it was just going game busters a little bit more difficult for sellers. Not a chance back in the boom era there.

[00:27:35] Randal McLeaird: Exactly. And you mentioned something just now about buying from turnkey. So basically you're buying when you're buying those as a strategy, are those turnkey guys typically selling to investors below full retail? No, 

[00:27:49] Scott Saunders: you know, actually, I think they're selling at full retail. Okay. You know, they've got a lot of demand when I do a turnkey and let me just describe it, it's where somebody else has basically done the fix and flip.

[00:27:59] Scott Saunders: They're going to pick [00:28:00] up a, an asset in Memphis for 60 grand. That's still apodated. They're going to put 30, 40 grand into it. They're going to put a new roof on, new mechanicals, spruce up the kitchens, the bathrooms, landscape it. So let's say they put, they bought it for 60, 000, they put 40, 000 into it, and they're going to sell it to me for 130, 000, 140, 000.

[00:28:17] Scott Saunders: So I'm buying a full retail, but the reason why I like those, I'm not going to have any of the major CapEx to deal with for the first 10, 15 years. My roof's done. I'm going to get a little higher quality tenant, because now instead of it just putting a little bit of fresh paint on it, I've got a freshened up kitchen with stainless steel.

[00:28:35] Scott Saunders: I've got a nice LVP in it. It looks fresh and clean. So it's going to attract a better tenant. I put in low maintenance, things like that, right? LVP versus carpet. So it's going to be a little bit more bulletproof. I freshen up the yard. So it's got curb appeal. So for me buying retail, I'm okay with it because I'm going to buy and hold long term.

[00:28:54] Scott Saunders: And for me, what I want is I want investments. I don't have to be actively managing and having the turnover. I want just [00:29:00] kind of plug and play, put a tenant in there for 1, 2, 3 year lease. Hopefully they like it. I'll keep the rent bumps down a little bit and they stay long term. And then I reduced my tenant turn costs as well.

[00:29:10] Scott Saunders: Nice. So are they giving you a tenant at close? Most of them do. Yeah. A good provider will do that. It varies, right? When you say turnkey provider, there's no one standard. Yeah. But a company that, you know, some of the companies I like working with, they'll have a tenant in tow right when I close on it. So now I don't have it sitting there vacant for a few months where I got negative cashflow.

[00:29:31] Randal McLeaird: Yeah. 

[00:29:31] Scott Saunders: Everybody wins with 

[00:29:32] Randal McLeaird: that deal. Yeah. Yeah, for sure. No, I've seen those guys. I know a lot of guys were doing that in Phoenix or there was big provider out in Phoenix, but I haven't looked at it. On a nationwide scale, just to see who those guys are, who the players are. So good strategy, solid. 

[00:29:45] Scott Saunders: Yeah, it's a cool niche.

[00:29:46] Scott Saunders: You know, where I think it's neat is a lot of people think investment real estate, Oh, it's a lot of work. I got to manage it. I tried to self manage years ago and it's not for me. So I'm happy to outsource all that pay an 8 percent fee to somebody to take all the phone [00:30:00] calls and the hassle. That's just into my.

[00:30:02] Scott Saunders: Analysis of an asset, right? So I'm going to get a little less cashflow, but if you stack up enough assets, you're still going to end up with decent cashflow at the end of the day. Do 

[00:30:10] Randal McLeaird: you have any plans long term to exit most of the single families and roll into one a 10 30? Yeah, 

[00:30:18] Scott Saunders: great question. I'm sure I'll consolidate some of the assets, believe it or not.

[00:30:22] Scott Saunders: I'm bullish on the single family niche. I just think we've got, depending on who you listen to, you know, three, four, five, 6 million units. Underserved, right? We have 2 little inventory. So I like the niche. I get good returns. So I'm not, I'm not of the belief that you always have to scale up and go to commercial.

[00:30:41] Scott Saunders: I can stack up a portfolio of single family and get kind of like returns by just having a bunch of small assets. I'm sure they'll come a time where. I'll take some of them, you know, and maybe roll it into a small apartment complex or something like that just to have a little less management. But at this point, I'm good.

[00:30:59] Scott Saunders: I'm fine [00:31:00] with the single family assets and I'll just keep scaling, you know, with those types. 

[00:31:04] Randal McLeaird: Yeah. Yeah. Nice. I mean, the cash flows on the apartments have been compressed a lot lately. So yeah, now maybe not. Best time to do that. But you can take your own strategy and go into a tick, man. 

[00:31:16] Scott Saunders: Yeah. You know, it's real estate.

[00:31:17] Scott Saunders: There's no one way to do this, right? You can make money in ticks and you could do it in industrial and self storage, right? There's a lot of different ways to do it. What I like about single family, if I were to share my bias is you get 30 year fixed financing. So I scooped up a lot of assets with the lower debt.

[00:31:32] Scott Saunders: So I've got low debt for basically forever, right? 30 years. When I'm dealing with commercial, I've got a refi. I mean, there, there's going to be a lot of carnage in some aspects of the commercial real estate. There's something like a trillion dollars of loans resetting right now. And everybody's playing, you know, extend to pretend, but eventually they're going to have to deal with that.

[00:31:54] Scott Saunders: There was an asset. I don't know if you heard about in St. Louis that. And I forget the numbers. Don't quote me. It's just traded last [00:32:00] month for three and a half million. And I think it traded before at 120 million, a downtown office asset. Now, I don't think that represents the market, but the point is downtown class, a office that stuff because of just changes and work environment.

[00:32:14] Scott Saunders: There's going to be some challenging stuff going on. So I'd rather just, uh, keep making little base hits with the single family. It's nothing sexy, but it gets the job done. 

[00:32:23] Randal McLeaird: Yeah, for sure. No, I mean, to that point, like I've started looking into multifamily and you had to pull back and just stay with some single family stuff just because the way the market is and the way the debt is on some of those things.

[00:32:34] Randal McLeaird: So, 

[00:32:35] Scott Saunders: so Miranda, where do 

[00:32:35] Randal McLeaird: you invest? Do you invest locally then in Arizona? Locally? Yeah, I have, I have an asset in Atlanta, one in Dallas. Those are larger multifamily deals and then a lot of single family stuff here in San Antonio. So, yeah, we buy, um, we've got a fund that we are basically buying single family houses and then owner financing those.

[00:32:54] Randal McLeaird: So we're providing the debt for the end buyer. And so I'm keeping the notes and just going to stack those. Yeah. [00:33:00] That's the majority of what we're working on. Cool. No, that's great. That's a fun niche. Yeah. Yeah. So, well, Hey, Scott, man, I appreciate you jumping on sharing your knowledge. You are dropping like text code.

[00:33:11] Randal McLeaird: This obviously, you know, you have, you have a wealth of knowledge. So I appreciate you jumping on and sharing that information with us. If anybody's looking to do a 10 31, your contact information is going to be in the show notes by all means, reach out to Scott directly and have a chat with him about it.

[00:33:24] Randal McLeaird: So thanks for coming on. Cool. Great visit with you. A lot of fun. Thanks. Good catching up with you. Thanks. Did you know that 80 percent of the agents we speak with got into real estate in order to gain passive income so they could obtain financial freedom and become work optional? If you want to stay up to date, the best way is to make sure you're subscribed.

[00:33:41] Randal McLeaird: So if you haven't done that, go ahead and do it now. We'll catch you on the next episode. 

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