Exchange Your Rental Before It’s Too Late

Residential landlords today are facing many challenges. In many coastal states, legislatures and city councils are imposing increasingly restrictive regulations. The White House proposes to limit future 1031 exchanges. And now the SEC is considering making private-placement properties available only to families with more than $10 million of assets. Being a mom-and-pop landlord has never been more challenging.

On the bright side, last year a record volume of investment real estate changed hands, and the market for 1031-qualified securities reached an all-time high. Many owners of rental SFRs, townhomes and condos sold properties over asking price to home buyers chasing a limited inventory of homes. The combination of demographic trends and low interest rates spurred unprecedented increases in owner-occupied home prices.

Yet this sellers’ market cannot last indefinitely. A new supply of houses and higher interest rates will level the current supply/demand imbalance. In some markets, owners of rental houses and condos will see their resale values once again re-coupled with prevailing cap rates, rather than driven by a bubble in the housing market. When that happens, you may find far less buyer demand for your West Coast rental home/condo than you enjoy today.

Increasing regulations, elevating tax burdens and negative migration do not bode well for left-coast rental properties in the long term. Not to mention that many of today’s owners are seeking to retire from being landlords. If you are interested in relocating your equity to greener pastures, now may be the best time to conduct a 1031 exchange into a passive replacement program.