How Real Estate Investors can Utilize the Starker Exchange Technique

Real estate investors use the Starker technique, the 1031 tax-deferred exchange, to sell investment property and roll the proceeds into a like-kind property while postponing capital gains tax. A qualified intermediary holds the money; the replacement must be identified within 45 days and bought within 180.

Everyone should know the 1031 tax-deferred exchange if they own investment property and consider purchasing or selling it.

A Starker exchange, better known as a 1031 tax-deferred exchange, is an excellent strategy for a real estate investor to postpone paying capital gains taxes. The 1031 exchange is the most popular property exchange used by investors today.

The exchange lets an individual sell real estate and utilize the earnings to purchase another property without paying capital gains taxes right away. While it appears straightforward, you must follow some guidelines for the exchange to be legally recognized.

So, how does a 1031 exchange work? We examine how investors can use this exchange technique to their benefit.

How does a 1031 exchange work?

1. What Properties can be Used in a 1031 Exchange?

A 1031 exchange is usually reserved for commercial or investment properties. Personal property, such as a permanent residence or a vacation home, usually does not count.

2. Locate the Property You Intend to Buy

The properties you’re selling and buying must be “like-kind,” which implies they’re of the same sort, character, or class but not necessarily the same quality or grade.

It’s worth noting that the rule only applies within the confines of the United States, so you cannot exchange one asset for another in a different country.

3. Select a Reputable Intermediary

You MUST involve a licensed intermediary, often known as an exchange facilitator. Essentially, they hold the money in escrow until the transaction is complete, assuming you won’t conduct the sale and buy simultaneously.

4. Determine How Much of the Sale Earnings Will Go Toward the Purchase of the New Property

You are not required to reinvest the entire sale proceeds in a comparable property. In most cases, one can only defer capital gains tax on their reinvested amount.

As a result, if individuals retain some of the proceeds, they may have to pay capital gains tax on those funds immediately.

5. Stay Updated on the Schedule

An investor must fulfill two deadlines in most cases; otherwise, their profit on the property sale may be taxable.

First, they have 45 days from the date they sell their property to choose a new property. Selecting the property must be in writing and shared with the seller or certified intermediary.

Second, the investor must purchase the new property within 180 days of selling their previous property or filing the tax return (whichever is earlier).

6. Keep an Eye on Where Your Money Is Going

Remember, the whole point of a 1031 exchange is that the investor does not have any income to tax because they didn’t receive any funds from the sale. 

As a result, an investor gaining ownership of the cash before the exchange may disqualify the transaction and make the gain taxable right away.

7. Inform the Internal Revenue Service of Your Transaction

With your tax return, you’ll almost certainly have to file IRS Form 8824. An investor defines the properties, provides a timeframe, explains who was involved, and includes financial information on that form.

What are the 1031 exchange rules?

1. The Real Estate Investment Must Be Similar

An investor must reinvest the earnings from a sale in another similar investment. The new property acquired does not have to be of the same type, grade, or condition as the old one. 

Most revenue-producing commercial real estate investments in the United States are considered similar and thus eligible for a 1031 exchange.

2. Hire a Qualified Intermediary

The transaction must be done as an exchange rather than a sale to comply with IRS laws. Consider it as though you were exchanging one property for another.

Accommodators is another term used for qualified intermediaries. They are either a company or an individual who facilitates the 1031 exchange and evaluates all the requirements. 

The investor does not touch the funds involved, which is vital in an exchange. Instead, the accommodator purchases the property and transfers it to the new buyer.  

They will use the proceeds from the sale of that property to purchase suitable replacement property and transfer it to you from the seller. 

3. Identification Period: 45 Days

While the IRS allows real estate investors considerable latitude in selecting comparable properties, there are specific deadlines to meet to avoid paying capital gains tax. To begin with, investors have 45 days to find the new property or properties they want to buy.

The 3-Property rule is the most popular in the 45-day identification timeframe. An investor can use this rule to find up to three properties they would be willing to buy in exchange for the one they just sold. 

The 3-Property Rule allows this to occur regardless of the property’s fair market value. 

4. Exchange Period: 180 Days

An investor must close on at least one of the properties they’ve identified since relinquishing their property and identifying other properties to acquire. They have 180 days to complete this task.

It’s crucial to remember that the 180-day window begins on the sale of the actual property. Don’t be fooled into thinking you have 180 days from the date of property identification.

What are the benefits of a 1031 exchange?

1. Deferred Taxes

A real estate investor could be paying taxes of more than 35% of their profits. It depends on various factors, such as the state in which their property is located. 

A 1031 exchange permits an investor to delay these taxes indefinitely if they reinvest their proceeds in real estate.

2. Increased Cash Flow

A 1031 tax-deferred exchange can improve both cash flow and overall revenue. For example, an investor can exchange a vacant block of land that yields no cash flow for a commercial facility that does.

3. Relief for Management

Investors who own multiple rental properties have the burden of intense management and costly maintenance, leading to increased stress. 

An investor can enhance revenues while saving time and effort by consolidating out of high-maintenance rental properties and into an apartment building. 

4. Diversification

An investor can swap one house for many others, combine lots of property into one, and buy property anywhere in the United States, thanks to the flexibility of the exchange.

5. Accumulation of Assets

A 1031 exchange is a vital instrument for accumulating wealth. The number of consecutive exchanges is unrestricted, allowing investors to exchange into larger and larger properties over time. 

Investors can leave assets to their heirs with proper estate planning, and they may obtain a “step-up in basis” of that asset to its current market value. The exchange essentially allows heirs to sell the property at its fair market value without paying capital gains taxes.

Bottom Line

If you purchase property through a 1031 exchange and then turn it into a primary residence, you must hold it for at least five years before the sale becomes wholly taxed.

Benefits like enhanced cash flow, investment diversification, and tax deferral are significant reasons for using a 1031 exchange. 

A real estate investor can transfer investment properties and meet tax and investment objectives using a 1031 exchange.

Frequently asked questions

Is a Starker exchange the same as a 1031 exchange?

Yes. A Starker exchange is another name for the 1031 tax-deferred exchange. It lets a real estate investor sell an investment property and put the proceeds into a like-kind property without paying capital gains tax right away. A qualified intermediary holds the money in between, and the investor has to meet the 45-day and 180-day deadlines.

What would disqualify a 1031 exchange?

Several things break the exchange. Personal property such as your permanent residence or a vacation home usually does not qualify, and you cannot swap a U.S. property for one in another country. Taking possession of the sale money before the exchange is complete can make the gain taxable right away, and so can missing the 45-day identification or 180-day purchase deadline.

What happens if you keep some of the sale proceeds in a 1031 exchange?

You do not have to reinvest everything, but in most cases only the amount you reinvest gets the tax deferral. Any proceeds you keep may be subject to capital gains tax right away. To defer the full gain, the money has to move from the sale, through the qualified intermediary, and into the replacement property without passing through your hands.

How long do you have to buy a replacement property in a 1031 exchange?

You have 45 days from the sale to identify replacement properties in writing, and most investors use the 3-property rule to name up to three candidates. You then must close on at least one of them within 180 days of the sale, or by your tax return filing if that comes first. The 180 days start at the sale, not at identification.

Health and safety are pushing businesses and workers away from dense, crowded cities toward suburbs and smaller cities, with technology and remote work making the move possible. Remote work rose from 5% before the pandemic to above 40% after.

Good medical care will be a considerable determinant regarding where people, businesses, and companies choose to locate. These significant changes are because of the ongoing effects of the global pandemic.

The initial impact of the pandemic had the economy shrinking by as much as 32% during the second quarter of 2020, leading to extensive business disruptions. There now exists a direct and indirect link between the pandemic and a company’s decision to locate its premises.

This article analyzes how health and safety concerns force businesses to rethink their office’s location or where employees will work.

Why did the pandemic hit crowded cities hardest?

The pandemic has destroyed the inner cities due to the sheer number of people packed in a small area. Poor areas bore the brunt of COVID-19 because of all the people packed into tiny spaces at home, dealing with poorly ventilated subways and workplaces.

Even well-to-do areas had to contend with cramped office spaces and interaction with numerous people all day long. It’s no coincidence that the most densely populated states also had the highest excess mortality rates:

By comparison, suburbs offer sunshine, open spaces, and outdoor activities, an excellent environment for preventing infectious diseases. Statistics show those living in suburban metro counties may have lower premature death rates than residents in urban areas.

How Companies and Individuals Are Reacting to the Pandemic

In the end, people need to adjust to the pandemic as they have always done in the face of other crises–incompetently at the beginning but slowly and firmly solving the problem by adjusting to the threat.

1. Being close to people

Pandemics and natural calamities, including climate change, often cause changes in how and where people live.

For instance, New York’s three counties with the highest urban density recorded the highest fatality rates compared to the state average. Manhattan’s fatality rate is at 4.8, and Brooklyn and Bronx are both at 7.5 times the nation’s proportional death average.

On the other hand, suburban and less dense counties, with urban densities between 2,500 and 5,000, recorded a lesser national death rate average at 0.8%.

Even with an increase in death rates, states like Texas, Kansas, and Dakota still record between one-third and one-eighth of those in New York and similar places.

The measures taken to curb the spread of the disease will have a more profound and longer-lasting impact among the poor, who are more vulnerable for obvious reasons.

For these reasons, there is a push for workers and organizations to move away from crowded workplaces. In addition, companies should embrace measures that minimize human contact for health and safety reasons.

2. Technology

Many companies are anxious and worried about the level of productivity of their workforce when working remotely from home.

Indeed, various factors may affect telecommuters’ productivity, such as poor time management, procrastination, distractions, poor communication, and coordination challenges.

However, strategic use of technology and digital connectivity has been of massive help during the pandemic.

As people dispersed and isolated during the pandemic and most employees worked from home, technology became a savior as people learned to complete tasks virtually. Now, individuals and businesses employ technology to improve efficiency and productivity. 

3. Dispersion

Being away from crowded places, driving in your car, and having few neighbors considerably reduce the risk of contagion. Judging from emerging demographics and current real estate trends, it is evident that people should consider dispersion to smaller, less densely packed cities.

In addition, remote working, which increased from 5% before the pandemic to above 40% after, may be the new trend. Most people working from home prefer to continue to do so.

Most companies, especially tech firms like Twitter, Facebook, and Salesforce, have resigned themselves to seeing most workers working entirely online. They now expect a large section of their workforce to continue working remotely even after the pandemic.

How should businesses and workers adapt to keep the workplace safe?

The new workplace seems to involve working at home away from other people, so companies and individuals may have to contend with and adapt to this new reality.

Adapting and adjusting is never easy for both individuals and businesses, but accepting the challenge ensures every party acclimatizes to ensure health and safety practices in the workplace.

Firstly, organizations need to provide a healthy working environment for workers. That could mean improving ventilation, reducing the number of workers in every workspace, and adopting a hybrid work model so you won’t have all workers in the same place on the same day.

They would need to clearly define and enforce health and safety management roles and responsibilities to convince workers.

Workers should learn to adapt to working online and have a dedicated space free from the distractions of working from home to ensure a smooth transition. Moving to the suburbs might also help.

What Will Happen to the Big Cities?

Coming up with ways to make tiny spaces safer should be the top priority of cities, especially if they want to find new residents.

In the future, there’s a possibility employees will rank locations based on safety, health, and environment at the workplace and the location, such as the quality of medical care infrastructure, how the site performed during the pandemic, and their adherence to the health laws like social distancing.

Rather than promote expensive and crowded bars, clubs, and loud festivities, cities will now strategize and market themselves based on safety standards, spacious office areas, open places for recreation, and strong internet connection that supports telecommunication.

Frequently asked questions

What factors now shape where a business locates?

Health and safety have joined the list. Businesses and workers now weigh the quality of local medical care, how a place performed during the pandemic, how well it follows health rules such as social distancing, the space available in offices and outdoors, and the strength of its internet connection for remote work. Crowded, dense locations lose ground on most of those measures.

Why are businesses and workers moving to the suburbs?

Density spreads infection. During the pandemic the most densely populated states had the highest excess death rates, while suburbs offered sunshine, open space and outdoor activity, and suburban metro counties may have lower premature death rates than urban ones. Remote work and digital tools make the move practical, because many jobs no longer need a desk in a crowded downtown office.

How did remote work change where companies locate?

Remote work rose from 5% of the workforce before the pandemic to above 40% after, and most people working from home prefer to keep doing so. Tech firms such as Twitter, Facebook and Salesforce expect a large share of their staff to stay remote, so fewer companies need big offices packed into dense city centers.

How will big cities compete for businesses after the pandemic?

By selling safety instead of nightlife. Rather than promoting crowded bars, clubs and loud festivities, cities will market their safety standards, spacious office areas, open places for recreation and strong internet connections. Their first priority is finding ways to make tight spaces safer, especially if they want to attract new residents and the employers who follow them.

The emerging real estate trends for 2022 were a move into alternative sectors such as student housing and self storage, investment in Sun Belt markets, rebounding senior housing, demand for life sciences research space, openings for mom-and-pop rental owners, and a stronger focus on ESG.

Editor’s note, August 2026. This piece was published in September 2024 and describes the market as it stood then. Where it stands now, from Federal Reserve data: the median U.S. home sale price is $410,700 (Q2 2026), below the $442,600 peak of Q4 2022; the federal funds rate is 3.63%, down from a 5.33% peak in August 2023; the 30-year fixed mortgage averages 6.66%, down from 7.79% in October 2023; and consumer prices are rising 3.3% year over year. Sources: FRED series MSPUS, FEDFUNDS, MORTGAGE30US and CPIAUCSL.

Real estate proved its resiliency despite the pandemic and possible market crash forecasts. If anything, the real estate industry emerged from the pandemic unscathed, according to real estate guru Byron Carlock. Only after breaking down the various real estate entities will you discover that specific properties are still thriving despite the chaos the pandemic heaped onto the market. By looking at events in the industry, you might think there never was a pandemic. That only happened because real estate players tapped into their creative sides to develop innovative solutions for the challenging conditions. So, what will the housing market be like in 2022? This article examines the emerging trends in real estate in 2021 and maps out what will drive the real estate industry in 2022.

Insights from Real Estate Investors

Now that the real estate market is relatively stable compared to 2020 trends, investors are taking it as an opportunity to invest in housing and real estate products in high demand. That has driven up prices so that you can expect near-instant results from investments. As much as there is an opportunity for agencies to grow, there are a few speed bumps–rising costs, labor shortage, and infrastructure bills. These factors pile on the traditionally high costs for labor and construction materials. Considering the current industry shortage, as seen in the table below, you could choose to go for the win by ignoring all the doubts and doing your best to meet the industry demands. Experts seem to believe the real estate market trends in 2022 will be apparent in the following ways:

Which alternative real estate sectors attracted investors?

Private investors will likely show interest in various alternative sectors rather than traditional ones like office, retail, and industrial. Investors will have to bear the high cap rates, which come with less risk. Therefore, tenants, driven by economic growth, are the primary source of promise for real estate investors. So, what are these alternative sectors that have appealed to investors?

A) Recession-Proof Student Housing

Real estate investors understand the stability that comes with multifamily housing, especially student housing, as normalcy resumes. The pandemic minimized demand for student housing since students had to switch to remote learning. However, once we achieved relative normalcy, the need for new leases spiked in the summer of 2021, leading to a marked rise in occupancy rates and rents.  In 2022 investors will have more confidence and invest in multifamily housing for its strength after the pandemic.

B) High Demand on Self Storage

Subsequent house moves peaked when the pandemic hit. As workers switched to remote work, there was an increased demand for self-storage facilities. Vacancy rates tanked to lows of 5.5% in the second quarter of 2021, an unprecedented event. 2022 is likely to feature high demand for self-storage facilities even as the dust settles. Renters have discovered a new system that works for them, involving remote work and emphasizing outdoor activities, fueling the growing demand.

Why are investors moving into Sun Belt markets?

There is a likelihood real estate dealers will commence investing in Sun Belt Markets because of their rich promise. Experts think it is worth watching these markets in 2022. The said market withstood the exodus that came with the pandemic. That said, what is the fastest growing real estate market? Here are at least ten markets with promising prospects:

1. Austin, Texas
2. Nashville
3. Atlanta
4. Phoenix
5. Boston
6. Raleigh/Durham, North Carolina
7. Charlotte, North Carolina
8. Seattle
9. Tampa/St. Petersburg, Florida
10. Dallas/Fort Worth, Texas

Sun Belt markets hardly experience the clearing out that major cities like New York and Chicago experienced. Additionally, the markets are in tax-friendly states, and the quality of life there is better than in other states. The main elements driving their growth include: 

1. Strong growth
2. Affordability
3. Job Prospects
4. Homebuilding outlook

A) Rebounding Senior Housing

Senior housing registered some decline at the beginning of the pandemic. The discovery of a vaccine changed that, as demand peaked in the second quarter of 2021. Given that the world is still trying to adjust and considering how hard the pandemic hit that age demographic, it is still amazing how senior housing continues to rebound. According to recent reports, the demographics favor the sector as most people will age into potential tenants of senior housing. Once it turns out this way, the low occupancy levels will ultimately stabilize by 2022.

B) Life Sciences Research Spaces

Real estate investors turned their attention to the high demand that came with the focus on vaccine developments. The application of new technologies, in particular, has caused a reaction where investors are showing interest in laboratories and medical buildings. Investors will work to meet the demand for healthcare properties in the future. Renters, mostly healthcare providers, are moving facilities closer to consumers for convenience. That is in stark contrast to how it was in the past where healthcare providers settled in old-school hospital campuses. Therefore, it’s more suitable to consider the transformational move as a trend.

C) Mom and pop rental owners market (for smaller investors)

Smaller investors have a real chance of thriving by meeting mom-and-pop rental owners’ demand for rental space. They could take up affordable renovation projects which will build a portfolio. For the best chances of success in 2022, smaller investors can sell family land and invest in income-producing property. Success in this sector would require paying keen attention to the community’s needs. The local market is full of promise and would be a great place to start.

How is ESG changing real estate investing?

Another top trend that will feature the real estate industry in 2022 is stakeholders’ drive to alleviate climate change. Real estate leaders have taken the responsibility to adopt green building to other socio-economic changes. It comes after real estate stakeholders finally started paying real attention to environmental, social, and corporate governance (ESG) in the following ways:

1. Considering primary ESG elements will be the main point of consultation for real estate investors when making operational and investment decisions.
2. There will be intentional attempts to respect social issues and to solve them.
3. Perhaps from the point of self-interest, investors will want to mitigate climate-related property damage.
4. Stakeholders in real estate will likely invest in affordable housing. Housing problems were evident during the pandemic.
5. There are also hopes to make the real estate industry more diversified and inclusive.

Conclusion

Everything that the financial market experienced during the pandemic had a less severe impact on the real estate market than expected. The 2022 real estate market will thrive once real estate leaders start investing in the new sectors.  These include student and senior housing, self-storage, and investing in the Sun Belt markets. Even better is if real estate investors can successfully implement ESG since the benefit would be far-reaching.

Frequently asked questions

What were the biggest real estate trends of 2022?

Six trends stood out. Investors moved into alternative sectors such as student housing and self storage, put money into fast-growing Sun Belt markets, backed a rebound in senior housing, chased demand for life sciences labs and medical buildings, found openings as small mom-and-pop rental owners, and paid far closer attention to environmental, social and governance (ESG) factors.

Why did demand for self storage rise?

The pandemic set off a wave of moves as workers switched to remote work, and many needed somewhere to put their belongings. Self-storage vacancy fell to 5.5% in the second quarter of 2021, an unprecedented low. Renters settled into a new routine built around remote work and outdoor activities, which kept demand for storage high heading into 2022.

Is senior housing a growing real estate sector?

Yes. Senior housing dipped early in the pandemic, then demand peaked in the second quarter of 2021 once vaccines arrived. The demographics favor the sector, because a large share of the population is aging into potential senior-housing tenants, and the low occupancy seen during the pandemic was expected to stabilize by 2022.

How can small investors get started in rental real estate?

Smaller investors can meet the demand of mom-and-pop rental owners for rental space, taking on affordable renovation projects that build a portfolio over time. Some sell family land and put the money into income-producing property. Success depends on paying close attention to what the local community needs, and the local market is the natural place to start.

Why are investors buying life sciences and medical buildings?

Vaccine development and new medical technologies created strong demand for laboratories and medical buildings. Healthcare providers, the main renters in this space, are also moving their facilities off old-school hospital campuses and closer to the people they serve, which gives investors a lasting reason to build and own healthcare properties.

Inflation cuts purchasing power, pushes interest rates and borrowing costs up, and can feed on itself as people spend to get rid of a depreciating currency. Four strategies for dealing with it: relocate cash into other assets, invest in real estate, spread holdings across less affected economies, and cut expenses.

Even before the first reported case of COVID-19 in the country, the economy entered a prolonged downward spiral. What followed was a series of lockdowns worldwide, leading to businesses and factories closing shop, which only seemed to create a decrease in industrial production and an increase in currency production.

This made importing raw materials impossible, increasing manufacturing costs. It resulted in pandemic-related supply shortages hence an increase in the price of goods and services. The Bureau of Labor Statistics reports consumer prices rose by an annual rate of 6.2% in October 2021.

The government’s efforts to resolve the issue through the stimulus and relief package didn’t bear fruit. World economies had shut down, creating supply chain shortages.

People resorted to buying all the available stock, fueling the current inflation rates, the highest it has ever been since November 1990. This piece examines four ways businesses can insulate themselves from the effects of inflation. But first…

What are the effects of inflation on the economy?

Reduction in purchasing power

During periods of inflation, consumers cannot purchase the same amount of goods and services they used to with the same amount. The tremendous increase in prices forces them to either cut back on consumption or substitute for cheaper goods or services.

Increase in interest rates

With high inflation rates, interest rates follow suit due to the heightened investment risks. This increases the cost of borrowing and leads to an increase in the cost of production.

Creation of a feedback loop

Inflation can cause even more inflation of the currency. People tend to spend more to rid themselves of the depreciating currency. As this happens, the money supply becomes higher than the demand leading to a further reduction in its purchasing power.

 Encourages spending

Although most effects of inflation are negative, one of the benefits of inflation is that it encourages spending. As mentioned earlier, you won’t want to stick with money that’s rapidly depreciating. Instead, the motivation is to buy goods that don’t lose value now rather than later.

Fortunately, there are measures you can take to protect your business against the impact of inflation on the economy.

How can a business deal with high inflation?

Relocate cash

Since inflation reduces buying power, having large cash reserves is not a great idea. The best option is to diversify your investment into several assets that regularly outperform during inflationary periods. What that does is limit exposure of any one type of asset and shield your money from inflation.

You can choose to invest in stocks, bonds, investment accounts, and treasury inflation-protected securities (TIPS). Stocks, bonds, and investment accounts are typically good hedges for outpacing the inflation rate.

The TIPS principal increases with inflation and decreases with deflation, and on maturity, one gets the adjusted amount. You can also opt to invest in resources and equipment that will provide value to your investment and help further strengthen your company’s operations.

However, before deciding what to invest with your cash, you need to assess your business’ circumstances. Scrutinize the inflation rate and the rate of investment in bonds and investment accounts to gauge if it’s worth the risk.

Another good investment against inflation is commodities such as gold, crude oil, and natural gas. These barely lose value even when faced with recessionary forces. If anything, the price of gold increases during recessions.

Invest in real estate

Properties are unlikely to feel the effects of market changes; hence they are a good hedge against inflation.

That makes real estate an excellent industry to invest in since, over time, high inflation rates result in increased income for property owners as they can increase rent simultaneously.

You can also choose to own the property your business operates in to avoid the high rent charges because of inflation.

However, real estate is illiquid, which means that you will not access the funds in a financial emergency.

Fiat currency arbitrage

Some economies don’t face the same fluctuations, so a high inflation rate in the US will not affect the markets in these countries directly. These include Australia, South Korea, and Italy.

Diversifying your investments to these international financial havens secures them from the inflationary effects of a single market. Setting up your company abroad means it will operate normally even with high inflation rates locally.

Examples of such investments are foreign stocks & bonds, cryptocurrency, commodities [such as gold, silver, platinum, palladium].

Assess expenses

One of the most effective measures to protect your business from inflation is to cut costs. It’s a good business practice to minimize costs to minimize high production costs. Find ways to get raw materials at a cheaper price, and you can go as far as substituting your supplier.

Identify any areas you can make a saving and cut down those costs. You can also set up a contract with a fixed rate to avoid buying raw materials at a higher price in the future.

Bottom line

Inflation disrupts the economy and can adversely affect your business. As a business owner, it’s impossible to control inflation rates, but luckily, you can employ a few strategies to beat inflation.

Some of the best ways to deal with inflation include cutting costs, investing in relatively inflation-proof assets, and investing abroad. These strategies are a surefire way of protecting your business against the harmful effects of inflation.

Frequently asked questions

What are the main effects of inflation?

Inflation does four things. It cuts purchasing power, so the same money buys fewer goods and services. It pushes interest rates up, which raises the cost of borrowing and of production. It can feed on itself, as people spend to get rid of a depreciating currency. And it encourages spending, because nobody wants to hold money that is losing value.

Who benefits from inflation?

Property owners are among the clearest winners. As prices climb, they can raise rent, so their income rises along with inflation, and a business that owns its building avoids the rising rent everyone else pays. Inflation also pushes people to buy goods that hold their value now rather than later. The trade-off with property is liquidity: you cannot pull that money out quickly in a financial emergency.

How does inflation affect a business?

Inflation raises what a business pays for almost everything. Higher interest rates make borrowing more expensive, pricier raw materials drive up the cost of production, and customers with less purchasing power cut back or switch to cheaper goods. The defense is on the cost side: find cheaper raw materials, change suppliers if needed, cut wherever savings exist, and lock in fixed-rate contracts before prices climb further.

Why is holding cash a bad idea during inflation?

Cash loses buying power every month that inflation runs. Instead of sitting on large reserves, spread the money across assets that tend to hold up in inflationary periods: stocks, bonds, investment accounts, Treasury inflation-protected securities (TIPS), whose principal rises with inflation, and commodities such as gold, crude oil and natural gas. Weigh your business’s circumstances and the rates on offer before you move the money.

A due diligence checklist for buying commercial real estate has ten checks: the financial records, property management, the building’s condition, an estoppel certificate on the tenants, a site visit, an appraisal, insurance, the agreements in place, the existing loan, and the closing statement. Complete every one before you sign.

There is no doubt that due diligence is crucial in business dealings. Considering the US commercial real estate market is worth more than $1 trillion, you can expect stiff competition, so you must carry out due diligence before formalizing any real estate deal.

Like every massive investment, compile a commercial real estate checklist and follow it religiously. Failure to stick to the checklist may result in colossal losses, time wastage, and costly litigation.

A due diligence checklist for commercial real estate lets you check all the facts about a property before purchasing it. In the process, you can assess the nature of the deal and the state of the property before signing on the dotted line.

What is on a commercial real estate due diligence checklist?

When buying commercial real estate, these are the factors you should consider lest you make a regrettable investment mistake:

• the financial state of the company
• property management
• condition of the property
• information about the tenants
• site visit reports
• lease agreements in place
• insurance of the property

The due diligence checklist addresses these factors in totality and is thus a must-have:

1. What financial records should the seller provide?

Financial information enables you to identify liabilities and weigh the possible returns after purchase. While newly built commercial real estate cannot always provide the required information, for other potential investments, the property agent should at least provide:

• Income and expense statements of the last three years
• Copies of audited financial statements for the past three years
• History of receivables for the past 18 months
• Information on the cost of leasing the property for five years
• Real estate tax bills for the last three years
• 5-year history of capital expenditure
• Budget of the current year and the following year
• A list of all unfunded capital projects in progress
• The general ledger for the current year
• The cost of tenants’ electricity bills, and
• Copies of tenants’ recovery schedules such as common area maintenance (CAM) tax billing

2. Check Management of the Property

Commercial properties have people who oversee the operations within the building. Property management has extra costs that you will need to look into.

Some of the operational costs of commercial buildings that you should check include 2-year utility bills and employees’ salaries. Therefore, you need to look at the list of employees and contracts on service, utility, and maintenance.

Request your agent to share the property management agreements and the list of personal properties and equipment.

3. Confirm the State of the Property

There’s no way around it–repairing, upgrading, and maintaining commercial properties is costly. Knowing the state of the property and the existing preventive maintenance program will protect you from false representation and unforeseen mandatory repair costs.

During the inspection, request the site plan, occupancy certifications, licenses, permits, architectural plans, and specifications. You should also confirm if the property management has embraced safety measures and the property fits the description provided.

4. Ask for an Estoppel Certificate

Commercial real estate agents keep a portfolio of their tenants. Agreements, credit information, security deposit, and lease abstracts are some of the information you can get in an estoppel certificate.

Knowing your potential tenants’ profiles and payment history is a good start. After all, once you own the property, you will be dealing with them frequently.

Verifying information about the tenants will enable you to identify anticipated challenges and address them.

5. Schedule a Site Visit

Site visits confirm if the property meets the description provided and the standards set. In addition, it allows you to interview the tenants to verify uncertainties like the property’s security and cleanliness.

For tall buildings, check if elevators are available and functional. Take note if the facility complies with the Americans with Disabilities Act (ADA) standards.

You can request experts to assess the structural and environmental condition of the property and its mechanical, electrical and plumbing (MEP). The assessment will enable them to make a reliable report for your perusal.

6. How is a commercial property appraised?

Appraisals are assessments done to determine the value of a commercial property. The assessment involves researching the property’s zoning, ownership, and ADA compliance of the property.

It also consists of comparing compiled sales, costs, and rents analysis of similar properties to determine the value of a property. From the appraisal provided, you will decide whether to buy the property or not.

7. Ascertain the Insurance of the Property

Good insurance goes a long way in compensating property owners in case of loss or damage. Understanding the underlying documentation and legal description of a property’s insurance enables you to assess the risks.

From an existing title report, you will learn about historical and pending litigation. It will help you determine the insurer’s reliability in safeguarding your property.

Remember to request an ALTA survey to know the insured property’s existing covenants, boundaries, and easements.

8. Go through the Agreements in Place

Sale agreements safeguard the parties’ interests with regard to the ownership of a commercial property. Going against such agreements may attract legal suits, and you risk losing the property.

Apart from tenant leases, general contracts, and amendments, you should check:

• Parking agreements,
• Brokerage commission agreements,
• Tenants’ lease agreements,
• Property management agreements,
• Contracts for service, utility and maintenance,
• Exclusive brokerage agreements, and
• Loan agreements.

You can seek the clarity and counsel of your legal representative when examining the agreements.

9. Look at the State of the Existing Loan

Loans are liabilities: if a loan goes into default, you risk losing your investment through auction. By checking existing loan agreements, you will weigh potential risks and act accordingly.

Take note of the primary lender’s commitment by checking the promissory note and fixture filings. If the loan was an authorized partnership borrowing, request a resolution to avoid future disputes. 

10. Assess the Closing Statement

After buying a commercial property, the last thing you want is to deal with litigation arising from undefined roles. It is crucial to seek closure on who will handle outlined financial responsibilities.

A closing statement comes in handy by listing all profits and liabilities. The statement clearly defines the roles of each party, highlighting whoever is in charge of a particular proceeding.

Final Remarks

Once you have completed your due diligence, you can decide whether to buy the property or not. It is the essence of following the due diligence checklist. The checklist involves site visits and assessing contracts, financial information, and insurance positions.

While the process may be tiresome and costly, it is worth it. After all, it is better to lose some coins in preliminary investigations instead of blowing up millions of dollars on a poor investment.

Every time you buy a commercial property, make sure you carry this checklist. It will save you a ton of money and provide peace of mind. Remember, failure to do due diligence is the precursor to bad investment decisions.

Frequently asked questions

What are red flags in due diligence?

On a commercial purchase, watch for a building that does not match its description, repairs nobody disclosed and a weak preventive maintenance program. Check the title report for past and pending litigation, the existing loan for default risk, and whether the property meets ADA standards. Missing financial records deserve questions too: only newly built property has a reason not to supply three years of statements.

What is an estoppel certificate?

An estoppel certificate is a record of the tenants in a commercial building. It covers each tenant’s agreement, credit information, security deposit and a lease abstract. Asking for one before you buy tells you who you will be dealing with and how they pay, so you can spot tenant problems before they become yours.

What is an ALTA survey?

An ALTA survey shows a commercial property’s boundaries, easements and existing covenants. Request one during due diligence alongside the title report, which lists historical and pending litigation. Together they tell you what the insurance covers and what legal limits come with the land before you commit to the purchase.

Why is due diligence important when buying commercial real estate?

It lets you check every fact about a property before you commit, so you can judge the deal and the building’s condition before you sign. Skipping steps can lead to large losses, wasted time and costly litigation. The checks cost time and money up front, but losing a little on preliminary investigation beats losing millions on a poor purchase.

Selling a commercial property frees up capital, ends management and building-safety responsibilities, and turns the asset into a lump sum. The disadvantages: finding a buyer can take from 2 weeks to more than a year, a poorly timed sale can lose money, and you give up the property’s steady income and future appreciation.

One of the best things about commercial real estate is the promise of steady and long-term cash flow. It came as no surprise when CNBC reported that nearly 90% of high net worth individuals made and maintained their wealth through real estate.

But, circumstances might change (crashing markets, someone making you an offer you can’t refuse, or the smart money has moved elsewhere) that make selling a commercial property sensible.

And what a market! Statista estimates North American commercial real estate at $1.3 trillion. But that is not to say there aren’t some downsides. Read on for the advantages and disadvantages of selling commercial property.

Advantages of Selling Your Commercial Property

Some of the general advantages of selling your commercial property include:

• Freedom from rates and taxes
• You don’t have to worry about the hassle of managing a property
• After the sale, you get a nice lump sum instead of waiting for ages to recover the same amount
• Potential growth in investment, so you are likely to get more from the sale than what you invested initially
• It frees up a lot of your capital
• You don’t have to worry about market trends eating into the value of your investment
• No more responsibility for building safety or ongoing costs

That said, there are two distinct ways of selling a commercial property: on-market and off-market, each with its own advantages and disadvantages.

If you opt for an on-market property sale, it means you are using conventional means of selling the property by placing it on multiple listing services (MLS) using real estate agents or brokers.

On the other hand, off-market refers to selling your commercial property without using the agents, brokers, or public listings. It is harder for potential buyers to find the property as it is not in the general public knowledge.

Here are advantages to selling your commercial property on-market (through brokers) and off-market (without real estate agents):

On Market

• The broker understands the market better than you and knows where to source buyers.
• Selling through brokers increases the competition among prospective buyers, potentially leading to an increase in the selling price, netting you higher returns.
• Since the property is on MLS, it is more visible to a broader audience of potential qualified buyers. Anyone can go on the internet and search for a property anywhere in the country.
• A real estate agent knows they get a sales commission, so they will do their best to get you a great deal.
• Brokers have a game plan to sell a property, such as market intelligence, competitive analysis, and property marketing plan, to ensure they milk the best price from the sale in the quickest time possible.
• Real estate agents have advanced algorithms so they can tell you what you should expect before any potential buyer makes an offer to buy the commercial property.

Off-Market

Selling property off-market is the opposite of on-market–you don’t list on the MLS, and you don’t market it to the general public. While you can sell the property yourself, you may involve a broker, typically a single real estate agent tasked with keeping the potential sale low-key.

An off-market property is a private sale, with only a few people made aware that the property is on sale. Here are the advantages of selling your commercial property off-market:

• There will be little disruption to tenants because the sale of your property has not been made public. Interest in your commercial property will be from potential buyers you have identified.
• You can maintain the confidentiality of buyers’ profits, costs, and identity.
• No broker fees or commissions.
• You can test the waters to see if a potential sale can fetch you a reasonable price.
• Since the property is not on MLS, it is an exclusive deal, a bargaining chip you can use to raise the price.
• If you involve a broker, they know where to source ready clients, even without marketing.

Disadvantages of Selling a Commercial Property

These are some of the disadvantages of selling a commercial property:

• Since it is costly, commercial property is not in the fast-moving-product category. Finding a buyer can take anywhere from 2 weeks to more than a year.
• If promoted poorly, sold during a dip in the market, or if you sell the property yourself without proper market research, you stand to make a loss from your initial investment.
• The commercial property selling process is quite lengthy, especially if the buyer uses a loan. The process involves completing appraisals, paperwork, and loan committee reviews, which might take up to 60 days to complete. The fastest way to complete a real estate deal is through a cash deal, but since commercial properties are expensive, that is a tough ask.
• You lose out on the long and stable income that comes with owning a commercial property.
• As most real estate tends to appreciate with time, you miss out on potential income if you had held on to the property in the long run.

How can you raise a commercial property’s value before selling?

You can start by raising the commercial property value. A commercial property management enterprise will upgrade the face of your commercial property, saving it from deterioration and increasing its market value.

Another way to increase the value of your property is by changing the purpose of the building. For instance, office spaces bore the brunt of the pandemic, registering low occupancy rates.

Consequently, they fetch lower prices in the current market. To offset that, you could transform the building into a multipurpose facility, which milks its maximum potential and fetches a higher price.

Why do people sell commercial property?

You might not want to sell your commercial property, but circumstances may compel you to do so, such as:

1. Maximum Earning Capability 

The commercial property hit its potential earning ceiling, and you don’t see any other way to improve it. You’ve tried every trick in the book, such as increasing rent, upgrading the facility, and changing its use, but it still doesn’t fetch as much money as you would like.

In such cases, the best option is to sell before incurring further depreciation or piling on taxes and mortgage payments.

2. Too Little Return on Work

While the property may not be turning in losses, it takes more effort than you are willing to put in. For instance, it could be an aging building, and you don’t have the resources to conduct facelifts or repairs, or there are too many lease turnovers that need plenty of marketing funds. In short, managing the asset is too hectic for you to keep up with.

3. Favorable Market Conditions

Sometimes the stars align favorably, and the market is just right. Then someone makes you a once-in-a-lifetime offer that you can’t resist. High demand and financing options ensure quick sale completion and low cap rates. It makes sense to cash in on the healthy profit then and invest elsewhere.

4. Major Tenant’s Lengthy Lease Ends

The end of a long-term lease on your commercial property exposes you to the risk of holding a vacant property. Selling your property saves you from the dangers of retaining an inactive property. 

Final Word

In conclusion, you may have various objectives for selling your property. The advantages and disadvantages of selling your commercial property on-market and off-market should direct you on which path to take.

Selling a property offers an escape from hectic property management, mortgage, rates, and taxes and provides a chance to recoup invested capital while earning a healthy profit to boot.

On the other hand, you miss out on steady monthly income and a chance for future profits if you sell a commercial property. Similarly, you could lose a chunk of your initial investment if marketed poorly or if sold during an unfavorable market period.

Frequently asked questions

What happens when you sell a commercial property?

You trade the building for a lump sum. Your management duties, building-safety responsibility and ongoing costs end, and the capital is free to use elsewhere. You also give up the steady income and any future appreciation. If the buyer uses a loan, appraisals, paperwork and loan committee reviews can take up to 60 days. An all-cash deal closes fastest but is rare at commercial prices.

How long does it take to sell a commercial property?

Finding a buyer can take anywhere from 2 weeks to more than a year, because commercial buildings cost too much to sell quickly. A financed sale then adds up to 60 days of appraisals, paperwork and loan committee reviews. Listing on the MLS through a broker puts the property in front of more qualified buyers and builds competition among them.

Can you sell commercial property without a broker?

Yes. An off-market sale skips the MLS and public marketing, and you can handle it yourself or bring in a single agent to keep it quiet. You avoid broker fees and commissions, tenants see little disruption, and the details stay confidential. The cost is visibility: fewer buyers know the property exists, and a sale made without proper market research can lose money.

When is a good time to sell commercial property?

Owners usually sell for one of four reasons: the property has hit its earning ceiling, it takes more work than it returns, the market is strong, with high demand, available financing and low cap rates, or a major tenant’s long lease is ending. Selling during a market dip, by contrast, is one of the main ways sellers lose part of their original investment.

Converting an office to residential use starts with zoning: local law must allow it, and the building must be brought up to residential code for water, electrical lines and entry points. Renovation cost, exterior layout and access, and a permit process of weeks to months decide whether the project makes sense.

Converting commercial property to residential property is a good investment strategy at the moment. Since the pandemic struck, the new normal is a hybrid working model where workers spend alternating days working from home and the office.

That translates to smaller working office spaces and a demand for better working spaces at home. Given the market conditions, CNBC notes that 41% of all apartment conversions in 2020 and 2021 were office buildings to residential conversions.

Some commercial properties are perfect candidates for conversion if the building quality and surrounding amenities are right. However, note that not all office property is suitable for residential conversion. This guide provides insight into converting office space into residential property.

Can you convert commercial property to residential property?

Yes, if the property zoning and housing laws allow. Local governments have rules that distinguish specific areas for commercial and residential properties.

If you want to convert commercial space into residential property, the best place to start is to familiarize yourself with local building laws. If you have more questions, schedule a meeting with a county clerk.

Aside from laws, an investor must ensure the building they want to convert is up to code. This is necessary because contractors build commercial and residential properties for different purposes. Structural requirements differ and include factors like water and electrical lines and entry points.

Successfully converting commercial property to residential depends on zoning laws and your ability to renovate the property to meet housing standards.

What should you weigh before converting commercial property to residential?

1. Costs

As you look at a potential commercial to residential property deal, analyze the potential renovation costs. You will need to hire experienced construction staff and specialized designers to ensure the project meets the legal standards.

Additionally, you need to factor in the building and material costs. These costs can quickly escalate during the conversion process.

2. Exterior layout

The exterior layout plays a big part in commencing an office conversion project. Traffic flow is another factor that may affect the success rate of converting a commercial building to a residential one.

That’s because some office locations prevent easy access to and from the building. You may succeed in converting the building, but the location will determine whether the switch makes sense in the long run. In short, the right infrastructure will decide whether or not you can convert a building successfully.

3. Time

Depending on the size of the project, the process may take a long time. Investors will need to start with the permit application process before beginning renovations. This process may take a few weeks to a couple of months.

Before moving forward with the deal, analyze all the above factors to ensure a smooth conversion process. Remember to factor in all the costs to allow for the best returns on this investment.

How do you convert an office building to residential use?

Keep the above-mentioned factors in mind as you begin looking for commercial property to convert. Only consider listings that make financial sense and are eligible for conversion.

Since area laws differ, you may want to consider this before investing in areas outside the local zone. Having this information determines whether there are extra steps you may need to take.

Below is an overview of what you need to implement an office to residential conversion project:

1. a) Understand zoning laws. You need planning permission to change offices to residential units.

1. b) Next, look at the structural design and determine how you’ll create residential units that fit the current market requirements. The factors you need to look out for include:

• What is the best residential use in the market? You’ll need to choose between rentals and condos.
• What is the best size for the units?
• Consider creating a co-living area or an interior courtyard for a large floor plate. 
• Study the floor plate to determine whether you need to reduce passenger elevators.
• Does the building exterior comply with energy code and ventilation requirements?
• Identify whether the building’s codes comply with yard requirements.

What makes office-to-residential conversion hard?

The biggest challenge that an office to residential conversion faces is the office floor plate depths, which is a problem that is more common in modern office designs. In addition, some buildings feature designs that limit natural light and air.

This poses a problem if you are trying to convert to small residential units, but it is not an issue if you intend to convert it into large rentals. However, you will face competition from smaller units with a more uniform design.

Newer residential properties have about 35 feet between a window and corridor wall, which is not applicable in commercial office spaces. It will take a lot of creativity to convert a modern office into a residential space.

The best option is to choose co-living designs instead of the typical one or two-bedroom apartments. This design guarantees a better success rate when converting from office to residential space. Additionally, the shared living arrangements encourage less space wastage.

The Potential Future of Office to Residential Conversions

It is too soon to say that more investors will join the office to residential conversions bandwagon. That’s primarily to do with the restrictive zoning laws regarding rear yard spacing that make it illegal to conduct the conversions.

When the laws came into play in the 60s, building conversion regulations only had in mind small office buildings, not the behemoth offices that investors want to convert into residential places today.

During that time, regulations required buildings to have a minimum of 20 feet of yard space. Residential buildings need to have at least 30 feet of yard space as a zoning requirement. There haven’t been significant revisions to the laws to account for office buildings post-1961.

Today, developers remain tempted by the office to residential conversions because of the mere fact that they do not need to build, excavate or perform any massive construction. Instead, most of the work is internal, like changing layouts, but nowhere near the kind of work needed when building a project from scratch.

However, considering the bottleneck of rear space required by zoning laws, many shun the projects as it would mean physically reducing the footprint of the building. That is no easy trick and remains the biggest threat to the office to residential conversion.

It seems like the mixed-use or hybrid properties will be the most appropriate way to cater to the office and residential usage.

Final Word

Before embarking on an office property to residential property conversion, you need to identify the best size for the units, whether to turn them into rentals or condos, and how to carve out an interior courtyard.

That’s because zoning stipulates that you must have at least 30 feet of rear yard space; otherwise, the local authority will disqualify your application for office block conversions.

Frequently asked questions

Is it easy to change a property from commercial to residential?

Rarely. Zoning has to allow residential use, and the building has to meet residential code for water, electrical lines and entry points. Modern offices add a design problem: deep floor plates leave interior space far from windows, while newer apartments run about 35 feet from window to corridor wall. Rear-yard rules that require at least 30 feet of yard space stop many projects outright.

How long does an office-to-residential conversion take?

It depends on the size of the project. The permit application alone takes a few weeks to a couple of months, and renovation cannot start until it clears. After that, most of the work is internal, such as new layouts and new water and electrical lines. That is far less work than building from scratch, with no excavation or major new construction.

Are office-to-residential conversions booming?

Demand grew after the pandemic moved many workers to a hybrid schedule and office space shrank. CNBC reported that office buildings made up 41% of all apartment conversions in 2020 and 2021. Whether more investors follow is less certain, because rear-yard zoning rules written in the 1960s with small offices in mind still block many large buildings.

What drives the cost of converting commercial property to residential?

Renovation is the main expense. You need experienced construction crews and specialized designers to bring the building up to legal residential standards, and building and material costs can climb quickly once the conversion is underway. Count every cost before you commit, because the numbers decide whether the conversion makes financial sense.

Nine myths keep people out of large multifamily investing: that it is too complex, too risky, unaffordable, easy to make profitable, short of good deals, only for the experienced, too costly to maintain, harder to keep occupied, and unaffected by nearby construction. Most are false; a few hold partly true.

Some multifamily home myths, such as recommendations to only redecorate in neutral colors, will barely raise your eyebrows. However, myths like single-family homes are cheaper than multifamily properties will cost you business if you are a seller.

Let’s take the above myth as an example. Sure, the multifamily home is more expensive than the single-family residence. But, that does not consider the spare homes you can lease out. If anything, the rent paid can offset your mortgage payments.

This article scrutinizes the top nine multifamily home investment myths and comprehensively debunks them.

Multifamily Unit Investment Myths Debunked

1. Investing In Large Multifamily Properties Is Too Complex

Investing in a large multifamily property is not that different from smaller ones. It is easier to believe that multifamily is not as complicated as rumor would have it by starting small. Initially, investing in smaller properties can prepare you for the rigors of larger multifamily investments.

Large properties have a lot of moving parts that require more analysis. As an investor, you will find that these parts are different from small properties, but not radically. It’s best to approach operation and ownership matters with an open mind.

The mere thought of the vast operations involved in multifamily investments is enough to cause anxiety and fear, which might discourage some from investing. However, hiring skilled personnel to handle operations will make the process relatively pain-free.

2. Is multifamily investing too risky?

Like any other investment, multifamily investments carry their risks. But they are not at the levels of stock market investing. That said, the level of risk varies from one multifamily investment to another.

As an investor, you are at a great advantage if you can find the level of risk you are most comfortable with. You have to research and educate yourself about what to expect from an investment.

As expected, investments that promise quick returns carry high risks. On the other hand, low-risk investments will produce a steady trickle of income.

3. People Can’t Afford Large Properties

It depends on how you look at it. The ordinary person won’t have enough money to buy large apartment buildings. But then again, even large multifamily investors hardly have portfolios big enough to accommodate sizable multifamily unit investments.

However, these investors who can afford to buy these properties often do so through private lenders, seller financing, hard money lenders, investors, real estate crowdfunding, and other means of raising money.

Every entity with a stake in raising investment capital for an investor gets something out of the investment, but the investor keeps most of it.

4. It’s Easy to Make Multifamily Investments Profitable

Many assume you can easily control the value of a multifamily unit by applying the concept of forced appreciation. That involves either or both raising rents and cutting back on expenses. While this seems like an easy thing to do in theory, the reality is much different.

Raising rents may help increase the value of your multifamily investments, but on the other hand, the market controls rent rates. You can’t raise the rent on a whim. Otherwise, you are looking at increased vacancy rates.

Property renovations and marketing campaigns may encourage tenants to accommodate high rent rates, but it takes money to perform these, and there is no guarantee it will work.

5. There Are No Good Deals

The real estate market is in an ever-changing cycle with highs and lows. Often, there is a financial crisis that comes with predictions of an industry decline or complaints about the pricing of materials and assets.

That said, the industry always marches on. There are always opportunities to get good deals regardless of how the market is doing. A good deal is measurable by how satisfactory the outcome is. Here are some of the hallmarks of a good deal:

• There is a promise of high cash flows.
• The deal could also be solid enough to withstand recessions and inflations.
• Also, the property should have the potential to appreciate and increase its value over time.

Such deals may sound too good to be true, but they exist. As an investor, it’s up to you to hunt for them and not settle for anything less.

Expect to face a challenge finding them if you only rely on online resources for information. Research on how to get good deals can help you land a profitable multifamily unit.

6. Do you need experience to invest in multifamily?

Yes, having experience in multifamily investing is a plus, but it’s not a necessity.

One hack inexperienced investors use is investing in a small multifamily unit first. As your portfolio grows, so does your capital, experience, and knowledge about the market.

Alternatively, pair with people familiar with multifamily investing to boost your knowledge of the industry.

You can also acquire some multifamily investing knowledge through online courses, or you can self-teach by reading books from industry experts.

7. The Cost of Owning and Maintaining a Multifamily Asset Is High

You will have to pour a significant amount of resources into a multifamily property. The cost of maintaining an entire multifamily property is higher than that of a single unit.

It pays to hire a management firm. They will be in charge of managing and maintenance. Once you crunch the figures to assess how much management will cost, you’ll discover it’s a worthwhile investment that saves time and money.

8. Keeping Multifamily Properties Occupied Is Harder Than Single Rental Properties

To keep the multifamily property fully occupied calls for you to invest in marketing strategies to get many tenants. Successful marketing requires a lot of preparation and planning.

Since controlling people is impossible, some units remain occupied even when others are vacant. Although it’s challenging to keep multifamily units fully occupied, it’s no harder than keeping a single-tenant property occupied at all times.

9. Does new construction nearby affect a multifamily investment?

Yes. New construction near your multifamily unit guarantees rental space oversaturation and, subsequently, a drop in property value. One thing that can tell you if it’s good to continue investing in property near new buildings is absorption rates.

To be on the safe side, consider investigating the potential investment’s location. Consider staking your assets elsewhere if the area has a lot of development activity and low absorption rates.

Conclusion

Overcoming the myths about large multifamily investments is a significant part of investing. While most myths are just that–myths, some are true. Moreover, some people believe them, which costs you business.

To be on the safe side, revisit these arguments against housing development highlighted above to ensure they don’t affect the property. That way, you will make the right financial move before signing the dotted line.

Frequently asked questions

Is it smart to buy a multifamily property?

It can be, if you go in clear-eyed. Most of the myths that keep people away, such as “too complex,” “too risky” or “only for the experienced,” do not hold up: large buildings run much like small ones, risk varies deal by deal, and a skilled management team carries the daily operations. The myths that hold partly true are real costs, so research the location and the numbers before you sign.

How do investors pay for large multifamily properties?

Few people buy a large apartment building with their own money, and even big multifamily investors rarely do. Buyers raise the capital through private lenders, seller financing, hard money lenders, partner investors and real estate crowdfunding. Each source takes a share of the investment in return, but the investor who puts the deal together keeps most of it.

Is it harder to keep a multifamily property occupied?

No harder than keeping a single-tenant rental occupied, though full occupancy takes work. Filling many units calls for planned marketing, and you cannot control when people move out. The difference is that some units stay rented while others sit empty, so one move-out does not leave the whole building without income.

What makes a good multifamily deal?

Three signs mark a good deal: strong cash flow, a property solid enough to hold up through recessions and inflation, and room for the building to appreciate over time. Deals like that turn up in every market cycle, but rarely on listing sites alone. Research beyond online sources is what finds them, and settling for less is how investors end up with a weak property.

COVID-19 hit commercial real estate through seven pressures: remote work reshaping offices, a split lending market, falling retail and hotel REITs, emptier retail space, shifting industrial demand, housing moving to the suburbs, and heavy restaurant and hotel losses. Warehouses and storage boomed while hotels and restaurants took the biggest hit.

Editor’s note, August 2026. This piece was published in September 2024 and describes the market as it stood then. Where it stands now, from Federal Reserve data: the median U.S. home sale price is $410,700 (Q2 2026), below the $442,600 peak of Q4 2022; the federal funds rate is 3.63%, down from a 5.33% peak in August 2023; the 30-year fixed mortgage averages 6.66%, down from 7.79% in October 2023; and consumer prices are rising 3.3% year over year. Sources: FRED series MSPUS, FEDFUNDS, MORTGAGE30US and CPIAUCSL.

Following the outbreak of COVID-19, federal and state governments imposed strict measures to curb the spread of the disease, leading to an unprecedented crisis. One of the hardest-hit sectors was commercial real estate (CRE). In the months that followed, empty offices, abandoned malls, silent bars, and closed restaurants became symbols of social distancing and limited interactions among people. As of April 2020, hotel and retail real estate investment trusts (REIT) indices were down more than 48% each, while CRE transactions declined by more than 30%. Shutdowns, quarantines, remote work, social distancing, and layoffs during the pandemic cut the demand for space. Below are a few challenges CRE subsectors face post-pandemic.

1. How did remote work change demand for office space?

At the beginning and during the height of the pandemic, people were comfortable with working from home. Offices closed as companies implemented social distancing. Now that things are slowly getting back to normal, the demand for office space is starting to gain traction, but with a twist. Pre-pandemic, there was a high demand for offices with gyms, meeting rooms, and lounge areas. Now, workers demand better indoor air quality, appropriate distancing among cubicles, and touchless technologies. These new demands force developers and builders to modify building plans to suit these new requirements. CRE firms are also developing flexible working arrangements and repurposing space for alternate uses. There is an increased demand for a talented workforce to make structural and design changes to accommodate the new requirements for office space post-pandemic. On the other hand, the companies downsized to smaller buildings to accommodate the smaller in-person workforce. And, because of adopting new hybrid working models, most companies may not return to larger buildings and offices. Developers’ cash flows and project timelines are affected by the slow pace of activity and no movement in certain types of construction. That’s to do with the shutdown of industries worldwide, causing a shortage of raw materials and protective equipment. Active project sites still have to adhere to guidelines such as cleaning common areas and social distancing, which slow down development projects.

2. How did COVID affect commercial real estate lending?

Some loan industries will fare better than others. Banks will develop appetites for newer projects. The hotel and hospitality sector will be the hardest to finance because the travel industry is yet to reach full capacity. Retail and restaurants are still in limbo, even though there is a positive upward trend as the sector returns to normal. Because of working from home, some companies may adopt a hybrid model embracing working from both home and the office. It will result in a reduced need for office space. That said, the need for offices for medical use is still strong and growing, so it won’t be as difficult to secure financing. Industrial warehouses still have huge customers like Amazon experiencing increased activity due to a rise in e-commerce. Therefore, warehouses still command the most substantial rents and attract high demand, making them easy to finance. You can expect to see an increase in demand for loans and increased supply from banks as businesses try to return to pre-pandemic levels.

3. How did COVID affect REITs?

Retail and hotel REITs went down by up to 53%. Leases in these two segments face pressure because of tenants’ businesses and liquidity tanking. Percentage rents and base rents are equally affected because of business shutdowns. Brokers feel the heat of buyers and sellers who are currently taking the wait-and-see approach. Property touring is slowly rising, but it is still not at pre-pandemic levels.

4. What happened to retail space occupancy?

Even before the pandemic, retail stores struggled to attract in-person shoppers because of the growing popularity of e-commerce. When the pandemic hit and the authorities forced retail stores to close down, this further fueled the growth of online shopping. E-commerce grew by over 30% in 2020, leading to a massive $791 billion in sales. However, it is not all doom and gloom for some types of retail stores. For instance, smaller retail shops have recovered by opening their doors. These retailers rely on community support and customer loyalty to attract in-person shoppers.

5. Industrial Spaces

You cannot perform many industrial jobs remotely, so properties in this industry such as warehouses, storage facilities, and distribution centers did not face a significant decline during the pandemic. Also, many employees still go to work in person in this sector. The increased demand in e-commerce led to a rise in demand for space for shopping inventory. Also, an increased need for grocery shopping deliveries led to a higher demand for refrigerated food storage spaces. Similarly, advancements in technology have led to a higher need for data storage facilities. These trends show that this sector did not face a blow like other sectors in CRE. The demand for these facilities will continue to grow.

6. Housing Spaces

Without the need to work at the office, many workers suddenly became remote workers, causing a massive shift in the housing market. That led to an increased demand for homes with office spaces, helping reduce the need for workers to live in densely populated areas. The shift led to a rise in occupancy rates in suburban areas and a decrease in major cities’ occupancy. Further, the increased demand for these properties led to a spike in housing prices, making it harder to secure affordable housing. In turn, this also contributed to lower occupancy rates.

7. Why did restaurants and hotels take the biggest hit?

The restaurant and hotel industry is one of the CRE subsectors that took the biggest hit during the pandemic, with reported losses of up to $240 billion. Social distancing caused people to refrain from leisure activities like eating out and traveling. During the first wave of the virus, restaurants had to rely on outdoor seating and takeout services. Restaurant sales dropped by 34%, leading to the closure of approximately 100,000 businesses in 2020. In 2021, restaurants started reopening gradually, helping the economic recovery. As for the hotel industry, hotels experienced up to 50% losses from low room occupancy rates. In 2022, these are slowly resuming for business trips and vacations, but occupancy rates are still low. The hotel industry can still expect to experience low occupancy rates for the next 2-3 years.

Conclusion

The economy is looking to open up due to a reduction in infection rates of the COVID-19 virus. People are going back to offices and businesses are reopening, but that’s not to say commercial real estate (CRE) did not face some challenges during and after the height of the pandemic. The economic challenges of COVID-19 on CRE were a real mixed bag, as the restaurant and hotel industries were all but extinguished. In contrast, the warehouses and storage space industry experienced booming business. The pandemic may be on its deathbed, but there is no denying COVID’s impact on commercial real estate now and well into the near future.

Frequently asked questions

How did COVID affect real estate?

It split the market. Offices emptied as companies moved to remote and hybrid work, hotel and retail REIT indices fell more than 48% each by April 2020, and commercial real estate transactions dropped by more than 30%. At the same time, remote workers moved toward suburban homes with office space, and warehouses, storage and distribution centers held up because e-commerce kept growing.

Why did real estate get so expensive during COVID?

Demand moved. Once workers no longer had to be in an office, many wanted homes with room for one and left densely populated city centers. Suburban occupancy rose while occupancy in major cities fell, and the extra demand for those homes pushed housing prices up, which made affordable housing harder to find.

What industry suffered the most from COVID-19?

Within commercial real estate, restaurants and hotels took the biggest hit. Restaurant sales fell 34%, about 100,000 restaurants closed in 2020, and industry losses reached as much as $240 billion. Hotels lost up to 50% as room occupancy collapsed, and retail and hotel REITs dropped by as much as 53%.

Which commercial real estate did well during COVID?

Industrial property. Warehouses, storage facilities and distribution centers saw no significant decline, because much industrial work cannot be done remotely and e-commerce drove demand for inventory space. Grocery delivery raised demand for refrigerated storage, and advances in technology raised demand for data storage. Warehouses also stayed easy to finance because they command strong rents.

A 1031 exchange lets you defer capital gains tax when you sell an investment property and buy a like-kind replacement of equal or greater value. Both properties must be U.S. business or investment property, a qualified intermediary holds the proceeds, and you have 45 days to identify the replacement and 180 days to close.

If you want to expand your investment portfolio through real estate, you should definitely pay attention to the 1031 exchange. The same knowledge could also come in handy if you are thinking about selling one of your properties and buying another for investment purposes. 

The 1031 exchange is probably one of the least known forms of investment strategy that allow you to defer capital gains tax after selling and buying a like-kind investment property.

1031 exchanges can be one of the most lucrative ways of developing your real estate portfolio if done correctly. Here are the ten essential things you should know about 1031 exchanges.

What is a 1031 exchange?

A 1031 exchange is a barter or swap of one’s business or investment assets for another of like-kind. The US Internal Revenue Code section 1031 defines what type of trade will be recognized. 

Although the exchange can be for various assets, its primary use is real estate investments. Most property exchanges are taxable as sales, but if yours qualifies for a 1031 exchange, you can have your capital gains tax deferred. 

Thankfully, there’s no limit on the number of times an investor can capitalize on a 1031 exchange. In short, you can buy investment properties and swap them as many times as you wish, as long as they meet the requirements.

Finally, you can pay tax at the long-term capital gain rate when you sell for a profit. Here are the fundamental points about 1031 exchanges you should familiarize yourself with:

1. Exchange Property Should be for Business or Held for Investment Purposes Only

This provision for exchange is only for trade, business, and investment properties and not for personal use. Properties used as primary residences or vacation homes do not qualify.

However, a former primary residence may be applicable under certain conditions. 

2. Exchange Property Should be of Equal or Greater Value

It is important to note that the replacement property has to be of equal or greater value than the property you have sold. There is a provision to reinvest your proceeds into one or more properties of equal or more value.

Properties cannot qualify if they are in different countries. Both properties must be in the United States to be eligible for the 1031 provision.

3. What does ‘like-kind’ property mean?

The terminology ‘like-kind’ can cause some confusion as even though the like-kind phrase is broad, you should be careful how you use it.  

Replacement properties need not be the same type, but similar; both assets should be income-generating or held for investments.

For example, you may swap land with a building, or a multi-family home with a commercial property, so long as they are suitable for exchange.

Video: The 1031 Exchange Explained | A Faster Way to Build Wealth

4. Only Specific Types of Properties Qualify for the Exchange

Changes to the tax bill applicable after January 2018 indicated that tax-deferred exchanges are now only valid for the buying and selling of real estate, referred to as real property. 

All investment real estate property qualifies for an exchange, such as:

• Land
• Commercial properties
• Single-family homes
• Multi-family homes

Other assets such as vehicles, machinery, and intangible business assets do not qualify for like-kind exchanges. 

5. Properties Held for Sale do not Qualify

If you buy a property intending to sell, you will not qualify for this provision. That’s because properties held primarily for sale cannot apply this exchange provision. If you sell this type of property, the taxman will treat it as ordinary income and charge you accordingly.

If, however, you maintain the property for investment purposes for several years, and the property attracts market-based gains, then you could qualify for the 1031 provision.

6. What are the 45-day and 180-day deadlines?

There is a stipulated timeline for the exchange and two fundamental rules to be observed. You have 180 days to complete the transaction after the transfer of the exchanged property.

Basically, from the day you sell your property to the final closing of the replacement property, you would have six months to complete the transaction. You have 45 days from the sale date to formally identify one or more potential properties for exchange. 

7. What does a qualified intermediary do?

Any proceeds that you receive from the sale of your property would normally be taxable. However, you should not touch the sale proceeds for the transaction to be eligible for the 1031 exchange. Most investors are unaware of this critical factor, and it is where many make mistakes.

It would be best if you transferred all sales proceeds to a third party, a qualified intermediary, who holds the proceeds and transfers them to the seller of the next property for you. Be careful not to use your own agent or fiduciary such as attorney, realtor, or Certified Public Accountant.

8. What are the three property identification rules?

Identification rules will apply differently to multiple properties. In the first instance, you may identify up to three properties that are like-kind to be your replacement properties, irrespective of their value in the market.

The other rule allows you to identify an unlimited number of properties as long as their cumulative market value does not exceed 200% of the fair market value of your property.

The last possibility is known as the 95% rule, where you may identify several properties, but you must close on 95% of the value of all the properties you specified. 

9. Consider Depreciation Recapture

Depreciation lowers your taxable income throughout the property’s useful life. When you sell, account for those deductions: the recaptured depreciation counts toward your total taxable income. 

10. File Your Reports to IRS

When filing your tax returns for the year, you also need to report the exchange. Use Form 8824 to indicate the exchange details, including the transfer dates, description of the properties, and their value.

If you assumed some liabilities after the transfer of properties, you should also indicate that correctly. Be careful when filling in the form to shield yourself from adverse effects such as penalties or a high tax bill. 

Final Word

The 1031 provision allows many investors to defer their capital gains tax until later. That means many investors can grow and diversify their portfolios in an easy, legal way.

However, you must engage with a qualified intermediary who will walk you through all the transaction steps and take advantage of this option to grow your portfolio.

Prepare the exchange properties well in advance and arm yourself with the correct information as you only have six months to complete the transaction after the initial sale. 

Frequently asked questions

What would disqualify a property from being used in a 1031 exchange?

A property fails if it is for personal use, such as a primary residence or vacation home, or if you bought it primarily to resell. Property outside the United States does not qualify, and since 2018 vehicles, machinery and intangible business assets are excluded because the exchange now covers real property only. Touching the sale proceeds yourself also breaks the exchange; a qualified intermediary must hold them.

What are the downsides of a 1031 exchange?

The tax is deferred, not erased: you pay capital gains tax when you finally sell for a profit. The clock is tight, with 45 days to identify a replacement and 180 days to close. The replacement must be of equal or greater value, you cannot touch the proceeds, depreciation recapture has to be accounted for, and the exchange must be reported to the IRS on Form 8824.

What is the 95% rule in a 1031 exchange?

The 95% rule is one of three ways to identify replacement property. It lets you name more properties than the other two rules allow, as long as you close on 95% of the combined value of everything you identified. The alternatives are naming up to three properties of any value, or naming any number whose total value stays within 200% of the property you sold.