Real Estate Investing School Podcast Episode 216: REAL DEAL: Optimizing the 1031 Exchange Release Date: December 5, 2024 Host: Brody Fawcett Guest: Mike Neubauer

Introduction

In Episode 216 of the Real Estate Investing School Podcast, host Brody Fawcett welcomes Mike Neubauer for an insightful discussion on optimizing the 1031 Exchange. This episode delves into a specific real estate deal that showcases strategic networking, effective deal funding, property renovation, and successful exit strategies using a 1031 Exchange. Whether you're a seasoned investor or new to the real estate game, this episode offers valuable lessons and actionable insights.

I. Finding the Deal

Networking Leads to Opportunity

Mike Neubauer emphasizes the pivotal role of networking in uncovering lucrative real estate opportunities. The deal in focus—a short-term rental condo in Maui—"found us" rather than the other way around. Mike explains that through active participation on various online platforms and forums, he was approached with an estate sale opportunity.

Mike Neubauer [00:16]: "We found this deal. Well, we didn't find this deal. This deal found us."

Estate Sale Dynamics

The property was part of an estate sale following the passing of the unit owner’s husband in Korea. Mike recounts the complexities involved, including handling the transition after the subsequent passing of the property's owner.

Mike Neubauer [04:59]: "There was a death in the family and the people who owned this particular unit was, I think it was a husband of some lady in Korea and he passed away."

II. Funding the Deal

Financial Structuring

Brody and Mike discuss the financial aspects of the deal. They purchased the condo for $450,000 and invested an additional $40,000 in renovations. The financing was structured with a 30% down payment secured through a 10-year ARM at 5.5%, coupled with a 30-year amortization schedule.

Mike Neubauer [13:13]: "We took it down with 30%. We put 30% down to get the loan and we had it on a 10 year... fixed loan for 10 years at 5.5%."

Partnership Dynamics

The investment was a collaborative effort between Mike and his partner, sharing both the financial burden and the responsibilities associated with property management.

Mike Neubauer [13:16]: "We did, yeah."

III. Renovating and Managing the Condo

Strategic Renovations

Mike took an active role in renovating the property, handling much of the physical work himself. The $40,000 investment went towards gutting the condo and making it rentable as a short-term vacation rental.

Mike Neubauer [11:58]: "We completely gutted this place... I laid the floors and put up some walls and whatnot."

Operational Efficiency

By focusing on one-bedroom and studio units, Mike minimized wear and tear, catering primarily to honeymooners and couples rather than larger families. This strategic choice reduced maintenance costs and streamlined property management.

Mike Neubauer [16:48]: "We decided to focus on the smaller stuff. Let's gear this towards, like honeymoon couples."

IV. Financial Performance

Revenue and Expenses

The renovated condo was rented out at an average of $200 per night with an impressive 86-87% occupancy rate. This translated to gross monthly revenues of approximately $6,500, with net earnings around $3,000 after accounting for mortgage, HOA fees, insurance, and minimal property management costs.

Mike Neubauer [14:23]: "We were bringing in around 6,500 a month, I'd say on average. ... probably, yeah, 3,000 somewhere in that range."

Mortgage Breakdown

The monthly mortgage payment was around $1,800 to $1,900, with total monthly expenses, including HOA and insurance, reaching approximately $2,400.

Mike Neubauer [14:23]: "Mortgage on that was probably ... around 1800, 1900 a month in mortgage."

V. Exiting the Deal Using 1031 Exchange

Profitable Sale

After a year of successful operation, Mike and his partner decided to sell the property for $650,000, realizing a substantial profit of approximately $200,000.

Brody Fawcett [19:37]: "You bought this thing for all in with your rehab and everything about 490. And then you sold it a year later for 650, which is like $170,000 spread."

Implementing the 1031 Exchange

Opting for a 1031 Exchange, Mike reinvested the proceeds into a luxury glamping resort near Zion National Park. This strategic move allowed them to defer capital gains taxes while upgrading to a potentially more lucrative investment.

Mike Neubauer [20:57]: "...we decided to 1031 exchange that. We knew that we needed to spend at least $650,000 in order to satisfy the 1031 exchange."

VI. Future Plans and Next Steps

Luxury Glamping Resort

The new investment is a 20-unit luxury glamping resort adjacent to Zion National Park. This larger-scale project represents a significant step up from the single condo, offering enhanced amenities such as a gym, meeting center, and pickleball court.

Brody Fawcett [24:30]: "We're going to have like a big gym, meeting center... pickleball court and all the fun stuff."

Collaborative Efforts

Mike expresses enthusiasm about this partnership, highlighting the seamless collaboration between himself and Brody, founded on mutual trust and strategic alignment.

Mike Neubauer [22:17]: "We're now transitioned into that property, which I'm super excited... to a 20 unit luxury glamping resort in Zion National Park."

VII. Key Takeaways and Insights

1. Importance of Networking

• Mike Neubauer [26:50]: "Networking is one of the biggest things when it comes to investing in general. So get out there, network, meet people..."

2. Defining a Clear Buy Box

• Establishing specific investment criteria (location, property type, price range) streamlines the decision-making process and ensures alignment with investment goals.

3. Strategic Partnering

• Collaborating with trustworthy partners can enhance deal feasibility and share the investment burden.

4. Adaptability in Property Management

• Tailoring property features to target demographics (e.g., honeymooners vs. families) can optimize occupancy rates and reduce maintenance costs.

5. Leveraging 1031 Exchanges

• Utilizing 1031 Exchanges allows investors to defer taxes and reinvest in higher-value properties, facilitating growth within their portfolios.

VIII. Notable Quotes

• Mike Neubauer [26:50]:

  "Networking is one of the biggest things when it comes to investing in general. So get out there, network, meet people, talk about what you do, what you want to do, all that fun stuff. That's how deals get done."

• Brody Fawcett [18:19]:

  "Gotta be able to cater to the families. You know, I just thought that was a good point to bring up because I never even thought about that before."

• Mike Neubauer [19:38]:

  "This is the fun part, right? So we decided to 1031 exchange that... This is an asymmetrical bet that I am willing to take."

• Brody Fawcett [27:43]:

  "How do you go be that person, you know, that you add enough value that people are like, oh, I do business with it."

IX. Conclusion

Episode 216 of the Real Estate Investing School Podcast provides a comprehensive look into the intricacies of optimizing a 1031 Exchange through a real-world example. Mike Neubauer’s journey from acquiring a short-term rental condo in Maui to leveraging a 1031 Exchange for a luxury glamping resort offers listeners actionable strategies and highlights the importance of networking, strategic planning, and adaptable property management. This episode serves as an invaluable resource for investors aiming to scale their portfolios effectively while mitigating tax liabilities.

Connect with Mike Neubauer:

• Instagram: @EarthTrot or @MauiInvestor

Thank you for tuning into this detailed summary of Episode 216. For more insights and real estate strategies, subscribe to the Real Estate Investing School Podcast and stay ahead in your investment journey.