1031 Exchange Case Study:

Trading Up from Watertown to Cambridge

I have many investor clients who own properties that aren’t getting ideal returns. What are some common reasons why?

  1. The location isn’t particularly desirable or changing for the better

  2. The layout is poor or confusing, which impacts rentability, rent price and re-sale price

  3. The condition of the unit is poor, which creates ongoing problems, including greater expenditures and effort

  4. The unit is in an older building, which can result in ongoing special assessments that never seem to end

If any of the above items sound familiar, you are not alone. Over half the investors I know are dealing with at least one of the items above in some shape or form.

But fear not - because there are better opportunities available to you. And the 1031 exchange process gives you access to those opportunities. As I’ve mentioned before, a 1031 exchange allows a property owner in the U.S. to sell their investment property and put the equity and any gains into one or multiple new investment properties without paying any capital gains or depreciation recapture taxes - which often results in 25% - 35%+ in taxes. For my clients, the 1031 exchange helps them achieve a significantly better investment with little out-of-pocket cost to them and only several hours of their time.

Let me share one such example with you now, from earlier this year:

My clients owned a 1-bed / 1-bath condo in a large building in Watertown. The building was built in the early 1970s and small special assessments had become the norm. Pictures of the unit in it's original state (prior to updating and staging it for sale) are below:

1-bed units in this building don’t generate much income - generally around $1800-$2200/month depending on layout and condition. Despite the unit appreciating in value, there just wasn’t that much coming in after HOA costs, taxes, and assessments.

In addition, there was little long-term upside to holding onto the unit. There weren’t many planned changes to the area that could significantly increase the value of the unit, the building or potential renter pool.

With that in mind, my clients outlined their life situation and what they were looking for in their next investment:

  • They were a family with 3 kids living in the suburbs

  • They had limited time and limited bandwidth to deal with a multi-family property or a unit that required a lot of work

  • They were hoping that their next investment could be more hands off, potentially generate more income now, and have more long-term upside for them in retirement as time went on

With that in mind, I was able to identify an off-market 1-bed / 1-bath condo available in Cambridge through my network. This unit would be a major upgrade for a lot of reasons compared to their existing Watertown unit:

  • The building was in excellent condition (it was a 2017 build)

  • Garage parking space included in the sale price

  • Gym in the building - nice draw for tenants

  • 80 square feet larger

  • Quartz island, laundry in-unit, central AC/heat, all high-end finishes (vs the 70s finishes in the Watertown condo)

Pictures of the Cambridge unit are below:

And by far the biggest upgrade was the location - it was located in Cambridge, walking distance to Lechmere, Kendall Square, MIT and the Broad Institute.

In addition to all these major upgrades, the unit had an existing tenant in place for another year. The tenant was one extremely neat scientist paying over $3000/month!

I helped facilitate the sale of the Watertown condo - including making the necessary updates to the unit and marketing the property appropriately to get an excellent price for a 1-bedroom in a 1970s Watertown building. Below are pictures of the Watertown unit after I helped prepare the unit for sale through updates and staging:

The owners then utilized the sale proceeds to conduct a 1031 exchange and obtain the Cambridge condo.

These investors now are in a great place. Why?

  • They have an asset that over the long run will increase in value at a significantly higher rate compared to their Watertown property

  • The rents are also likely to increase at a faster clip compared to the Watertown condo, given the Cambridge unit’s location

  • There is a larger pool of qualified tenants in this part of Cambridge compared to their old Watertown unit, so the ease of renting their new unit should be significantly smoother

  • The unit and building is less than 10 years old, so the likelihood of major costs or headaches with their unit is now much lower for quite a while

  • Cambridge property taxes are $5.90 per $1000 of property value compared to Watertown’s $11.70 per $1000. This means that for every $100k in property value, they will be saving $580/yr. In practice, this means they will own an asset that is close to double in value to their old asset, but they will pay LESS in annual property taxes. A huge long-term win in terms of what the owners will keep.

So if you own an asset and feel like you’re dealing with too many property headaches OR you feel like there could be better opportunities out there - then give me a ring and I am happy to give you my thoughts on whether or not it makes sense to consider a 1031 exchange to upgrade into a better situation!