If you own investment properties that have enjoyed significant price appreciation, my experience in the last few years may be insightful.
I sold two properties that had gone up in value and used a 1031 exchange to acquire five properties, more than doubling my portfolio, and I am now on the verge of doing it again.
I also made a big mistake, one I hope to help you avoid.
Leveraging the experience I had, you can apply this investing model to your real estate portfolio too, doubling it roughly every four to six years.
What I Did to Grow My Portfolio
In 2018, I decided to sell two single-family homes I owned in the Phoenix, AZ area. I had to wait for the tenants to leave as their leases expired and, after some renovations, executed two 1031 exchanges a few months apart. Each property had appreciated approximately $100,000, and I decided it was time to redeploy that capital into other properties with higher cash flow and appreciation potential.
I 1031d the first house into three renovated houses in Huntsville, AL, a rapidly growing area that primarily offered good cash flow but also some potential for equity growth due to the jobs moving into the area. A few months later, I 1031d the second house into two renovated homes in Port Richey, FL, a rapidly appreciating area about an hour north of Tampa.
In so doing, I more than doubled my portfolio from two houses into five houses.
Now, six years later, those two Port Richey, FL homes have appreciated by over $100,000 each, so I’m now considering 1031ing those into either four properties in another up-and-coming market or into two duplexes. Either way, those two doors will turn into four doors early next year.
This is a strategy you can use to build your portfolio:
- Buy in a market where home values are appreciating
- Wait four to six years, letting the property’s cash flow pay for itself while it’s appreciating
- Use a 1031 exchange to double your portfolio, then repeat
Before we dive into this strategy, there is one cautionary tale: In the six years since I sold those two properties in Phoenix, they have appreciated another $150,000 each, so I left about $300,000 on the table.
How was I supposed to know the Fed was going to lower interest rates to near zero??
What I’ve learned from this experience: Learning when to sell.
When to Sell
Candidates for Sale
To understand reasons and timing for selling, we should first review the difference between Return on Investment (ROI) and Return on Equity (ROE). Consider the simplified example below for a $250,000 Arizona property with 20% down:
In year one, the down payment and the equity are the same, as the property hasn’t had a chance to appreciate yet, just after purchase. Return on Investment and Return on Equity are the same at 5.0%.
By year five, however, the property has appreciated by $100,000, and net cash flow after expenses has increased to $3,000. The Return on Investment (on the original down payment) has increased from 5.0% to 6.0% ($3K/$50K), but the Return on Equity (ROE) has decreased from 5.0% to 2.0% ($3K/$150K) because property values have increased faster than rents.
The investor in this example has a lot of equity tied up in this property; equity that could be redeployed into other higher-returning properties. The property in question would be a good candidate for sale.
Selling too Soon
As I found out the hard way, the flip side is that you might sell too soon!
At the time, the idea that a 1,423 square foot home in Gilbert, AZ, selling for over $400K was inconceivable. What I learned was that in an appreciating market with lots of high incomes and money moving into the area to bid up prices, what homeowners (not investors) will pay for a property can surprise you.
If I had to do it again, I would look for signs that home prices are plateauing:
- Days on market are increasing
- The number of listings on MLS is increasing
- The number of multiple offers is decreasing
- Listed home prices are being marked down
- Interest rates are starting to inch up
If you see some of these signs, you can decide that prices have gone up about as much as they ever will and it might be time to redeploy your capital. On the other hand, if the local market is not showing these signs, there might still be upside potential and now might not be the time to sell, and you should explore other methods to leverage your equity.
Other Ways To Leverage Your Equity
Rather than selling the property, you can also consider refinancing it and taking some of your equity out (“cash-out refi”) so you can use it to buy more properties, or you can consider borrowing against the property (HELOC).
Cash-out refi
With a cash-out refi, you take out a new mortgage for more than your previous mortgage balance, pay off the old loan and pay yourself the remainder in cash. Using the previous example, a refi would look like this:
1 There’d be some principal paydown, but it’d be negligible after five years
As you can see, by refinancing, you can take out $50K from your equity in the property and use it to buy another property.
The caveat here is that your original property – now with a larger $250K loan – has to cash flow even with the higher loan amount. If rents have gone up sufficiently to cover the new mortgage, then this is a viable option.
HELOC
A Home Equity Line of Credit (HELOC) is a cheaper option than a refi, as a HELOC does not require you to get a new loan and pay points and lending fees. However, most lenders will offer a HELOC only on a primary residence, so you’d have to find a lender that’s willing to do HELOCs on investment properties to make this option work.
That said, you could borrow the $50K in this example using the equity in your investment property as collateral and use that $50K to buy another property.
The caveat here is that new property you buy will essentially be 100% financed, with the $50K down payment from the HELOC at some interest rate, and the remainder financed with a conventional loan.
With 100% financing, it’d be difficult to make the newly acquired property cash flow.
Bottom Line
While cash-out refis and HELOCs have routinely been used by investors over the years, as of this writing (Fall 2024) interest rates are relatively high and it’d be difficult to make these options worthwhile. Interest rates are expected to decline over the new few quarters, so these strategies may be viable in 2025 and beyond, but for now, the most likely way to “liberate” your equity and build your portfolio is to do a 1031 exchange.
How to Make This 1031 Exchange Strategy Work for You
If you are currently sitting on investment properties that have enjoyed significant price appreciation, you should consider using 1031 exchanges to build your real estate portfolio.
If market conditions allow, see if you can double your portfolio every four to six years so you can reach your financial goals sooner.
To do that, redeploy your equity/capital to markets poised for home price appreciation, i.e., where there’s job and population growth and where the demand for housing is greater than the supply. Many metros in Florida and Texas fall into this category.
Before selling, analyze local market conditions to make sure you’re not selling too soon and leaving money on the table.
If interest rates come down, consider other options such as cash-out refis or HELOCs.
Finally, real estate is a very forgiving asset class. Even if you don’t time things perfectly, you can still double your portfolio!
Looking for help with your 1031 exchange strategy?
Become a member to schedule a complimentary strategy session with Joe or another one of our highly experienced investment counselors. Join for free here; membership is 100% free.
Frequently Asked Questions
A 1031 exchange lets real estate investors defer paying capital gains taxes when they sell an investment property and purchase a “like-kind” replacement property with the proceeds. You must use a Qualified Intermediary (QI) who holds the funds, identify replacement properties within a 45-day window, and close within 180 days. Learn the complete rules and step-by-step process →
There are seven primary IRS rules that all 1031 exchanges must follow:
1. Like-Kind Property – Both properties must be investment real estate
2. Investment Property Only – No primary residences or personal use
3. Equal or Greater Value – Replacement property must be worth same or more
4. No Boot – In order for the exchange to be completely tax-free, you must not receive a “boot.”
5. Same Taxpayer – Title must be in the same name as the taxpayer on the relinquished property.
6. 45-Day Identification – Identify up to 3 properties within 45 days (no extensions)
7. 180-Day Purchase – Close on replacement within 180 days (no extensions)
You have 45 calendar days from the closing of the rental property you are selling to identify up to three replacement properties and a total of 180 days to close. These IRS deadlines are very strict with no extensions, so proper planning is critical. See the complete 8-step timeline and avoid missing deadlines →
Start early, and do so long before you put your property on the market. Planning early reduces the anxiety of the 45-day identification window, helps you connect with the best QIs, lenders, property teams, and find the best 1031 exchange replacement properties so you can meet all of your deadlines and not end up stressed out and settling for mediocre deals. RealWealth can help streamline the process for by connecting you with trusted 1031 exchange qualified intermediaries and property teams who have turnkey rental properties for sale now.
The IRS mandates two critical deadlines. The identification period is a 45-day window to identify potential replacement properties. The exchange period is the acquisition of the replacement property, which must be completed within 180 days of the sale of the relinquished property. Learn more about 1031 exchange timelines and mistakes to avoid →
There are four main types of 1031 exchanges in real estate: Delayed Exchange (most common, where you sell first and then buy), Simultaneous Exchange (where you close both properties on the same day), Reverse Exchange (where you buy first and then sell), and Construction Exchange (where you make improvements using exchange funds). Each has different requirements and timelines. Compare all four types and choose the right one →
Yes, a 1031 exchange qualified intermediary is required by law for 1031 exchanges. The QI holds the sale proceeds, prepares documents, coordinates closings, and ensures IRS compliance. If you touch the funds at any time without a QI, you’re disqualified and will owe capital gains taxes. Learn what a QI does, costs, and how to find one →
To find 1031 exchange investment property, focus on markets with population growth, job growth, affordability, low property taxes, and landlord-friendly laws. Start your search before selling and consider multiple properties in two to three markets, so if one of the rental properties falls through, you have a backup plan. Get the 12 rules for identifying cash-flowing replacement properties →
While all RealWealth property teams have ample inventory for 1031 exchange replacement properties, some of the most popular locations have been Dallas-Fort Worth, Alabama (including Birmingham and Huntsville), San Antonio, Jacksonville, Tennessee, and Cleveland. These markets offer strong cash flow, appreciation potential, affordability, and landlord-friendly laws with available turnkey rental property inventory. Explore available properties in top markets now →
Yes! As long as the properties meet the “like kind” requirement and you can replace the full value of the relinquished property or properties, you can defer all capital gains taxes with a 1031 exchange.
Yes, you can exchange a California investment property for an out-of-state 1031 exchange investment property, provided you follow the rules. However, California requires annual Form FTB 3840 filings to track deferred gains until you sell or pass away (please consult with your tax advisor or CPA). Many investors exchange their high-equity California rental properties to dramatically increase cash flow in landlord-friendly states. Learn about California-specific requirements and why investors leave →
Buy properties in appreciating markets, hold for 4-6 years while they generate cash flow and appreciate, then exchange them for multiple properties in growth markets. RealWealth’s investment counselor Joe Torre turned two properties into five, then plans to turn two into four again—doubling his portfolio every four to six years. Read the complete portfolio doubling case study and strategy →
Yes, RealWealth offers a free 1031 Exchange Masterclass webinar covering all the critical rules, timelines, qualified intermediaries, partial exchanges, and real investor case studies. The webinar features a live Q&A session with 1031 exchange professionals and is ideal for both new and experienced real estate investors. Watch the free 1031 exchange masterclass now →
RealWealth connects its members with property teams that sell off-market, turnkey rental properties in top U.S. markets. These turnkey teams sell single-family and multi-family properties that are fully rehabbed or newly built, and come with property management in place. Free membership includes one-on-one strategy sessions and ongoing support from investment counselors who specialize in helping real estate investors find replacement properties within the 45-day deadline. Get help finding properties fast →
RealWealth specializes in connecting investors with vetted turnkey property teams in landlord-friendly states across the U.S. Our network includes trusted providers in top markets like Texas, Alabama, Tennessee, and Ohio—all offering professionally managed, 1031-eligible properties with strong cash flow and appreciation potential. Connect with vetted property teams now →
Before you begin your search, it’s critical that you know that the 1031 exchange intermediary industry is not well-regulated. Be very careful with whom you use and be sure that they will not invest your money in risky ways while you are in between purchases.
You could start by getting referrals from escrow officers, researching online reviews, and checking credentials. Look for a 1031 exchange facilitator with thousands of successful exchanges and experience with your specific exchange type (delayed, reverse, or construction). Learn how to find and vet a qualified intermediary →
To save time, become a RealWealth member (100% free). We have worked with the same reputable 1031 exchange facilitator for over a decade. We know they are great, because we use them too! Let us introduce you →
Start your search before selling. Focus on markets with strong cash flow and appreciation. Target properties in areas with population growth and job growth. Choose landlord-friendly states with low property taxes. Work with property teams that have immediate inventory to avoid missing your 45-day identification deadline. Get the 12 strategies for finding cash-flowing properties →
You can start by viewing sample investment properties here. But the best way to find qualified properties is to become a RealWealth member. After you join, schedule a strategy session with your investment counselor, who can help you identify a market that matches your goals and connect you with a property team that has 1031 exchange replacement properties for sale now. Depending on the market you choose, these turnkey properties may include single-family rentals ($120,000-$350,000), duplexes ($200,000-$600,000), and fourplexes ($500,000-$985,000) in markets such as Texas, Alabama, Ohio, and Tennessee. Properties range from rehabbed turnkey to new construction, with options for cash flow, appreciation, or hybrid strategies. View property types and examples by market →
A quick internet search will help you find 1031 exchange services. Whomever you choose, be sure to vet them thoroughly. Investors choose to work with RealWealth because we connect them to trusted 1031 exchange facilitators (whom we use ourselves) and vetted property teams. These teams have off-market turnkey properties in growth markets and have property management in place. In addition, we offer personalized strategy sessions with investment counselors who understand the stress of the timeline crunch. RealWealth membership is 100% free and provides access to educational content and a network of trusted professionals, including qualified intermediaries, attorneys, and CPAs. Explore services and get started free →
The key is to find a property of like kind. Based on what you are selling, your options may include single-family rentals for steady cash flow, duplexes and multi-family properties for higher returns, new construction in growth markets for appreciation, and rehabbed turnkey properties for immediate rental income. You can choose from markets offering various price points ($120,000-$985,000+) and investment strategies based on your goals. See available options in top markets →
RealWealth members get free access to a comprehensive directory of vetted professionals, including 1031 exchange qualified intermediaries, turnkey property teams, real estate attorneys, CPAs, lenders, and more—all experienced in real estate investing strategies. This network helps streamline your exchange process and ensures you’re working with trusted experts. Access the professional directory free →
If you don’t identify a replacement property within 45 days or close within 180 days, your entire exchange fails, and you’ll owe capital gains taxes on the full sale amount. Other risks include settling for an underperforming property due to time pressure, overpaying in competitive markets, or selecting a property in the wrong market that fails to meet your investment goals. Learn the complete timeline and avoid these risks →
Membership to RealWealth is free and gives you access to vetted Qualified Intermediaries (we’ve used them ourselves), off-market turnkey rental properties in landlord-friendly states, one-on-one strategy sessions with experienced investment counselors, educational webinars, and market research to help you complete your exchange successfully and meet critical deadlines so you avoid paying capital gains taxes. Get expert help with your 1031 exchange →
Membership to RealWealth is free and gives you access to vetted Qualified Intermediaries (we’ve used them ourselves), off-market turnkey rental properties in landlord-friendly states, one-on-one strategy sessions with experienced investment counselors, educational webinars, and market research to help you complete your exchange successfully and meet critical deadlines so you avoid paying capital gains taxes. Get expert help with your 1031 exchange →
