Are you doing a 1031 exchange and need to find replacement properties that cash flow? To help you learn how to identify 1031 exchange replacement property smartly and quickly, we’ve rounded up 12 rules that help you make the best investment decisions for your real estate investing goals.
Quick Answer: How do I identify 1031 exchange replacement properties that cash flow?
Looking for 1031 exchange replacement properties can be stressful. However, with the right plan and support in place, you can reduce the stress and find properties fast. Here are twelve rules to find cash-flowing properties:
- Step 1: Identify up to 3 properties within 45 days of closing your sale
- Step 2: Follow the 200% rule if identifying more than three properties
- Step 3: Use the 95% exception rule only if you’ll close on 95% of the total value
- Step 4: Target markets with population growth (40% will be renters)
- Step 5: Choose markets with strong job growth
- Step 6: Select affordable markets with 1% price-to-rent ratios
- Step 7: Ensure adequate inventory to avoid bidding wars
- Step 8: Prioritize low property tax states (Example: Alabama: 0.35%, not California: 0.73%+)
- Step 9: Choose landlord-friendly states with no rent control
- Step 10: Buy multi-family over single-family (multiple income streams, one loan)
- Step 11: Close February or later (avoid holidays, NFL season)
- Step 12: Consider Section 8 properties for guaranteed rent
Key deadlines: 45 days to identify and 180 days to close
Best property type for cash flow: Multi-family (multiple income streams, one loan)
Top Cash Flow Markets (8-10% cap rates):
Birmingham, AL | Cleveland, OH | Indianapolis, IN | Cincinnati, OH | Tuscaloosa, AL | Columbus, GA
Top Appreciation Markets (strong cash flow + equity growth):
Atlanta, GA | Dallas-Fort Worth, TX | Jacksonville, FL | Cape Coral, FL | San Antonio, TX | Huntsville, AL
Hybrid Markets (balanced cash flow + appreciation):
Dallas-Fort Worth, TX | Ocala, FL | Chattanooga, TN | Oklahoma City, OK | Kansas City, MO | Palm Coast, FL
Jump to the 12 rules | Explore properties in top markets | Get expert help
Need more guidance? Download How To Boost Your Rental Property Cash Flow with a 1031 Exchange→
How Doing a 1031 Exchange Can Help You Increase Cash Flow
There are so many reasons why real estate investors choose to do 1031 exchanges. For some, it’s an opportunity to build greater wealth by finding replacement properties in up-and-coming markets with a high chance for appreciation. For others, it’s a chance to create financial freedom by boosting their monthly cash flow, giving them the means to retire, travel the world, and spend more time with children or grandchildren.
Why Cash Flow Matters in 1031 Exchanges
Many investors choose to sell their appreciated properties in high-cost markets like California, New York, or Washington State, where cash flow is minimal but equity is substantial. Through a tax-free strategy, called a 1031 exchange, they can defer capital gains taxes and redirect that equity into multiple cash-flowing properties in landlord-friendly states.
Example: A $800,000 California property generating $500/month in cash flow can be exchanged for 4 duplexes in Alabama, each worth $200,000 and collectively generating $3,000+/month—a 6x increase in monthly income.
Investor tip: Learn how RealWealth Investment Counselor Joe Torre doubled his portfolio using this strategy →
How to Identify 1031 Exchange Replacement Properties: 12 Rules to Upgrade & Get Cash Flow
To begin, there are three general rules to follow when identifying replacement properties. They include:
1. The Three Property Rule
The Three Property Rule states that, in a delayed exchange, the exchangor has 45 calendar days from the date the relinquished property closes to identify a replacement property. Under this rule, you may identify up to three properties of any value, as long as you purchase one of these properties within the 180-day exchange window.
2. The 200% Rule
The 200% rule allows you to identify more than three properties, but the combined value of these properties cannot exceed 200% of the relinquished property’s value. If you use this rule, we recommend creating a little padding (180-190%) so you don’t go over the 200%.
3. The 95% Exception Rule
If you choose the 95% exception rule, you can identify any number of properties, and you don’t need to take the sale price of the relinquished property into account… if you actually acquire AND close on 95% of the value of the properties you identify. Be careful with this one. If you acquire less than 95%, your entire exchange will be invalid.
Additional Rules For Finding Cash Flow Replacement Properties
When looking for 1031 exchange replacement properties that will cash flow, here are a few more rules we generally follow. These cash flow rules are not specific to doing a 1031 exchange, but are important for anyone looking to purchase cash-flowing rental property. However, if you are looking to find replacement properties for a 1031 exchange that will cash flow, you should consider following these rules.
Want to learn more? Download How To Boost Your Rental Property Cash Flow with a 1031 Exchange→
4. The Population Growth Rule
When identifying 1031 exchange replacement properties that will offer strong cash flow, we look for real estate markets with population growth. Population growth is a good sign for potential cash flow because, typically, about 40% of a city’s population will be made up of renters. As the population grows, the demand for rental properties grows correspondingly.
5. The Job Growth Rule
We also look for real estate markets that are experiencing job growth. This follows the same logic as population growth, because typically, as more jobs are created, more people move to an area. In other words, job growth causes population growth.
Real estate markets that are retirement destinations, like Southern Florida, may not show significant job growth, but they do show population growth. These areas would still be considered strong cash flow markets.
Top 1031 Exchange Markets: Job & Population Growth Data (2024)
Cash Flow markets: Stability Focus
- Birmingham, AL: 1.1% job growth, 0.7% population growth
- Cleveland, OH: 0.9% job growth, 0.3% population growth
- Indianapolis, IN: 1.4% job growth, 0.8% population growth
- Cincinnati, OH: 1.2% job growth, 0.6% population growth
- Tuscaloosa, AL: 1.3% job growth, 1.1% population growth
- Columbus, GA: 1.0% job growth, 0.8% population growth
Why this matters: These markets offer stable, consistent rental demand without the volatility of boom-bust markets. Perfect for investors prioritizing predictable monthly cash flow.
Appreciation Markets: Growth Focus
- Huntsville, AL: 2.5% job growth, 2.8% population growth (Top performer!)
- Dallas-Fort Worth, TX: 3.2% job growth, 1.9% population growth
- Cape Coral, FL: 2.8% job growth, 2.3% population growth
- San Antonio, TX: 2.1% job growth, 1.7% population growth
- Jacksonville, FL: 1.9% job growth, 1.6% population growth
- Atlanta, GA: 2.3% job growth, 1.8% population growth
Why this matters: According to U.S. Census Bureau data, metros with 2%+ annual job growth consistently outperform the national average for both rental demand and rent appreciation. These markets offer the best of both worlds—strong current cash flow PLUS substantial equity building.
Key Insight: Huntsville, AL, shows appreciation and hybrid potential because it uniquely offers high cash flow (9% cap rates) AND explosive job growth (2.5% job growth, ranked #1 nationally for tech job growth). This makes it ideal for investors who want maximum flexibility in their 1031 exchange.
Hybrid markets: Balanced Growth
- Dallas-Fort Worth, TX: 3.2% job growth, 2.1% population growth (Top performer!)
- Ocala, FL: 1.8% job growth, 1.8% population growth
- Chattanooga, TN: 1.6% job growth, 1.5% population growth
- Oklahoma City, OK: 1.4% job growth, 1.3% population growth
- Kansas City, MO: 1.3% job growth, 1.2% population growth
- Palm Coast, FL: 2.2% job growth, 2.0% population growth
Why this matters: Hybrid markets deliver solid cash flow today (7-8% cap rates) while positioning you for strong appreciation over the next 4-6 years. These markets hit the “sweet spot” for investors who want monthly income but don’t want to sacrifice future 1031 exchange opportunities.
Key Insight: Dallas-Fort Worth uniquely offers both explosive job growth (3.2%) AND solid cash flow (7-8% cap rates), making it the ultimate hybrid market
6. The Affordability Rule
When looking to generate cash flow, you don’t want to overspend on your investment property. Choose a real estate market that offers affordable housing prices and about a 1% price-to-rent ratio.
Markets like Alabama, Cleveland, and Jacksonville offer strong affordability entry points. Explore available properties in these markets →
7. The Inventory Rule
When doing a 1031 exchange, you need to be able to identify replacement properties quickly and close within 180 days. Because of this deadline, it’s important to choose a market that has a good amount of inventory, so you’re not losing out during bidding wars.
Investor tip: During your 45-day window, identify properties from at least two to three different turnkey teams. If one deal falls through, you have immediate backup options without having to restart your search.
8. The Low Property Tax Rule
Choose markets that have lower property taxes in order to increase your monthly cash flow. For example, cities in Alabama, such as Birmingham or Huntsville, might be great options because the state’s property tax rate is just 0.35%.
Compare property taxes and cash flow across all top 1031 markets here →
9. The Landlord Friendly Rule
When seeking cash flow, it’s also important to target landlord-friendly states. An ideal market would be one with no rent control initiatives and where it isn’t insanely difficult to evict problem tenants. For example, California, a highly regulated state, may not be the best option to buy replacement properties, especially if you’re a newer investor.
Learn more about doing a 1031 exchange from California to another state.
10. The “Right Kind” of Property Rule
When identifying cash-flowing 1031 exchange replacement properties, it’s also essential to choose the right kind of property. For example, a duplex will generate more cash flow than a single-family rental. Even if one side is vacant, you still have income coming in from the other unit.
Investor tip: With a traditional loan, such as Fannie Mae and Freddie Mac, you can have up to 10 loans. A benefit of investing in multi-family investment properties (duplexes, triplexes, quadplexes) over single-family homes is that even though the property has more than one door, you purchase it under one loan.
For example, if you only invest in single family rentals (one door), your 10 loans will amount to 10 doors. However, if you were to invest in duplexes (two doors), you’d get 20 doors with 10 loans. A fourplex is an even better opportunity for cash flow, but it costs significantly more ($500,000 to $900,000 versus $200,000 to $300,000).
Warning: You may want to avoid choosing new-construction replacement properties for your 1031 exchange. Why? There can be delays with building new homes. If the property is not available, you have no backup properties, and your 180-day window comes to a close, you could end up paying capital gains taxes. If you are set on new construction, speak with your RealWealth Investment counselor or qualified intermediary about how to avoid risks!
11. The “Right Timing” Rule
There are certain times of year that are better for cash flow than others. Ideally, you want these prime-time cash flow periods to line up with the close of escrow on your replacement property for your 1031 exchange.
Here are a couple of tips:
- Unless your turnkey property has tenants in place, avoid closing during November and December, as it can be hard to find people looking to move during the holidays.
- In some markets, like Pittsburgh and Dallas, it can also be harder to find tenants during football season. People don’t want to spend their weekends looking at rentals when their favorite college team is playing on Saturdays and NFL games are their priority on Sundays. This is especially true in markets like Pittsburgh and Dallas.
- To maximize your cash flow, time your close for February or later, because there’s no football and no holidays during this period.
- In February, people start to get their refunds from the IRS, so many prospective tenants have money for security deposits.
- You may also want to consider staggering duplex purchases by a month or so to avoid vacancies at the same time.
12. The Don’t Discount Section 8 Rule
If you’re really looking to maximize cash flow with replacement properties, consider investing in Section 8 housing, which is government-subsidized. Learn about the pros and cons in Is Section 8 Good For Landlords or Not?
Identifying Your 1031 Exchange Replacement Property in Phases
Phase 1: Before You Sell (30-60 days out)
- Research target markets using the cash flow rules
- Connect with turnkey property teams in 2-3 markets
- Review available inventory and pricing
- Hire a Qualified Intermediary
- Find a lender
Phase 2: After Sale, Days 1-45
- Formally identify up to 3 properties in writing to your QI
- Go under contract on your top choice (with contingencies)
- Complete inspections and due diligence
Phase 3: Days 46-180
- Finalize financing
- Close on replacement property
- Begin the tenant placement process
Ed & Ann’s 1031 Exchange Success Stories
#1: Ed (Maryland → San Antonio, Texas)
- Real data: Sold for $340K, bought $624,900 duplex in San Antonio
- 2.8x cash flow increase ($2,000/year → $5,592/year)
- Went from 1.2% ROE (return on investment) to 3.6% ROE
- Hands-on to hands-off management
- Got a special 3.75% financing rate through RealWealth’s network
#2: Ann (San Diego → Alabama)
- Real data: Sold $930K STR in San Diego (negative cash flow!)
- Bought four properties across Alabama for $957,900
- Went from NEGATIVE cash flow to $29,483/year positive
- 9.8% return on equity
- Diversified across 4 Alabama cities (Huntsville, New Market, Birmingham, Bessemer)
Need help Finding replacement properties fast?
Join RealWealth (it’s free!) for expert guidance and access to all our 1031 Exchange resources.
Top 3 Common 1031 Exchange Replacement Property Questions
1. Can I Exchange My Property for Multiple Properties in Several Markets? Should These Markets Be in Different States? If So, Why?
Yes, you can purchase replacement properties in more than one state. This is a good idea, especially if the property you plan to relinquish is on the pricier side.
See how one investor diversified into multiple markets and doubled his portfolio →
Investor tip: If you’re buying 10 or more properties, you should diversify into 2 or 3 markets. If you’re buying three or fewer rentals, it’s okay for all of them to be in the same area. Ideally, they would be within driving distance of one another so you can visit them during the same trip. Travel time eats up cash flow.
2. What Type of Replacement Property Do You Recommend for Cash Flow?
We covered this a bit above already, but we’d typically recommend duplexes for replacement property if your goal is cash flow. Duplexes are still affordable, but they offer a larger income potential on a single loan.
Access our network of turnkey properties available for quick closing →
3. What if I’m Already in the 45-Day Window? Is It Too Late To Find 1031 Exchange Replacement Properties that Cash Flow?
No, it’s not too late! Ideally, you’d want to have at least an idea of what replacement properties you’d like to purchase before you close on your 1031 exchange. But it’s still possible to find cash-flowing properties with little notice, especially if you work with an expert like RealWealth, who has vetted property teams with turnkey properties for sale now.
1031 Exchange Replacement Property Resources
Essential Reading Before Your 1031 Exchange
- Complete 1031 Exchange Rules & Definitions – Learn about critical IRS rules
- 1031 Exchange Timeline: 8-Step Process – Understand every deadline
- Qualified Intermediary Guide – Find the right QI for your exchange
Ready to Find Properties?
- Browse 1031 Properties in Top Markets – Dallas, Alabama, Jacksonville, Cleveland & More
- California to Out-of-State Exchange Guide – Increase cash flow 6x
Real Investor Success Stories
- How I Doubled My Portfolio with a 1031 Exchange – Joe Torre’s case study
Free Training
- Watch the 1031 Exchange Masterclass – Complete rules, timeline, and Q&A
Get Expert Help With Your 1031 Exchange
Finding cash-flowing replacement properties within 45 days doesn’t have to be stressful. RealWealth members get:
Membership is 100% free, and once you’ve joined, you can schedule a complimentary strategy session with your investment counselor and start viewing sample properties. Join 80,000+ investors today!
Frequently Asked Questions: 1031 Exchange Essential 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 →
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, and 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 you by connecting you with trusted 1031 exchange qualified intermediaries and property teams who have turnkey rental properties for sale now.
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 about whom you use, and be sure they will not invest your money in risky ways while you are 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 →
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 →
