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Oct. 3, 2021

62. Using 1031 Exchanges to Achieve Financial Freedom with Dave Foster

62. Using 1031 Exchanges to Achieve Financial Freedom with Dave Foster

Join Mike Cavaggioni and Dave Foster on the 62nd episode of the Average Joe Finances Podcast as they talk about how 1031 exchanges can help you achieve financial freedom. Dave is the founder and CEO of Ironwood Solutions. The multi-industry company focuses on value addition through systemic process improvement, balancing capital maximization, and wealth preservation. They also provide project-specific solutions for various profit and non-profit institutions. Today, Dave shares his experiences, from teaching tax deferment strategies for real estate to managing a nationwide intermediary firm. 

 In this episode, you’ll learn:

  • How to utilize 1031 exchanges in converting tax deferrals into tax-free assets.
  • The six requirements you need to meet before doing a 1031 exchange. 
  • The benefits of a 1031 exchange when transitioning from active investing to passive.
  • What common issues do people often run into when performing a 1031 exchange?
  • Why risk mitigation strategies are essential in managing cash-flowing properties?
  • And much more!

 About Dave Foster:

With 20 years of real estate investing, Dave Foster has helped thousands of investors keep their equity working for them and legally avoid paying taxes with 1031 Exchanges and other tax strategies. In addition, through a combination of 1031 Exchanges and Section 121 exemptions, Dave achieved his dream of living aboard a sailboat with my young family. 

He also provides strategy, consulting, and 1031 Exchange Qualified Intermediary services, helping investors worldwide with powerful tools to build their US portfolio, defer all taxes and comply with IRS requirements. These powerful tax strategies even allowed him to pull out profit and purchase their 53’ ketch for cash, as well as build a portfolio that helped cash-flow a decade of adventure. 

 Find Dave Foster on: 

  1. Website: the1031investor.com
  2. Twitter: twitter.com/DaveFoster1031
  3. Facebook: facebook.com/the1031investor
  4. LinkedIn: linkedin.com/in/davefoster1031
  5. Instagram: instagram.com/davefoster1031


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Transcript
Average Joe Finances:

This is Average Joe Finances podcast episode 62. If you're watching this on YouTube, make sure you smash that like button and click subscribe. For those of you listening on a podcast platform, be sure to subscribe on whatever platform that is, and leave us a rating if you can. The more likes ratings and subscriptions that we get, the more we can spread the message and grow our community. So we also have a free Facebook group. It's called the Average Joe Finances network. Check us out, join the group, join the community ask questions, and become a part of the team. All of our other social media accounts are listed in our flow page. And we have them in a video or podcast description below.

Dave Foster:

It really fits into what I call the four DS of 1031 investing. That's right there. Ready we talked about that? Yeah, weekend the four DS defer defer? Let me know if I go too fast. Oh, no, we're good. We're gonna defer and die.

Average Joe Finances:

Welcome to the Average Joe Finances podcast. Are you trying to get out of debt, invest or just not sure where to start? Then this is the place for you. We discussed different ways to get out of the rat race and build your wealth. Join us on this wild ride to financial freedom. Hey, how's it going, everybody? So today's guest is Dave Foster, and he is the founder and CEO of the 1031 investor. Dave is a degreed accountant and serial real estate investor who is a Qualified Intermediary and a consultant for tax saving strategies such as the 1031 exchange, and the section 121. homestead exemption. Dave started fixing flipping in the mid 90s, and realized that about 40% of his profits were going directly to the IRS, they will tell us about the updated rules and regulations around using the 1031 exchange to legally compound your tax interest that will stay with you. Instead of going straight to the government. Dave breaks down exactly how to use the 1031 exchange in layman's terms. He explains to us how he moved away from Denver, Colorado, to Tampa, Florida over 10 years ago, using the section 121 homestead exemption so that he and his family can move on to a boat, which was a huge dream of his and also one of mine. Well, we can talk about that too. So tune in to listen to Dave, and we'll talk about how he raised four boys on his boat while investing in properties with the 1031 exchange. So Dave, I'm really excited to talk about this 1031 exchanges is definitely a useful tool that any real estate investor can use to better leverage themselves when they're when they're selling property. So really excited to have you on thanks for joining me.

Dave Foster:

Thank you, Mike. It's great to be here. And you know what, speaking to a Navy guy, I mean, we got the love of the water in common. So absolutely powerful driving force. I gotta tell you,

Average Joe Finances:

Yeah, I agree. I you know, I love being on the water. As matter of fact, when my wife and I, we moved out here to Hawaii, instead of buying a house, we were looking at buying a 40 foot catamaran sailing catamaran that we were going to live on. We had everything worked out, we were looking at a boat that was down in New Zealand, and I was going to hire a crew to sell it up here. But the funny thing about boat loans versus a mortgage is for a boat loan, you need to have 50% of what you're trying to borrow in the bank funds available that you have to prove that you have which was I thought was absolutely insane. didn't have that. So I use my VA loan and we bought a house. So yeah, it's it's it's awesome to talk to somebody that is living the dream that that I eventually would love to get to. Because I would love to sail around the world My wife wants to travel. It's kind of like a two birds one stone type deal for us. I love the water she wants to travel. We can we can knock it all out right there. Right?

Dave Foster:

here's, here's our first tip of the day, you did it in exactly the right order to make it sustainable. Because you took care of what's going to end up being an income producing property. So that now you can go and buy the boat and travel using proceeds from that as that becomes a rental. That's Yeah, that's exciting. Yeah, awesome.

Average Joe Finances:

Thank you. Alright, so I shared a little bit about your background, with with your bio. Can you tell us a little bit more about yourself and share a little bit more about your story? Like, how did you get started on this adventure?

Dave Foster:

Yeah, I mean, that's kind of the whole thing. This is all our life, our story. My job. 1031 is all intertwined in this amazing series of events over 20 years. And it started out in Denver, in the mid 90s. When my wife and I were both in pretty high profile, high pressure careers and this Magical event happened. We had our first child, and that we didn't get a chance to talk about the children, right? But I gotta tell you, when you start having children, your life changes. First thing you do is you throw away the TV, because there's no need for a TV, you just sit and watch these kids forever, because you're just fascinated. But we realized very quickly, that the most valuable commodity in our lives was not money any longer. It was time. And it was going to be time, that was not going to be forever to watch your kids grow up and be with them. So we changed from building careers, and building income and that sort of thing. To trying to find ways to build margin, how can we create a life that maximizes the time we get to spend with our kids? So that became Barnes and Noble date night, right? What can we do? What can we start, and we decided the cheapest way to live would be on a boat. Now, mind you, I'm from Kansas, and my wife is from Minnesota. And we were living in Denver. Not exactly three bustling seaports, but right, that was what we decided, sailing is going to be the thing. We started going to San Diego to take sailing lessons, we became hooked. And we realized that this was going to be an affordable, sustainable way to exercise freedom to build something and our kids have self sufficiency, and to make a cool life for ourselves and have an adventure. So now how to finance that became the second question. And so like so many people today, we looked around and said, well, toward real estate, it's got to be real estate, there's a dozen ways to make money. They're not making any more. It can happen while we're gone. Let's do it. Just like your house. So I just dove in, because that's who I am. I bought a duplex in Denver, I fixed it up. We sold it. It was awesome. Until like my bio says that winter, I went to see my accountant, Drupal, Andy. And Andy said, Dave, you're gonna pay for tax this year. And I just said timeout, I did not know that I had a silent burger. And his name was Uncle Sam. And I was going to spend almost as much on him, as it was on me. Well, that put the brakes on the plans, right? All of a sudden, instead of a five or six or 10 year goal, he was going to take his 21st kid was going to be gone. So right at that moment, this was 1996 1997 ish. There had been a huge court case over this thing called the 1031. Exchange. The 1031 exchange has been a part of the tax code for since 1920. But only at that moment, there have been a huge loss where the plaintiff had one against the government. And at 1031 exchanges were now going to be available and usable. For Joe, average investor. You and me and your listeners. And I had some friends at that time. Who you know, you're good. You know how to tell your good friends like they're the ones that mock you mercilessly and always have your back, right? Absolutely. They have mocked me mercilessly over what had happened, and said, Hey, by the way, Dave, you're an accountant. We're thinking of starting a business to do these for people you want in? And I said, Oh, heck yeah. So right at that moment, we started focusing on creating a strategy of using temporary ones first, and doing them for others as a business. And we never looked back at that point. Because then everything we started doing for the next 10 years for ourselves involved, never paid tax, and be able to put that tax into new real estate, and ultimately into the boat. Because we would, we sold our portfolio in Colorado, and we repositioned it in Connecticut, without paying a penny of tax using 1031 exchanges. Along the way, we would occasionally convert a property from investment into our primary residence. And at that time when you did that, and then lived in the property for two years, all of the profit, the $500,000 of profit was tax free. And you could do that once every two years. So every two years, we would could vert a property and to our primary residence, live in it and then take all of the profit tax free and Put that into the boat fund. So we were continually 1031 tax deferred, and converting decks deferred into tax free. Until ultimately, our entire portfolio was in a portfolio of different types of properties in the state of Florida. And we had enough money in our boat fund, that we could buy the boat with cash. And then when the financial crash hit, instead of throwing up our hands, and go into work at the Kroger store, we simply cast off the dock lines. Because we had the boat, and we had enough real estate to make it work. We lived and raised our boys in the boat for 10 years.

Average Joe Finances:

That's amazing. I mean, that's being able to take that money right? From each property as you sold it and you tend 31 debt, right? So you tax deferred all this money, and then putting it into a residence that became your primary residence, right, live there for two years, and then sell the property to get all that money tax free. That's absolutely amazing. What a great strategy because

Dave Foster:

the IRS has built the most powerful strategy out there. Yeah, absolutely. Right now, because it's still available. Now they have tweaked it, because the IRS I think, put my poster my picture up in their lunch room. Because prior to 2008, you could do this and you would get 100% of the game, to actually, you know, since 2008, you have to if you're doing the 1031 conversion into primary, you have to own the property for five years, you have to live in it for two years. And then when you sell it, you're going to prorate the game. Between the years it was a rental, and the years it was your primary residence, which still is not going to be too bad. I've got a guy down here in St. Pete beach, one of my clients who has three identical condos and his retirement plan. He's not gonna have a part time job. It's his retirement plan is he's gonna move into one of those and convert when he moves into it, he will sell his former primary. So guess what, that's his first couple years income right there. The profit from that sale, tax free. Meanwhile, he's living in that property. Now, I asked his wife I we were going to know when it was time to move, because she said, Well, when it's time to redecorate, we're just going to move to the next one. So we'll leave in that that former investment property for a few years, and then they will sell it now. They'll take part of the game tax free, they will have to pay tax on part of the game. But that still beats a part time job at the convenience store. And he's moving into the next one. And they will simply repeat that until a different life strategy presents itself.

Average Joe Finances:

Yeah, and it still beats paying the full tax on the property when you go and sell it if you were just to sell it as a rental property. So Oh, absolutely. You're cutting a lot of that out. You're cutting Uncle Sam out of a lot of that cut.

Dave Foster:

So it really fits into what I call the four DS of 1031. Investing. That's right there.

Average Joe Finances:

Ready? We talked about that. Yeah, we can

Dave Foster:

the four DS defer defer. Let me know if I go too fast. Oh, no, we're good. We're gonna defer and die

Average Joe Finances:

Defer and die,

Dave Foster:

defer, defer, defer and die. Here's what that means in real life. When you've got that first piece of investment property, and it's appreciated, you've done your value add, you're gonna make money on it. If you sell it into a 1031 exchange, you will indefinitely defer payment of the tax and depreciation recapture. Any time you sell that property, to move it to another state, to another type of investment property, to different numbers of investment properties, whether you're trying to expand and get more properties, or consolidate and get fewer properties. If you do a 1031 exchange, you'll never pay the tax. If you put the property into a vacation rental, that you can enjoy the rest of your life and that your family can, you'll never pay the tax. If you turn it into a property you later convert into your primary residence. You'll never pay the tax. If you 1031 into passive investments, such as Delaware statutory trusts, which are a syndication type property, you will never pay the tax. And then the kicker is that under current law, when you die, your heirs get the property and what is called a stepped up basis. Which means they inherit it as if they paid market value for them the day you die. So all of the tax when you die goes away. So there is never a reason to pay a penny, in real estate gain tax the rest of your life. And instead, you use that for yourself. And that's what Albert Einstein called compound interest, right. And he called compound interest, the eighth wonder of the world, because those who understand it will benefit from it. Those who don't, will pay for it, whether you're using deeper DAX, to make money and continue that cycle, or whether you're paying interest to somebody else, if you understand you can benefit from it. That's the four DS. And that's what we have followed. And that's what tons of my clients have. I am on my third generation of a family in Greenwich, Connecticut, for 16 years now, they started before I was around, they have continued to use 1030 ones. And we're now on the third generation from grandpa. And they've never paid a penny in tax.

Average Joe Finances:

That's phenomenal. You know, how they say, you know, there's two things that are certain in life and that's death and taxes, right? So this is, this is one way to cut one of those out, you can take the taxes out. solidify, just death is the only certainty in life as a 1031 exchange expert, that's for sure. So, okay, so, um, that that's absolutely amazing, especially like you have this one family that's on the third generation. So that right there itself is living proof, how powerful this is. And so for my listeners that that are listening right now, you know, the most important thing to realize is that when, you know, the the person who owned the properties die, and it is passed on to their heirs, they're getting it at that market value what it is today. So for example, if somebody bought a property for $20,000, you know, 40 years ago, and today it's worth, you know, 250,000 or plus minus whatever, right? when that person passed away all that appreciation, and then depreciation that they claimed, right, that goes on that property, what you can get taxed on will be gone. And it's it's as if the child or the air bought that property that day, the day of death for that new value of 250,000. So everything starts over, it's like pushing the reset button. So that's absolutely amazing.

Dave Foster:

A huge piece of advice. Be careful about telling your children about it too soon.

Average Joe Finances:

Yes. You don't want to all of a sudden, you start seeing blood and stuff and you realize you've been being fed glass or poison, you

Dave Foster:

start to wonder why they all of a sudden want to become a doctor. I want to know how the machines work? Well, you know, it's interesting, I wish that we had the ability for me to put some Excel screens are there for it, because we've got a hugely powerful example, where we take two investors and him 20 years over four transactions. The difference between the investor who pays the tax on each sale versus the investor, who's simply does the 1031 exchanges, and invests the tax ends up being over $8 million in property that they control. If you sold a property with $100,000 gain, I mean, you could just ballpark because different states are different, but ballpark your gain at your tax at 20%. If you do a tickler exchange and take that $20,000 and use it to buy more property, then you've got $100,000 to put down. So what can you buy a $500,000 property. If you pay the tax, you only have like $80,000. So you can only buy like $432,000 of property right? So that's the first transaction five years later, at a regular 5% appreciation, the difference becomes a couple 100,000. At 10 years, it becomes a million and a 20 years. The investor who has done nothing but not pay taxes will owe almost $500,000 in real estate taxes. But they will loan almost $12 million in real estate. The other investor won't owe anything in taxes. But they'll only own about three and a half billion in property. And that's that compounding effect that is just so huge, which like you discovered that because you bought the house first. The compounding effect is going to let you get a 44 foot boat. And by the way, if you're looking for a good cat, the 47 foot leopards are going to be perfect for you and you're gonna be able to get

Average Joe Finances:

one The boats that we're looking at, we happen to really be fond of leopards.

Dave Foster:

Love the leopard. Yes, indeed.

Average Joe Finances:

Oh, that's awesome, man. That's awesome. So I know one of the things that I talked about before we hit record. And maybe you touched a little bit on it. But there is six requirements of a 1031 exchange. Can we talk about that? What what are these requirements that you have to meet, in order to be able to do this?

Dave Foster:

Yeah, that's the nuts and bolts, and where it all comes down. Remember, the reason why they're user friendly now is because the IRS lost a lawsuit. And there's nothing more p owed than a government agency that loses a lawsuit. So they have to let us do them. It's part of the tax code. But they don't have to make it easy. And that's where the six requirements come in, because they really want to keep a close eye on it. Now, they all hands off the first and most important requirement, and that is that you have to use, it's not a DIY process, you have to use the services of an unrelated third party called the Qualified Intermediary. These are the people like us, that's all we do. We can't do anything else. We can't be your realtor, we can't be your accountant. All we can do as a 1031 exchange. But it's a hard job to be the guide for you. So the tip 31 is document it correctly. And all the proceeds because you can't touch the money. And that makes the of the most important criteria about that is if the cue is to be involved, prior to the closing of your sale. If you close your sale, and then come to us afterwards, you can't do a temporary one, because it wasn't documented correctly, and you touch the money. So that's the single most important criteria, the other five are all going to piggyback and springboard off of that. But if you've got that one taken care of, it's the cue eyes job to guide you through the other five. So we don't have to spend a lot of time talking about it. But the first one is that it is only involving investment, real estate, real estate for real estate. And this kind of speaks to a little bit of the question when I talk about syndications. A lot of syndications today will not work. Because what you're selling is real estate. But what you're buying is a membership interest in an entity that owns real estate. And that won't qualify for temporary one, you actually have to purchase real estate itself. So it's real estate for real estate. And it's investment, real estate for investment, real estate. Now along with that, because they don't want to drag it on forever. There's a couple of timing requirements, you only have 45 days to identify your potential replacements. And you have 180 days to close for all teed off the closing of your sale. Now, you know seller's market like this are really handy strategy. Because you want to be shopping The hardest thing is not going to be selling your property, the hardest thing is going to be buying your new one. So before you close your sale, try to find your replacement property, even get it under contract if you can. So that it's under contract that people doing this now, all over the place. They're not even listing their properties for sale. They're trying to find a property getting under contract. And then they're listing their property for sale, getting a contract on it in a day. So that's best to get that contract before you close your sale. But you've got 45 more days if you want and a total of 180 to close, you're going to have to make sure that the taxpayer or the title holder is consistent from the old property to the new property, it's got to be the same entity. And lastly, you have if you want to defer all tax, you have to purchase at least as much as you sell your net sale. And you have to use all of the proceeds to do that. So if you sell a property for 320,000, and there's $20,000 in closing costs and commissions, your net sale then would be $300,000. You need to purchase at least that much real estate. to defer all tax doesn't have to be one property. But in total at least that much. If there was $100,000 mortgage on it, you would have to use all $200,000 of proceeds to purchase $300,000 in real estate. And I say it's as simple as that. Obviously the application is a little bit more difficult. But those are the six that are there. And within those Like I started to allude to, there's all sorts of different opportunities to create strategies that can help you out. For instance, three investment requirement. If you think that appreciation has taught me now, you're worried about us going to a downturn, maybe you take 150,000 of those proceeds, and go buy one property for cash so that it doesn't have any debt risk at all. And then use the other 50,000 as a downpayment. On another property for 250. Did you purchase at least 300,000? You sure did. Did you use all your proceeds? You sure did? Well, what did you do, you now have a property that's protected. All you got to do is adjust rents to keep the lights on. And on the other side

Average Joe Finances:

you can purchase more than one property when you're doing a 1031. Exchange? Absolutely.

Dave Foster:

And that's called a diversification exchange, sell a property and use it to buy two smaller properties, or that kind of thing. Yeah. In our example, you're buying one for cash, and one with the maximum leverage. So if everything goes bad, you've only got one property of risk. So awesome strategy.

Average Joe Finances:

Yeah, that's fantastic. I, I didn't know you could do that. I thought it was you know, it was a one for one type deal. You know, you, you do the 1031. If you you know, if you're exchanging $300,000, then Hey, you got to go put it into something that was worth more than the old property. And that's it can put, you're done, you're just rolling that money into something bigger and better. Let's take a brief moment to hear from our show sponsors. Hey, what's going on everybody, it's Mike Cav from Average Joe Finances. Just want to talk to you today about Prep Agent. If you're interested in learning how to become a real estate agent, and being able to pass the test on your first try, check out Prep Agent, check out the link below in the show notes or in the video description. What's going on everybody? So today I want to talk about the podcast editing service that we use for the Average Joe Finances podcast that is EditPods.com. And what I really like about them is it's a subscription based service. So the prices are fantastic. And not only do they do the podcast episodes for us, but they also make us videos, audiograms, social media caption videos, they do our show notes, thumbnails, it's just fantastic products. Go check them out at EditPods.com. Let's get back to today's episode. You're listening to the Average Joe Finances podcast, whether it's single or multifamily real estate, the stock market or side hustles, we discuss it all strap in and enjoy the ride.

Dave Foster:

Oh, heavens, no, you can change location to some new stuff here anywhere in the United States, obviously. So if you want to sell and save an appreciation of a state like California, or New York, or cash flow sucks. And they go to the Midwest, where there's not a lot of appreciation. But there's great cash flow, you can do that. You can change sectors of real estate. So you can go from residential, to commercial, industrial to raw land, you can also change the numbers of property as well. And I love this because all of these things are what I call the ebb and flow. You let the market speak to you. And maybe it's time to expand. So you're selling properties, and then buying multiple properties to take advantage of the growth phase. But then there comes a time where you wake up one day and you're tired. Why am I so tired? Well, it's because you got 25 single family homes, and you're on your fourth plumbing call the day, the activities you got to clean and all that. So maybe you take those and start to sell them to combine into larger, more efficient properties, a large multifamily or something or maybe it's time to move into commercial, triple net properties. So that you don't have to worry about multiple tenants and management while you're sailing. That's the type of thing and you can do that all with the 1031 exchange throughout your life as an investor.

Average Joe Finances:

That's awesome. That's absolutely amazing. So I have to ask you, since I know that you you've been on a boat for the past 10 years, where are you actually at right now as we're shooting this episode?

Dave Foster:

Well, we swallowed the anchor my friend and I are living in St. Petersburg, Florida, but I have 200 yards for the beach. So I have to stay close like it still smells

Average Joe Finances:

quite like a leopard.

Dave Foster:

I know. You know something happens it you know there's like there's there's times in life. There's cycles and seasons of life. And yes, why tell people? There's a Mark Twain quote that I think is just so appropriate. Mark Twain said 20 years from now. You will not regret The things that you did, you will only regret the things you did do. And that he says this. So get cast off the lights, get out of the Safe Harbor, and go explore. We took advantage of living on a boat. When our kids are young, I just six, five, my wife is six feet. Even a 53 foot sailboat was starting to get small with four boys. We got 10 good years, and then the seasons changed to my boys were looking at college. And we still wanted to be in their lives. It was like yeah, you know, boats, kids small. Let's get rid of it. Now let's go into another season. Because a 47 leopard is always just around the corner. whatever we want, and they can be rigged for double handling.

Average Joe Finances:

Yeah, yeah, I know. I know. They're absolutely amazing. That's awesome. Um, okay. Yeah, I was just curious, because let's say like a definitely interesting background. If you were on the boat, and it must be you must have a really good Wi Fi connection.

Dave Foster:

So yeah. Well, we did run the 1031 business for years off of it. Yeah. He just stay there. Believe me, the Wi Fi out there now. is amazing, no matter where you're at? Oh, yeah,

Average Joe Finances:

with like the repeaters and stuff that they make that you could put install. I mean, you can sit there and be, you know, 100 feet anchored off shore and get a great signal. I know other boaters that you know they do. You know, they use Google five for their phone service now and they can use it all over the world. Absolutely amazing. Some of the things you could do I watch all those sailing channels on YouTube and stuff. My wife and I are hooked. It's kind of like part of our weekend routine. When we're sitting down. We look at our expenses and budget. And then we talk about sailing. And we're looking at we're watching videos on sailing and going overseas and all that other stuff. So you're getting me to travel a bunch once I retired from the Navy. So

Dave Foster:

yeah, you're kidding me hungry? again. This is a it's a dangerous drug.

Average Joe Finances:

Yeah. Yeah. So you know, this, this is a curious question for me. And I'm sure a lot of my listeners would be curious about this as well. You know, when you moved from your you were living in Denver, right? You said, correct right. And you move from there to Florida to move on to the boat. How did you? How did you do that? It was is that? Is that something to do with the 121? homestead exemption? No, that's what you did to move to Florida, right?

Dave Foster:

Yeah, that's exactly Well, to me, you have to move to Connecticut and into Florida. So we started our careers in Florida. And we built up some rental properties there. And then during that time twice, we sold our primary residences, and moved into new properties. We just bought new ones at that time. So we did that twice. Now, we knew that we needed to get to some kind of real water. And there was an opportunity that arose for us in Stamford, Connecticut. So we moved there. But ahead of that, we sold our investment portfolio in Denver. And we started purchasing properties in Stanford. And then when we finally moved, we sold our last house in Denver, that was our primary residence. So that was tax free, and moved into one of the former rental properties in Stanford. So now we add a new primary residence, and some rental properties in Stanford. And we kept building that. And we weren't there very long at all. Before we realized that when we asked God to let us move to sailboat water, we forgot to ask for warm sailboat water. Analog is that exactly qualifies, you know. So that's when Florida became on the radar screen. And so we did the same thing. We started to slowly transition our portfolio of investment properties from Connecticut to Florida. And then we sold our last, we converted her last house to investment in Connecticut. By the way, it was something that I had, that I turned into what eventually became a movie set for a major motion picture. And we lived there long enough to get 121 and then sold it. And then the movie company, took it afterwards and turned it into a movie set was kind of fun. And we moved to Florida. And then we have our portfolio in Florida, along with a fleet of vacation rentals. And when we lived on a boat, it was awesome. Because even when we lived on a boat, if there was going to be a major repair project, or something like that, instead of making my family suffer through it, because you got to keep mama happy. We would move into one of the vacation rentals that wasn't been occupied. So the family always take comfortable and we'd work on the boat. And that was how we transition that way. So it was always a combination of 1031. And one point,

Average Joe Finances:

that's absolutely amazing. You know, it's almost like, I picture you moving from Cleveland to Connecticut, and then down to Florida, it's like, I don't know if like the right way to describe it is like the snake game. But like, you know, it's like moving over just moving all the bricks over here and then moving all the bricks down south, and you move them all down, then you start popping them off and popping them off and popping them off. And then you're taking all that money in the end and buying your boat. So but you didn't sell all the properties in Florida, right? So like you said, You kept the that fleet of rental properties. So you guys had a good passive income flow, while you also had the cash to go buy this boat and you bought the boat, you said 100% cash, right? Right. Yeah, we're the best way to buy a boat. Because, you know, like I explained a little bit earlier how you know, the complexity of a boat loan is kind of ridiculous. Yeah, buying it. Cash is probably the better route to go,

Dave Foster:

right? Oh, yeah. And again, it's one of those lifestyle things, too. Yeah, the last thing you want to worry about, is making payments when you go. It's your woman, our friends, and the people that we ran into the ones that were the happiest, were the ones who lived the most simply because coupled with that simplicity. They didn't have debt to worry about what a lot of friends that had a lot of fun. But they were continually happy to monitor and manage businesses and pay debts. And when everything went south, in 2018, there were a lot of people that had to get off the water, because they couldn't sustain it. You know, we all sustain hurt. We all got hurt back during that. But because we had the debt, and a few other things that were cash that were blown free, were able to stay on the water. And instead of losing that, we just cast off the dock lines and said, well, let's go find someplace else to live cheap. Let's go.

Average Joe Finances:

Yeah, that I mean, that's that's, like said live in the dream. Right? So and you did that for 10 years. That's that's absolutely awesome. So speaking of, you know, 2008 and everything that happened with you know, a lot of people lost pretty much everything right? But now when it comes to 1031 exchanges, you know, since we're talking about, you know, losing, and just, you know, things like that, what are some of the, I guess, more common issues you see people have with 1031 exchanges, especially, you know, with you as a queue, I like you're, you're seeing a lot of these right, you see them all the time. So what are some of the biggest problems or roadblocks people run into?

Dave Foster:

Yeah, I would say the, the single biggest issue that people have trouble with when they're trying to do a 1031 exchange is lack of focus. You've only got that 45 day period. And you can name several properties on that 45 day list. But honestly, the chances of the rest of those properties being there, while you negotiate for one, and then have it fall apart is slim to none. It's it's really, it's smoke and mirrors, you're going to name three or four properties, and none of them are going to be available in two weeks. So you've got to be so so focused ahead of time. Now we find that a lot of people say, well, aren't these Arctic complete, we do periodic audits internally. And they're, they're informal, I get it. But what we found over the years is that less than 10%, of 1031 exchanges started, don't complete. Now, there's no penalty for not completing, you simply pay the tax. but less than 10% of the people out there are unable to find good replacement properties to keep going. So it's not an issue so much that you can't complete it. The ones that don't, though, are those that aren't sure where they want to go, or what they want to buy, and aren't super focused on what they're looking for. So be laser focused on your target. And being already ahead of the game is so key there. I would say over historically, if we're talking about 2008. And now, I would say the biggest fear that I have for people is that the only thing that's going to hurt you in a 1031 exchange. if the market goes south, is carrying too much debt. It's temptation because you can always right, sell one and buy to sell those to buy for and keep growing and keep adding to the debt. And so you keep taking out the maximum debt. And there's a lot of people who love to house and buy properties using an FHA loan, which is three and a half percent down and if they live in that quad or duplex for a year, and then they move out do it again. Well remember those people are 96% leveraged. What happens if you can't rip that property for six months or a year like happened in 2008 what happens if you lose Your income, you're going to be in a world of hurt. I had a lot of clients who lost on paper, multiple, multiple, multiple millions of dollars. I was living, we were in Fort Myers area, homes in that area was the 80% of their value. And I had investors with billions of dollars. But I had a whole bunch of those people that never lost a penny, because they never had to sell. So it didn't matter to them what the property was worth, they just kept renting it. And the reps may have adjusted a little bit. But they did very long, they always went back up. So I would say those are the to be focused, ever really concentrate on keeping the debt manageable, and being able to sustain a four to six month correction.

Average Joe Finances:

Yeah, I think that's, that's super important to like, when you're leveraging your debt that you don't over leveraged yourself, right? Because if a situation like that, arises, again, which it could very well happen in the next few years with the way things are currently going right, or we can keep going, you know, the way we're going with this housing shortage, but I think we're gonna start to see as as some of these deferments and forbearance starts going away, as things start to normalize. Again, we might run into some issues here in the future where we'll have an oversaturation of the market. And, you know, a lot of these home values that we've been enjoying will not be what they are right now. I can't predict the future. But you know, you can sit here and look at these indicators and make a good assumption, right? One of the things is, you know, if having multiple exit strategies, right, so if if you're going to leverage your money, or leverage your debt, and buy a property that, you know, if you bought multiple properties with a 1031 exchange, and you you know, bought one, or you sold one bought two bought two, sold two bought four, ideal, are you buying properties that will rent, even in a environment where the market gets saturated with homes to buy. So it's, it's just a matter of, you know, doing your research on the market in your area as well, right, because if, if the market does tank, and you're upside down on some of your loans, but you're still cash flowing, you're still in a pretty decent spot, because you're not having to sell. And one of the ways that you're gonna be able to cash flow to is if you put a larger down payment, like you were talking about before, you know, in that one scenario where somebody buys the one property, cash, and then takes the other 50,000, and buys that other, that other asset, with the 50,000, to put the down payment, yeah, you might be upside down on that $250,000 property that you bought, or the $250,000 loan that you have. But if it's cash flowing, and your other properties, cash flowing, or even covering it down to that to the point where you can hold it, and not have to sell it if if crap hits the fan, then you're in a better place. So it's just it's all things that, you know, it's it's the risk mitigation and the risk management that the investor themselves have to take into account when they're when they're doing these things, right.

Dave Foster:

Yeah, that's exactly right. And of course, one thing, it's very tempting now, and it's very wise strategy right now is to actually take on more debt. Because long term fixed interest, leverage, or debt is the best mitigator against inflation yet. So buying properties is a huge mitigate year, inflation edge. And every low interest fixed debt is the best way to go. You just got to balance that. And make sure that you're leaving yourself, you know, you sometimes it's right to swing for the fence. And sometimes you just need a few signals.

Average Joe Finances:

Yeah, absolutely. And that's why I like the way I look at it, too, is like my primary residence, I, you know, I got a 2.25% interest rate. And the way I look at it is I don't want to pay anything extra or try to pay it off early. Because, you know, 20 years from now, when I'm still making this mortgage payment on this house, that's probably tripled in value by then. I'm still paying with yesterday's dollars. So on today's market, so that's, that's one of the things I love about, you know, having these these lower fixed interest rates. And, you know, you don't see like a lot of people like thinking that way. They just think, Oh, well, I don't want to be paying for it for 30 years, and look at how much I'm paying in the long run. But realistically, all that extra money that you would have put into your primary residence, if you would have invested elsewhere, how much more would you have made versus how much more you're paying over the 30 year period, right? And that goes back to what you were talking about with Albert Einstein, talking about compound interest being the eighth wonder of the world. And that's one of the reasons why it's the eighth wonder of the world

Dave Foster:

when that's yourself on the back, right? Because they're projecting inflation is going to Almost 4% like slightly after, for this year, and you're paying 2.5, which means two point your life 2.25 you're actually making on that loan 1.75% on your money. That's an investment for you, you're making that much money, because you're paying it back in cheaper dollars.

Average Joe Finances:

That's huge. Yeah. So I mean, it's, it's all about, it's a certain type of mentality you have to have when you're, you know, not only for your primary residence, but any investment properties that you're buying, you need to look at, for those of you that have like a, I got my duplex back in Virginia was at a, you know, 3.75% interest rate, that's still gonna be under the inflation rate. So I'm still making a small amount of money on that, you know, so it's just about how you look at these things. But this has been seriously awesome. I have one more thing I want to ask you about the 1031 exchange, because we kind of touched on it a little bit earlier. And that is, you know, if somebody wants to transition from their active investing into passive investing using a 1031 exchange, how would they do that? Because I know you mentioned that you can't go like directly into syndication, because you're purchasing interest in that real estate instead of the real estate itself. But I know there's certain ways you can get into a syndication where you're actually purchasing a percentage of the property. And would that work,

Dave Foster:

right, you have as sherkin. So there, there's kind of a hierarchy of opportunities to move from active to passive. And that's part of that episode we talked about. So the first level is to get bigger, single properties, like larger multifamily where you can have on site management, I mean, you don't want to ignore that as a strategy for going from active to passive, certainly, the movement into commercial and what are called triple net properties. triple net simply stands for the lease, where the tenant pays for the taxes, the insurance have a maintenance, so you do nothing except collect the check. And usually these are long term corporate guaranteed leases, with large corporations. So that's very, very passive. Below that, then you get into these, what are called fractional opportunities, like a syndication. Now, what you're talking about that qualifies the syndication, that qualifies would be a syndication, where you are able, or the syndication is able to sell to you. And actual percentage of the property has a tenant in common. So it might be a $5 million property. And if the syndications financing will allow it, then you could have usually it's a $500,000, minimum, that kind of thing, because it takes some hoops to jump through, but they could sell you 10% of the actual property itself. So you own 10% of the property, the syndication owns 10% of the property. And then they're combined with your management agreement. And those can be absolutely passive. Now, if you don't have that kind of stroke, to get into something like that, there's another one that's a level down, called a Delaware statutory trust, that typically requires accredited or savvy investors to get out the offering. And it also is a fractional ownership of a piece of real estate, through the vehicle of a certain type of trust that the IRS has officially blessed. And that too, is absolutely passing. Your money goes in, you simply get a check every month. And so all of those things, the vacation rentals on another opportunity, whether they're vacation rentals, whether you where you hire management, or whether you have central residents, excuse me, central reservations, like at a ski area, or a beach area, have the entire building is all rentals. And there are what are called condo hotels and ditches makes money and you do nothing except make sure the fees are paid and collect your check. So there's a bunch of different ways to skin that cat passivly.

Average Joe Finances:

Awesome. Awesome. Definitely more than what I was thinking that the tenants in common was where I was going with the with that with with syndication. So definitely love talking about all the other stuff too. So Delaware statutory trusts I've heard about those as well and people 1031ing into those. Now that has a fixed rate, does it not on your return or does it vary?

Dave Foster:

Well each project has its own performance. So each individual offering is going to have a a rate that their advertising they are not stuck With that, but they have to produce that as part of their sec compliance. So it could adjust. But when you get that, you're also getting your share of the appreciation and your share of the depreciation. So there are some variables that are in there. Typically, they're very, because the returns are really conservative. The projects are very conservative, and what they advertise yet,

Average Joe Finances:

okay, yeah, sounds good. Sounds good. All right. So this has been absolutely awesome. Not not only talking about the 1031 exchanges, but also talking about boats and everything. And I really had a blast talking with you. And, Dave, I wanted to ask you, if you had any last tips or tricks that you would recommend for somebody who's getting ready to sell an investment property, and they're considering 1031 exchanging it?

Dave Foster:

Well give us a call sooner rather than later. And we're at the1031Investor.com. And you

Average Joe Finances:

can say that so where can people find more about you then?

Dave Foster:

Yeah, the1031Investor.com get your writer education portal, we have probably 40 different videos that are all short snippets of this. We actually for those of you who have insomnia, I just uploaded a three hours CE class for realtors that are interested in taking a deep dive in how to use these are the tips and tricks. But you know, I guess I just leave you with Mark Twain man. If you want to get somewhere, Real Estate's the way to do it. Don't wait to buy real estate, buy real estate and wait. And if it's anything else that you want to do, don't wait. Do it now. Seize the moment.

Average Joe Finances:

Absolutely. Love it. Absolutely love it. So do you have any social media by the way that people can follow you on?

Dave Foster:

We do check out and I am the lead of the mix. So I tell you what we'll do in your post production notes. My staff will give that to you to try to figure out and navigate with the GPS

Average Joe Finances:

awesome. So hey, I'll make sure I have your website, your social media where everybody can find you. You know and for those that want to learn more and take some of those classes that's that's fantastic. Because you said the website will take you right to the education portal, I'm probably going to take that C E Class if I can get some c credits for my for my realtor license as well. So that's awesome. And you know, I felt like just in this short time talking with you, I've learned more about 1031 exchanges than I've ever known before. which is again we're only hitting wave top stuff I mean we got a little detailed but we're still hitting wave tops, there's still so much more to it. So for those of you listening, go check out Dave's site. Go see what they're all about. See what they're doing with 1031 exchanges and if you're if you're coming up on one you got a good QA right here that can that can help you out. Dave, absolute pleasure. Thank you so much for taking the time to talk with me today. Send me some pictures that a leopard when you get it will do will do for sure. Thanks for listening to the Average Joe Finances podcast. Your source for beating debt, saving money and investing Learn more at AverageJoeFinances.com. The Average Joe Finances podcast is for informational and entertainment purposes only. Do not use this for any real estate or investment making decisions.