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Case Study: Exchange of Single-Family Rentals Earns Investor Time & Money

Dollar General, Del City, Oklahoma

December 9, 2019

$1,276,000

6.45% Cap Rate

NOI: $82,302/year

Yes, You Can Exchange Single-Family Rental Properties for Commercial Properties

In autumn 2019, an experienced and skilled real estate investor was ready to sell a few of his 60 high-maintenance, single-family rental properties in return for less complicated investments. He contacted Westwood Net Lease Advisors to learn if he could exchange residential properties for commercial properties using the IRS’s 1031 exchange code, and he wanted to know more about the nature of triple-net (NNN) investing. He had no prior experience with NNN lease properties, so Westwood Advisors Mike Kocur and Phil Bundren worked with him to educate, advocate, and facilitate a smooth 1031 exchange for a lucrative, zero-responsibility Dollar General property.

A 1031 exchange allows you to invest profits from the sale of one or more commercial properties into similar or “like-kind” and often more valuable income-producing properties, within 180-days, and defer 100% of the capital gains taxes.

Buyer Exchanged High-Maintenance for No-Maintenance

The first step in a 1031 exchange, and often the biggest challenge in the process, is identifying, in writing, the property you intend to buy in the 45-day timeline set by the IRS. Since this buyer was new to NNN investing, and the timeline was short, experienced advisors Kocur and Bundren teamed up to help him understand the process and all the ways in which he would benefit from exchanging his old, time- and capital-laden real estate for a no-responsibility, expense-free, single-tenant, absolute NNN property, as well as the ability to use the capital gains to his own advantage.

NN lease investment vs nnn lease investment

How Kocur & Bundren Simplified the Process

After they performed due diligence and financial evaluations and presented several possible properties, the buyer made an offer on a newer, corporate-built Dollar General in an Oklahoma City suburb, and met the 45-day IRS identification timeline. Typically, Dollar General properties are strong NNN investments that don’t stay on the market long, so the need to act fast helped the buyer negotiate a favorable contract – including a 5-year lease extension with built-in, above-market increases of 10-13% – and secure the property without delay.

Throughout the process, Kocur and Bundren made sure the property and transaction details met the strict requirements for a 1031-exchange, and most importantly, that it was in the best interests of their client. Through a lender they work with regularly, they further helped the investor source his debt financing with a below-market, fixed interest rate for ten years, after which the investor will own the property outright with no outstanding debt. They also sourced the attorney and worked with the buyer every step of the way to make certain he had the best investment experience possible and met the rigorous 1031-exchange rules.

Why Dollar General is a Superior NNN Investment

This Dollar General property is a great investment. First and foremost, it is an investment-grade tenant with a long-term corporate-guaranteed lease. Secondly, this location’s sales history is strong as it’s in a growing area less than five miles from downtown Oklahoma City and has a 5-mile population of 166,000+ and a projected 4.92% population growth of over the next five years.

Dollar General Corporation (NYSE: DG) has an S&P rating of BBB and a Moody’s Baa1. The FY2019 Q3 report shows net sales increased 8.9% and same-store sales increased 4.6%. For fiscal year 2020, the company plans nearly 2,600 real estate projects, including 1,000 new store openings, 1,500 mature store remodels, and 80 store relocations.

Overall, Dollar General properties meet all the key criteria for NNN success. In addition to the aforementioned attributes, they have strong lease guarantees (15 years on new locations), great cap rates, and are usually strategically placed with solid demographics. Dollar General also fits the three main end-goals of any NNN investor:

  1. Passive, guaranteed monthly income from anywhere in the country.
  2.  Reliability for the preservation of equity.
  3.  Recession-proof, investment-grade tenant.

delay capital gain tax in 1031

To Wrap It Up –NNN 1031 Exchange Preserves & Grows Capital

The Kocur and Bundren team helped this CRE investor go from minimal NNN investment and 1031-exchange knowledge to advanced knowledge, and simplified the 1031-exchange purchase process. Because of their expertise and diligence, the client was pleased with how smooth the process was from start to finish and that he was able to carry on with business as usual while they managed the day-to-day minutiae. Ultimately, this investor preserved valuable capital by deferring the profits from the sale of his single-family real estate and is now the proud owner of a no-maintenance NNN lease property with an annual net operating income (NOI) of $82,302k.

If you are considering trading up to a low- or no-maintenance property with a 1031 exchange, there’s no time to waste. Start the process prior to selling your single-family rentals, multi-tenant properties, or other high-maintenance real estate and take advantage of the many financial, tax, and time benefits that come with NNN lease investments. Westwood advisors educate and assist throughout the entire process, from property search to closing, and ensure you get the best investment for your financial and lifestyle goals  – all at no charge to you. Contact Mike Kocur, 314.266.2654, or Phil Bundren, 314.563.2203, for a free, no-obligation consultation today.

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Tags: 1031 exchange, nnn lease property