Real Estate Investment Case Study

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Refinance & 1031 Exchange

Hollywood Apartments (16 Units) to Verona Apartments (16 Units)
2012 & 2015, 2018/2019 - Current
Engagement Type
Cash-Out Refinance (2x), 1031 Exchange
Realty Yield Role
Listing Agent, 1031 Exchange Coordination, Buyer's Agent, Mortgage Broker
Investor Cash/Capital
$1,133,984 (1031 Funds)
Gary M

Investor Profile

As of 2018: Long-time owner/operator of several small/mid-size apartment properties located in the Portland-metro area plus a single-tenant Industrial property located in Bend, Oregon. Client has over the years strategically sourced built-up equity in owned properties and purchased additional income-producing real estate of various property types. Client's main focus and priority is continued wealth (capital) growth through the optimal allocation of invested capital (equity) and the strategic use of leverage.

Engagement-s Objective

2012: Client was interested in both lowering his interest rate from 6.75% (2007 loan) to a current lower market loan rate of ~4.125% (2011-2012) as well as pulling some cash-out to use for another income-property acquisition in 2012.

2015: Cash-out refinance plus secure/lock-in a lower interest rate.

2018: Execute 1031 exchange into a newer/larger property.


2012: Prepare loan package and shop lenders for best price (lowest interest rate) and terms. Additionally, provide and assist the lender underwriter and appraiser with objective sales and valuation data in what was a disjointed marketplace at the time.

2015: Prepare loan package and shop lenders for the best price (lowest interest rate) and terms.

2018: Property was prepared for sale, rents brought to full market, offering memorandum was prepared and the subject property was listed on the open market.

The Opportunity-s

2012: Potentially pull-out over $200,000 in equity/capital while keeping the monthly payment about the same (within $200) and locking-in a new lower loan interest rate.

2015: Lower the loan interest rate (now hovering around historical lows) and pull cash-out for another acquisition.

2018: 1031 Exchange older building and acquire higher value, newer property.

The Challenges

2012 (cash-out refinance): In order to obtain the desired loan amount we would ultimately need an appraisal with an applied a cap rate that was on-par with the compressed capitalization rates we were now seeing in “some” sell/buy transactions. Unfortunately, there were very few, recent, same-type vintage properties in the immediate geographic sub-market that had sold. What comparable sales would the appraiser use?

The other notable challenge was how the appraiser and lender underwriter would interpret the very light operating expense load that was being achieved by the owner. Since the owner was both hands-on and managed directly (no actual property management expense), the expense level was less than most other like-kind properties. How much would the appraiser and lender recast (adjust/increase) the expense load?

2015 (cash-out refinance): This particular refinance was overall going to be a fairly typical process. Maximum cash-out funds were being sought. Some negotiation with prospective lenders was going to be required in order to get a loan commitment in an amount our Client was going to be satisfied with.

2018 (sale): The sale was going to be pretty straight forward, seller's market at the time. Primary consideration, after price, was to secure a Buyer that was flexible on a closing date to allow our Client adequate time to find a suitable 1031 replacement property.

The Execution

2012 (cash-out refinance): It was imperative that the submitted loan package objectively showed very low historical vacancy and that ongoing property maintenance expenses could be sustained at the low-end of the customary underwriting range. It was also determined that Realty Yield would need to research and assemble our own list of comparable sales. The idea being, that we wanted to “help” the appraiser “fill in the blanks” since like-kind comparable sales were few and far between at that time.

2015 (cash-out refinance): Loan package was prepared, lender options were evaluated and the loan was placed by Realty Yield.

2018 (sale & 1031 exchange): Disposition property was brought to the open-market (seller's market). Many interested parties brought offers. Many potential 1031 replacement properties were reviewed and analyzed. A suitable condo quality multi-family property was identified and put under contract.

The Result-s

2012: After many conversations with various direct lenders regarding income/expense line items, vacancy factor to be used and applicable capitalization rate we came to agreement on a loan amount, interest rate and terms. And, as anticipated, the assigned appraiser was having problems finding comparable sale-s to support the value we felt was warranted (equal to what the open-market would command). Our comparable sales list helped the appraiser reach a supportable valuation conclusion. A loan amount of $1,000,000 was approved and funded which equaled the initial amount requested.

2015: A new $1.3 million dollar loan was secured at 3.47%.

11/2018: Relinquished property sold for $2.7 million, 1031 exchange funds were used to purchase a newer replacement property for $3,625,000. This replacement property was an off-market property/opportunity owned by a Realty Yield client.

Realty Yield Comments

This case study represents a typical, long-term engagement Realty Yield has with our Clients. There are usually multiple strategic decisions that are made over many years to best serve our Client's objectives at a given point in time. In this case, two cash-out refinances were completed (2012 & 2015) to both lower the loan interest rate and raise capital for additional income-property purchases. And in 2018, Client decided to sell his long owned older property and acquire (through 1031 Exchange) a newer, higher value condo quality apartment property.

Verona Apartments, Acquired (through 1031 Exchange), May 2019 - $3,625,000. Loan Assumption.
Verona Apartments, Acquired (through 1031 Exchange), May 2019 - $3,625,000. Loan Assumption.
Hollywood Apartments, Sold (1031 Exchange), November 2018 - $2,700,000. Additional: Realty Yield arranged cash-out refinances, 2012 & 2015.
Hollywood Apartments, Sold (1031 Exchange), November 2018 - $2,700,000. Additional: Realty Yield arranged cash-out refinances, 2012 & 2015.