My friend Frank was facing an all-too-common problem: he owned a beautiful ranch that his kids wanted no part of. His son in California is a budding entrepreneur (he builds hothouses for pot growers), and his daughter is a vegan/animal rightist who hates cows and cowboys. So Frank responded to an ad for anyone wanting a free meal at a fancy resort to come learn about 1031 exchanges. Who says there’s no such thing as a free lunch? He even took his wife who constantly complains he never takes her anywhere nice to eat.
The lawyer hosting the meet-and-greet made it all sound so easy. They could transition out of their hard life as ranchers into a leisure retirement financed by rent checks just by swapping their ranch for apartments. And all the income from the sale of the ranch would be tax free!
Now, two years later Frank is deeply depressed despite being named customer of the month by Home Depot for buying truckloads of drywall and spackle to repair all the holes in the walls left by vacating tenants. Instead of playing golf Frank is patching roofs and replacing water heaters. He has recurring nightmares about leaky faucets. (Did you know that no two are the same?) His once peaceful life has turned into one giant honey-do list.
“Frank there are people to do all that work,” I advised. “They are called property managers and they’ll do the maintenance and collect the rents for you.”
“HA! You don’t understand. I went from being land rich, cash poor to being apartment rich, cash poorer. At the end of the month there’s not enough money left for my wife and I to live on so how am I going to pay a property manager? Especially when the apartments I traded for are all rent controlled! It got so bad my wife and I had to move into one of our apartments. What a dump. No wonder no one wants to rent one.”
“Don’t you have managers living in each of your buildings?”
“Are you kidding? I just spent six months and $10,000 to get one evicted, another turned his apartment into a meth lab and another throws wild parties every weekend the cops have to respond to. The police now have my number on speed dial.”
“It’s got to be physically less demanding than ranching,” I said.
“I had a stroke last year from the stress. And I miss my cows! I swear, my apartments are like a miniature United Nations and I don’t speak any of the languages. I have to keep my dog on a short leash for fear she’ll get eaten. And you never know when a renter will vacate the premises in the middle of the night and leave behind an old gross couch on the street for you to haul to the dump and an apartment that looks like a bomb went off in it. The cleaning deposit doesn’t come close to cleaning things up. They say that when you do a 1031 Exchange it has to be for “like” property but there’s nothing alike about ranching and owning apartments. They are as alike as New York City and Chugwater. When I sold my cattle at the auction market I got paid the same day. Most of these folks are four months behind!”
“Was the 1031 exchange a mistake then?”
“Let me put it this way, I’d much rather get up at 3:30 in the morning to pull a calf than to respond to a domestic disturbance. Perhaps instead of apartments I should have traded instead for the chain of bankrupt water parks, the shopping center anchored by a dying Sears store on one end and a JC Penney on the other, or the church building in Chicago’s slums.”
“Can you trade for your ranch back?”
“I’ve thought of that but the lawyer who did the trade won’t return my calls. I’ve heard he either has “relocated” to San Quentin or that he’s now peddling conservation easements in Colorado. I couldn’t afford my old ranch anyway. It’s now for sale for twice what I got paid. I tell you, that free lunch was the most expensive I ever ate. I should have known that something was fishy when they served chicken parmesan to a bunch of ranchers.”