Grow your REI Business with 1031

John Harcar (00:00.91)
Hey guys, welcome back to the show. John Harcar here. I’m here today with Drew McCabe. And we’re going to talk about how to utilize 1031 to grow your investment in your rental portfolio. Remember guys, here at Investor Fuel, we help real estate investors, real estate entrepreneurs, and service providers 2 to 5x their business. It’s by putting you with people that are going to help you develop that business you’ve always want to develop, as well as live the life that you want to live.

Drew, welcome to the show. No, awesome. Hey, I’m super excited to talk about 1031. I know it’s an avenue around, I’ve heard a lot of people utilizing a lot more. But before we talk about that, give me an idea or give our audience idea of who you are, where you’re from, what you’re doing, how you got here.

Drew McCabe (00:31.682)
Thank you, John. Thanks for having me.

Drew McCabe (00:49.038)
Sounds good. Boy, that’s a loaded question. As you and I were talking about before, we have some commonality with where you grew up and where my wife grew up. But long story short, grew up as a country boy in Oregon, came to school out in Colorado, got into the 1031 business, I’m scared to say 25 years ago. Got in actually through my dad. So my dad was a real estate attorney. So I grew up around real estate my whole life.

John Harcar (00:52.46)
You

Drew McCabe (01:16.874)
In college, I knew I wanted to be in real estate in some form or fashion, getting a typical business degree, actually started a mortgage company my senior year of my college doing mortgages out of my dorm room. Quickly realized that I loved real estate and I hated homeowners. I didn’t want to deal with the emotional side of real estate. I wanted to deal with the numbers and the logical and the investment side of real estate. So I was finishing that up, graduating college and trying to decide what I was going to do next. And my dad’s business partner actually wanted to hire me.

John Harcar (01:25.739)
wow. Okay.

John Harcar (01:37.176)
Drew McCabe (01:46.339)
And my dad said, no, basically said he’s got to go figure out on his own. Yeah. He’s got to go figure out on his own. Exactly. Exactly. And said, you need to go figure this out. And so I’m but notes to me behind the scenes. My dad’s partner was like, I want to hire drew. I want to hire drew. And finally my dad, guess, relented gave in. don’t know. And so I went to work for, I went to work for them, but really went to work for my dad’s partner. And we were blessed. That would have been like 2000 ish.

John Harcar (01:48.516)
Wow. Not gonna give you a gold spoon, you’re gonna work for it.

John Harcar (02:09.429)
Mm-hmm. Okay.

Drew McCabe (02:15.886)
and the market was growing. Unfortunately, my dad and his partner had a splitting in the ways a couple of years later. And by that time, my dad figured out I wasn’t a complete moron. And so he and I went and started our own 1031 exchange company. And again, that’s kind of 04567. The market was really going and we built that up and we sold that off. I did some other things, got into some private equity and then started this particular company back up in 07.

John Harcar (02:21.357)
Mm-hmm.

John Harcar (02:28.163)
you

John Harcar (02:36.535)
Yeah.

John Harcar (02:45.507)
Okay.

Drew McCabe (02:45.631)
and have really been focusing on 1031 exchanges pretty exclusively along with my own personal portfolio and things like

John Harcar (02:53.259)
Sure. Have you always been that analytic type of person? You you mentioned you’re the numbers, right? You like the numbers. You don’t like the little homeowners. So have you always been that type of personality? Is that something you just kind of gravitated towards once you really started getting in the weeds?

Drew McCabe (03:06.218)
Yeah, I would say I have, yeah, very, very logic, not very emotive, right? My wife would tell you the same thing. You know, like, hey, here’s the problem, let’s fix it. And so, yeah, so looking at, when I look at my investments, it’s, I don’t care about the emotive side of it, just show me the numbers.

John Harcar (03:24.355)
Got it. OK. So you’re in college. You’re flipping loans out of your dorm room, in a sense. So once you got out of that, and you built the 1031 thing, you ran into the crisis, right? 2008. How did you navigate that? Because I like when I’m talking to folks that I know have been through that. I think there’s some key things that people can pick up, maybe, on how you navigated it or pivoted or what you did.

Drew McCabe (03:31.298)
Yeah.

Drew McCabe (03:49.839)
That’s a great question. So the pivot was we had sold in 07, right? So we sold at the right time. We had sold the right price. Unfortunately, we sold to the wrong guy. But at that point in time, you know, I got a chunk of change, but I was a minority holder, so I needed to keep working. And so that’s when 08 hit. And here specifically in Colorado, they actually changed the foreclosure laws, which was intended to be more friendly to the homeowners.

John Harcar (04:18.211)
Mm-hmm.

Drew McCabe (04:18.254)
but actually worked out better for the investors. So it used to be you’d go buy a property and you’d sit and wait and there would be all these different redemption periods, et cetera, et cetera. Whereas now then when they changed laws, you could go buy and you would get the property almost instantaneously. So a couple of buddies of mine came to me and said, hey, we think there’s going be an opportunity here. And so 08, 09, 10, we were just buying properties at the foreclosure auction, picking stuff up. Hindsight being 20, hindsight being 20, 20.

John Harcar (04:32.504)
Mm.

John Harcar (04:44.065)
Okay.

Drew McCabe (04:46.702)
I wish I would have pushed all in more. As you well know, it’s one of those things, you’re limited by capital and time and fear and you got little kids and all this type of stuff. But I was blessed, I can’t complain. I bought quite a few properties, most of which I still have today. But yeah, that time was, it was interesting. was a lot of fun, it was a lot of experience. But at the same time, like I told you, I started this in 07.

John Harcar (04:55.499)
Yes. Right.

John Harcar (05:11.299)
Mm-hmm.

Drew McCabe (05:16.526)
And this was more or less kind of sitting on the shelf because there wasn’t a lot of activity going on in the 1031 world, right? Most people just, there just, there wasn’t a lot of gain. And so I was kind of doing this on the side and then probably about 2011, 12 kind of saw the market coming out of our trough and really went back and focused a lot of my time on this business. And again, we’ve been, we’ve been blessed and we’ve grown and we do them now all across the nation. So.

John Harcar (05:22.08)
Right.

John Harcar (05:33.556)
Mm-hmm.

John Harcar (05:38.284)
Okay.

John Harcar (05:45.144)
back when you were buying these properties at Real Estate Auction, were you flipping them out? What were you doing? Were you, mean, and it’s funny, and a lot of folks that I know are listening resonate with you. There’s two regrets, right? Not buying enough and not holding long enough. You know, so what did you do with the properties you bought?

Drew McCabe (05:50.871)
Yeah, well.

Drew McCabe (05:57.391)
Yeah.

So a lot of stuff that I was doing with my partners, we were flipping. I mean, we were whole tailing them, carpet and paint and turn around and put it back out. The stuff that I decided, I’ve always kind of been a long term investor. I bought my first property in 2000. I literally bought a property in April of 2000 and graduated college in May. So right before I graduated college. And so I always knew that the path to long term wealth was real estate, long term.

John Harcar (06:07.747)
Mm-hmm.

John Harcar (06:21.923)
Hmm.

John Harcar (06:28.525)
with real estate.

Drew McCabe (06:30.056)
And I always have a saying, get rich slow. There’s a lot of get rich schemes in real estate. I’ve always been just grind hard and go that way. So all that say, was a combination. I was flipping stuff and holding stuff, wholesaling, flipping contracts, anything you can imagine we were kind of doing.

John Harcar (06:53.847)
Got it. Okay. And then did you continue that or did you just kind of put a halt to all that and focus on this new section of the business, which we’ll talk about here in a minute.

Drew McCabe (07:01.75)
Yeah, no, I kept doing it and still do it to this day. I’ve really transitioned more. Most of my stuff is I do private lending. It’s all loaned to other guys who are flipping properties. So I won’t say I’ve done it all, but I’ve done a pretty broad spectrum of stuff, mostly in the residential world. Obviously, we do 1031 exchanges in the commercial world, but as far as my personal investments has been mostly residential.

John Harcar (07:04.545)
But okay.

John Harcar (07:11.746)
Mm-hmm.

John Harcar (07:22.978)
Right.

Right, no, yeah, definitely. Are there any mistakes that you made? Like, you know, like, what’s a big, like, boof you made when you were doing some of these flips?

Drew McCabe (07:35.503)
No, I’ve never made a mistake, John. don’t know. Yeah, it’s amazing. I’m being facetious if you can’t tell. Gosh, where do I start? I don’t have enough fingers. I’d have to take my shoes off and you wouldn’t like the smell. Number one would probably be not buying more. I know that sounds kind of weird, but when we were buying them, there’s always this thought that it can go to zero, right? Even though I was buying a house,

John Harcar (07:38.709)
Never. Wow. A lot of folks are like, I got stories to tell you.

No, I know.

John Harcar (07:58.98)
Mm.

Drew McCabe (08:05.718)
in a suburb here in Denver for 42,000 bucks. And back in my mind, that fear was, well, it could go to zero and you could lose everything. And so probably that confidence would be a big one. I was working with a lot of guys, but we were still learning ourselves. And another one probably be not finding a mentor to really improve what I could have done into 10X, for lack of a better term, my investments.

John Harcar (08:12.611)
Mm-hmm.

John Harcar (08:25.581)
Okay.

John Harcar (08:33.731)
Sure.

Drew McCabe (08:35.054)
who you partner with is another one. It’s like a marriage. And so you want to make sure that you’re equally yoked. And so a lot of guys have gone through this. That’s nothing new, but that would be one that I would strongly encourage people to do. start with the end in mind. I’ve seen a lot of guys who get into deals who are just super excited, which we love the enthusiasm, but they don’t think about what it’s going to look like at the end. so really, yep.

John Harcar (08:41.909)
Yeah.

John Harcar (09:01.911)
Did not think about the exit, yeah.

Drew McCabe (09:04.046)
Really, the exit from a tax standpoint, which would be more on the 1031, the exit if the deal goes bad, the exit if John and Drew just decide we’re not compatible anymore, that’s probably the bigger one. And just really laying that out and putting it on paper. Paper doesn’t lie, and it’s really easy to go back and say, hey, Drew, you said you were gonna do this. Yeah, John, you’re right. This is what it says. So those would be the lessons I think I’ve learned.

John Harcar (09:13.911)
bright.

John Harcar (09:28.355)
Yep, yeah. Well, good. And those are huge nuggets for people, right? Because they’re, you know, people get into it. And like you said, it’s like they don’t think about that end in mind. They’re just like, yeah, yeah, yeah. And we love that energy. And that’s great. But but you got to also think that there’s homeowners on the other end of that are, you know, kind of the reciprocation of what you don’t do or the receivers of what you don’t do. So you’re in Colorado. Are you doing business in Colorado? Where are you doing your current investing business?

Drew McCabe (09:48.704)
Exactly.

Drew McCabe (09:56.815)
Me personally, I’m invested here in Colorado single-family’s duplexes things like that Colorado as you know, Kelly Boise has just I gone like this So it’s very it’s very difficult to find cash flowing properties out here. Now. There’s still appreciation plays There’s still flip plays out here. But if you’re looking for cash flow, which is kind of always been my you know, get back to that get rich slow It’s hard to do in Colorado. So

John Harcar (10:08.365)
Shot. Crazy.

Drew McCabe (10:25.006)
I’ve got my current portfolio, which is fine, but I started investing in Tennessee in probably 18, 19, and started building up a little portfolio out there just because the numbers worked out there.

John Harcar (10:36.949)
Sure. What part of Tennessee? What part of Tennessee? What city? Chattanooga.

Drew McCabe (10:40.718)
Yeah, so we’ve been in Chattanooga. Yep, Chattanooga. Yeah, so I had a client here in Denver who we built a great relationship with. He moved out there and he actually came back here and we were having lunch and he told me the story. I said, what are you up to? And he says, I’m doing some construction, some flips. And I bought a rental. I said, what are the rental numbers look like? He goes, well, I paid 25 grand for it and rents for 650 bucks a month. And I said, whoa, tell me more, tell me more. Right. And so this is 17, 18.

John Harcar (11:05.987)
That’s rad. Yeah, yeah. Can you get any more of those? Sure.

Drew McCabe (11:10.55)
Yeah, exactly. And he says, yeah, there’s stuff like this all over the place. you know, that’s that’s what sparked my interest out there.

John Harcar (11:18.755)
In 2000, I think it was in 2019, I got one in Indiana. It like 75 grand. It rents for like 1200 bucks. Good markets like that. Okay, cool. So anybody who is in Chattanooga, right? Chattanooga you said? Chattanooga, if you guys got a deal, reach out to Drew. All right, so as we talked a little bit earlier, you’re still doing some of that, but you focused your business on maybe more of your focus of your businesses to helping folks understand the 1031.

Drew McCabe (11:31.278)
Yeah, yeah, yeah.

Drew McCabe (11:35.534)
There you go.

John Harcar (11:48.099)
Before we really get in high debt, give me a brief overview. What’s a 1031 exchange for folks that are listening maybe don’t understand the concept?

Drew McCabe (11:57.123)
Great question, John. So 1031 exchange is a tax code that allows you to sell a piece of investment real estate and defer the gain into the purchase of a new piece of investment real estate. In order to do that, the IRS has set up guidelines and rules that you have to follow, one of which is you have to use a qualified intermediary. That’s what we are. That’s our function. So we prepare the paperwork that reflects you’re doing the exchange. We walk you through the transaction, the timeframes, hold your hands. We have to hold the proceeds.

from the transaction, you as the client aren’t allowed to do that. Think of it as like a 401k rollover, right? You’re gonna roll that money over, you’re not allowed to touch the money. Same idea with the 1031. A lot of people will hear, will call it a tax-free exchange. It’s not tax-free, it is tax-deferred. So you are kicking that can down the road, right? But with proper planning and tax strategy and estate planning, you can make that tax go away, right?

John Harcar (12:35.745)
Right.

John Harcar (12:43.479)
Deferred.

John Harcar (12:54.029)
Mm-hmm.

Drew McCabe (12:54.584)
The joke in our office is we call the four Ds, defer, defer, defer, and then die. And so you just move that defer, you defer, defer, and then 50, 100 years down the road, you’re gone. Your heirs get it at what’s called a step up in basis as the law stands today, and the tax all goes away. So it’s a little morbid, but it’s kind of the joke. to the end of your question here, we help people all across the nation.

John Harcar (12:59.395)
Yeah, yeah.

John Harcar (13:10.871)
Mm-hmm. Mm-hmm. Yeah. I like it.

Drew McCabe (13:24.216)
So it’s 1031 exchange is domestic property. So you have to go US to US. There are some exceptions with like US Virgin Islands and things like that. we help people from California to Florida and everywhere in between effectuate 1031s.

John Harcar (13:28.983)
Hmm. Hmm.

John Harcar (13:39.809)
Okay, so someone can just go buy a property and then, you know, have their property, go buy any property and do that 1031. There’s no regulations on what type of property or anything like that.

Drew McCabe (13:50.915)
Great question. oftentimes people heard the term like kind and there is some confusion with that because people will think, if I sell a condo with a purple door, I got to go buy another condo with a purple door. And that’s not the case. It’s investment for investment. you could sell, John, you could sell your Indiana rental and you could go to New York City and buy a high rise if you wanted to. You could go down to Texas and buy dirt or a ranch.

John Harcar (14:04.035)
You

John Harcar (14:14.733)
Mm-hmm.

Drew McCabe (14:18.71)
As long as John is holding it for investment purposes, then it’s going to qualify for 1031 treatment. Now there’s some timeframes in there as well. There’s some people that are excluded from doing 1031 exchanges like dealers and developers, flippers. You truly need to be holding the property for long-term investment. Some people will say that’s a minimum of a year. Some people say at least two years. if your business is a builder, for example,

John Harcar (14:24.035)
Okay.

John Harcar (14:36.44)
you

Drew McCabe (14:45.548)
They can’t do 1031 exchanges because they hold the property for inventory. So it’s got to be somebody like you or me that’s holding these properties for long-term appreciation.

John Harcar (14:49.187)
Great.

John Harcar (14:54.525)
Got it. does the value have to be more than the property I’m currently owning?

Drew McCabe (15:00.204)
Another great question. Yep. So you have to buy a property equal or greater in value to the property you sell. And when I say properties, it could be more than one. So you could sell Indiana and you could go buy three single families in Chattanooga if you wanted to, as long as the value is equal or greater in value to the property that you sell.

John Harcar (15:18.883)
Okay.

Where you do you see a trend in the market and a trend of this you know going towards this way are you seeing more interest in it what are you seeing in the 1031 exchange market?

Drew McCabe (15:36.207)
Another good question. mean, golly, I’ve been doing this for 25 years. 1031 exchange has been around for over a hundred years. So it is an old, old code. Kind of the origin story is you and I were both farmers and I grew soybeans and you grew potatoes and we would actually swap deeds. So that’s how it kind of originally started. And that was the 1031 exchange. There was a case out of Oregon, got out of our stomping grounds called Starter. So sometimes you’ll hear it called a Starter exchange.

which was kind of the case that created what we go by now. But as far as what I’m seeing, it’s pretty consistent. expert level guys who understand taxes are doing these all day every day. There’s no limit on how many you can do as long as you’re holding property for investment. So you can roll stuff over indefinitely and not pay the tax.

John Harcar (16:11.628)
Right.

John Harcar (16:30.349)
Hello.

Drew McCabe (16:35.948)
As far as trends that we’re seeing, it’s more local than necessarily numbers. So we’re seeing a big exit out of higher appreciated markets, i.e. Denver, Boise, into the Chattanoogas, the Indianas, the Cincinnatis, the Southeast, Arkansas, Tennessee, all that. People are saying, hey, my property in Denver is appreciated, golly, whatever, six, seven, 10X. And my return on original investment is good.

John Harcar (16:46.188)
Drew McCabe (17:05.208)
but my return on equity is terrible. And so they can go take that equity, roll it into something else and increase that cashflow significantly.

John Harcar (17:07.267)
Mm.

John Harcar (17:12.451)
Got it. Are there any parameters or maybe things that make someone a better candidate or make a property a better candidate for 1031 than not? Any situations to where that 1031 is doesn’t make sense.

Drew McCabe (17:26.604)
Yeah, I mean, we have that conversation a lot. And it’s usually personal based. So somebody either A is tired of being a landlord. 1031 may not be a right choice for them because you’re going to go have to be another landlord. You got to go buy more property, right? Yeah. There are some alternative investments out there that allow you to kind of step out of that role a little bit. But for the most part, you’re still going to be a landlord. You know, we get the call of

John Harcar (17:40.707)
still be a landlord. Right.

John Harcar (17:51.683)
Mm-hmm.

Drew McCabe (17:54.287)
I got to pay for kids college. Well, cash out, take the tax. I always tell people it’s never a bad time to take profits off the table. If you need the money, take the profits, it’s okay. But if you don’t need it, 1031 exchange is a massive way to grow your wealth, because you just took somewhere between as low as 15 % and depending on if you live in California, 30 % of tax that you’re going to lose.

John Harcar (18:08.643)
you

John Harcar (18:21.953)
Yeah.

Drew McCabe (18:23.33)
I mean, imagine if you have 30 % more to go roll into a new property with leverage and things like that. just, it’s exponential.

John Harcar (18:31.105)
Yeah. How are you guys finding your clients? How do you guys go out and get more business?

Drew McCabe (18:39.182)
Great, great question. Doing this kind of stuff is one. We really market to agents. So real estate agents is one of our, who we market to a lot, individual investors, title companies. That’s how we’re out there marketing. We’ve been in the business a long time. So as you know, you just have some natural organic growth. And then we just have, I’ve got outside sales reps in different locations.

John Harcar (19:01.783)
Sure.

Drew McCabe (19:07.47)
who we teach a lot of classes, so education is very important to us. So we’re licensed to do CEA in Colorado and Texas, Florida, Michigan, Indiana, all over different places. So really educating people on 1031 exchanges. I find that if we can get somebody on the phone who understands, have heard of this 1031 thing, but I don’t know all the rules, we walk them through it, we’re gonna land the deal. But I don’t say that to be, know, braggadocious, I’m just like,

John Harcar (19:11.799)
Okay.

John Harcar (19:18.711)
Mm-hmm.

John Harcar (19:32.47)
sure.

Drew McCabe (19:36.47)
It’s more of an education on people because once you get into real estate, you’ll hear this 1031, 1031, but you may not know the nitty gritty.

John Harcar (19:45.493)
Yeah, you know the overall basis of it, but you don’t know the steps, which could be pitfalls if you don’t know them, right?

Drew McCabe (19:51.971)
And that’s 100 % is you have to make sure you’re working with somebody who knows the rules. Like we haven’t even talked about the timeframes in the 1031 exchange, not touching the money, buying equal or up, owning title the same way you own it the old way. So there’s lots of nitty gritty that you need to make sure, which is what we pride ourselves on educating people and walking them through.

John Harcar (20:07.415)
Yeah.

John Harcar (20:14.755)
So when someone reaches out to you for all intents and purposes, you’re going to be able to help walk them through and educate them whether or not they utilize your services, but you still provide that type of information just for the overall basis of good. People need to know.

Drew McCabe (20:30.254)
100%. I’m of the believer the pie is really big, right? There’s business out there for everybody. Me explaining somebody, explaining something to them, hopefully they come back and use us, but if they don’t, it’s okay. We’ll go do the next deal. And I know in your guys’ world, you’re very big on helping each other out. like we talked about before, a couple of people that I know in your guys’ group.

That’s the name of the game. It’s like, hey, I this 1031. Oh, John, call Drew. Drew, call John. And that’s the value of groups like yours is back to my statement about not finding a mentor or a group. This would have been a perfect fit.

John Harcar (21:05.976)
Yeah.

Yeah.

John Harcar (21:16.803)
Well, it’s nowadays, it’s a less, it’s a lot less of what you know versus who you know, right? Utilizing people who have the strengths that are your weaknesses. What sets you apart from any other company out there I can go use? What, you know, what, what makes me say, Drew’s the man.

Drew McCabe (21:34.255)
Yeah, yeah, thank you for asking that. I would say our expertise. So there are a lot of title companies that have 1031 companies attached to them. Title kind of said, hey, we can we can prepare paperwork. They’re right. Anybody can prepare paperwork. Where we’re going to be different is our expertise. I’ve been doing this for 25 years. My dad, who’s still around, did his first exchange in 1977. Yeah, so a long, long time.

You know, we’ve got tax, title, finance, attorneys. We really cover a broad spectrum of the real estate world. So I would say our expertise and our ability to do more complex transactions such as like reverse exchanges and construction exchanges, improvement exchanges, which we haven’t touched on. And so that’s a whole other show. Exactly, exactly. So that would be our sales pitch, I guess, for lack of a better term.

John Harcar (22:23.523)
That could be a whole nother show. Yeah.

John Harcar (22:32.547)
Awesome. And expertise is huge, right? We need to know that people that are guiding us have been through the ringer and, you know, have experienced all the, I like to call the suck, right? Experiences of suck in the attempt in learning and growing. So I love it. Drew, man, I learned a lot today. I hope our folks that listening, if people want to get a hold of you and talk about 1031, maybe go over the structure, the process, is it good or right for them? How do they get a hold of you? How do they reach out?

Drew McCabe (22:42.198)
Yeah.

Drew McCabe (23:01.474)
Yeah, you know, we’re on all the social medias. Our website is www.erg1031.com. So E is in exchange, R is in resource, G is in group, 1031.com. Our phone number, local Colorado phone number, 303-789-1031. Feel free to call that number. Our emails, my email is drew at erg1031 if you want to email me directly. But you can call the office, talk to anybody in the office.

And we would love to help you out, answer any questions for you, walk you through.

John Harcar (23:35.491)
I love the last four digits of the phone number, 1031. Did you have to go out and get that? Did you have to request that? Yeah, yeah, okay. I would have said the happenstance of getting that number would have been crazy.

Drew McCabe (23:37.966)
Yeah, did. did. Yes. Well, we’ve had it for so long, but yes.

Drew McCabe (23:48.697)
That would have been pretty sweet.

John Harcar (23:49.988)
Well Drew once again man, thank you for spending time with us. Like I said, we got so much stuff we can talk about we might have to book up another show here. you know, I hope everyone enjoyed it. Hope everybody learned a little bit, you know about 1031s for folks that didn’t know and you know, and we look forward to seeing you guys all the next episode. Have a good afternoon guys. Cheers. Thanks, Drew.

Drew McCabe (23:57.442)
would love to do that.

Drew McCabe (24:07.608)
Thanks, Rob. Appreciate it.