A couple says they quadrupled their rental cash flow by swapping one property for 2 using a little-known tax strategy

• Jeff White and Suleyka Bolaños used house hacking to retire before 40.
• They leveraged a 1031 exchange to upgrade properties and boost cash flow.
• A 1031 exchange allows you to swap one property for another (or multiple) and avoid capital gains tax.

The first property Jeff White and Suleyka Bolaños bought was a piece of work. It was a fourplex that they planned on house hacking, meaning they'd move into one unit and rent out the other three.

"It took us three months before we could fully move in," White told Business Insider. The renovation process "was like having two full-time jobs for both of us."

Looking back, "we could have done a lot better," said White, who is now a real-estate agent and helps investors in the Denver area find properties. "I've looked at 100-plus two- to four-units and, yes, I can confirm that we bought the worst one."

Still, it worked out for the couple. After months of living in Bolaños' sister's basement while renovating, they moved into one of the units and filled the other three. The rental income covered their entire mortgage and then some, allowing them to live for free in their own home.

Several years later, they were able to use that same property to scale up and leverage a 1031 exchange, a strategy that allows investors to reinvest the proceeds of one property into another without immediately paying capital gains taxes. This swap helped them upgrade to two better-performing assets, significantly boost their cash flow, and, ultimately, hit their early retirement goal.

Upgrading the fourplex and more than quadrupling their cash flow

Despite the challenges of the first house hack, which they bought in 2017, White and Bolaños continued purchasing one property a year with the goal of fully replacing their day job income with rental income. Their strategy revolved around house hacking, which not only allowed them to live for free but meant they could qualify for owner-occupied financing and put just 5% down on each property, rather than the typical 20% required for investment properties.

While cost-effective, the strategy can be limiting. The main stipulation with owner-occupied financing is that you have to live in the property for at least 12 months, meaning White and Bolaños could only do one house hack a year. That wasn't an issue — they liked the cadence and knew they could hit their early retirement goals by acquiring a home a year — until 2021, when White found a deal they couldn't pass up.

"It was this huge house that was really nice, about 3,000 square feet, 6-bed, 4-bath," said White, who looks at properties in his market regularly as both an investor and agent. At the time, the couple was looking for large single-family homes that they could rent by the room, their most lucrative rental strategy.

"I was like, 'Jeff, this is so nice, but we literally just bought a house three months ago,'" recalled Bolaños. She chose to problem-solve rather than shut down the idea. "I just couldn't get this house out of my mind. It would be perfect for our portfolio. So then I said, 'Would it be possible if we were to sell our worst-performing property and get this house more as an investment property, instead of us moving into it?'"

The answer was yes — using a 1031 exchange, they could defer capital gains on the sale of their worst-performing property (their fourplex) and reinvest the proceeds into another like-kind property. That's where they ran into another speedbump: The property they wanted wasn't of equal or greater value than the fourplex.

Their workaround was to find a second investment property — investors can exchange one property for multiple properties — to meet the equal or greater stipulation.

"We listed the fourplex for sale, found a buyer, and then went under contract on that single-family large house and a condo," said White. "We closed on the same day — three transactions — paid zero tax, and got rid of our worst property that only cash flowed, at that time, $400 a month maximum, to those two other properties."

They rented each individual room in the single-family home and rented the condo to a Section 8 tenant, which more than quadrupled their cash flow, said White: "We went from $400 to $1,700 overnight."

1031 exchanges are specifically for investment properties, not for primary residences or vacation homes. It's a complex strategy with specific rules investors must abide by. For example, there's a strict time limit on 1031 exchanges: You must identify your replacement property (or properties) in writing within 45 days of selling the first property. Then you must close on the replacement property within 180 days of your initial property sale.

Another investor BI spoke with attempted a 1031 exchange but ultimately abandoned it because he couldn't meet the 180-day deadline.

For White and Bolaños, the process involved a lot of paperwork, but was "pretty straightforward," said White, who worked with a 1031 exchange intermediary and a title company.

They said that meeting the two deadlines wasn't an issue. It helped that White was so in tune with the market as an agent and knew exactly what price point they needed to fulfill the equal or greater rule.

"Jeff was always looking at the market, so he knew what was available and out there," said Bolaños. "And as soon as we knew the spread of money that we had to spend, then it just made it that much easier."