Industry veteran argues that capital preservation, not chasing yields, should drive 1031 exchange decisions in today’s market.
The pursuit of aggressive yields and deal volume has created dangerous risks for real estate investors, particularly in the 1031 exchange space, according to a senior industry executive who argues for a fundamental shift in how deals are evaluated.
Mike Auerbach, who recently joined Bonaventure to lead their tax-advantaged investment platform, says the industry’s focus on marketing upside potential often overshadows crucial risk considerations.
“We all romanticize about the upside, but what we’re really trying to do is limit downside risk and preserve capital. And I don’t think a lot of people really lead with that,” Auerbach says.
Recent market conditions have exposed the dangers of prioritizing yields over risk management, according to Auerbach. “You’re really starting to see the fallout from a sponsor perspective, of buying bad deals in ’21 and ’22 and now their investors have suffered,” he notes.
This pattern has created what Auerbach describes as “deal fatigue” among investors wondering when market conditions will bottom out. While he sees current timing as potentially advantageous for new investments, he emphasizes the need for careful evaluation rather than rushing to deploy capital.
“You never want to be that group or in that market that catches the falling knife,” Auerbach warns. “It’s been a tough market to navigate the last couple of years from a deal perspective.”
Auerbach argues that preserving investor capital should be the primary focus, even if that means passing on deals with apparently attractive returns.
“It takes a lot of people a lot of time to build up that capital, and as stewards of that capital we are responsible for it,” he explains. This perspective shapes how his firm approaches investment opportunities, often leading them to be more conservative than competitors.
“In competitive situations, there are groups with higher yields that seem like better deals,” Auerbach notes. “But ultimately, that’s where you get in trouble if one lever goes down, because they haven’t really assessed the risks of the deal.”
Current market conditions make capital preservation more important than ever, Auerbach emphasizes. Interest rate volatility continues to create unpredictable borrowing costs, while political headwinds add layers of policy uncertainty that can derail long-term planning. At the same time, the market still lacks stability, and complex debt structures have made financing more difficult to secure and evaluate. Together, these factors underscore the need for a cautious, preservation-first investment strategy.
“I think we need more stability, more normalcy, so people can make more decisions,” he says.
Rather than chasing the highest projected returns, Auerbach urges investors to adopt a holistic evaluation framework. This approach prioritizes sponsor co-investment levels to ensure alignment of interests, a careful review of debt structure and associated risks, and robust capital preservation strategies that can weather market shifts. Equally important are the sponsor’s operational expertise and a proven track record across multiple market cycles, which provide critical insight into how they perform under both favorable and challenging conditions.
While Auerbach remains optimistic about market opportunities, he emphasizes that success requires discipline and patience. “Being able to create a repeatable, scalable product that preserves capital is the utmost importance,” he argues.
This may mean fewer deals and lower projected returns, but Auerbach believes this approach better serves investors’ long-term interests. As he puts it: “Don’t let the tax tail wag the dog. It’s better to pay the tax than go into something that you don’t understand.”
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