Everything’s Free & Clear — Rentals Included — Yet Still Taking Home 25-35% of What’s Easily Attainable

Posted @ 10:21 am - Filed under 1031 Exchanges, Purposeful Planning, Cash Flow, Retirement Income, Depreciation

How can that be? Easier than you might think — a lot easier.

Josh and I are currently studying one our San Diego data bases. This one isn’t made up of investors we know, but of those we’d like to know.

Earlier this week I noticed a woman and her holdings that really caught me eye. She owned everything in her name only. There were three homes plus her personal residence.

All were free and clear.

Easy Street, right? Let’s break it down, and take a closer look. As you go through this, please keep the concept of Purposeful Planning in mind. (On the right hand column of this blog are two podcasts on the subject.)

The rental homes are worth, more or less, $500,000 apiece. Her personal residence is located in a neighborhood where a 1,500 square foot fixer runs around $800,000 or so. Hers is worth at least a million if not $1.5MIL. Don’t forget, it too is free and clear of any debt.

Let’s not get bogged down in a bunch of number crunching. Her net income from the three rentals is, at the absolute best, $4,000 a month — but I doubt it. They’re old, and have had tenants in them for the last 20 years. Still, we’ll use that figure.

Her home was purchased after California’s now famous Prop 13 property tax law. (actually a constitutional amendment, as the authors didn’t trust politicians as far as they could throw ‘em) The lowest her tax bill could possibly be, annually, is about $13,000. It’s probably a few thousand more, but let’s not quibble.

Using properties our clients’ have purchased this year, or that are available now, we did some quick comparative analysis on this woman’s position.

First, let’s flesh out her financial status quo in San Diego.

Her rentals have been owned, according to public records, since 1985. This is significant because it means she’s totally out of depreciation (read: tax shelter) due to the depreciation schedules of that time. Result? All of her net income from the rentals are taxable. So that $4,000 a month we talked about? Not so fast, after-tax breath!

Her income is now significantly lower than the $48,000 we originally thought. It doesn’t matter how much, but when both Fed and State taxes are subtracted, she’s not happy, trust me.

Now let’s look at what we’d ask her to consider.

Execute tax deferred (1031) exchanges on all three rentals. This would result in approximate tradable capital of just under $1.4 million. Including the all costs of acquisition, she’d be comfortably able to trade into around $5 million of income properties located in much more cash flow oriented regions.

We’d want her financing to be relatively long term, and fixed. Her depreciation (tax shelter) will be revived to miraculous levels. Her net income will easily be between $125-145,000 annually. Most, but probably all of this income will be tax sheltered — far beyond her life expectancy.

In other words?

She will have at least quadrupled her after-tax income — for the rest of her life.

She’ll be able to do things she’s not
been able to afford for years. She can go to Europe, or an exotic island, or replace her old car — easily.

BawldGuy Axiom: Free and clear is almost always a false friend. It’s akin to burying your money in a Folger’s can in the backyard.

This woman is a few months away from a massive improvement in the financial lifestyle of her Golden Years.

Going from $48,000 a year before having to pay both real estate ($13,000) and income taxes, to $10,000 a month or more — after all income taxes — is a paradigm shift in anyone’s financial life. To be able to make that change in what amounts to a few months?

Incredible — and imminently doable.

There are literally many thousands of people in very similar circumstances, who are living a life less abundant than is easily possible for them. They can’t really be blamed either.

Why?

BawldGuy Axiom #2: We don’t know what we don’t know.

This woman can’t get the answer to a question she doesn’t know to ask.

Being able to have such a positive impact on folks’ lives, is the high that keeps on giving. It’s why I love what I do. Receiving postcards from Italy sent by retired clients? A cool bonus.

This entry was posted on Friday, September 21st, 2007 at 10:21 am and is filed under 1031 Exchanges, Purposeful Planning, Cash Flow, Retirement Income, Depreciation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.