Real Estate Investors: A Case Study In Turbo Charging Your Journey To Retirement

Posted @ 10:10 pm - Filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Retirement, Real Estate Markets, Depreciation, Capital Growth, Tax Shelter, Texas

Setting up a Purposeful Plan is not a walk in the park — not for us and not for our clients. It takes serious work on both sides. Between podcasts, case studies, white papers, and what I do here on a daily basis, you can pretty much ascertain how much is involved. Being serious isn’t an option, it’s a necessity.

Today let’s explore a potential case study. I’m using numbers obtained by a very experienced and competent pro in the midwest.

We’ll not dwell on the minutia, but instead take a broad view of the before and after. Let’s use an investor’s income property in an area which is probably not gonna grow much, and where the future is fine, but not nearly as promising as solid growth regions we’re now recommending. I say it won’t grow much since it’s averaged less than 2½% a year for what seems like forever — especially to the long suffering investor.

Here’s what we’re working with: Small income property worth around $250,000 — loan balance of around $135,000 — sales costs of around $20,000 or so.

Let’s get started.

She’s owned this property for well over a decade, and though her capital has certainly grown, it’s not been, relatively speaking, impressive by any measurement. An annual appreciation rate of less than 2½% speaks for itself.

Here’s a synopsis of this investor’s status quo.

Current cash flow is just under $3,500 annually

Net tradable equity after sale — $95,000

Depreciation (read: tax shelter) currently $4,500/yr

Currently managed by the owner

Here’s what I’ve recommended as the destination for her capital. This is a tax deferred exchange. Her tradable equity can almost handle the acquisition of four Texas duplexes. She is excited and says she’ll gladly add the few thousand extra needed to close. This will be less than $10,000 — well within her budget. It also leaves plenty for her Sominex Account (read: cash reserves)

She closes the tax deferred exchange with the following changes in her normal routine. This includes management, tax shelter, capital growth rate, and flexibility.

Her increase in tax shelter is $20-25,000/yr depending upon aggressiveness

Her increased tax savings/yr will approximate $6-7,500/yr

The properties are all brand spankin’ new — in better quality locations

She’s now free of the ‘tenant trouble call’ 11:30 Sunday nights

Her capital growth rate has been turbo charged — increased by a factor of at least 8-10

With three properties now she’s added flexibility to her menu for future opportunities

She’s rescued her virtually dead equity and reinvigorated her capital growth rate while divorcing herself from the need to manage the units herself. Her after tax cash flow is increased significantly, from what she left locally.

In the business this is what we call a no brainer.

If she only realizes a 5% annual appreciation for say, five years, here’s where she’ll be, give or take.

Her gross capital will have grown by about $225,000 — compared to less than $35,000 if she’d not executed the tax deferred exchange. That number of course, is the main reason she made the move. Hence the use of the phrase — no brainer.

If this sounds like you, OR it could if you invested locally instead of one of the growth regions, chase me down and make me explain how you can make it happen. You can, you know.

There’s all sorts of ways you can contact me — phone — email — my carrier pigeon is brown and white knows how to find me wherever and whenever. Pick your method and let’s get you going.

You gotta make the decision to retire well with a larger retirement income than you thought possible.

We’ll take it from there — along with a killer Purposeful Plan.

This entry was posted on Tuesday, April 29th, 2008 at 10:10 pm and is filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Retirement, Real Estate Markets, Depreciation, Capital Growth, Tax Shelter, Texas. 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.