February 27th, 2017 by Paul
Many property owners can realize far greater cash flow on appreciated equity in rental properties that they own. Owners often make the mistake of calculating return on their investment by dividing current rental income by the original investment they made in the property.
As an example, suppose you put a 20% down-payment of $40,000 to buy a rental home for $200,000 with a loan of $160,000 in 1990. You are now receiving $4,000 net income annually after debt service and other expenses. This is equivalent of a 10% return on the original investment of $40,000 which may make you feel good until you consider the following:
During the 28 years you have owned the property, the property has appreciated from $200,000 to $800,000 and the equity in the property has increased from $40,000 to $640,000. Your $4,000 return divided by $640,000 of the current appreciated equity is less than 1% instead of 10%. Furthermore, you have taken all your depreciation benefits and must now pay more taxes on your annual rental income. What should you do?
It may be far better to sell this property and invest the proceeds of $640,000 via a 1031 Exchange (actual proceeds may be less due selling cost etc.) as down-payment to buy one or more properties that can produce returns of 5% to 7% or higher on all of your appreciated equity. If your replacement property has income of 6% after expenses (average return for DSTs), you would realize ~$38,400 of annual income compared to $4,000 currently (6% X $640,000 = $38,400). And you would have fresh depreciation to write off to keep most of that money in your pocket!
A question an investor may ask is, what about the capital gains and applicable taxes? That is where 1031 Exchange comes in to play. IRS allows investors to re-invest the proceeds from sale of an income property and reinvest into another like-kind exchange and defer 100% of applicable taxes
We offer a wide range of wholly owned properties or fractional ownership interest in for investors to do a 1031 Exchange with minimum investment as low as $100,000 with cash flow of 5% to 7%+ paid monthly.
Please contact us at 877 375-3523 for more information.