Opportunity Costs and the 1031 Exchange option

Opportunity Costs: The unexpected costs of property ownership!

You've done quite well with your property...perhaps now is the time to cash in your midsize property for a larger one. Holding on to a property can actually limit your ability to go after a bigger property.

The occupancy is high, the debt service is low, maintenance is stable...did you know there's an opportunity costs associated with owning an apartment property?

There’s a phenomenal tax incentive available in a 1031 Exchange, which allows you to take the gain from the sale of a property and roll it over, tax-deferred, into another property.

When you sell the property, the original deferred gain, plus any additional gain since the purchase of the replacement, is subject to tax. Unless, that is, you opt to roll-over that gain into another like-kind property.

One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. Be careful! You, nor anyone who has worked for you (attorney, broker, etc) in these capacities (for the past 3 years), can act as your facilitator!

“Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free." (Source: IRS.gov FS-2008-18, February 2008)

Investing in Real Estate Tip - Leverage

I believe that people have an innate desire to own something solid and substantial that they can actually touch.[.1] Real estate is great for this type of investor.[.2] It is one of a small group of investments where an investor has the potential to impact the profitability through good management, hard work and smart negotiating. As you look at all of the types of real estate available for investment, I believe that Multi-Tenant investment real estate deserves a special look. It has the unique ability of allowing you to leverage a group of tenants with a single transaction. A single apartment complex may contain from as few as 4 units to several hundred apartments. Each one can be purchased with a single contract and is treated as a single transaction.

Leverage, as a term used in real estate investment or in fact any investment, allows you to multiply the return on the money that you have invested to get even greater returns. "Give me a lever and a place to put it, and I can move the world". [.3] A great quote! This is truly the power of using leverage in real estate. You can invest a small amount of capital (say 20% of the total purchase price) and see huge effective returns on that capital on an annual basis. This is what we are talking about when we talk about leverage in a real estate transaction.[see my video below!]

---

[.1] There is plenty of competition, be ahead of others by having a good relationship with your local bank and an experienced realtor.

[.2] There are no "no risk" investments, even if you can touch this. Make sure you've done your homework.
[.3]Archimedes of Syracuse

Getting Started in Investing with Confidence

Confidence is the key critical factor to be successful because without it many investors would not move beyond their first initial property.

If that first property turns into an “alligator” and cost them a ton of money, they would have sold it at a loss and never purchased another property. It takes lots of courage to begin an investment and it is this that needs to also sustain you when things are tough. Courage to sustain you when you get calls for unplanned expenses. Courage needs to sustain you when you must evict tenants for non-payment of rent, illegal activities, etc. And finally, courage needs to sustain you to complete your business plan as well as facing the true expenses / income numbers that demonstrate how your property is performing.

Confidence keeps you making the tough phone calls when you would rather stick your head in the sand and hope that the problems go away. The confidence allows you to hold your head high and celebrate when things are going well and you know that you have faced every challenge head on.

This reminds me of a familiar passage: 1 Corinthians 9:24-27a.

"Don’t you realize that in a race everyone runs, but only one person gets the prize? So run to win! All athletes are disciplined in their training. They do it to win a prize that will fade away, but we do it for an eternal prize. So I run with purpose in every step. I am not just shadowboxing. I discipline my body like an athlete, training it to do what it should."

---

THE SHEEHY TEAM: Empowering Investors To Do More Deals!

Laying the Groundwork - Investing in Real Estate

“It takes a bigger foundation for a courthouse than it does for an outhouse”. I can remember reciting this phrase when people would make fun of size of my feet. There is a similar principle: a large building needs a big foundation in order to support the structure, similarly you need to build a strong "investment" foundation as preparation to build a strong real estate investment portfolio.

Therefore, you must begin your investments by creating a strong financial foundation that will carry you through your investment deals.

Here are some of the basics:

The 80% rule. It is imperative that you maintain a good credit score and the easiest way I have found to do this is to live beneath your means. In general you should live on 80% (or less) of your take home pay. If you have overspent and are unable to live at that level, you have two options. One, begin spending less immediately (pay off debt, etc) or two you can make more money. Professionals in all fields who excel at the basics are successful in athletics and investing and in life. Being diligent with your finances and saving a portion of each paycheck is simply a pre-requisite to successful living--throughout your life.

Keep Your Day Job: In the initial stages of investing in real estate it is nearly impossible to live on the excess cash flow. Property expenses and debt service take up nearly everything that you have coming in every month. Additionally, if you take money out every month it is difficult to build up the cash needed for the occasions when capital repairs or improvements are needed on the property. The benefit in the early years is that you are building equity in your investment that will allow you to live on in the later years. Remember the child’s fable of the tortoise and the hare. The hare-type person wants to take money out of his investment immediately, while the tortoise-type person is content to wait and roll all of the cash into the property each month. The tortoise is the one that crosses the finish line first in the fable and the tortoise-type in real estate investing

Cash Is King: Banks love to see a borrower with cash on hand. My recommendation is that you build up $100K (or more) of cash as soon as possible and have it on hand with your local bank. It seems like a lot of money but it is a great way to rapidly get a banker working for you in completing your deals. In most of your deals you should not need to leverage this cash toward individual transactions.