This story is true. The names are changed and the figures have been rounded to more clearly show how this family benefited.
Last year, Howard and Irene were considering their situation:
About 20 years earlier they bought some rentals. Many things have changed, but in spite of the surprises, the units have always sheltered taxable income and their value more than doubled. The remaining debt was less than 25 percent of the property value.
Cash flow was substantial. The depreciation and tax shelter was almost gone. They expected that within 30 years, they will both pass and their adult kids would inherit the property. Their finances were good and they knew it.
They achieved superior success because they periodically checked the options. Here were two alternatives that were not good enough:
1. Howard and Irene seriously considered just letting things ride. They loved their kids, but the next generation did not yet have Howard and Irene’s investment maturity.
2. They considered refinancing and buying more. They decided that if they would make any change, it would be better to get a different property.
They sold their existing building and bought a more valuable one; they did a “tax deferred” (1031) exchange. It was the best way to improve the family position. The old apartments had more than doubled, but property taxes were only up about 60 percent. Candidly, the property tax almost kept them from looking for better options. The good can be the enemy of the best.
Their trusted broker had excellent 1031 experience. He sold their units for a good price and helped them find a more valuable trade up, “upleg”.
The low interest rates and increased tax shelter more than offset the property tax increase. Their new loan was conservative in relation to value. The more valuable building gave them more depreciation and more cash flow.
Now, their cash flow is better than with the original building. That seems hard to believe, but it is true. The new loan is at a lower rate than their old loan. More rent checks, lower interest and more depreciation overwhelm the higher property tax. The numbers confirm it. Since they own more units, inflation will grow more value and provide a more substantial legacy.
“Every important thing we ever did, from raising kids to owning income property, had its challenges. Sure it was hard. We picked activities that were really significant and then completed them,” Howard said.
“Twenty years ago, our best friends sold their rentals. They regret it. Our better cash flow will help with our aging parents and can give our adult children a head start. When we are gone, our kids, grandchildren and our charities will be better off because we traded up.”
They had it good and found a way to make it even better.
For more than 30 years, ACI Apartments has helped clients build wealth through apartments. Allow us to boost your investments success. To learn more about whether this strategy will work for you or to receive the one page of numbers behind this case study, call (619) 299-3000 or email firstname.lastname@example.org
-Submitted by Terry Moore, CCIM, ACI Apartments.