If Real Estate Investment Is So Great, Why Doesn’t Everyone Do It?

June 15, 2009 – 2:28 pm

The Real Estate Investment Version of the Fear Factor Oh, that’s an easy one. I can answer that in one word. FEAR.

Real estate investment is a great way to change just about everything in your life, but it’s one of those things where doing it for the FIRST time is the toughest. In fact, the second is exponentially easier!

It’s fear folks, plain and simple! And why doesn’t make much sense to me. Consider that:

- “Everyone knows that the surest path from low income to millionaire is through real estate.” This appears to be a well-documented truism. I’ve seen a similar statement in some of the most prestigious financial resources on the planet.

- I rarely hear of someone losing it all from real estate. I might be living in la-la land, but for the most part I only hear of folks prospering from real estate investing. Sure, occasionally I hear of deal going bad or growing complicated, but not to the point of ruining folks.

- There are a lot of properties available at below market prices.

- Rental demand is strong and rents never go down!

So with all this common knowledge and raw opportunity out there, why isn’t everyone investing in real estate?

Here’s my theory.

* Real estate transactions are more involved than going to Wal-mart for a pair of undies, so that scares people. You have to learn a little bit. Mind you, this isn’t a lot of learning, but it is apparently enough to keep some on the sidelines.

* The numbers are big. I’ve seen folks nearly CEASE UP mentally talking about large amounts of money. Merely talking about a $100,000 mortgage causes some people break out in a sweat.

* Horror stories. Everyone’s heard about some scam, sink hole, meteor or something else on the fringes of believability that has happened somewhere at sometime. I mean, there is SOME risk involved.

* Fear of taking action! It’s hard to do something you’ve never done, and harder to do something you’ve never done before in a subject matter on which you aren’t an expert! People fear something, which makes facing that fear hard. What I’m referring to is what I call, “IT’S EASIER NOT TO.”

So what does one do to face fear and make a change in their life,

Ah, that’s just as easy as the last question. I can also answer that in one word…KNOWLEDGE.

Once properly armed with the knowledge they need, most folks can overcome their fears to the point of taking action.

So if you are contemplating taking your financial future into your own hands by investing in real estate, FOCUS on one thing for the next 3-6 months. Buy books or courses, go to real estate investing club meetings, visit websites and get on discussion groups. Let those things be your action steps for awhile. I suspect you’ll be ready to dive into the market with the knowledge you’ll gain.

I have a motto.

“Knowledge Always Precedes the Money.”

Antonio

www.wholesaledetroithouses.com

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Showing you the money! Here is what you can buy for $40,000 with positive cashflow!! ARV $110,000

May 14, 2009 – 12:35 pm
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Description
Beautiful 3 bedroom 1 bath brick home - beautiful kitchen - with a 1 car garage. This home is ready for you. The seller is very motivated.
Features
Bedrooms: 3
Bathrooms: 1
Location
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How to Ensure Tenants Look after Your Property

May 13, 2009 – 7:06 am

Measures to reduce risk concerns that will guarantee the well-being of your rental property.
The most troublesome aspect of being a landlord is tenants who damage your property, from complete trashing to total destruction, and even worse. There are plenty of horror stories around about what tenants can to a rental.

And, if you think finding a good tenant depends on luck, you couldn’t be more wrong, or else why don’t you work to ensure luck favours you, at least, in relation to the right choice of tenant. That means taking the following measures to reduce risk concerns that will guarantee the well-being of your rental property.

First, adopt Tenant Screening, which is the magic mantra of all successful, savvy landlords. How many landlords can confirm they carry out a complete tenant screening exercise, when looking for prospective tenants? Not many if gauged from the horror stories that float around about property damage! To get a good tenant, a landlord must be thoroughly professional about the entire tenant screening process, and verifying past landlord references is an essential part of every standard screening process. Call them and question them about prospective tenants.

Second, as an important part of the screening process, visit or at the very least, drive by the property the tenant intends to vacate, in order to assess its physical condition. The odds are your prospective tenant will treat your property in the same manner he / she treats their current rental home.

Third, photograph and videotape as in before and after advertisements, in the presence of the tenant after he / she has finished signing the lease. This evidence will ensure tenants look after your property as if it were their own. After all, if taken to court, the before and after evidence ensures law is on your side, no matter what argument the defendant might put up.

Fourth, before handing over your property prepare a complete Property Condition Report documenting the state of your property. Go over it with the tenant and once he / she has signed the inventory and condition checklist, he / she is on record, and you have another legal document, in addition to the lease.

Fifthly, before handing over possession, take a substantial sum as security deposit including the first month’s rent. With so much at stake, the tenant will ensure he / she looks after your property well.

As long as you follow the above steps, you will be able to find a responsible tenant to take good care of your property.

Antonio

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How to Build a Profitable Property Portfolio

May 6, 2009 – 4:21 pm

Ten top tips from property professionals to aid and abet all those interested in purchasing property and building a real estate portfolio for maximum profitability.

As more and more of us look for better ways to secure our financial future than investing into stocks and shares or relying on our government to provide for us in our old age, so interest in purchasing property as an investment asset is increasing. 

 

After all rarely do careful investments made into real estate lose a purchaser money, whereas all too often investments made into pensions companies or on the stock market fail to come to fruition - is it any wonder therefore that more people want to know how to build a profitable property portfolio?

 

Here are ten top tips that expert property investors abide by when looking for property that they can do up and resell or rent out for profit.  If you want to learn the tricks of the trade then read on…

 

1)            Speak to agents and do your own research, find out how much rent you think you can comfortably get from a given property type in a given location.  With that figure confirmed and in mind never pay over 100 times more than the monthly rental figure for a property.  I.e., if you’re sure a property will return you GBP 700 a month do not pay more than GBP 70,000 for that property and you will then achieve a good rental yield.

 

2)            Understand and harness the power of OPM – other people’s money!  Never over commit your own personal wealth to a pure investment property, instead use loans, mortgages and credit facilities and put down the smallest deposit possible.  Preserve your own wealth at all costs.

 

3)            Don’t invest in future potential, invest in real potential.  If an area is considered to be up and coming because in the future it will benefit from better infrastructure never bank on the investment being made…just know that if an area has already arrived and a particular property is already profitable, the future prospects for that property are already assured and make a far better bet than speculating to hopefully, maybe, potentially one day accumulate!

 

4)            Don’t make it personal – an investment is a pure profit making enterprise therefore don’t get emotionally attached to any particular property, remain as objective as possible.

 

5)            When Renting property let it unfurnished because you will have enough to cope with getting the rent out of tenants and keeping on top of property upkeep without having to locate someone to fix a leaking washing machine.

 

6)            Seriously reconsider plans to renovate and refurbish to sell on for profit.  Unless you’re a builder and an interior designer and you have friends in the trade to help you and get you materials at cost you will end up paying more than you intend to pay and eating away at your profits.  Yes money can be made from renovation property but it is far easier to make money from rental property!

 

7)            Learn all you can from the wealth of brilliant books that have been published by property investors and real estate millionaires.  You can bet your bottom dollar that all those who give seminars on making money from real estate are actually making their money from you attending their seminar – whereas if a successful property portfolio owner has committed their knowledge to print you cannot afford to overlook their wisdom.

 

8)             Do hands on research – get out on the streets, visit Renting agents and estate agents, look at property prices, rental rates, the popularity of a given area and only when you are certain about a location and a property type should you make a commitment to buy real estate.

 

9)            If you do your homework and keep revising your facts and figures you should be confident in your own decisions and not be swayed by others who might say your plans will never work.  You have to have dreams and ambitions and visualize all your hopes and hard work coming to fruition.  Keep your feet on the ground and don’t be swayed by the negativity and limitation of others.

 

10)          Be financially pessimistic.  Always underestimate your returns and overestimate your outgoings that way at best you’ll be spot on with your earnings and at best you’ll be rewarded for practical and careful budgeting.

 

 

 

 

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Real Estate Lingo for The Newbie

March 28, 2009 – 8:08 pm

In today’s real estate market there is a lot of uncertainty. The sub-prime mortgage crisis is the buzz word phrase that has a lot of people talking. One lesson that can be learned from this situation, is that it is so important for prospective homeowners to know what they are getting themselves into. Buying a home can be stressful, and overwhelming, but knowing what you are signing on for is paramount to securing an investment that will serve you well. A little education can go a long way. Below is a glossary of key terms associated with all things real estate. If you are a “newbie”, familiarize yourself with these as you begin your real estate search:

We’ll begin in the middle of the alphabet with “M” words, as “mortgages” seem to be the hot topic these days.

Mortgage: is a lien on the property that secures the Promise to repay a loan. A loan to finance the purchase of real estate, usually with specified payment periods and interest rates.

Mortgage broker: Is a professional who works for a firm that originates and processes loans for a number of lenders.

Mortgage banker: Is a company that originates loans and resells them to secondary mortgage lenders such as:Fannie Mae or Freddie Mac.”Who????”, you ask. Just, read on.

Fannie Mae: Is a sort of acronym which stands for Federal National Mortgage Association (FNMA); a federally-chartered enterprise owned by private stockholder. This enterprise purchases residential mortgages and converts them into securities for sale to investors;by purchasing mortgages, Fannie Mae supplies funds that lenders may loan to potential home buyers.

Freddie Mac: Is another acronym of sorts is the Federal Home Loan Mortgage Corporation (FHLM); a federally-chartered corporation that purchases residential mortgages, coverts them into securities,and sells them to investors, providing lenders with funds for new home buyers.

Mortgage insurance: Is a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.

ARM: Adjustable Rate Mortgage is a mortgage loan subject to changes in interest rates. When rates adjust, ARM monthly payments increase or decrease at intervals determined by the lender. The change in monthly -payment amount, however, is usually subject to a Cap. “What is Cap in this case?”, you ponder. Again, just read on…

Cap: Is a limit, such as that placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease.

Assumable mortgage: Is a mortgage that can be transferred from a seller to a buyer; once the loan is assumed by the buyer the seller is no longer responsible for repaying it; there may be a fee and/or a credit package involved in the transfer of an assumable mortgage.

Amortization: Is the repayment of a mortgage loan through monthly installments of principal and interest. The monthly payment amount is based on a schedule that will allow you to own your home at the end of a specific time period.

Appraisal: Is a document that gives an estimate of a property’s fair market value; an appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Balloon Mortgage: Is a mortgage that typically offers low rates for an initial period of time, after the said time period elapses, the balance is due or is refinanced by the borrower.

Bankruptcy: Is a federal law whereby a person’s assets are turned over to a trustee and used to pay off outstanding debts. This typically occurs when someone owes more than they have the ability to repay.

Building code: Is based on a set of agreed upon safety standards within a specific area. A building code is a regulation that determines the design,construction, and materials used in building.

Credit bureau score: a number representing the likelihood a borrower may default. This number is based upon credit history and is used to determine ability to qualify for a mortgage loan.

Debt-to-income ratio: a comparison of gross income to housing and non-housing expenses. With the FHA, the-monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income.

EEM: Is short for an Energy Efficient Mortgage. This is an FHA program that helps home buyers save money on utility bills by enabling them to finance the cost of adding energy efficiency features to a new or existing home as part of the home purchase

Fair Housing Act: Is a law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Home Inspection: Is an examination of the structure and mechanical systems to determine a home’s safety; makes the potential home buyer aware of any repairs that may be needed.

Interest rate: Is the amount of interest charged on a monthly loan payment. This is usually expressed as a percentage.

Lease purchase: This exits to assist low- to moderate-income home buyers in purchasing a home. It allows them to lease a home with an option to buy. The rent payment is made up of the monthly rental payment plus an additional amount that is credited to an account for use as a down payment.

Lien: Is a legal claim against property that must be satisfied When the property is sold

PITI: Principal, Interest, Taxes, and Insurance. These are the four elements of a monthly mortgage payment. The payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance goes into an escrow account to cover the fees when they are due.

Pre-qualify: This is when a lender informally determines the maximum amount an individual is eligible to borrow.

Pre-payment: This is a payment of the mortgage loan before the scheduled due date; maybe Subject to a prepayment penalty.

Principal: The amount borrowed from a lender. The principal doesn’t include interest or additional fees.

Real estate agent: Is an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

REALTOR ®: Is a real estate agent or broker who is a member of the NATIONAL ASSOCIATIONOF REALTORS, and its local and state associations.

Refinancing: Means paying off one loan by obtaining another. refinancing is generally done to secure better loan terms such as a lower interest rate on a loan.

Rehabilitation mortgage: Is a mortgage that covers the costs of rehabilitating (repairing or Improving) a property. Some rehabilitation mortgages, allow a borrower to roll the costs of rehabilitation and home purchase into one mortgage loan.

Sweat equity: Using your own labor to build or improve a property as part of the down payment

Title insurance: This is insurance that protects the lender against any claims that arise from arguments about ownership of the property;also available for home buyers.

Title search: Is a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Of course, there are many more terms and different types of mortgage situations to explore and educate yourself on. But, the above definitions are a good start toward becoming acquainted with the language, lingo and important concepts in real estate.
Antonio

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Four Reasons To Offer Seller Financing

March 14, 2009 – 2:02 am

Do you absolutely need to get cash for your property? If not, why not make it easier to buy and make more money with seller financing?

An example of seller financing: Years ago I bought a rental property, and nine months later sold it for 15% more, without fixing or improving a thing. The easy terms are what sold it. I took $1000 down, and I still get a payment every month, with 9% interest.

Four Reasons To Offer Seller Financing

 1. To get a higher price. As you can see from the example above, buyers pay for easy terms. From the buyers perspective, he gets a place for almost nothing, that the renters will pay for. He comes out okay even if he later sold it for less than he bought it for.

 2. To get a decent return on your money. The 9% I’m getting is nice, but the true return was much higher, since I also sold the property for 15% more than I paid, and I get 9% on the entire balance. In fact, for a great return without the headaches of being a landlord, you can simply buy low for cash and sell high with terms.

 3. To sell faster. Anytime you expand the potential market for a property, you increase the odds of selling it fast. Selling with easy terms definitely invites more buyers to look at your real estate.

 4. To sell difficult properties. If you have a property that is difficult to finance conventionally, offering seller financing may be the only way get it sold, and at a fair price.

Of course the ways you can sell are limited by mortgages and other loans. I owned the rental free and clear, which meant I could sell it any way I wanted. There are other ways to use seller financing though, even if you owe on the property. There are ways to do this safely too. Those topics are for another article.
Antonio

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Detroit Wholesale Rehabbers

March 9, 2009 – 8:50 pm

Detroit Wholesale Rehabbers / MLS LLC

 

Provides a turn-key solution assisting passive, absentee real estate investors looking to capitalize on the incredible discounts available in the greater Detroit area.

 

Background

·         The two principals, Tom and Antonio, have a combined 18 years experience buying, selling, rehabbing, and managing properties in this market

·         In addition to managing investor properties they also act as principals for their own portfolio, which includes investing in over 100 homes just this past year.

 

Infrastructure

·         Over years of rehabbing and managing homes for themselves and other clients they have systems in place that include:

o        Sourcing new inventory at significant discounts

o        Evaluating properties for clients with site visits, BPOs, title search

o        Advising clients on where to buy and where not to buy

o        Locating financing for acquisition and rehab of properties

o        Coordinating complete rehab of properties within 3-6 weeks

§         Includes providing clients photo updates throughout the construction process and a virtual tour upon completion

o        Executing a constant, ongoing marketing campaign that creates a constant flow of qualified buyers and tenants for each completed property

o        Partnering with local Non-Profit Groups and Government entities which also creates a constant flow of qualified end buyers and tenants

o        (more details below)

·         In addition to the two principals, they have

o        2 Project Managers

o        1 In-House Title Agent

o        4 Property Management Companies

o        12 Construction Crews

·         They have perfected these systems throughout the years and they can be scaled up and scaled down according to demand.

 

Non-Profit Partnerships

·         IF YOU WANT TO SELL HOMES:  MLS one of only two exclusive partners in Detroit with a Non-Profit Education Company that specializes in educating first time home buyers on what they need to qualify for financing, they assist them in repairing their credit if needed, and help them qualify for down-payment assistance and/or lease-purchase agreement

o        This organization assisted over 300 people and families buy homes in the last 18 months, most of them ended up in MLS homes.

 

·         IF YOU WANT TO RENT HOMES:  In addition to traditional tenants, there is currently a huge need in the area for “Transition Housing” – i.e. older foster children (ages 17-21) and half-way homes for those coming out of rehab, mental health, or detention facilities – where the rents are paid directly from the government through Section 8, Social Services (SSI) or other grants.

o        Because of the need in this area, zoning is much more flexible if you want to provide this type of housing which can dramatically increase cash flow.

§         For example, if you had a 3 BR house with a basement.  First, you would be allowed to put extra bedrooms in the basement provided there are windows in the room.  Second, you can put up to 2 people in each room and the government rate is $300 per person, which would mean a monthly cashflow for a 3 BR home where you added 3 BR’s in the basement, you could have a monthly gross income of $3600.

 

o        Because of the dramatic discounts being seen in the Detroit area, in most cases, your net cash flow after 12-18 months with any type of rental property usually yields a 100%+ return on a buyer’s invested capital.

 

OPPORTUNITY OVERVIEW

 

o        Because the Detroit market essentially crashed years ago due to massive job losses before the current national housing crisis hit, the market has likely reached bottom with current pricing sitting significantly below replacements costs.

 

o        With a significantly low acquisition costs per unit available through Worst Bank, especially with a partner in place with Non-Profit ties, a relatively small bulk purchase in this area creates two key advantages versus other markets:

o        The risk of losing money on a few assets will be spread across numerous assets

§         COMPARISON:  A $5 million purchase in California that will only equate to about 15 homes where one bad home purchase can significantly impact return.

o        Easy to cash flow properties in these price ranges if you have to move to a Plan B of renting units should they not sell – with the possibility of recouping your entire investment within 12-18 months.

§         COMPARISON:  If you have a $400,000 house in Texas with an HOA, average taxes, and utilities, creating a positive cashflow is a more difficult hurdle.

o        Overall ROI is likely to be considerably higher than in other areas because the acquisition costs are so low

§         COMPARISON:  If you buy a home in NJ for $250,000, you will likely not be able to sell it for $500,000 within 60-90 days because the initial discount will not be that low.  In addition, if you have to rent that same home, you will be luck to get a 10% cash on cash return within a year, much less a 100% return.

 

o        Most importantly, with MLS, we have a turn-key provider in place to navigate most of the usual pitfalls involved in these low value pools, such as:

o        Initial valuation prior to purchasing

o        Identifying underlying title issues prior to purchasing

o        Knowing where and where not to buy – staying out of war zones

o        Asset management and rehab infrastructure in place

o        Partnering with the right local organizations to line up qualified buyers and tenants to maximize return in minimal time.

o        Because of their experience, proven systems, and substantial infrastructure, MLS is a best-in class service provider for investors looking to minimize risk and maximize their returns in one of the most opportunistic markets in the country.

 

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Real Estate Investing Guide: The Difference Between Income Tax And Property Tax

February 24, 2009 – 12:09 pm

 

 

As the name suggests, income tax is tax that is deducted from your income. When tax is imposed on incomes of companies, then this may be called corporate tax, profit tax, or corporate income tax. Tax from the earnings of an individual is usually charged from his total income. In terms of real estate investing, income tax comes in when you are profiting or having income from your property. Property Tax

 

Just like in any other business, real estate investing would require you to pay different kinds of taxes. Two of which are income tax and property tax. To know the twists and turns of real estate investing, you should know what these taxes are, when do you pay them and their difference.

Income Tax

As the name suggests, income tax is tax that is deducted from your income. It is charged on the financial income of people, corporations or further legal entities. There are different systems of this kind of tax coupled with different degrees of incidence. Charging this kind of tax can be proportional, progressive or regressive.

When tax is imposed on incomes of companies, then this may be called corporate tax, profit tax, or corporate income tax. Tax from the earnings of an individual is usually charged from his total income. But in the case of corporations, the tax is usually charged from the net income of the corporation.

In terms of real estate investing, income tax comes in when you are profiting or having income from your property. For example, you have invested in a piece of land and leased it, then you would have to pay income tax from the income you get from your rentals.

This includes your gross income or all amounts that you received as rent. Rental income is considered to be any payment that you received for the use or the occupation of your property.
However, the positive side effect of charging income tax in real estate investing is that you can deduct different expenses of renting property from your total rental income. Generally, the rule is that you deduct your rental expenses during the year in which you pay them.

Expenses that you can deduct include advertising, cleaning and maintenance, utilities, insurance, taxes, interest points, commissions, tax return preparation fees, travel expenses, rental payments and expenses on local transportation.

If you are a taxpayer under cash basis, you usually report your rental income on your return in the same year that you constructively or actually received it. You fall under this category if you report income the same year that you receive it, despite the month you earned it.

Property Tax

In real estate investing, you also pay property tax. This is also known as millage tax. Property tax is said to be an ad-valorem tax, where a property owner pays depending on the value of the property being charged.

There are basically three different kinds of property. First is land, then your improvements to the land, such as buildings; and last but not the least, personality like manmade objects that are movable.

Real property, real estate and realty are all terms used to pertain to the combination of improvements and land. In real estate investing, the taxing authority usually requires or does an appraisal of the property’s monetary value, and then tax is assessed in ratio to the value.
If you really want to get into real estate investing, then you should know what form of property tax that is used in the municipality you are investing in.

One common mistake that real estate investors make is their confusion between special assessment and property tax. These are actually two different forms of taxation. One is an ad-valorem tax, which highly relies on the property’s fair market value for justification, while the other highly depends on a special enhancement that is called a benefit for its justification.

In real estate investing, the rate of your property tax usually comes in percentage form. To calculate your property tax, you multiply the assessed value of your property with the mill rate and then divide them by one thousand.

 

 

 

 

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Real Estate Rentals - Selling For More

February 18, 2009 – 1:24 am

Sell your real estate rentals for much more, by understanding capitalization rates.

Selling real estate rentals isn’t like selling houses. You can paint a house, and get a little more because it looks nice. Rental properties, especially larger ones, are  different, because they’re bought by investors, who look at income more than new paint. Raise the income, and you increase value to investors.

Time to learn about capitalization rates. If investors in your area expect a capitalization rate of .08 it means they want a net return (before loan payments and taxes) of 8% on the purchase price. So if your three-plex generates $12,000 net income annually, they’ll value it around $150,000 ($12,000 divided by .08). If you can make it generate $16,000, you make it worth $200,000.

More Income From Real Estate Rentals

Raising rents is the obvious way to boost income, if you can justify it. See what similar units are renting for. If your units are $60 below the going rate, you can raise the rents and not lose your renters. Increasing the rent $60 for three apartments means $2160 more net income annually. With a .08 cap rate, you just added $27,000 to the value of your property.

There are other ways to raise rents. Maybe your tenants will agree to $30 more per month if you have a carport built. That’s $1080 more net income annually, meaning roughly $13,500 more value added to your property. ($30 x 3 units x 12 months = $1080 divided by a .08 cap rate = $13,500) If you can build that carport for $4,000, that’s a good return on investment right? What else do they want?

Higher rent isn’t the only way to get more income. Storage sheds can be rented to tenants or you could put in a coin-operated washer and dryer. With a larger income property, you could install pop machines.

Reduce Expenses Of Real Estate Rentals

Could you add insulation to reduce the heating costs? If you’re paying $80/month for lawn care, will one of the tenants do it for $40? Could you buy cheaper insurance? Any way you can reduce expenses raises net income (unless it scares away tenants). A new $4,000 furnace that saves $800/year on heating costs means you just turned $4,000 into a $10,000 higher sales price.

This isn’t an exact science, and of course appearance and other factors matter. Increasing that net, though, is the surest way to get more for your rental properties. Make the changes at least several months before you try to sell the property (a year before, if possible). Also, learn how do the math - it really does matter with real estate rentals.

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Section 1031 Exchanges for Real Estate Investors

December 21, 2008 – 8:13 pm

Summary of the tax rules for an investor to sell real estate and replace with like kind property under Section 1031 of the Internal Revenue Code.

When a real estate investor sells real estate, a capital gains tax is recognized, along with a tax on deprecation recapture. The regular capital gains tax, deprecation recapture, and any applicable state tax can often result in a tax liability in the 20% to 25% range for the sale of real estate. (If the real estate has been held for less than 12 months, all of the gain will be taxed at much higher short term capital gains rates.)

A Section 1031 exchange, named for the applicable section of the Internal Revenue Code (also known as a Starker Exchange, Tax Free Exchange, or Like-Kind exchange), allows an investor to defer all tax on the sale of real estate if the real estate is replaced with other real estate pursuant to a detailed set of rules.

The replacement property must be identified within 45 days of the sale of the relinquished property. (1) The replacement property must be purchased within 180 days of the sale of the relinquished property. (2) The replacement property must have a purchase price at least as great as the relinquished property, otherwise some tax will be recognized. (3) All of the cash proceeds from the sale of the relinquished property, less any debt repayment and expenses of the sale, must be reinvested in the replacement property. (4) All of the cash proceeds from the sale of the relinquished property must be held by a Qualified Intermediary, which is a person or institution with whom the investor has not recently conducted other business. The investor must not have any access to the cash while it is being held. (5) The titleholder of the relinquished property must be the same as the purchaser of the replacement property. (6) The sale or purchase of a partnership interest does not qualify for a Section 1031 exchange, except under a few limited set of circumstances. (7) The relinquished property cannot have been classified as inventory, such as condominiums built by the investor, or lots in a subdivision that was subdivided by the investor.

If these rules are followed, real estate investors can sell current real estate holdings and replace them with other properties. A Section 1031 transaction is an excellent way for a retiring real estate investor to convert actively managed properties into passive properties, such as triple net leased properties.

Antonio Echols

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