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return on equity.
What can that higher return on leveraged equity do for me? If I had $200,000 in my checking account at that time, I could have bought that house all-cash, and would have $1.2 million today. If, however, I bought 5 houses with separate $40,000 down payments, I would have $6 million today – all from the power of leverage.
HOW LEVERAGE CAN HELP YOU – HIGHER INCOME POTENTIAL
A second excellent benefit of using debt financing is the potential for positive leverage. If I buy some apartments at a 5% CAP, that estimates my income –ifIbuyitALL-CASH-at5%. IfIcanbuythat property with 50% leverage and a 4% interest rate, that means I’m earning 5% on the portion that the bank “bought” and that I only need to pay them 4%. I am earning a 1% “spread” on the bank’s money, so this can make my income look something like 5.5%.
HOW LEVERAGE CAN HELP YOU – MORE DEPRECIATION POTENTIAL
My investors are buying new property through 1031 Exchanges. In doing so, they will avoid paying their capital gains and accumulated depreciation taxes by “carrying forward” their tax basis to a new property. This means that they keep their old depreciation schedule – unless they use leverage.
Financial advisory
Perhaps you own a, (for example), property worth $1 million. During your long ownership of this property, you have exhausted all your depreciation benefits. By using a moderate amount of leverage, such as 50%, to buy your replacement property, we could then buy you a $2 million asset. The IRS will call this $1 million of additional property “new basis” that you can start depreciating immediately over 27 1⁄2 years. (For residential properties.) This will defer (perhaps forever) income taxes on $36,363 of income every year. ($1,000,000/27.5 = $36,363).
HOW LEVERAGE CAN HURT YOU
The presence of leverage, of course, brings foreclosure risk as well. When you borrow money, you will need to send the bank their payments. If your income on the property goes down, that could jeopardize your ability to make those payments. If you miss enough of those payments, the bank will take the property from you.
I think that, through the use of moderate leverage and careful evaluation of prospective purchases, we can manage this foreclosure risk. I also realize that it is certainly possible to suffer catastrophic losses with unleveraged properties as well. With this in mind, I think the added risk of leverage can certainly be worth the potential rewards.
Are you using your equity to buy assets for future growth? If you’d like to discuss, my office number is (877) 313-1868.
Securities offered through Emerson Equity LLC, member FINRA/SIPC. Emerson Equity LLC and Specialized Wealth Management are not affiliated. All investing involves risk. Always discuss potential investments with your tax and/or investment professional prior to investing. Hypothetical scenarios herein are provided to illustrate mathematical principals only, and they are not a promise of performance. There can be no assurance that any investment strategy will achieve its objectives.
WANT A REPLACEMENT PROPERTY WITHOUT ACTIVE MANAGEMENT?
Recent offerings, located nationwide, have included:
• Office • Apartments • Triple Net • Retail • Energy Royalties
I have completed over four hundred 1031 exchanges for investors. $200,000+ equity required.
Learn more about our investment programs at www.ChrisMiller1031.com
Contact Chris Miller, MBA for a free consultation
877-313-1868
Chris@SpecializedWealth.com 2522 Chambers Rd., Suite 100 Tustin, CA 92780
Investing in real estate, with or without use of a 1031 exchange, carries the risk of losing your principal, income or tax benefits. Additionally, the IRS has issued inflexible guidelines for completing tax-deferred 1031 exchanges. Failure to follow these guidelines could lead to a loss of tax benefits. 1031 Exchanges can involve significant fees. This does not constitute an offer to buy or sell any security. Investments may be illiquid in nature and those seeking to dispose of their investments early may be unable to do so. Securities offered through Emerson Equity LLC. Member FINRA/SIPC, MSRB registered. Advisory services offered through Emerson Equity LLC an SEC registered investment advisory. Emerson Equity LLC and Specialized Wealth Management are unaffiliated.
AMM1/6 APARTMENT MANAGEMENT MAGAZINE - SEPTEMBER 2021 73