A real estate investor from California has several small rental properties (8), all local.
Location quality is suspect, as they’re in… you know… California.
Opinions vary on that topic. 8% sales/closing costs generates a net equity of around $435,000, give or take. That includes one rental in which he used to live that’s now under water.
He’s a couple years from 40 years old, so time is one of his A-List buddies. Household income is below $100,000 so they (married) can take any and all depreciation available, up to $25,000 yearly.
The End Game Agenda.
As in virtually all plans, maximum spendable retirement income is the ultimate goal.
One of the tenets upon which I build a Purposeful Plan is multiple sources of income, if possible. Furthermore, I very much prefer those sources to be independent of each other. By that I mean in the sense of no reliance on one source in order to make another successful.
Still, using what I’ve come to call Strategic Synergism, the investor definitely wants each source to be able to contribute one and/or both of the following benefits to the overall plan.
1) Speeding up the timeline, enabling the investor to retire earlier than originally planned.
2) Arriving at the end game goal with more spendable retirement income.
‘Course, Captain Obvious mutters under his breath that they all should do both. Well, sure, I get that.
But it doesn’t always work out that way. Since this couple is still relatively young, and not huge wage earners, their great start in real estate will act as their initial foundation.
I’ll not be able to provide in-depth numbers here, as time hasn’t been my friend this week. However, their $435,000 net equity will be exchanged, tax deferred, into five small income properties (duplexes) in another state.
The cash flow will be roughly $5,000 a year less than what he has now. The reason for that is that he’s significantly improving the location quality with his new acquisitions. Also, they’re brand new, which will benefit his bottom line for the first 5-10 years, depending on his relationship with Uncle Murphy.
Ironically this trade will increase total property value and debt a modest amount. He’s improving his status quo in the following ways:
1. Going from California to Texas is akin to trading your beat up Yugo for a new Beemer. Texas loves business, investment capital, and investors to death. The state has no personal income tax, and it was just declared the best state in the country to do business. (I can personally attest to that fact.) There’re many more reasons to love the move there, but those are the major points.
2. The repair ‘n maintenance costs will be far lower as the acquired properties are very well built, and brand new.
3. The quality of tenant will measurably improve. High quality location + state of the art brand new works virtually every time it’s tried. Higher quality tenants generally bring with them lower repair ‘n maintenance costs, all else being equal.
4. Down the road, when debt is eliminated, the net operating income of the Texas real estate will be appreciably higher than what he left. In fact, experience tells us that it will be impressively so.
5. Given that people and businesses are leaving California, while the opposite is happening in Texas, the potential for both increased value, NOI, and buyer demand are laughably higher in the latter.
The Next Step.
That’s phase one which will take much effort to execute, but will also be well worth it.
Phase two will involve a couple half steps. First, he’ll pay off one of the duplexes completely. This will then allow him to pull out cash in a refi. The tax free cash from the refi will then be used, in full or in part to establish a second income source, discounted notes, secured by real estate, in first position.
My initial estimate is that it’ll take ‘em roughly 6-8 years or so to pay off that first property. When note investing begins is when the real party starts as it relates to his plan.
We’ll get into the weeds on that phase next week.
Be sure to leave your comments below!