Please Evaluate My Plan

[Michael Swan]

A little background first. In 2011-2012 purchased with 20% down loans 10 condos in sunny San Diego. Averaging about $48,000.00 cash flow. Life was good. Then I calculated my return on Equity and noticed San Diego property values escalating rapidly in about the end of 2014. The return on equity was barely 3%. Sooooooo, decided after educating myself, decided to begin 1031 exchange these 2 and 3 br condos in for Apartment complexes in North East Ohio. I traded in one Condo in June of 2015, that was cash flowing $4,000 a year for a ten unit apartment complex in Cleveland Heights, Ohio. Back up a little and the end of 2014 I started buying with cash, duplexes and half duplexes, along with one 4bd/1bath single family in Euclid Ohio that cash flows $3,200 a month presently on a $240,000 investment. I am using the same property manager for the apartment complexes too. They are a small mom and pop property management company. They are parent's of a colleague of mine and I trust them. So, back to the 10 unit in Cleveland Heights, Ohio. I only put down $30,000 on the property in San Diego, that was cash flowing about $4000.00 a year. I bought that property for $125,000 and sold it for $215,000 in Feb of 2015, two years after purchase. The Cleveland Heights 10 unit, after 3 months of repositioning is break even and by Jan I expect it to cash flow at $15,000 for the next 12 months and then with rental increases, cash flow will increases to $20,000. We purchased this property for 420,000. We only put down about $100,000. Then, in August we traded in a condo that we purchased for $120,000 in 2012, that was cash flowing $4500.00 a year for a 15 unit in Painesville, Ohio. We expect after 3-6 months of repositioning to be at $25,000 cash flow. Then, since most tenants are on month to month leases and 100 dollars under market rents, that NOI will rise dramatically. This property we purchased for $592,250.00. Now, presently we are exchanging a property here in San Diego that we purchased for $152,000 in 2013 and just sold for $270,000 for a $500,000 8 unit in a really nice area of Shaker Heights, Ohio. Rents are significantly higher and the tenants earn a lot more money, practically double what Cleveland Heights and Painesville tenants earns. We are signing final loan docs on Oct 3rd. Nice cash flow almost right out of the box. Just have to rent out old owner's unit and one vacancy. Of course at market rent of $975.00 for a 2bed/1bath. Right now all units are at an average of $890.00. Finally, we are selling another property and will 1031 too. My goal is to eventually have $1,000,000.00 in cash flow each year. If you have been where I am going, your suggestions would be greatly appreciated.

Swanny

[Dave Foster]

@Michael Swan, @Dan Schwartz is correct.  You're depreciation does not start over at the completion of the 1031.  Your basis is carried over and continues in the next property.  So there is a finite benefit on depreciation of your original basis.  However, you do get a second clock on additional basis that you buy over and above what you sell.  So one goal as you defer defer defer could be to monitor your tax future and buy additional basis in a 1031 if you anticipate needing the tax break (which will reduce cash thrown off due to additional debt) or leaving only the original basis in play if you want less debt and more cash flow.  Both are appropriate at different times.  The biggest key is that the tax is completely deferred even once depreciation is exhausted, until you sell without a 1031, die, or start to convert property to your primary residences over time.