How are your current real estate investments going here in Kansas City? Or anywhere, for that matter. Do you even know? You should.
There has been a lot of talk lately about moving money out of real estate investment properties and back in to the stock market. And for many people this could be a good idea. But for most, I doubt it. Assuming you purchased the property using good, solid market financials.
What you need to do is measure where you are and where you should/could be. If you own rental income property here in the Greater Kansas City area you should know that if you have owned that rental for more than 7 years you are probably losing a lot of money. From this point forward you are re-buying a income producer that you never would have purchased in the first place. Here are two of the many reasons why;
- You are no longer maximizing your leverage
- If you are properly bifurcating your depreciation you have already exhausted your personal property portion (with the exception of new personal property added)
Example Home: Let's take them step by step. We'll use a $175,000 duplex located in Johnson County, Kansas. Rents on both sides are $750/mo. And for our purposes the property was purchased 7 years ago for $122,000 using a conventional mortgage with an 80% ltv. Interest rate was a modest 7%.
Leverage
The great thing about leverage is proper utilization. In the Kansas City investment market you can leverage yourself into a quality income property for as little as 10% down on an interest only loan and 20% down on a conventional mortgage.
Using our example above our original mortgage balance was $97,600. And that balance has been reduced to $88,960. Becuase of 5% growth per year (on average) our home's sales value is now sitting at $175,000.
- When we purchased the home we had an 80% ltv
- We are currently sitting at 50.8% ltv
Let me ask you a question: Is it better to continue to have one $175,000 duplex grow at 5% a year or to take that equity out in an IRC 1031 exchange, pay the real estate commission, and reinvest the money into two $185,000 duplexes growing at 5% a year? Multiply the difference out until your retirement year and tell me how much money you'll be losing if you don't make the change, NOW!
There my friends is where the power of leverage can come in.
Stay tuned for tomorrow when I talk about how much money you are leaving on the table, depreciation wise.
EDITOR'S NOTE: Tomorrow is now today. If you are interested in reading more on Point #2, Depreciation, .click here to visit BBQ Capital
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