How much Money are you loosing on your Investment Properties?

Many people who bought investment properties even just 3 or 4 years ago are loosing money on their investment. The sad part is they probably do not even realize it. They may well have a good cash flow and think everything is fine, but dollars are flying out the door. Why is this happening? To understand why you need to understand two basic investing principles:

1. Leverage or OPM (Other Peoples Money). Basically generally when investing it pays to borrow, especially when money is as cheap to borrow as it is now. In short suppose your Investment Property is appreciating at 4% a year. If it is a $400,000.00 property and you put $100,000.00 if it is going up in value 4% a year you are earning 16% on your investment. Assuming the property income is paying the mortgage.

2. Depreciation. For a 1-4 unit investment property you will be depreciating the property over 27.5 year. Now you only get to depreciate the structure, not the land. So suppose you have your $400,000.00 property. You are writing off 70% of the property or $280,000.00. Divide that by 27.5 is $10,181.82 per year. This does not include any upgrades you put in the property. Now if the top part of your income is in the combined Federal and State Income Tax Bracket of even 30% a year you are saving $3,054.55 per year or $254.55 per month. This does not include write offs for expenses and such, which hopefully are paid out of rents.

So now we have had significant appreciation of property going on. Perhaps your $400,000.00 is worth $600,000.00; not unrealistic over the last 3 years. So what does this mean? It means you have $200,000.00 plus your earned equity (payment made on the equity) not working for you.

So what is an investor to do? Sell the Property in a Tax Free 1031 exchange. Then invest in a properties worth $1,200,000.00. Note this is a 25% down purchase with money you already have invested. This is minimal if any out of pocket expense to you. How much was your original investment? How much out of pocket do you have now? The same $100,000.00? Is property still appreciating at the same rate? Yes! So if property appreciates 4% per year how much are you earning on your $100,000. per year? 48%.

Now I want to stress this is a rough example. There a are some expenses associated with selling, the market needs to be examined carefully both for sale and purchase of the new property. Even a more negative scenario is still very profitable.

Oh and now you are Depreciating maybe 70% of $1,200,000.00 (Depreciation amount varies and should be reviewed with our accountant.)

One last bonus. I think many of the investors are still in the same loan they purchased with 3 or 4 years ago. The new loan may very well be at a lower rate, and purchase loans are better than refinance loans.

Any and all 1031 Scenarios are different. To review your situation and possibilities call me at 925-260-4321 or e-mail me directly.

Gene Riemenschneider is the Broker and Owner of Home Point Real Estate in Brentwood CA. Serving the East Contra Costa County Communities of Brentwood, Antioch, Oakley, Discovery Bay, Pittsburg, and beyond. For Buying, Selling or Investing call 925-260-4321.