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Take advantage of the 'New 1031' |
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Tax-Free
Now comes the "sacred cow" - real estate. The last 24 months have put real estate investors into the exact same state of mind, in that their expectations may be a bit unrealistic in terms of expected future returns as well as the time frame it will take to obtain those returns.
This is only natural and is to be expected on the heels of a sudden and drastic run-up in values that we as a nation experienced last year.
History tells us that we can expect a prolonged period of 'catch up" with any market that runs too far, too fast. The term "cooling off" has become a household word. This is not to say that any of these are bad investments for the long-term investor. The point here is that many may have to settle in for another market cycle to realize the full potential of their investment.
Those who were fortunate enough to liquidate their real estate investments during the housing boom have taken alternative routes to avoiding the capital gains associated with the selling of real property.
Most are familiar with the 1031 Tax-Free Exchange, whereby the seller of an investment property takes the proceeds of their investments and re-invests them into a like-kind property to avoid paying capital gains taxes on the profits.
Many educated investors have taken advantage of the professionally-managed commercial property portfolios to avoid jumping back into the same situation they just exited.
Let's take a situation we experienced here on Marco Island. A client decided to liquidate his real estate portfolio after the run up in values last year. This client indicated that he was not interested in re-investing in exactly what he had just sold. This client wanted the opportunity to generate income from his real estate portfolio without buying another identical property right down the street.
By researching the options available to him, the investor decided to take advantage of the "New 1031," a professionally-managed commercial property portfolio. Not only was this the type of portfolio that he normally would not be able to just walk up and invest in, but he enjoyed an added level of comfort by knowing that his assets were invested with some the largest real estate investors in the world.
His asserts would be invested with the likes of large state pension plans and large institutional investors, such as Warren Buffet of Berkshire Hathaway fame.
Predictable
The comfort of knowing that the assets were professionally managed was only equaled by the total returns. The "New 1031" portfolios, such as this investor entered into, generally have enjoyed consistent total returns.
Historically, these portfolios have an exit strategy of around 48 to 60 months. This means that he would be liquid again in a short time frame.
Also, the "New 1031" portfolios generally paid an annual income stream of around seven percent, payable monthly.
Finally, as these portfolios liquidated, they generally added premium to the purchase price of around seven to eight percent. This gave the investor a total average annual return of around 14.5 percent per year, which according to the "Rule of '72" would nearly double his portfolio value in 60 months.
He was able to enjoy all of these benefits while knowing that his assets were in a stable, predictable portfolio all the while taking advantage of the "New 1031" tax-free exchange.
Finally, while this investor was rolling over a large sum of assets, as this portfolio continues to grow, the 1031 process becomes more and more difficult. Seven figure 1031 tax-free exchanges can have a higher level of complexity.
By taking advantage of the professionally-managed portfolio, the investor found comfort in not having to worry about all of the details that are critical to a successful 1031 exchange.
Details such as property management hassles, after-tax cash flows, debt-to-value ratios and - perhaps most importantly - diversification.
Remember, there are many variables involved in properly exercising a 1031 tax-free exchange, especially if there was existing debt on the sold property.
The "New 1031" is an attractive alternative to replacing your investment property with an identical property, especially given the economic sensitivity that accompanies residential real estate.
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