Understanding the rules is important, but I find in many cases investors don’t understand some of the basic tax issues involved in an exchange.

Exchange Value

Some may wrongly assume that the exchange value is the selling price or profit made on the sale. Reality is that the exchange value is the net selling price of the property sold. There are a number of costs incurred in a sale including commissions, closing costs and recording fees.

It can also be said that the exchange value is the total of all cash received in the sale plus the total of all mortgage debt.

Boot

Boot is anything received by the investor that is either cash or some other type of non-qualifying property. Boot is almost always taxable so it is very important to understand what might be treated as boot.

An investor that receives cash in an exchange has received taxable boot. Heavy emphasis on receives.

Boot is more than the cash received though. Boot is also personal property received in an exchange. Personal property includes items like farm equipment received with a farm or say an RV that was left on the property.

Beware of mortgage boot.

One of the most misunderstood examples of boot though is mortgage boot. An investor who exchanges a property, and lowers their overall mortgage debt in the process, will have taxable boot equal to the amount of the mortgage reduction. It is not uncommon for this to come back and haunt investors.

An example

An investor has a single family rental that they would like to exchange for a 4-plex.

Relinquished Property

FMV of the house is 300K
Mortgage 250K
Commissions paid 18K
Closing Costs 7K

Acquired Property

FMV of 4-plex 300K
Mortgage 225K
Closing Costs 5K

Based on this information we know the exchange value of the relinquished property is 275K and the acquired property is 295K.

Taxable boot

There is no cash being received but there is a mortgage reduction of 25K that will be taxable.

BawldGuy Here: Didn’t wanna let this one go ’til I pointed out something about this topic most real estate investors pass over. The $25,000 that’s taxable in the example? You as the exchanger never received that cash in the exchange — but you’ll still owe the taxes.

In a random conversation last year during a break at an outa town conference, an investor came up to ask a question. Bottom line? He was about to incur well over $200,000 in boot directly due to what Chuck wrote about today. After his breathing return to near normal, he excused himself to call his real estate broker. Woulda loved to’ve heard that conversation. Got a call the next day from his wife, who promised me a big hug if we ever met.

There are three basic factors to consider when deciding to sell/trade or keep a local income property.

1. The true quality of it’s location.

2. The true quality of it’s construction.

3. The current age of the property.

Location quality

In my experience, this often morphs into too much of a subjective choice. A little over eight years ago when I decided San Diego income properties were not measuring up, it became imperative to establish a universally objective way to ‘appraise’ location quality. This ‘rule’ had to effectively and accurately assign the level of quality to any particular property in any state/county in the country.

The BawldGuy Mom Rule was born.

Mom turns 81 this spring. If I wouldn’t put her into a property I’m considering for a client, the property is no longer considered. No exceptions, no excuses — next property please. Before the rule was made policy, it was a coin toss as to what I’d find when a team member in another state would tell me it was ‘blue chip’. Or, a ‘slam dunk’ location. Or my favorite, “Jeff, it’s a no-brainer. You don’t even need to fly over to see it Trust me.”

Now? They know what’s comin’. They think twice before tellin’ me they’d put my Mom into this golden location. Funny how puttin’ a face on a policy, along with the the concept of ‘Mom’, changes everything in an instant.

So, back to your local portfolio.

Would you put your mom or grandma into your income properties to live alone? If the answer is an instantaneous and confident ‘yes’, you’re one up in your decision making process.

Construction quality

Let’s not play games with this one, OK? Most of us know quality vs crappola when it comes to construction. Is the foundation solid? How many corners were obviously cut during construction? Remember, you’re not lookin’ at the quality for now. You’re lookin’ at it for 15-30 years down the road. Is the quality of a nature that you wouldn’t mind owning it and possibly managing it in 2025? Ah, that puts a different spin on it, right? Not being straight with yourself on this topic will almost surely bite you in the butt later on. You’ve been warned.

The current age of the property.

The vast majority who call/write me say their properties were built in the 1980s or earlier. If you’re already 40ish, planning to retire at around 60, think. Those properties that’re 35 years old today, are gonna be over half a century old at retirement. Think operating expenses. They’re gonna be measurably more than they are today — duh. That directly impacts your bottom line retirement cash flow negatively. The older the units, the more likely it is you’re dealing with functional obsolescence. It could be floor plan, basic design, unattractive kitchen setup, and that’s just three simple examples. It directly affects both the number and quality of tenants you’ll be attracting.

Expanding operating expenses combined with a decrease in the size of the tenant pie, not to mention tenant quality, ain’t something you wanna generate on purpose. Yet that’s virtually guaranteed to happen in most cases. It’s a downward spiral I’ve not seen reversed in my decades of experience.

A final word

When appraising quality of location, here’s something to consider. Average to below average quality locations tend to go downhill over the long haul. Not always by any means, but more likely than not. Take a look at what were perceived as ‘average’ areas in your town when you were a kid. How are they perceived now? I know where I lived during my last couple years of high school was considered fairly average in the late 1960s. Now? When you say that city’s name, foreheads furrow, and frowns appear.

Neighborhoods that were universally thought of as ‘Average +’ are still considered as at least average if not the same as 30 years ago. If they were considered ‘blue chip’, they still are. Are there exceptions? You bet. But in my experience this has tended to hold true everywhere I’ve been.

What speeds the downturn of an area is when poor quality construction begins to ‘out’ itself. Word gets around, and before ya know it, it’s become common knowledge around the community at large. For the record, that’s never a good thing.

Add functional obsolescence to the equation? Admit defeat and get outa there.

Take a look at your local real estate investments with these three factors in mind. Be brutally honest in your analysis and conclusions. You’ll have a much better idea of what you should keep and what should be sold or exchanged.

Here’s the next thing you might wanna do: Call me. I need a fix — every day. 619 889-7100 will find me. Or, you can opt to click the Contact BawldGuy button up top. Either way, we’ll figure things out together. Have a good one.

Now for some real estate investment info to dazzle ya.

Charles Perkins is workin’ on some killer posts, some of which were by my request. ‘Course, I’ve learned to keep my topic suggestions with him as narrowly defined as possible. He tends to research the livin’ crud out of it, which makes me feel guilty sometimes. This is especially true the last month of the year — which, unfortunately is merely the precursor to ‘tax season’. For CPAs, tax season is that ugly stretch of roughly 105 days, when they sleep at least 3-5 hours a day, no matter what.

• He’s got some killer info on various aspects of depreciation.
• He’ll be listing some of the brand new surprises the IRS has for us — most if not all of which went into effect last Sunday.
• I’m makin’ a topic list for him. (Hope he doesn’t read this.)

John Park will be providing his usual stellar posts on self-directed IRAs/401Ks. The guy is always comin’ up with solid info. The clients who’ve used him, now swear by him. He’s the real deal.

David Shafer is by far the most knowledgeable pro I’ve ever met, when it comes to EIULs. He’s a wizard when it comes to EIUL structuring, which is the most crucial factor. I’m big time OldSchool, but Dave sometimes makes even me roll my eyes.

My first post this year will be on the topic of tax deferred exchanges. In fact, I may do a series on all the different strategies for which it can be incorporated into a well thought out Purposeful Plan.

Meanwhile, back at BawldGuy Ranch, operators are waiting to hear from you. Seriously, I need a fix. Call me at 619 889-7100 — OR — click the Contact BawldGuy button up top and gimme your story. I wanna hear it. Have a good one.

The landscaping is pretty cool, isn’t it? It’s not the norm in San Diego as many might think, but it’s not rare either. Makes for pretty good curb appeal, that’s for sure. Anywho, let’s get started.

A note here, for those readers who might think, even a little bit, that I picked this duplex for it’s crummy location etc. Not hardly, as I’d easily apply the BawldGuy Mom Rule to this property without the slightest hesitation. I know this area like the back of my hand, having lived in or nearby the neighborhood since 1967 when I was 16. What’s the BawldGuy Mom Rule for Heaven’s sake?

BawldGuy Mom Rule: Brown and Brown Investment Properties policy is that no client shall be advised to invest in real estate in which I wouldn’t put my 80 year old mom to live alone. Period, over ‘n out, no exceptions. Hence the name of the rule.

The numbers tell the story 

Here are the assumptions used:

• They owe $100,000 on existing loan.
• This is the only property they own other than their home.
• Sales/Exchange costs will run around 10%. (We’re in termite country.)
• The investor is 50 years old.

At $470,000 +/-, the net proceeds from a sale would be approximately $323,000. They’d be moved directly from escrow to the Accommodator used in the exchange. (Another post altogether.) It’s from that account the second half of the exchange will be executed.

Maintaining the Status Quo

Having reduced the loan to $100,000, and if he’s like most investors, he’s already done the math figuring out the income this duplex will provide in retirement, sans debt. It’s even money it’ll be less than his projected Social Security check. In this case, $1,455/mo., not even $18,000 yearly. Sadly, he’s probably better off than most of his family and friends. But for fun, let’s say it’s $20,000.

His net worth, (only this duplex) is $470,000.

If he exchanges to a superior market

Here are the assumptions used:

• He’ll be puttin’ 25-30% down on any property acquired in exchange.
• All loans obtained will be 30 year, fixed rate, at 5%.
• His ‘depreciable base’ will be increased by roughly $700,000 or so.
• All retirement income/net worth numbers will be those at acquisition — no value appreciation or increase in Net Operating Income (NOI) will be applied, as per my policy.

I’d trade his equity (tax deferred, per IRC Section 1031) into four small income properties. The cost would average out to about $255,000 apiece. Three of ‘em would be with 25% down payments. The fourth would be using, give or take, 40% down.

The NOI for each would be a bit over $19,000. But we’ll be happy with the $19,000 for this example. Using the BawldGuy Domino Strategy he’ll have eliminated debt from all four properties in time for his 65th birthday/retirement party.

His two retirement scenarios in a nutshell

Status Quo — $20,000 a year in retirement income. Little if any of it tax sheltered. The property is now 80 years old, which virtually always means higher expenses than significantly younger buildings. Duh. We have a longstanding joke about old buildings. It’s possible the only reason they’re still standing is cuz the termites have agreed to keep holding hands. Bada boom!

His net worth, as noted earlier, is $470,000 — a kindness I extend to the elderly as policy.

Exchange scenario: $76,000 a year in retirement income. Roughly a third of which would be tax sheltered for around 12 years or so into retirement. Better than a kick in the head, right? The buildings would be only 15 years old, about broken in. They’re family sized units (3 bedrooms/2 baths with 2-car attached garages for each unit.) so over time they would’ve had less tenants in each one. This results in less wear ‘n tear, and therefore lowered expenses overall.

His net worth in this scenario would be in excess of $1 million.

Income/Net Worth if he stays the current course — $20,000/yr — $470,000.

Income/Net Worth using my suggested strategy — $76,000/yr — over $1 million.

When I constantly beat the Get Outa Dodge drums, it’s cuz it’s a no-brainer. This guy would almost quadruple his retirement income while more than doubling his investment property net worth if he opted for the exchange route.

It ain’t rocket science by any stretch.

Hey! You don’t need rocket science to find me. Call 619 889-7100 and we’ll be chattin’ before ya know it. Or, if you like, click on the Contact BawldGuy button at the top of the page. Together we’ll figure things out and make it happen. Have a good one.

Today, it is easy to place too much trust in the tools we have at our disposal. I say this because it is far easier than many might realize to miskey and assume that our software will properly calculate, store and report on the information we put in.

What does this have to do with anything you say? Well, I find that many times people don’t realize a mistake has been made because they don’t have a clue of what the expected outcome should look like.

The Point

I know, I know. Get to the point. The point is income tax law can be quite complicated. Hear me out, I know you might be looking for Captain Obvious as the BawldGuy likes to say. Captain Obvious is close by, but I find that our reliance on software can lead to mistakes big and small.
It is easy for tax preparers and others to think that inputting all of your financial data into a program like TurboTax and carefully answering all of the questions will lead to a tax return that is correctly stated and report the least that should be paid to the IRS.

When returns get complicated

When taxpayers are strictly employees and have but a few deductions, then tax returns are pretty straight forward. It is when individuals get into businesses and investing activities that returns can become complicated. Real estate investors can have some very complicated returns.

One aspect far more complicated than some might realize is how gains and losses in real estate are netted and interact with gains and losses of other investment activities. There can be loss carry forwards, lookback rules, at risk limitations and differing treatments for similar property classed under different IRS code sections.

Tax software can make some of these things seem deceptively easy. Knowing that the various transactions have been treated properly is often the real problem. It is all about recognizing that the answer given resembles something that makes sense and recognizing when something is clearly not right.

While I hear some of you saying to yourself “Garbage in, garbage out,” it really isn’t that simple. You can have good information that is incomplete or mislabeled. Recognizing what the outcome should look like helps.

I was reminded about the complexities of the tax code as I helped a student this week review capital gains rules. It is not that most investors can’t find the answers. Instead, it is much like BawldGuy often laments — you can’t find answers to questions you do not even know to ask. For example, re: capital gains, what’s the adjusted basis? Is there any loan over basis? (A very important question when executing a tax deferred exchange.) Are there any losses you might be able to use in offsetting any gain? What schedule/strategy was used for depreciation? And on and on and on.

Knowing what your answer(s) should look like gives you an incredible edge over most who’re using software to get the job done. Garbage in, garbage out is bad enough. But when the taxpayer is literally unaware of data/answers they should be inputting, but can’t, therein lies the real reason so many out there aren’t getting what they think they paid for.

Anywho, I wrote about an ongoing case study over there this morning. It’s about combining several strategies dynamically to improve your end game results, which is spelled — Retirement Income.

BawldGuy Heads Up: Tomorrow (Wednesday) I’ll be out of touch with the world completely. Gettin’ some dental work done, and they wanna knock me out to do it. Works for me.

I’ll be available for calls beginning at noon Thursday. ‘Course by then I’ll be Jonesin’ for a fix. You can help me with that by callin’ me at 619 889-7100. Or you can, if you prefer, send me a note using the Contact BawldGuy button up top. Have a good one.

It talks about a couple guys who came into my office quite some time ago. Real folks, in the flesh, with real agendas and money to back ‘em. A father and his son — from different schools. I learned much about human nature from those two.

Anywho, here’s what I really think of cash flow vs capital growth — read and enjoy. I hope ya like it. Better yet, I hope it helps in some small way.

I’d love to talk with you about your retirement goals. Call me at 619 889-7100 — let’s put our heads together. Or, if you’d rather write me first, click on Contact BawldGuy up top, and we’ll start that way. Either way, do it quickly, cuz I need a fix. Have a good one.

There are multiple schools of thought related to investing in real estate for retirement. Two dominate.

One says you buy property, holding it forever. When you’ve saved sufficient capital to buy additional property, you do — then hold IT for evermore too. The idea is you allow rental income to pay off debt as quickly as possible, arriving at the point of a debt free cash flow machine. Do this a buncha times and you’ve built the foundation for a nice retirement income stream.

Or so the doctrine goes.

The other school’s doctrine teaches cash flow comes from the yield on capital or equity in an asset. The bigger the capital amount or equity in the asset, the greater the income, measured in dollars. The ‘yield’ itself is expressed in terms of a percentage. For example, 7.5%. This commandment says that since the yield is equal, more or less, for a more substantial or less generous figure, why not arrive at retirement with the largest amount of capital and/or equity possible?

The million dollar questions?

The ‘Buy & Hold’ school (BHS) gets you there. But in what condition? Furthermore, how much cash flow relative to the ‘Capital Growth First’ school (CGF)?

Buy and Hold

Limited to how fast investor can save capital for down/closing on each purchase

Properties are old, having high maintenance/expenses when investor retires

100% of income is devoid of any tax shelter — right when they need it most

Properties more likely than not to exhibit functional obsolescence upon retirement

Older properties generally don’t compete well for highest quality tenants

Props are old when you retire, & only get older each year — not a good trend

Rents will be less likely to keep up with the competition — or inflation

That’s the short list, but you get the idea. Buy and Hold should be called Buy and Mold.

First — Capital Growth

By ensuring a more or less superior capital growth rate — net worth increases

Capital growth is maintained by exchanging equities when the market dictates

Exchanging keeps the power of prudent leverage working

This results in significantly larger capital/equity base

Larger capital/equity base = larger income in terms of dollars using same yield % at retirement

Arrive at retirement with higher income, mostly tax sheltered

Able to execute strategies completely unavailable to Buy & Hold

Again, that’s a short list. You can readily see the advantages.

Here’s an example with some real life numbers for illustration. Sadly, the investor used in the example chose to stay his buy ‘n hold mold course. Here’s what coulda happened if he’d switched strategies.

Considering Real World Examples

“Wayne”, 71, came into my office many years ago — a genuine born again buy ‘n hold guy. His pride ‘n joy was a fourplex, purchased in his 30′s, now free & clear, spinning off a net income of roughly $2,900 monthly. This is in addition to two other income sources — Social Security and a taxable annuity.

Wayne’s paying a lotta taxes on the annuity income and the fourplex — neither of which is keepin’ pace with his cost of living. He retired in 2005. He bought the fourplex in 1975. We both live in San Diego, so I’ll be using that market to illustrate. The principle works for most any market — especially over the long haul.

He paid just about $80,000 back then. Upon retirement the value was nearly 10 times that. Where would he be today had he gone the capital growth route? So happy you asked.

The market would’ve signaled him to exchange his increased equity position in the first quarter of 1979, give or take. Having put 20% down, his equity at that point would’ve been around $100,000 — more than five times his originally invested capital. His cash flow for the period won’t be added into that, except for the paying of closing costs on his newly acquired exchange property(s).

He now owns about $400,000 in multifamily properties. He’s conservative, so due to interest rates at that time, he puts 25% down. He then waits for the next time the market signals him to make a move. It’ll be longer than four years this time, as the recession exacted its toll. Meanwhile, his units are rented, with slightly increased rents over the long term. The recovery arrives around the end of 1983. He waits, wanting to be sure. Values again start rising. Still, he waits. In roughly July of 1988 he triggers another tax deferred exchange with the following results.

Note: From roughly 1985 to the beginning of 1990 appreciation rates in SoCal were double digit, more or less depending what specific market. San Diego did, um, well.

His exchangeable net equity at that point was approximately $275,000. Again, he chose to put 25% down on his exchange uplegs. (newly acquired properties)

Let’s pause at this juncture to figure his capital growth rate.

It’s been 13 years since he began with about $18,000 to close his first investment back in 1975. He now has $275,000. That’s an annual capital growth rate, exclusive of tax benefits and cash flow of about 23% — a figure nobody with a three digit IQ would predict in public, but historically accurate nonetheless.

Anywho, he now owns about $1.1Mil dollars of multifamily properties. They not only pay for themselves, but cash flow — not heavily, but enough to make him happy. For the record, he does two things consistently along the way — one I recommend sometimes, and one on which I insist. He has way more than adequate cash reserves. I call it a Sominex Account, as when Murphy visits, you can still sleep at night.

The recommendation at this point is to apply a portion of the cash flow to the loan balance. Back then it was almost a built in practice for my clients, due to interest rates 2-4 points higher than today’s. It just made sense. It’s called keepin’ your eye on the ball, which in this case is growing the guy’s capital/equity safely over the long haul with retirement always #1 on the hit list.

Around this time the S & L Crisis hits San Diego like boulder hits a bug. It was beyond horrible. Not only did we experience what everyone everywhere else did, we had the added thrill of losing two huge employers overnight. Talk about both barrels of the shotgun goin’ off point blank. Vacancy rates went from virtually zero to 10-15%, oft times more depending upon location. Rents plummeted even more in some cases. Bottom line? Wayne’s cash flow went from cool to break even faster than Rubio’s makes fish tacos.

This forced a holding period of about 10, no, more like 12 years. What’s an investor to do? Life happens. It certainly did back then. It seemed Murphy squatted in San Diego the whole time. Ever heard of O’Toole’s corollary to Murphy’s Law?

“Murphy was an optimist.”

Wayne executed another trade, tax deferred, in the early spring of 2000. His portfolio by then had risen at a more modest rate than in previous times. Real life. It’s now worth a total of $1.6Mil — give or take. His net tradeable equity is roughly $645,000. Relatively speaking, interest rates are a bit less, but he insists on a 30% down payment, overruling my advice to try 20% this time. It’s his money, so guess how much he put down? He’d been made nervous by his experience of the early 1990′s. Um, me too.

When the smoke cleared he ended up with $2.15Mil in multifamily property. It wasn’t cash flowing much, give or take $25,000 a year. His retirement was, according to him, a long way off. He changed his mind about that later.

In fact, he decided in early 2004 to call me about setting in motion his transition from capital growth to cash flow — he wanted to retire no later than spring of 2005, about 30 years after buying his first investment property. After much analysis and a few meetings of the mind, we agreed — he needed a property outside of California. The prices were simply outa whack in the Golden State, a fact of which we were both painfully aware. The search began.

First we had to ascertain how much equity we had to trade — cue the HappyFeet music.

Seems his luck had turned around again. From his latest acquisitions in 2000 his portfolio had grown in value from $2.15Mil to the neighborhood of $4Mil. His net tradable equity was about $2.2Mil. Let’s take a pause for the cause here, alright?

Is that a white flag I see being waved by the buy & hold crowd? Just askin’ . . .

We didn’t care much about growth now, as we wanted stable markets, not much prone to big swings either way, historically. Idaho, Texas and Kansas/Missouri ended up on the short list. We really liked Texas though, which is where we landed. We ended up with about $5.5-5.7Mil in cash flow properties. (Larger properties this time.) The cash on cash return averaged around 7-10% conservatively. This resulted in a yearly cash flow, the majority of which was tax sheltered by the way, of $140-200,000 yearly.

For discussion sake, discount the low part of that range by half. You still end up with $70,000 a year at retirement — mostly sheltered — not in ancient properties with ever rising operating costs. Even discounting the low end of the income range by half, he still finds himself with just short of double the retirement income he did applying the buy and mold, um, hold school of thought.

Of course, he won’t hafta discount all that mostly sheltered cash flow. A retirement income of five figures monthly. Sweet.

Here’s the real plot twist. Just as he did on the way there, Wayne can still apply a prudent amount of cash flow to the premature reduction of debt. Each multifamily property he pays off will increase it’s cash flow to him by a factor of 2-4. Nothing like getting a $500-1,500 a month boost in income on a regular schedule.

Real life for Wayne

Back to Wayne’s current reality. He’s now retired on just under $36,000 a year from his fourplex. His SS income and annuity supplement this. However, as pointed out earlier, every single dollar of the annuity and the real estate is taxable. Ouch. Furthermore, he’s now discovered, much to his chagrin, that he didn’t retire — he started serving a life sentence.

His option from Day 1 was to end up with so much sheltered retirement income that his SS check would simply be spending money.

So I restate the principle: Worshiping cash flow when capital growth is the appropriate approach will not have the happy ending you envision.

What school of thought do you favor? Let’s talk about your specific status quo and figure out what might be on your menu. Gimme a buzz at 619 889-7100. Or, if you’d rather, click on the ‘Contact BawldGuy’ button up top. Have a good one.

How long till you retire?

The answer often falls in the 10-15 year range. Let’s construct a scenario that mirrors many of the callers’ circumstances. The facts will be as follows:

Their property is worth about $300,000.

Net Operating Income (NOI) about $15,800 a year.

If sold, net proceeds would be roughly $270,000 or so.

Here’s pretty much what I’d suggest they strongly consider. It’s a no-brainer from where I sit, and I suspect from their viewpoint too.

I’d have them execute a tax deferred (1031) exchange (finding a buyer for their property first) into three duplexes in Texas. The new properties offer NOI’s of roughly $18,360 apiece. If the investor put a down payment of about 1/3 the price for each, their net proceeds of $270,000 would cover pretty much everything required to close, including all related costs.

Here are the numbers in a nutshell without goin’ all medieval on ya.

Each property would be cost just over $250,000 — and the loans would be a tad over $168,000 each at just 4.625%, amortized at only 15 years. The cash flow from the three combined would be a latte less than $700/mo., but we’ll round down to $500. We’ll also assume the investor can easily, comfortably add another $500 monthly to the cash flow.

Enter — The BawldGuy Domino Strategy

The monthly cash flow, $500, plus $500 a month from the investor allows $1,000 to be added to the monthly payment of just one of the duplexes. This will be done till it’s paid off completely. That’ll take less time than you might suspect — 7 years and 3 months.

One domino down — which means that duplex is now adding a few lattes over $1,500 monthly to the cash flow. Suffice to say that the second duplex is paid off much more quickly, while the third and final duplex is paid off almost faster than you can watch it happen.

Bottom Line

In this scenario, which is pretty OldSchool conservative, all three properties would be free and clear — no loans, sans debt, adios lender — in less than 12 years — 11 years and 2 months to be precise.

Furthermore, instead of a retirement income of less than $16,000 annually, it will be a month’s worth of lattes over $55,000. In other words, well over triple what they would’ve ‘enjoyed’ had they insisted on sticking with their wonderful debt free original property.

Epilogue — The increase in their annual depreciation (read: tax shelter) allows them to receive at retirement, more sheltered income than what woulda been their total annual cash flow had they opted for the status quo.

Again, this move is a no-brainer any way ya wanna look at it.

BawldGuy Takeaway: Contrary to popular belief, owning free and clear income property isn’t magical in and of itself. Having cash flow and being debt free 10-30 years before you retire will — in the vast majority of cases — actually sabotage what coulda been, and shoulda been a vastly superior retirement income.

Then there’s a little somethin’ I’ve not yet brought to your attention. Instead of hittin’ retirement with an equity of $300,000, they’ll have just over $750,000 of equity following this plan. That’s more than double, people. Think double the security when retired. Put into perspective, if an emergency arose after they retired, they could easily pull out more money than their entire equity woulda been had they stayed put with their original property.

Also, notice how relatively devoid of any real sophistication it took to execute this plan’s strategy. We’re back to Grandpa’s day, when basics couldn’t be ignored, and rent increases and/or price appreciation were merely daydreams folks had while sittin’ on the front porch.

Next time you’re relaxin’ on the porch, gimme a call, ok? You’ll find me at 619 889-7100 — or simply click on the Contact BawldGuy button up top and send me a note. Have a good one.

Breaking News: My old San Diego TC — Transaction Coordinator — just walked into Starbucks. Hadn’t seen Debbie in years. I’ve had TC’s since her, but none better, not even close. She was the real deal. So fun to run into her today.

OK, back to schlepping for Dad against our wills.

His units are now cash flowing about $5,000 monthly with $800,000 in debt. He says it’ll cash flow roughly twice that when the loan is paid off. He’s retiring in about 10 years. Oh, and for the record, the location of his units is such that I’d gladly have Mom live there alone. Just so ya know.

Ever heard the saying, “. . . like shootin’ fish in a barrel?”

Here’s what I’d advise him to do — while tellin’ him he should get the ball rollin’ sometime around 4:30 yesterday afternoon.

First, let’s establish where the bar is. If we can’t show him what appears to be a no-brainer strategy, then he shouldn’t do anything.

• Cash flow upon retiring should be significantly greater than $10,000 monthly.

• If possible, his equity should be equal to or greater than what would have been the case had he remained in La Mesa. (San Diego County)

• His units at retirement will be 36 years old — not encouraging on the operating expense side of the ledger. The props I’d have him trade into would barely be, well, 10.

• Executing my strategy would increase his tax shelter from, um, probably nothing, to somewhere around $20-35,000 annually. Not a lot, but better than the nothin’ he’ll have stayin’ put.

• Executing a tax deferred exchange (Section 1031 IRC) is also a no-brainer. His adjusted basis, after doing multiple trades over the years, is now probably enough to buy dinner for his immediate family at the local taco shop — about a $19.98 if he sticks with rolled tacos.

Using his valuation, his net tradable equity would be about $1,040,000.

The BawldGuy Domino Strategy

1. Sell his units, close them, while setting up a delayed tax deferred exchange.

2. The ‘uplegs’ — the properties into which he’d be trading, would be 10 very well located duplexes in Texas. Duh.

3. Nine (9) would be acquired with 33% down payments, using 30 year fixed rate loans at the current rate of 5.25%.

4. A 10th property would be bought for cash.

That ends Phase I of his Purposeful Plan — Here’s Phase II

Rick’s cash flow from Day 1 will be a bit over $83,000 a year, but that’s the figure we’ll use here. That’s $6,900 a month. We’re gonna round that down to $6,000.

Note that the cash flow, even with vastly increased debt is just under $2,000 more per month than his San Diego units are doin’ with just over half the debt. If you feel a trend developing, I suggest you go with the feeling.

Let’s start knockin’ down dominoes

Taking the $6,000 monthly cash flow and adding it to just one of the duplex loans every payment would result in payin’ off that property in just 26 short months. This would, of course, make it easy for Rick to then jump on the second duplex loan with more than $6,000 — probably about $1,000-1,200 more. That would then result in eliminating that duplex’s debt in less than 26 months, likely less than two years.

Pretty soon Rick’s payin’ off his loans faster than he can keep up. Well, pretty fast anyway. In any case, when he retires 10 years from Day 1, he’ll own the 10 duplexes free ‘n clear. His income from those puppies will be impressive, especially when compared to what it might’ve been had he opted for the status quo and stayed put.

The smoke-cleared bottom line? Let’s compare — it’s much more fun.

All assumptions on both property values and net operating income (NOI) is that from Day 1 neither ever goes up till the end of time. Long time readers already know that, but for those relatively new here, I’m OldSchool down to my DNA. In fact, many of my mentors were so old ‘n grizzled, they just called it School.

Here are the numbers Rick will have engineered when he retires in about 10 years.

Status Quo — $2 Million equity, debt free.

BawldGuy Domino Strategy — A few bucks over $2.5 Million equity, also debt free.

Status Quo — Roughly $120,000 in cash flow yearly. (No tax shelter whatsoever.)

BawldGuy Domino Strategy — About $183,000 in cash flow yearly. More tax shelter than Status Quo, but zero ain’t too hard to beat.

But wait, there’s more!

• Rick will also have a fine retirement coming from his decades as a teacher. If he wanted to he could supplement that income by starting an EIUL now, but planning to fund it monthly maybe 10 years past the day he retires. That would give him a solid 20 years, which would wind up generating a tax free income of several grand a month. Just a thought.

• By moving his equity to Texas now, he’ll enter retirement with literally 10 times the flexibility than if he’d stayed. Things happen that require largish lump sums to take care of. Wouldn’t Rick rather refi or sell just 10% of his real estate investment portfolio to take care of an unexpected need vs puttin’ a loan on his one and only piece of retirement income property? Flexibility in retirement can’t be overrated. Just ask those who didn’t have it when ‘it’ hit the fan.

• If Rick should want to acquire a second home after retiring, where would the cash come from? If he followed my strategy, he could sell/trade or refi just 10% of his portfolio and voilà! there’s his second home.

• Not sure whether Rick has any heirs, but let’s assume he has three. This is purely a subjective, though practical matter, but with 10 properties, he hands ‘em out equally with one left over, and avoids 90% of the decision making if the siblings don’t have the same outlook or agenda.

I’ll stop here, as I’m entering the well known War and Peace zone now. But I think you can see clearly — Rick will be far better off making the move to Texas. His current scenario is better than most — it’s just not the best scenario on his menu.

This works in the majority of markets around the country — some better or worse, but all with improved results compared to stickin’ with the status quo.

This hit you where you live? You’re not the Lone Ranger. Gimme a call at 619 889-7100 and let’s examine your situation. Can’t wait to hear from ya — and besides, I need a fix. Have a good one.