If you haven’t read yesterday’s post, take some time now to go read it here — A San Diego County Duplex vs Texas Duplex. In it, I show the core rationale for San Diego real estate investors, and really the entire west coast, for Gettin’ Outa Dodge. In it I promised to publish a post today showing what the owner of that La Mesa duplex could accomplish in real life with a tax deferred exchange into Texas. This be that post.
The premise is that the La Mesa duplex investor has owned it since forever, and owes nothing on it. He’ll sell it for $300,000 — netting about $275,000 or so after all sales/closing costs. In fact, let’s make that $270,000 — as it’s no doubt being held in place by all the termites holding hands. 
Yeah, a cheap shot, but I speak from painful and personal experience. Own San Diego real estate? You have termites. Get over it.
I’m gonna round the Net Operating Income up to $16,000 a year. Since there’s no debt, that’s the annual cash flow too. They’ve owned it since Reagan was in office, 1988, so there is no tax shelter left — all available depreciation has been used. They’re now 53 years old, wantin’ to retire before 70 if possible. Of course, with that anemic cash flow, that possibility seems somewhat remote.
Here’s a real life scenario I’d strongly advise them to execute.
We turn their sale into a tax deferred (1031) exchange. The net check from escrow — $270,000 and change — is swiftly deposited in the account of our long time Accommodator. We then identify three Texas properties, all of which will be acquired using 1/3 down payments. Here’s how that’ll shake out for them.
They’ll have acquired three duplexes for about $750,000 total. Each property will generate annual cash flows of (rounded DOWN) $7,000 — an annual combined cash flow of roughly $21,000 a year. Let’s pause here to recall their La Mesa duplex on its best day was giving them (rounded UP) about $16,000 annual cash flow. See where this might be headin’?
Those wishing to avoid slaughter and surrender now, please form a line to the left.
Here’s what each duplex will do for them from Day 1.
Gross Scheduled Income — $30,600
Vacancy/Oper Expenses — $12,240 They’re lower, but who cares?
Net Operating Income — $18,360
Annual Debt Service — $11,200 5.375% 30/yr fixed rate.
Annual Cash Flow — $7,160
Since they wanna retire before 70, and will be workin’ ’till that day comes, let’s use the cash flow to hasten its arrival. What would happen if…
…we took all the cash flow and ganged up on just one duplex’s loan? Here’s what:
The first duplex would be debt free in 61 months — about 5 years. Then we attack the next duplex’s loan. Of course, by then its balance has been reduced from $166,667 to give or take $153,600. The new annual cash flow has now increased to about (rounded DOWN) $32,000 a year.
We now apply that to each month’s payment on the second duplex.
49 months later — only about 4 years this time — their second duplex is also debt free! This results in a newly turbo-charged cash flow of (rounded DOWN) $43,000 yearly. So far, it’s taken less than 10 years to get this accomplished. Our former La Mesa duplex owner has now nearly tripled his annual cash flow.
On to the last duplex.
For the record, I’m noticing the line forming to the left is growing.
The last duplex’s loan balance has been reduced to just under $140,200. We now take the newly enlarged cash flow to annihilate this loan in just 35 months.
In just over 12 years — 145 months to be exact — They began as 53 year old, owners of a duplex over a half century old with just under $16,000 a year in cash flow — and zip, zero, nada, zilch tax shelter. Now? They own three 12 year old duplexes delivering roughly $55,000 a year in
cash flowretirement income — about a third of which is tax sheltered, and will continue to be for the first 15 years of their retirement. Bonus? They’re just 65 years old — able to retire a full 5 years before they’d anticipated.
The downside? Drivin’ by those units will take some serious road time.
Think about this a minute, will ya? At 53 years old they start out with an ancient, relatively poorly performing La Mesa (San Diego) duplex that spun off less than $16,000 a year in cash flow — all of which was naked every April 15th. In 12 short years (145 months) they owe not one dime on any of ‘em. The cash flow, now part of their retirement income, is about $55,000 annually — not to mention, roughly 1/3 of which is tax sheltered. Instead of retiring close to 70 years old, they pulled it off by 65.
Let’s put the value of their previous insistence of being able to ‘drive by’ their income property in context by askin’ a simple question.
What price do ya think they put on retiring 5 years sooner than they imagined doable? What we call this is having a Plan and executing it on Purpose. Put another way…
Ridding themselves of prehistoric duplex? $24,000+
Paying off 3 duplexes totally? 12 years of their lives.
Retiring 5 years early with WAY more income? Priceless
Those now standing in the crowed line to the left? Gimme a call at 619 889-7100. You can do this too — it ain’t magic. Have a good one.
Related posts:
- California Real Estate Investors Using 1031 Exchanges To Turbo Charge Portfolio
- How Real Estate Investors Really Get It Done – Attn: Newbies
- Real Estate Investors — Is Your Addiction To Cash Flow Lowering Potential Retirement Income?
- The Perfect Positive Storm For Real Estate Investors?
- Real Estate Investors Staying Local Endure Lousy Cash Flow – Worse Retirement
About BawldGuy
Makes perfect sense to me! I thought most of this was implied in yesterday’s post, but I’m a biased Texan, so what do I know?
I like leverage too much to like this plan.
I can see that there is some appeal in paying things off when one is older and needs the income to live on and ones risk tolerance goes down. But even there it would make sense to me to have some properties fully leveraged (for the magnified ROI) and some fully paid off (for the security/stability but at the cost of a much lower ROI).
Such a mix allows for the best of both worlds.
Why set up the leverage so that it large on some properties and small/none on the others?
1. Because it allows for payments to only be on some of the properties resulting in less mortgage payments.
2. Because it gives you more flexibility in Great Depression style disaster scenarios where properties might be lost if they (somehow) lose most of their value.
Greg — You’re preachin’ to the choir DIRECTOR here.
Depending upon the age and need of the specific client/investor, we counsel exactly that. In fact, we just closed several props for a client who executed the beginnings of that strategy.
I like the cut of yer jib young man.