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To truly create
wealth and get the
most out of your
investment dollars
you must invest for
the long-term. A
proven strategy for
long-term real estate
investing is the “Invest
and Reinvest” strategy.
This is a wealth
creating concept
for investor where
the in initial investment
is never liquidated.
Instead it is transformed
it into multiple
properties without
additional cash out
of pocket. The equity
in a property will
allow the investor
to acquire more properties
in a tax deferred
manner by utilizing
a 1031
Exchange or
by refinancing. Over
time enough equity
will accumulate in
the property to sell
and buy two properties.
For
example, an investment
home
is purchased for $80,000 with
20% down, or $16,000.
Total After
5 years the home is worth
$120,000. The proceeds
from the sale are
$40,000, which could
be reinvested evenly
between two homes
with $20,000 down
on each. If the new
homes cost $100,000
each there would
be sufficient proceeds
to put 20% down. The investor now
owns 2 homes, but
the initial cash
investment remains
the same at $16,000.
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Reinvest
Example |
|
| Purchase
Price |
$80,000 |
Cash
Down
(10% +
$2,000 Closing
Costs) |
$16,000 |
| Loan
Amount |
$64,000 |
| |
| Value
after 5 Years |
$120,000 |
| |
| Proceeds
from Sale * |
$40,000 |
* This examples
does not consider
realtor commissions
which might reduce
proceeds from sale
If the investor
chooses to sell the
initial investment
property, the gain
on the sale is taxable
if used for anything
other than buying
more investment property
(see 1031
Exchange section.
Alternatively, investors
will refinance or
take a second loan
on a property to
liquidate some of
the equity. The cash
is then used to invest
in more property.
Both techniques allows
the investor to take
funds in a deferred
tax manner.
A 1031
exchange is used
in circumstances
when the investor
prefers to sell the
property, when there
is an active selling
market, or when the
investor needs to
liquidate the entire
amount of equity
in the property.
Refinancing or acquiring
a 2nd loan is used
in circumstances
when the owner prefers
to hold the property
or when the investor
wants quick access
to funds.
Refinance or 1031
Exchange?
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PROS |
CONS |
| 1031
Exchange |
| • |
One
of the few
tools available
to defer
or eliminate
taxes from
the sale
of property |
| • |
Deferring
the tax makes
more money
available
to invest
in another
property |
| • |
You
can acquire
and dispose
of properties
to reallocate
your investment
portfolio
without paying
tax on any
gain |
|
| • |
Transaction
subject-to
strict rules & timelines |
| • |
Must
involve a
3rd party
intermediary
for approval
and to facilitate
the transaction |
| • |
Requires
investor
to sell the
property |
| • |
It
is a long
process from
selling to
buying |
|
| Refinance
or 2nd |
| • |
Allows
liquidation
of equity
for investing
without having
to pay taxes
on the gain |
| • |
Can
be done quickly
without having
to wait for
the sale
and closing
of the property |
| • |
Allows
the investor
to hold onto
the property |
| • |
No
complex rules
or restrictions
to follow |
|
| • |
Using
refinance
money to
acquire property
creates 100%
financed
investments |
| • |
Creates
less cash
flow because
of greater
leverage |
| • |
Closing
costs can
make it expensive |
| • |
Cannot
access all
equity as
financing
company requires
some equity
to remain
in home |
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