Please Evaluate My Plan

[Michael Swan]

A little background first. In 2011-2012 purchased with 20% down loans 10 condos in sunny San Diego. Averaging about $48,000.00 cash flow. Life was good. Then I calculated my return on Equity and noticed San Diego property values escalating rapidly in about the end of 2014. The return on equity was barely 3%. Sooooooo, decided after educating myself, decided to begin 1031 exchange these 2 and 3 br condos in for Apartment complexes in North East Ohio. I traded in one Condo in June of 2015, that was cash flowing $4,000 a year for a ten unit apartment complex in Cleveland Heights, Ohio. Back up a little and the end of 2014 I started buying with cash, duplexes and half duplexes, along with one 4bd/1bath single family in Euclid Ohio that cash flows $3,200 a month presently on a $240,000 investment. I am using the same property manager for the apartment complexes too. They are a small mom and pop property management company. They are parent's of a colleague of mine and I trust them. So, back to the 10 unit in Cleveland Heights, Ohio. I only put down $30,000 on the property in San Diego, that was cash flowing about $4000.00 a year. I bought that property for $125,000 and sold it for $215,000 in Feb of 2015, two years after purchase. The Cleveland Heights 10 unit, after 3 months of repositioning is break even and by Jan I expect it to cash flow at $15,000 for the next 12 months and then with rental increases, cash flow will increases to $20,000. We purchased this property for 420,000. We only put down about $100,000. Then, in August we traded in a condo that we purchased for $120,000 in 2012, that was cash flowing $4500.00 a year for a 15 unit in Painesville, Ohio. We expect after 3-6 months of repositioning to be at $25,000 cash flow. Then, since most tenants are on month to month leases and 100 dollars under market rents, that NOI will rise dramatically. This property we purchased for $592,250.00. Now, presently we are exchanging a property here in San Diego that we purchased for $152,000 in 2013 and just sold for $270,000 for a $500,000 8 unit in a really nice area of Shaker Heights, Ohio. Rents are significantly higher and the tenants earn a lot more money, practically double what Cleveland Heights and Painesville tenants earns. We are signing final loan docs on Oct 3rd. Nice cash flow almost right out of the box. Just have to rent out old owner's unit and one vacancy. Of course at market rent of $975.00 for a 2bed/1bath. Right now all units are at an average of $890.00. Finally, we are selling another property and will 1031 too. My goal is to eventually have $1,000,000.00 in cash flow each year. If you have been where I am going, your suggestions would be greatly appreciated.

Swanny

[Michael Swan]

Hi Justin,

Each of these pricey properties in San Diego were traded in by a 1031 exchange.  We are only putting down 25% down and depreciation, starts all over again, upon purchase.  We can take straight depreciation, or accelerated depreciation on certain components in the complex too.  Our loan on these new complexes are 20 year amortization, 4.8 fixed for 5 years and then we could do another 5 years at the then current FHLB, or payoff loan then.  I want to reposition and sell after 2 to 3 years with a 1031 and use that money to buy a larger complex.  The plan would be to defer,defer, defer, defer, getting to $1,000,000.00 in cash flow and then die.  Then kid inherits, at a stepped up basis, starting depreciation all over again. If he sticks to the plan, he can do the same.