All Forum Posts by: David Charles Edwards

@David Charles Edwards, as mentioned above 1031 into a portfolio of DSTs could be the right fit. A DST is a hands-off, institutional grade real estate investment (apartments, self storage, commercial, medical office, etc), that allows the investor the option to diversify into multiple markets and industries around the country. DSTs can provide steady cash flow, tax deferment and will keep pace with inflation as you are still invested in Real Estate, just passively. Professionals with decades of experience and proven track records do all the heavy lifting. Investors must be accredited. Here is a blog post written by Leslie Pappas, you may find it speaks to you.

https://www.biggerpockets.com/member-blogs/7993/48729-are-your-rental-properties-weighing-you-down

Since you said you want to be more passive, here are your only options in my opinion:

1) 1031 into A DST

2) Sell and pay capital gains tax and take proceeds to invest in mortgage notes at 12%

3) Keep what you have and hire a property manager.

4) Do a combination of all 3 above for diversification purposes.  Maybe keep those properties that have the most appreciation potential.

 This definitely is a big brain move @JD Martin !! Especially if they're all paid off!! But I would definitely restructure to remove exposure, shouldn't be too much of a lift to organize LLC's and proper trust!

Just my $.02... 

I am selling my 15 SFH portfolio as well ... About the same age..

Have your accountant run the cap gain numbers before you make a decision..

My properties average around 13% of sale price .. Most purchased around 100k and now worth +400k ... 

We began selling 1 to 2 smalls directly to first time buyers in 2017.  We still sell at least 1 per year this way, recently with seller financing since mortgage rates are so high. Part of our why is to give 1st time home buyers a hand up with a square deal.  All the commission savings are passed to them with concessions or price reduction. 

Yet accessing the equity is not your goal! The goal is simply to be able to drink wine and fish. Hence hiring a PM is a singular independent solution. Yes, there’s a cost to that (as with any other approach) other than what you’re currently doing. 

The strategy has to be adjusted for your own particular circumstance and interest rates relative to rent are a big factor. In a very low interest rate environment you can unlock some pretty massive amounts of equity and still cover costs. In a higher rate scenario it becomes somewhat riskier and harder to do. Not any different really from BRRRRR (I add the 5th R for "reserves"); sometimes and some houses it is difficult to make it work but you can usually make adjustments that will pencil, such as leaving some equity behind.

 If you are asking/expecting that there's a way you can access $1.5 million in capital gains without any cost, the answer is no. The only question then is if you'd rather pay 20% LTCG plus ordinary income tax on your reinvested proceeds or 5% effective rate on maintaining your investments while harvesting the equity you've accumulated. BTW, it's not a "theory" but simple math and what the truly wealthy do all over the world. The higher the delta between your cost to operate and your ability to generate income, the wealthier you will be. There's no such thing as "no cost" to anything since at a base level you're going to pay taxes. Avoiding paying higher taxes than necessary is a huge part of both generating wealth and holding on to that wealth, plain and simple. 

What extra income? I must be missing something because I don’t see how this equity harvesting scheme is supposed to add income in his pocket. He’s currently NET $112k on $1.5M assets because he has no mortgages. This is income he is counting on NOW. Mortgage them all and the income that he’s currently living on goes away - traded for a lump sum of cash. So then divide that lump sum over the 15 years of the mortgage hold period and it’s a NET LOSS compared to what he’s doing now. 

Heres a per unit look at it:

$125k equity per unit 

$100k cash out (80% LTV)

$12k annual loan payment on $100k  at 8.5% (there goes all his rental income) 

So then let’s look at his cash windfall. Divide the $100k cash out over 15 year proposed mortgage = $6666/year. This is less than his current return. 

I think equity harvesting only works if you can find another investment that produces a higher return than the borrowing rate. This was doable back when rates were 3-4%. At 8.5% not really possible.  I’m no expert so please show me I’m wrong because I’m in a very similar situation and I just don’t see it. 

As for 1031’s…

1031s are almost impossible to pull off, even if you’re simply trying to leverage into a higher value single property. Most people who do this are not worried about the keeping the income they’re currently making. But try pulling off a 1031 AND keeping the income that you’re getting on the current property. Almost impossible because typically as property values go up with a larger property the RELATIVE rent you can charge goes down. For example…I can charge $2700/month for my paid off $400k property. But can I charge double that if I leverage into an $800k property? If so I’ve never seen it. Add in the new $400k mortgage you think I’m still gonna my to be able to make that $2700/month? I don’t think so… 1031’s work for people who still are earning their living elsewhere and it’s purely an equity leverage up decision.