All Forum Posts by: David Charles Edwards

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. 

 There is plenty of middle ground. Owning 2 is significantly less headache than owning 15. 

Hey, I said "relatively low"! lol - definitely did not mean to insult, but show you an option.

Managing a tenant/unit takes the same amount of effort, regardless of how much the rent is. Actually, you typically have more headaches with lower-rent tenants.

So why would you not want to manage half the units for the same revenue?

@David Charles Edwards to reinforce your preference to not move around a lot, making your rentals your primary residence won’t get you that far. If you rented the property first, you’ll have to pro-rate the gain based on non-qualified use. For example, if you rented for 25 years and then lived in it for 2 years, the capital gain exclusion you’ll be eligible for is 2/25 of your gain. You’re also on the hook for depreciation recapture, which is likely larger than your cap gains.

You can consider 1031 into a DST to simplify your transactions. Then you can 1031 your DST into a single property and figure what you want to do with that property.

Those Annuities don't sound great, 6.4% yield if just you on the policy and only 5.8% if you add your wife to inherit the policy if you die someday (sorry but high likelihood, nothing lasts forever)

consider as recc above, find a few good syndicators with several upcoming deals you can identify within 45 days of the sale of your condos (sell all 15 as a package to some investor), then invest as a TIC, tenant in common, with one syndication deal, there won't be any fees, then make sure it's a longer term 10 year at least investment, then keep rolling until death. Then kids get the step-up. I recc NNN-multi-tenant large shopping centers that due cost segregation analysis at purchase to get maximum depreciation up front. CRE retail has good fundamental outlook next 5-10 years due to lack of supply. This segment has been big picture stable last 100 years. Also, multifamily (now down 30%) but wait 1-2 more years for massive new supply to be absorbed. I just invested in 3 different Data centers, they are too high risk for most people to consider, especially in retirement. Industrial is great too, long term, but a little overpriced still for now.

or sell, pay the taxes, invest in VOO, get 8-10% next 30 years, or invest in REITs, get 10-12% next 30 years

or buy MUNIs, i'm getting 5% tax free, which is an effective yield of  7.94% for part of my emergency fund

If you die 1 day , 1 yr, 1 decade after you sign an Annuity, they keep all your money, your wife/kids get nothing, unless you add them, but then the returns do go way down and they were low to begin with, Remember the Annuity company is investing in VOO and last 20 years got 13% a year, (long term 8.4% since 1801) they pay you 6 and keep the rest, good luck brother :)