Case Study #1 – From “Hands-On” Management to Passive Real Estate Investments
Apartment Sale and 1031 Exchange into Passive Real Estate
A family owned a 33-unit apartment building in La Mesa, CA for more than 20 years. Although they took great pride in the property and kept up on the maintenance and management, it became clear as the parents got older that their adult children were not interested in taking on the full time management when it was their time to retire. The family was also concerned about the increasing expenses of managing the property and the possibility that California could remove the Prop. 13 exemption for apartment owners in the future. After consulting with ACRE and their financial advisors, they determined that their best strategy was to sell the property and utilize the IRS 1031 Exchange Rule to defer their capital gains taxes and re-invest into passive real estate properties, whereby increasing their cash flow and eliminating management responsibilities.
After careful research and planning, ACRE marketed the apartment property and found a qualified investor. While still in escrow, their ACRE team began to search for exchange properties, ultimately selecting and closing on two brand new, corporate-owned 7-11’s and a fully remodeled KFC/Taco Bell. All three properties were absolute triple net properties, which means that for the next 10-30 years the family would enjoy steady increases in cash flow, without the need to worry about unexpected expense increases, rising utility and tax bills, or the cost of making major improvements like painting the exterior or replacing roofs.
As a result, the family now enjoys a stable investment income stream that will increase over time. Ultimately, this investment portfolio will be transferred to their children and grandchildren without concerns regarding proper management, reoccurring maintenance or increased operating costs.
Case Study #2 – Growing an Apartment Portfolio
Apartment Sale and 1031 Exchange into Apartments
An apartment owner, who was referred to ACRE by a past client, owned a 10-unit building in a tertiary market. He was frustrated by his lack of cash flow, below average tenant profile and medial appreciation over the 9 years of his ownership. His ACRE team analyzed his asset and put forth a strategy where he could sell his current 10-unit apartment complex and utilize the IRS 1031 Exchange Rule to purchase a 23-unit apartment building in a primary market whereby greatly increasing his cash flow and return-on-equity with a newer, better located property with a superior tenant quality.
Not only did this client grow his asset size, but he bettered his cash flow and has experienced an immediate appreciation in his property, based on recent apartment sales in his neighborhood. Further, he was successful in improving the quality of his property through capital renovations and has, in turn, increased the rents and lowered the expenses. His plan is to hold the asset for the next five years while enjoying his attractive fixed debt until his loan expires. At that time, he plans to relist the property with ACRE, sell and find a larger asset in which to invest in efforts to increase his wealth and produce more annual cash flow for retirement.
Case Study #3- Economies of Scale
Multiple, Smaller Apartment Sales and 1031 Exchange into a Single, Larger Apartment Asset
An owner and operator of various, smaller apartment buildings met with ACRE to discuss the viability and financial prospect of consolidating five smaller apartment buildings into one, larger apartment complex. The client was tired of the driving distance between his properties and was interested in consolidating his ownership into one property. His ACRE team put together an in-depth Pricing and Marketing Analysis for each of the five smaller properties he owned, ranging in unit size from a 5-unit building to a 14-unit building. His ACRE team also included a marketing and sales strategy that showcased the process in which they planned to sell his five apartment buildings while utilizing the IRS 1031 Exchange Rule to reinvest him into one, 60 to 80-unit building. His team at ACRE, along with his CPA and Attorney, devised a plan to sell the assets together as a portfolio, manage his exchange timeline risk and identify three potential replacement properties for acquisition.
Overall, his ACRE team was successful in selling all five properties to two qualified investors while sourcing and securing under contract two larger apartment complexes. In the end, the client fulfilled his 1031 Exchange within 55 days after closing escrow on his five separate properties and closed escrow on a 70-unit, Class B apartment complex in an excellent area. With ACRE’s help, the client was successful in greatly increasing his cash flow, ease of management and maintenance through economies of scale. Additionally, the client doubled the number of apartment units in ownership with one asset in a strong, primary market in San Diego. He has since utilized his ACRE team to sell two additional smaller properties in which he bought another larger apartment complex whereby increasing his cash flow and return-on-equity.