Lots of F*cks Given. Now What?

I was on a call earlier this week, reviewing the portfolio reallocation of an active investor transitioning to a passive investor.

This week in The TradeOff I'll explain why it led me to sell off some properties. You might want to consider doing the same.

This real estate investor had a portfolio of multifamily properties valued at $25 million, with $17 million in recourse debt.

ACTIVE INVESTOR:

I often hear that being a real estate investor equates to passive income. However, based on my 20 years in real estate, being an owner rarely mean things are passive. This was true for the investor in question. Although professionals managed his properties and rents were being collected, almost every week presented a new set of problems and challenges. This led to stress, and he gave "a lot of F*cks" all the time. On top of that his equity position of $8 million was generating about $8,000 per month in cash flow, with a looming $17 million in recourse debt hanging over his head.

PROBLEM:

The issue? He had a substantial Equity/Net worth of $8 million but only a tiny cash flow, approximately 1% ($96,000/year).

In essence, everything was upside down: heaps of recourse debt, minimal cash flow, and lots of F*cks given.

SOLUTION:

Through a passive investor portfolio reallocation, he managed to eliminate all the recourse debt and boost his monthly cash flow to $30,000 per month

Highlights of the Portfolio Reallocation:

• $8M invested in 8 funds/passive investments.

• Current cash flow is $30,000/mo, expected to rise to $40,000 by February 2024.

• The $8 million is projected to appreciate to $12 million in 3 years, with monthly cash flows anticipated to hit $50,000.

• No taxes owed from this transition - thanks to a 1031 exchange into 5 funds and projects, which will initiate accelerated depreciation to cover investments not rolled into the 1031. Plus, there's a $700k tax credit.

• F*cks Given per Week Now? ZERO!

WHAT TO LEARN FROM THIS?

You might not have $8 million in equity producing a mere 1% cash flow. But similar scenarios are more common than you'd think.

For instance, I own properties I bought for cash several years ago for $9,000 and $20,000. (I know back in the good ole days) Which together rent out for a total of $1500/month.

That's $30,000 invested, bringing in $18,000 a year - a 60% return, which sounds great, right?

Not exactly. These houses are now worth $300,000. After deducting expenses from the annual $18,000 rent, the net income is closer to $10,000. That translates to a mere 3% return on my equity in these properties. While they've appreciated impressively, and I've collected substantial rent over the years, the equity isn't working hard enough. aka LAZY EQUITY

As a result I am pruning my portfolio, directing funds to avenues targeting higher expected returns. I estimate the $300,000 equity in these houses could generate around $3,000 month after fees, making a 350% increase in my cash flow from that equity.

With inflation driving up real estate values, I'd urge investors to evaluate their portfolios. Consider what I did and maybe it’s time to sell off some under performing assets. Do an analyze on your investments, but also weigh the present-day value of each asset. If you spot lazy equity, it might be time for a shift. Remember, such moves might lead to capital gains, so consult a professional advisor to map out the best strategy.

If you need a good tax CPA for this let me know I can share with you an excellent one.

Until next week,

Jake