Client Profile Case Study: Travis & Michelle, 1031 Exchange Journey
Background: Millam Real Estate Group case study of real estate property owners Travis and Michelle who purchased a rental property in 2014 for $264,000 with a long-term investment strategy focused on property appreciation. Over the years, the property demonstrated robust equity growth but struggled with negative cash flow, prompting the consideration of a 1031 Exchange.
Considerations for Selling Now:
- Net operating income: Negative $3,000/year
- Mortgage: 15-year vs. 30-year
- Cash Flow: Underperforming
- Equity: Overperforming
Home Sale Details:
- Original Purchase Price: $264,000
- Selling Price: $417,500
- Proceeds for Reinvestment: $255,000
- Appreciation: $150,000 (58% rate of return!)
- Taxable Proceeds: $192,000
- Estimated Tax Liability without Exchange: $82,000
Reasons for Considering a 1031 Exchange:
- Increase Cash Flow
- Diversify Portfolio
- Leverage Opportunities
Three Action Steps:
- Identify three different markets with even better ROI on home sales.
- Analyze the potential for future sales or rental income.
- Purchase three new properties using a 1031 Exchange.
After some exhaustive research, here were the three properties that were in contention and that the couple ultimately decided to invest in:
(1) Acorn Ln:
- Purchase Price: $275,000
- Down Payment: $68,750 (25%)
- Gross Rents: $2,000/month
- Annual Realized Income: $8,093
- Cash on Cash Return: 11.77%
(2) Beaver Brook:
- Purchase Price: $252,000
- Down Payment: $63,000 (25%)
- Gross Rents: $1,795/month
- Annual Realized Income: $7,612
- Cash on Cash Return: 12%
(3) Derby Dr:
- Purchase Price: $260,000
- Down Payment: $65,000 (25%)
- Gross Rents: $1,995/month
- Annual Realized Income: $8,431.23
- Cash on Cash Return: 12.97%
Here is the Leverage Strategy broken down for the 1031 Exchange reinvestment:
- Total Reinvested Purchase: $787,000
- Total Down Payment: $196,750
- Total Net Rental Income: $5,790/month
Here are the final results:
- Increased Net Operating Income from -$3,000/year to $24,136/year.
- Diversified portfolio from 1 home to 3 detached homes.
- Enhanced overall financial portfolio.
- Potential tax savings on the resale due to 1031 Exchange.
- Increase Cash Flow
Conclusion
Travis and Michelle successfully leveraged a 1031 Exchange to strategically reinvest in three properties, which resulted in an increased cash flow, provided them with stronger portfolio diversification, and improved their overall long-term and short-term financial performance.
A Certified Real Estate Planner is crucial when it comes to guiding you through creative real estate planning as part of your overall financial planning strategies.
The Millam Real Estate Group described the critical role a Certified Real Estate Planner played in identifying optimal markets for Travis and Michelle, guiding them through a seamless exchange, ultimately maximizing their real estate investment potential.