In this episode, Bob Nelson of Pacwest Real Estate Investments and René Nelson of Pacwest Commercial Real Estate Investment discuss how a 1031 tax-deferred exchange can protect your investment by deferring capital gains tax costs when it’s time to sell your apartment complex and move to a less management-intensive property to maximize your cash flow.
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I’m René Nelson with Pacwest Commercial Real Estate. I’m a CCIM and a counselor of real estate.
I’m Bob Nelson, also a CCIM by professional designation, and a counselor of real estate, certified at the national level. I’m Pacwest Real Estate Investments. We are related by the first name, obviously, Pacwest. Pacwest Commercial Real Estate, Pacwest Real Estate Investments. Each of us specializing in a little different offering, working together when we need to, working separately on projects, investment situations when that’s called for.
Investment Strategy and 1031 Tax Deferred Exchanges
René Nelson: One of my niches is multi-family, and I have a lot of clients that ask me how they harvest equity and how they use that to bolster their portfolio. I know you’ve got a lot of great strategies, Bob. What’s your ideas on that? If I had an apartment complex, what would I do with it?
Bob Nelson: Well, first of all, I think we would analyze it, and we’re not doing that for a fee. We’re trying to figure out what your game plan is, what your strategy is. We can evaluate it, is there more things that can be done… are there more things that could be done with the property that you currently own? Is there a value-increasing opportunity by doing certain things to the property? You may say, “But I don’t have the cash, or I don’t have the interest in doing that.” Well, fine. Then we identify what you might also do with that same property.
But, for instance, as an example, we may find that you have a huge equity in a property, however, it’s got a mortgage on it and that mortgage has the same size payment as it did when you initially took it out. So, it restated the cashflow as going up somewhat, but the mortgage payment’s still chewing up a large portion of the cashflow. In some instances, is to refinance one of the properties that you have, harvest the equity, the refinance proceeds, the net loan proceeds, and pay off the other property. Now, all of a sudden, the cashflow steps up nicely and we can increase your performance that way.
Other instances, it’s not just refinance to pay down debt, it may be refinance to pay for a kid’s education, college educations, health bills, things that have happened where we would be able to pull equity out of something that you own that’s still performing nicely and utilize that to advance your personal life experience.
Other instances, it’s not just the refinance, it may be, in fact, to literally sell, if you find the thing is at the top of the market, and the benefit would be to go out at the top of the market, take the equity, tax deferred, not paying capital gains tax, operating through a 1031 tax- deferred exchange, moving it into a different asset with a different loan balance, a different loan strata where the property now, that you have gone into, produces a much higher benefit and a greater opportunity in the future.
Some would say the apartments have kind of run their course. At the same time, would I recommend somebody buy apartment? Sure. They’re always safe. You got two choices. You can live in an apartment or you can live in the street, I guess. The option of living in an apartment is always comfortable. We always know there’s going to be tenants for that property. Other types of properties, maybe there isn’t a tenant for it. If things happen, the economy changes and so forth.
René Nelson: You’re talking about office or retail-
Bob Nelson: I’m not saying apartments are bad. I’m just saying that for some people, they’re saying they’ve kind of run the course. I’ve enjoyed owning an apartment, now put me into something that is less management-intensive, less risk-oriented, greater dependable cashflow by the nature of the tenant, and so forth. It could be an office, could be a retail shopping center, could be a number of different things.
René Nelson: In the next video, Bob, let’s talk about how someone would go in and talk to a lender and get pre-approved and get ready to make that transition to either harvest equity or to go and buy more units or change their portfolio.
Bob Nelson: That makes sense.
René Nelson: Great.
Bob Nelson with Pacwest Real Estate Investments is an expert on 1031 tax-deferred exchanges. He can help you make the changes you want and need while ensuring that your investment is protected. Give him a call at 541-485-8100.