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Re-Evaluate Your Investment Property

Jennifer Openshaw

You know me better than that.

Actually, I'm a firm believer in the short- and long-term prospects of real property investments. True, we're going through a soft spot now, but really, I believe we're OK.

So why the dire headline? Should you pitch your properties out the window and head for cover? That's not what I'm saying at all.

If you really think like an investor, conscious of investment returns and fully realized tax deductions, take note. It might be time to sell.

I know it may seem counterintuitive in a soft market.

But soft markets are a good time to pick up other investments at attractive prices. And the 1031 exchange really makes it possible.

Here's how it works. Unlike most investments, where unlocking profits triggers capital gains taxes, real estate investments enjoy a special tax umbrella.

You can reposition your portfolio without taking a tax hit. You can sell appreciated property and reinvest into others without paying a dime in taxes. That's huge. Wouldn't you love it if this worked for other investments? But it doesn't.

Click here for the video version of this story from Jennifer Openshaw.

My good friend Kevin Daum, founder and CEO of Stratford Financial Services and author of What Banks Won't Tell You, gave me some tips on why you should sell, and how to reposition your investments.

• Unlock your cash. You're an investor, so return on investment is the name of the game. And you have a property that has grown, say, from $200,000 (when you bought it with a $50,000 down payment) to $500,000. Now you have $450,000 in equity. Nice, but for all intents, it's dead money, especially if you have other opportunities. And your return on investment -- the income and appreciation generated per dollar of equity -- has dropped.

  You can sell that property and redeploy your cash into two or more lower-priced properties. Suppose you buy two $250,000 properties, each with $50,000 down. Not only do you have $350,000 left over for something else, but you get more leverage and potential gain on each $50,000 deployed. And you'll realize other benefits, as I'll show.

• Increase rent-to-value. The principle of subdividing -- breaking large things into smaller things allowing you to charge relatively more for the smaller things -- works in rental property, too. Put another way, rents per asset dollar value, or rent-to-value (RTV), for high-end properties are less than for lower-end properties.

  If you sell an $800,000 house and buy four $200,000 properties, the sum of the four rents received will exceed the single rent for the more expensive property. The more expensive property may have rented for $2,800/month, while the smaller ones rent for $1,100/month each. The math is simple: RTV goes up.

  And the vacancy risk is reduced, too. One vacancy on a single $800,000 property costs more than one out of four $200,000 rentals.

• Maximize tax deductibility. For investment property, the rules only allow interest deductions on mortgages up to the lowest loan amount during ownership.

  So you have that original $200,000 property financed with a $150,000 mortgage, now worth $500,000. If you've paid off $20,000 in principal, now you can only deduct interest on $130,000, even if you refinance at a higher loan amount.

  Now suppose you sell for $500,000 and buy four properties for $300,000, putting $100,000 down on each. Now, instead of deducting $130,000 in interest, you can deduct interest on the full $800,000 in loans against the income you receive, while also getting greater rent-to-value and leverage on your investment.

As you can see, I'm not talking about abandoning the real estate market at all. I'm talking about repositioning your assets to achieve greater returns and to spread the risk across several investments. It's what I call smart investing.