Diversification Case Study

An owner approached us with a problem. A single property she purchased many years ago had appreciated substantially in value. This single property represented a large large chunk of her net worth and she felt uncomfortable "having all her eggs in one basket."

In discussing the owner's desire for diversification, we learned she was comfortable with moderate levels of long term, fixed rate debt. We also learned her day job was a high paying W2 job with minimal tax benefits. Here is what we were able to accomplish for her:

First, we secured a buyer for her current asset with favorable terms to the seller. At closing, the owner placed the sales proceeds with a 1031 Exchange Intermediary. Using the time allowances of the 1031 exchange, the owner identified two replacement properties and agreed to terms to purchase those. Her portfolio now had more diversification.

Second, keeping in mind what we learned in our conversations, we advised the owner to place loans for 50% leverage on the properties. This leverage was long term, fixed rate debt. Adding this debt helped the owner purchase larger assets than she could have cash and the annual principal pay down represented a passive increase in her net worth. We then explained the process of taking bonus depreciation on the properties to offset other income.

At the end of our process, this owner was able to increase her monthly rental income, build long term wealth through principal pay down and reduce tax burden via interest expense and higher depreciation benefits.

Again, this study took less than 2 hours of the owner's time. We were able to advise this owner, help align her portfolio with her comfort levels and provide other nuggets of advice she can implement in the future.

Commercial real estate does not trade on an open exchange. There are many factors that drive value. There are many factors that determine owner satisfaction. Our job is to talk to the entire market, learning what works and what doesn't. We pride ourselves on these case studies where we dug deep to understand the owner's circumstances and helped them achieve their goals, including introducing concepts that they might not know!