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Middle-Aged, High-Income Professional Middle-Income, Empty Nesters with Recent Inheritance
Objectives: A higher rate of return than achievable in money market funds; tax savings; some liquidity for other opportunities that may arise. "Kim Rutledge" is a 30-year-old salesperson with a small corporation involved in retail sales. She averages about $60,000 a year and will soon take a management position. She has $30,000 she can invest in real estate. Financial situation: Kim is single, with no dependents. Her income has been rising steadily for five years and is sufficient to support her. She owns a condominium for her own use. She has no retirement fund at her company. Cash is currently in a money market fund. She usually pays $15,000 to $16,000 in income taxes yearly. Discussion points and alternative strategies:
Solution: After physically viewing various condominium projects, Kim decided to invest $20,000 in a limited partnership involved in renovating a small downtown office building. She received 10% interest in the property for her investment. The first year of ownership will yield $4,000 in taxable loss, plus over $1,000 in cash flow. The $4,000 taxable loss will continue for a few more years. The cash flow before tax has been minimal; the building is still carrying a 20% vacancy factor, but is expected to attract tenants in a tightening market. The partnership projects a sale in Year 10 of ownership. With this project doing so well, Kim has decided to concentrate on tax-oriented partnerships for her portfolio and to avoid smaller projects that she might own herself. She now uses Internal Rate of Return (IRR) as a comparison tool to measure her real estate investments against the current money market rate.
Objectives: Building a portfolio; diversifying investments; tax shelter; avoiding negative cash flow; appreciation in value. "Brian Kile" is an investment banker in his late 20s who is enjoying an excellent market, two back-to-back years of earning $200,000 annually, plus end-of-year bonuses. Although he has a 401(k) and a number of investments in stocks and mutual funds, he wants to diversify into real estate. He is not sure how many more high-earning years he will enjoy before the market cools. He often works 80 hours a week and thus has little time or inclination for hands-on management. Financial situation: Brian can live comfortably on $75,000 per year. He is not interested in purchasing a home. He estimates that at his current level of earnings, he could afford to invest at least $100,000 per year in real estate investments. He does not necessarily want to hold on to an investment until retirement; future income could come from the sale of his portfolio, in whole or in part, as the real estate market dictates. He is seeking to shelter his income, but wishes to avoid negative cash flows in case the stock market experiences a downturn. Discussion points and alternative strategies:
Solution: Brian joined 3 partners in the purchase of a 48-unit apartment project. The purchase price was $2.3 million, with the owners carrying financing for 10 years. The owners guaranteed a gross income for the first two years of ownership. The down payment was $230,000. Management has been hired and the property is operating as expected. Brian has set a strategy of buying one or two investment properties per year to help build his portfolio. He likes small partnerships because of his intense work schedule.
Middle-Aged, High-Income Professional Objectives: Positive cash flow; tax benefits; avoiding overly speculative investments; professional management needed. "Dr. Thomas Painter" is a 45-year-old cardiologist. He has a well-established practice, two children at home, a son in college, and an annual income of $200,000 to $300,000. He currently owns a 20-unit apartment project, a partnership unit of a piece of development land, and a vacation home on the beach. Financial situation: A high-tax-bracket professional, Dr. Painter has owned apartments for seven years, has a low interest mortgage, and a $150,000 to $200,000 equity position in the apartment project. He has $150,000 cash in a CD available for investment; and has open credit lines of another $100,000 if needed. Property does not have to be local and liquidity of invested capital is not important to him. His income is expected to continue at the current level or higher. Discussion points and alternative strategies:
Solution: The owner of the building that houses Dr. Painter's office was approached about selling the office building, to which he agreed. The sale price of the building was $950,000, requiring a $175,000 down payment. The balance was financed by the doctor's bank at 8.5%. The property is an attractive building and the doctor seems very satisfied with the benefits it could provide. Additionally, his corporation pays rent to the buildings account. The doctor's accountant and broker are currently working on a way to help him take advantage of his $200,000 equity position in the apartment project.
Middle-Income, Empty Nesters with Recent Inheritance Objectives: Low-risk investment; income for retirement; liquidity; tax shelter. "Mike and Stacy" are in their mid-50s and have two children who have finished college and live independently. Mike is a blue-collar worker whose salary is $55,000; Stacy earns $35,000 as a nurse. They own their home outright, having paid off their mortgage early. They have some management and maintenance capabilities, but do not want management "headaches." Financial situation: The couple will receive $200,000 after tax from Brad's father's estate. Brad's income is secure and is likely to remain at this level until he retires. They have $20,000 in savings, in a CD. Discussion points and alternative strategies:
Solution: The Bradley's purchased a five-year-old brick building leased to a union's credit union. The credit union has signed a 20-year lease with increases built in every three years. The Bradley's maintain the exterior, parking area, and yard, but the union handles everything inside. Owner financing was used, which increased the projected IRR (Internal Rate of Return) to over 18% after tax. The rental increases were projected at 10% every three years and the building was conservatively projected to appreciate in value by 15% over the next 10 years. The purchase price of the building was $570,000, with a $142,500 down payment. The mortgage will fully amortize in 15 years.
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