Over the years clients would discuss their property, their portfolio and what they would like to accomplish or could envision n the future. Our clients looked for advice and although they could find real estate agents growing on trees and financial advisors for stocks and bonds can be found the investor with a house, condominium or one apartment building to a small portfolio has real difficulty in finding an advisor conversant in all facets of real estate and that can listen to a clients full strategy and help them develop a long term real estate strategy including one of simply holding for the long term.
To demonstrate Cal-Prop's capabilities in this area please review the following five examples: a doctor, "Ready to Retire", a retired gentleman, an entrepeneur, and a small business owner.
Dr. X, in 2003, had read our annual newsletter and came into our office. He had three properties in Pacific Beach and had the same manager for about twelve years. Management had operated under the "keep rents at the same level and keep the same tenants for years and do as little maintenance as possible" philosophy. It works for a while.
When Dr. X came into our office he said he wanted to take a comprehensive look at his properties and possibly take a new direction. Dr. X and Rick Thornton performed a walkthrough inspection of all three of his properties. Property A was a well- located 8 unit near the bay in very poor condition and very low rents. Property B was a well-located 9 unit with very large units and lots of parking within eight blocks of the ocean in extremely poor condition and extremely low rents. Property C was in tear down condition and extremely low rents. The portfolio represented a lot of potential, but the properties potential was not being utilized.
Dr. X asked for my recommendation, which was as follows: Property A had to be rehabilitated immediately and I offered two different scenarios a light rehabilitation and a full rehabilitation. Property B we should do a minimal rehab and raise the rents to market and take a look at the property again in five years. Property C was a tear down. The units were too small to rehab and I recommended three scenarios the owner could contract with a design/builder(long term contact), complete a joint venture with a design/builder or sell to a developer and complete a 1031 exchange into a newer property.
Dr. X looked at the options and concluded on the following strategy: Major rehab on Property A, a light rehab with maximum rent increases for Property B and to sell property C and complete a 1031 tax deferred exchange. The result of these moves was on property A: An increase in net income from $12,000 per year to $42,000 per year and a completely rehabilitated building. Property B: An increase from net income of $16,000 per year to $32,000 per year and decreased liability through a well-maintained building. Property C: An increase in net income from $5,000 per year to $10,000 per year and purchased two high quality well located buildings to replace a building that was falling down.
Ms P has three properties with 4 units each in Pacific Beach that she had purchased through Cal-Prop in 1991. There were tremendous locations. She had weathered the storms of the mid-nineties market and she was about to retire and she had significant equity. She further needed some cash to pay into an old retirement plan, which would increase her retirement stream. The year was 2004 and interests rates were very low and her variable loans had a 7% floor. We reviewed all of the options including selling and paying taxes, selling and carrying paper, converting to condominiums, only doing a refinance and finally doing a re-finance and re-position the property as luxury apartments. In the end Ms P chose the last option. We refinanced, pulled enough equity to pay down her retirement plan, completed a full remodel of the units for $350,000 and her net cash flow on the units went from $25,000 per year to $60,000 per year.
Mr. D has owned his apartments for over 20 years. They are in an extremely good Beach location, but are aging rapidly. Based on the value in today's market despite the fact that Mr. D has a very attractive Prop 13 property tax payment and the properties are free and clear the return based on current equity is 3.25%. Mr. D is retired and wants to cut down his involvement in oversight and management. Cal-Prop proposed and assisted Mr. D in selling his buildings to a condominium converter for an extremely attractive price and completed an IRS 1031 Tax Deferred Exchange in a Tenant-in-common (TIC) property. The TIC yields him a management free 8% return on his money. TICs can be found with 7 to 10% return in California and across the country.
Entrepreneur T owned four apartment buildings in Spring Valley, Ocean Beach and City Heights. He had recently purchased a continuing education school and wanted to use his equity to purchase a hotel that would bring synergies through utilizing the hotel for training purposes for the new school. Mr. T took advantage of the strong market to sell to condominium converters and sold two buildings and enacted a IRS 1031 Tax deferred exchange.
Small business owner R
Small business owner R and his two brothers received a property in Trust from his father that was free and clear in an outstanding location. He also owned a house in Clairemont. The four-unit free and clear was placed under management and the net income was maximized. The house had enough equity in which to trade up. A 1031 exchange was utilized. We traded up into a better location and for a newer property and for equivalent cash flow. Mr. R was very happy with the results.
These real life examples provide a good picture of what Cal-Prop can do for you:
Whether you have one property or a portfolio of properties please feel free to contact Rick Thornton at email@example.com or 858-483-3534 ext 13 to evaluate and discuss strategic asset planning for the small investor.