What is Increasing Net Worth, Worth? (Guest Post)

I couldn’t really ask for a better testimonial from a client. Thanks, Paul.

“What is increasing net worth, worth?”

net-worth-clientI was signing papers in an escrow office a month ago when I came upon some vital and surprising statistics. Not as vital as my heart rate or blood pressure, but still, very meaningful to me:

Total Assets: $2.26M – Net Worth $1.122M – Total Liabilities $1.138M. (see image above)

Why was this meaningful? Three years ago I had a net worth that was negative – essentially my $45,000 of student loan debt.

In that same year, 2013, I decided to buy income properties to build wealth and have a good long-term plan for developing passive income. My realtor, David Brundige, helped me find an undervalued fourplex in Koreatown. I bought it and, through some strategy and work, rented all the units at 50% higher rents than the seller estimated was possible. Now I had a cash-flowing fourplex in Ktown, minutes from Silverlake, Echo Park and Downtown LA.

One keeps a solid, cash-flowing property for 30+ years, right? That was the plan according to the standard “buy and hold” strategy. But as I considered how much I’d already increased the value of the property in year one with higher than expected rents, and how long it would take me to save up enough for my next property, I began to seriously question whether to hold or to sell the property. I discussed my impatience with David and he told me if I sold the property through a 1031 exchange I could buy something bigger, or maybe two properties, to replace my original fourplex investment. Then I’d have increased my equity and assets considerably while shielding profit and cap gains from taxes.

Against the advice of the fairly vocal “buy and hold” crowd, and after owning it for only one year, I put my first fourplex up for sale in 2014. David helped me sell well-above list price and just as planned the significant profit and 1031 tax deferment allowed me to buy two more properties with the proceeds. And a year later, in 2015, using the same formula that we used to sell my first fourplex, I sold my second fourplex and bought two more properties, bringing me to a total of three properties.

This brings me to my post’s title: What is increasing net worth, worth? Is it worth selling a property that will likely appreciate over time? Is it worth the energy it takes to reposition your property and increase its value? Is it worth the risk that when selling and buying in a 1031 exchange you may not hit your targets? For me, the answer to all of these questions is an emphatic yes. David helped me go from a negative net worth in 2013 to a $1.122M net worth in three years through two 1031 exchanges. If you feel handcuffed by your current property’s income stream and you have the potential to become a successful income property investor, David can help you to develop that potential—and you’ll find yourself making much smarter real estate decisions than you imagined you could.

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Sold! $110,000 above asking and that’s not the full story…

Closing my recent listing, the Glendale fourplex (1414 Dixon), at $1,305,000 this week answers the age-old question of “why sell.”

Not only did we negotiate $110,000 above asking, but the property also went into escrow like lightning speed. We had strong interest from several buyers, but ultimately the Seller favored the Buyer with the best financials and was most likely to close. The property went into contract 7 days after it went on the market, and closed in a 47-day escrow.

The hidden story behind this fourplex is that the Seller bought it with me in late 2014 for $860,000 and made $445,000 difference on the sale in less than 18 months time, minus closing costs and improvements on the property. Now we’re targeting two more properties that he can buy with these proceeds in a 1031 exchange (tax free), and hopefully do the same thing again next year.

There was no reason to sell 1414 Dixon, except that the landlord knew that he had maximized the property with the resources he had, and could do the same to a different, under-utilized one with new resources from the sale. If you have a property that you are curious about selling, please get in touch.

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Main StI just closed a property in an area I never expected to work: South Central Los Angeles. I have fearless buyers who are focused on the bottom line, and the bottom line pointed them very far south of the 10 freeway. We closed 8306 S. Main St. at $395,000 with rents at $4,120 per month. That’s a GRM of 7.99! You can’t find that in Echo Park, Highland Park, or even Boyle Heights.

What are the trade-offs here? The plus is you have excellent income with nice tenants. Three out of four tenants have Section 8 help, so the government cuts you a good paycheck every month and stays on top of them. We paid all cash and my clients stand to make 9.6% on their investment per year. If they refinance they’ll make over 17.5% on their cash per year.

The negative is that it’s not a high-growth neighborhood and there’s more crime. However, that doesn’t mean there won’t be appreciation. The previous owners bought the property for $250K in 2010 and just saw a 63% return in two years. That’s not bad.

What’s the lesson here? Do what you’re comfortable with. But if your true focus is the bottom line, a good investment is a good investment.

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Mid-City awesome Fourplex

There’s a huge fourplex that went on the market today in mid-city.  If you know the area, you know Paper or Plastik café.  While it has low-ish rents now, one of the big units is vacant and you could move in and still make cash flow.  If you want to live in a 2.5-bedroom apartment and put down approximately $160,000 to own a gigantic fourplex in an improving neighborhood, let me know! It’s going to get snatched up fast so strategy is key.

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Listing Agents & FHA

I’ve stopped asking agents if they’ll accept FHA loans. I had done that previously so my clients don’t waste time driving to a property they have no chance of buying. (FHA loans are sometimes less desirable because there are a few more steps to closing the deal.) While normally I give agents credit for knowing the difference, last week I actually startled a young agent with the question.

“Yeah, why not. We’ll take whatever the highest offer is.”

This is my kind of agent, I thought. I told my client that we had a good chance to get this place. She went to see it.

Two days later, we came in at the highest offer. The listing agent told me so (are we sensing something amiss?), and that the seller would accept our offer that afternoon.

Several hours of no phone calls later, I get a text saying they’ve countered a lower offer that has a higher down payment.

What could have happened between the morning and late afternoon?  Did this agent Google “FHA loans” and get scared?  I texted back that this property would surely assess (it had in city records already and had the rent roll to boot), but the agent didn’t want to go back to the seller and look silly.

The truth is, agents should favor FHA loans when they are higher offers, especially if the property will most likely assess.  Some agents want cash only if it’s a short sale or the building’s decrepit and they don’t want assessors near the place.  But this listing agent’s first instinct was actually the right one.

Now I refer to my client as “my FHA buyer” once to see if there’s a reaction, and if not, we don’t mention it again until the purchase agreement.

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Boyle Heights 3-plex! Hot!

The best deal on the market right now is a 3-plex in Boyle Heights for only $300K.  Good rents.  Just came on.  Let me know if you’re interested!

UPDATE (3/6/13): This property sold within days at $340K. Also, my broker and I think alike.

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