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How To Achieve Financial Independence Through Real Estate



Close-Up Of Coins With Model Home On Wooden Table

Eric is a Real Estate investor, founder of MartelTurnkey, and author of Stop Trading Your Time for Money.

Even if achieving financial independence is your No. 1 goal, how to make that a reality is far from obvious. A critical first step is to understand your expenses. Make sure your revenue is greater than your spending. This is basic advice, but a surprising amount of people spend more than they earn. Next, review your spending habits and itemize them so you know exactly how much you’re spending on things like clothing, restaurants and transportation. Identify areas where you’re overspending or buying things you don’t need. This may sound excessive, but make sure your money’s going toward expenses that are necessary or bring you happiness. To use a personal example, one expense I realized I could cut was cable television. I decreased my bill from $230 to $70 per month for high-speed internet and hardly missed all those channels I wasn’t even watching.

Next, find a passive income revenue source to offset your current expenses. Once your passive income exceeds your living expenses, you’ll have achieved financial freedom. But what kind of passive income investment is right for you? You should invest in something you fully understand and that works with your lifestyle, because ideally, you’ll be collecting passive income from this investment for a long time. Find opportunities with the highest, most consistent returns rather than highly volatile ones. Finally, you’ll want an investment that allows you to use leverage by borrowing money to increase the potential return. If the investment also provides tax benefits, even better. I chose real estate for my first passive income investment because it meets all these criteria. 

Once you’ve chosen your investment, calculate how much money you’ll need to achieve financial independence. For example, say you put $20,000 down on a turnkey rental property, and it provides you with $3,000 in annual cash flow. If you need, say, $60,000 a year in net cash flow, you would need to buy 20 properties (i.e., a purchase price of $400,000 for all properties).

Where will you find the money to invest? Examine your bank account, 401k or other retirement accounts. These are not obvious choices to invest from, but certain 401k accounts let you invest directly into a real estate property. Also consider equity in any assets you own, such as your home.

It’s important at this point to really run the numbers. Don’t make investment decisions based on instinct or emotion. For most Americans, the home is their primary form of equity, and they rely on it for retirement. However, factoring in property taxes and repairs, using your home as your main equity isn’t ideal.

Take this scenario: In 2005, let’s say you bought a house on the West Coast for $750,000. You put down 20% or $150,000. In this area, people are having a hard time coming up with the down payment because house prices keep going up and they can’t catch up. You spend $300,000 in renovations over 15 years, paid in cash or perhaps via a line of credit. At some point, you may have to refinance to account for other expenses such as a car.

Let’s say 15 years later, your mortgage balance is now $700,000 and your line of credit is maxed out at $200,000 and you’re ready to generate some passive income and achieve financial freedom. Your home is now worth $2 million. While this seems like a great investment, when you consider the tax payments, repairs and expenses, your actual return on investment is less than 5% per year. Your equity is about $1 million and you are trying to figure out how to leverage that equity. If you refinance, your mortgage payments will jump from $3,000 to $7,500 per month. In order to pay for this increase in expenses, you now need an additional $350,000 worth of rental properties to generate passive revenue to keep pace. Now it feels like you’re going backward financially.

I faced the same conundrum when I ran the numbers on my own financial situation. It didn’t make sense for me to use my home as equity. Every day I was visualizing this equity sitting on the couch watching television while I was working. I needed to figure out a way to have this equity work for me.

It is critical to figure out what you really want. Do you want to own a home? Do you want to be able to travel and not worry about work? For me, my home was a stressor. If the real estate market had a sudden drop, my equity would be jeopardized, along with my retirement. Rather than waiting until retirement, I used that equity in the present by selling my home and investing in my business, MartelTurnkey. Soon my passive income was offsetting living expenses. Many people warned me about the capital gains tax, but I didn’t end up paying tax on capital gains because the accelerated depreciation on the apartment building I purchased offset them. 

Some will ask, “Isn’t renting a home more expensive than owning it?” or “Isn’t it difficult to find a nice rental home?” I did the research and found neither of those assumptions to be true in my area. Our monthly expenses for the 4br/2b, 1700 sq. ft. home we owned near San Francisco was $6,000. We soon found and rented a much better, larger 4br/3b, 2,400 sq. ft. house in the area for $6,000. Instead of $6,000 in monthly expenses for a house I own, my investments are paying my rent and living expenses. This is how I manage to live for free, and it’s possible for you, too.

Forbes Real Estate Council is an invitation-only community for executives in the real estate industry. Do I qualify?

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Real Estate

1031 Exchange: Deal Or No Deal



Handwriting text writing Commercial Real Estate. Concept meaning Income Property Building or Land for Business Purpose

Is “deal or no deal” a popular refrain from a successful game show or is it the voice of real estate investors who are growing concerned about the potential repeal of Section 1031 of the Internal Revenue Code?  

A recent read of the Biden/Harris tax plan reveals a $4 trillion tax hike, and one of the considerations for funding this massive tax increase is a change of 1031 Exchanges. 

President Biden’s administration has proposed eliminating 1031 “like-kind” exchanges for investors with annual incomes of more than $400,000, as part of a plan to fund future government spending on childcare and elderly healthcare. 

1031 exchanges have been a part of the U.S. Internal Revenue Code since 1921. The law was originally passed by congress to stimulate economic growth. They allow real estate investors to defer capital-gains taxes when they sell properties by directing the proceeds into new investments, usually within a few months after the sale.  As written, the rule allows investors to perpetually roll over capital gains into successive replacement property purchases, effectively eliminating tax liabilities through estate planning. 

Throughout U.S. history, investors have relied on real estate as a means of generating both income and capital appreciation. Low investment returns and stock market volatility have converged to create enormous demand for income-producing real estate that is often used to fund future liabilities. 

Now, more than ever, investors are looking to their real estate holdings to diversify away from market risk and provide a steady stream of income during retirement. For many 1031 exchange investors, their real estate holdings make up the largest portion of their net worth and are a key pillar in retirement planning.     

Today individual investors and limited partnerships control more than $ 7 trillion in residential and commercial rental property. It’s estimated that one in four Baby Boomers own one or more investment property and annual 1031 exchange transaction volume exceeds $100 billion per year.  

Given forecasted economic and demographic trends (primarily driven by the Boomers), the question is not whether or not investors will be buying investment real estate but rather what types of properties will they buy. 

In light of potential policy changes and evolving tax reform, a possibly even bigger question is will commercial real estate investors be able to utilize 1031 tax deferred exchanges as a means of buying and selling properties in the future?  

If Section 1031 of the IRS code is reformed millions of small retail investors may stand to lose billions of dollars in property values. 

This is not the first time that attempts have been made to eliminate 1031 exchanges but so far it continues to survive threats of repeal because lawmakers generally understand its positive impact on the economy. 

As Brad Watt, CEO of Petra Capital told me, “eliminating exchange rules at a time when the economy is suffering from the coronavirus pandemic would deal a ‘one-two punch’ to real estate values. 1031 exchanges benefit the “everyday” man by allowing smaller and less capitalized real estate investors to increase their income and net worth by temporarily deferring tax on reinvested real estate sales proceeds.” 

Eliminating 1031 exchanges from the current tax code could have a profound negative impact on future real estate values and the economic prosperity of the many small investors who own investment property.    

For investors looking to sell their current investment property, there has historically been a long line of willing buyers. Investors have been eager to purchase stabilized income property with the added benefits of tax-sheltered income and the ability to protect future capital gains by utilizing 1031 exchange rules. 

Now with the twin-threat of coronavirus and looming tax reform, sellers and buyers of investment properties are beginning to recalibrate pricing and income expectations. A modification, or outright elimination of IRC section 1031, could potentially create a real estate recession that mirrors the impact of the Tax Reform Act of 1986. 

However, the impact this time around could be much worse as real estate is now considered the fourth asset class behind stocks, bonds and cash. 

Now, more than ever, investors are relying on the stability of their real estate holdings to hedge against an unstable and unpredictable economy. Adverse changes or elimination of 1031 exchanges would send a shockwave through the economy that would have irreversible consequences on existing investors and potentially eliminate trillions of value in future generational wealth transfer.

Meanwhile, perhaps in anticipation of the elimination or modification of 1031s, there has been a mad rush to get deals closed. Paul Getty, CEO of First Guardian Group, told me, “our phone is ringing off the hook.”

Getty’s firm sees more 1031 transactions as anyone; as he put it, “we have a front row seat.” In December 2020 his company saw a significant spike in 1031s. Mountain Dell Consulting, which tracks 1031 transactions, reported a 15% increase from first-quarter 2020 citing, “the market does not have enough supply for current demand.”

The 1031 exchange law is one of the most important tools in the toolkit for real estate investors and odds are good that there could be changes on the horizon.

Kim Lochridge, executive vice president at Engineered Tax Services told me that “the elimination of the 1031 exchange program would be absolutely detrimental to the real estate markets and industries.”

She added, “real estate folks are learning a current work around by selling and in the same year buying another property and using the bonus deprecation (from a cost segregation study) in order to offset the capital gains on the sale.”

That’s an interesting work around, however as she pointed out, “bonus deprecation begins to phase out in 2023 and is totally expired in 2027, so this would only be a short-term alternative solution.”

Decisions, decisions.

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Real Estate

Montecito Trophy Compound With Historical Cottages And Ocean Views Asks $72.5 Million



outside main house 2535 Sycamore Canyon Road luxury home montecito

Outside, it’s part private park, part sanctuary. Inside, it’s an elegant, designer hideaway worthy of a magazine centerfold. Altogether, it’s a compound for the ages and the latest trophy to hit a surging luxury real estate market in Montecito, Calif.

Called Mira Vista, the sprawling estate of more than 28 acres listed for sale last week for $72.5 million. The Grubb Cambell Team at Village Properties, led by Natalie Grubb-Cambell, holds the exclusive listing.

The property, dotted by mature oaks and approached by a meandering drive, centers on a graceful residence of nearly 13,800 square feet with five bedrooms and 6.5 bathrooms. Two historical cottages dating to the 1930s, a four-stall barn, a gatehouse, a riding ring and a tack room are among other structures on the estate.

Tall hedges conceal a swimming pool area and changing rooms on the verdant grounds. The 50-foot-long swimming pool and separate spa are surrounded by a checkerboard-patterned stone, while the pool’s mosaic tilework draws the eyes to its depths.

Built in 2013, the primary residence opens through tall glass doors that flood the vaulted entry with natural light. Arched doorways across the hallway open to a bright sitting area that takes in an unobstructed ocean view.

Handcrafted millwork, custom prints and colorful accents lend a distinctive character to each of the formal rooms. The formal rooms include multiple sitting areas, a wet bar and a dining room with seating for seven.

Designed for entertaining, the chef’s kitchen is outfitted with a dual island, high-end appliances and a butler’s pantry.

Two separate offices and a whimsical theater with its own stage round out the floor plan. The primary suite, located on a separate wing, expands to include dual walk-in closets, dual bathrooms and a covered fitness area.

The Sycamore Canyon Road compound comes up for sale as Montecito’s real estate market continues to reach new heights.

Last year, the coastal neighborhood saw a 66% increase in residential sales when compared with the previous year. According to Village Properties, the run on Montecito real estate resulted in home prices appreciating roughly 20-30% in 2020.

Montecito’s luxury sector, in particular, has continued to see a high demand for luxury homes in 2021. Among recent headlines was actor Rob Lowe’s purchase of three brand new Montecito homes totaling about $47 million. Musician and television personality Adam Levine and his wife, model Behati Prinsloo, are among others who reportedly purchased a Montecito home this year.

Village Properties is an exclusive member of Forbes Global Properties, a consumer marketplace and membership network of elite brokerages selling the world’s most luxurious homes.

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Real Estate

Guggenheim CIO Pays $12.5 Million For Two Miami Penthouses, Forming City’s Largest Condo



Biscayne Beach

In yet another sign of the white-hot residential market in Florida, Guggenheim Partners chief investment officer Scott Minerd bought a pair of penthouses in Miami for $12.5 million, sources familiar with the transaction tell Forbes. The purchases comprise an entire floor of the 51-story Biscayne Beach tower, in what appears to form the largest penthouse in South Florida.

Combined, the two units boast 22,547 square feet and feature 11 bedrooms, two swimming pools, 12 parking spaces and more than 4,000 square feet of terraces. Both penthouses include a wine room, sauna, library, and private elevator access. Biscayne Beach, a 399-unit luxury building, is located about 20 minutes west of South Beach. 

Bill Hernandez and Bryan Sereny of Douglas Elliman, who represented the buyer and seller, declined to comment. A representative for Guggenheim Investments did not respond to a request for comment.  

Minerd is a founding managing partner at Guggenheim, an investment colossus with over $300 billion of assets under management that traces its roots to Meyer Guggenheim, the mining magnate who emigrated to the U.S. from Switzerland in 1847. Minerd joined Guggenheim in 1998—a year before it launched—according to his LinkedIn page, after stints at Credit Suisse First Boston and Morgan Stanley’s European operation, and currently helps oversee investment strategy. 

He follows some heavy hitters who have bought into the Miami boom recently. Last week, the billionaire Larry Ellison acquired an $80 million megamansion in North Palm Beach (though he reportedly plans to tear it down). In February, a partner at Tiger Global Management set a record for Palm Beach, shelling out over $120 million for a beachfront estate. Shutterstock founder Jon Oringer, Keith Rabois of Founders Fund and Playboy mansion owner Daren Metropoulos have also struck deals of late. Not to mention Jared Kushner and Ivanka Trump, who bought a $32.2 million lot on the “Billionaire’s Bunker,” Indian Creek, in December.

“Prices have just gone higher than anyone ever could have imagined,” billionaire real estate investor Jeff Greene told Forbes last week. While flagging the likelihood of a correction once vaccines proliferate and more wealthy Americans head back to New York, Los Angeles and other major cities, he said there is still strong appeal in the region’s luxury market: “I’m a long-term believer in this area.”

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