The 1031 Exchanges - Examined
1031 Exchanges – Multiply your money . . .
quickly . . . more often
Leveraging and compounding are the two primary components that accelerate an investor's profits in real estate. Leveraging is like a multiplier: it multiplies the value of an investor's capital, and thus multiplies the rate of return within the given market (90% financing by example is like a multiplier of 10x). Compounding is the reapplying of leverage to the proceeds that have already been earned‐‐ allowing an investor to take the proceeds from one property and leverage them into two or three more properties (virtually doubling or tripling their appreciable returns). 1031 exchanges—when properly used with financing—increase an investor's ability to both leverage and compound. (See example scenario at end of this writing.) 1031 exchanges literally allow an investor to multiply more money, and do so more quickly; thus building a larger portfolio in far less time. Lastly, 1031 exchanges work on all types of real property that is held for investment: raw land, single family, multi family, commercial, condominiums, etc. So regardless of any investor's personal preference for the type of property they acquire, 1031s remain universally applicable and beneficial for their future acquisitions.
Zero Cost Transactions and 1031's . . .
the greatest profit potential combination
Because 1031 exchanges increase the amount of capital that can be leveraged, they thus increase an investor's purchase power and quicken their compounding cycles. Costs, do just the opposite, they weaken an investor's ability to leverage and delay their ability to compound . . . thus contradicting some of the benefits of a 1031. The best way for investors to avoid losing the any strength of their investment dollar, is to utilize a 1031 exchange with zero-cost transactions.
Costs: Most investors accept costs as an inherent part of doing business. In truth, they don't need to—transactions are negotiated, and costs can be negotiated away. The problem with costs is not just the money paid away, but also the leveraging that leaves with it. For example, if a $250,000.00 investment deal (financed at 10% down / 90% financing) included 4% in closing costs, the transaction expense would be $10,000.00. Not only is this $10,000.00 that he investor loses forever; it is also $100,000.00 of property that will never be purchased because of it. If the same investor (with $35,000.00 of original available capital) got terms with the seller fronting the costs, then the investor could buy up to $350,000.00 worth of property. The investor would then start off with $35,000.00 of equity instead of $25,000.00 (immediately $10,000.00 richer), and the investor would make an extra 2300.00+ in annual tax breaks, plus an additional of $6,000.00 a year in a market with 6% annual appreciation. In just three years, the no costs terms alone would make the investor as much as his original cash outlay - in essence, allowing the investor to double the growth rate of his or her portfolio every three years.
1031 exchanges extend the growth benefits of zero-costs transactions by further removing the costs of taxes on the back end, and thus allowing the investor to put all of their proceeds directly towards capital – where it provides more in up front equity and more in leveraging power. The combination of 1031 exchanges and zero-cost transactions simply cannot be beat. They create the greatest growth for wealth and profit potential in any market.
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