Case Studies (Representative Sample Only)

Case Study #1 — Lynn & Denise W.

Starting Situation (2006): Client owned eleven (11) single family rental homes.

The total combined value of the properties was +/- $2,750,000. The combined loan-to-value was +/- 40%. However, even with a large equity position the pre-tax cash flow was less than 3% on invested equity-capital. When analyzing projected overall returns factoring income tax implications, additional yield from the principal pay down on the loans and appreciation projections total annual future returns were likely to average in the high single digit range. Absent of appreciation, future annual returns were calculated at 3-4%.

Primary Goal: Improve cash flow and overall return on invested equity-capital. Acquire more of a "hands-off" passive investment property type.

Strategic Options Considered: In order to improve cash flow and overall investment returns it was determined after completing a financial analysis that selling all homes and reinvesting the net sale proceeds (IRC 1031 Exchange) into higher returning income producing properties clearly offered better returns than the current situation.

The Decision: The decision was made to simultaneously sell all/most of the single-family rental homes and acquire through a coordinated IRC 1031 Exchange one or possibly two higher returning income-producing properties (apartment and/or office building).

The bottom-line: Ten (10) of Eleven (11) single-family homes was sold with closing dates carefully negotiated to occur on or about the same time. The proceeds were used to buy a 44-unit apartment complex and 30,000 square foot office building. Overall pre-tax cash flow was improved almost threefold (3X) and the total overall annual return on invested equity-capital increased nearly twofold (2X). The projected five-year overall NET Wealth Gain when comparing the "as-is" position with the "new" position is about $1,000,000.

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Case Study #2 — C. Family Trust

Starting Situation (2006/2007): Client owned 38-unit apartment property. Property was in highly desirable NW Portland location; however was in need of some replacements/improvements.

The value of the property was +/- $3,500,000. The combined loan-to-value was +/- 38%. However, even with a large equity position the pre-tax cash flow was less than 3% on invested equity-capital. Due to the owner's low tax basis in the property and relatively small interest expense deduction after-tax cash flow was only about 2%.

Primary Goal: Significantly improve cash flow. Continued overall wealth gain secondary.

Strategic Options Considered: In order to first improve cash flow and secondly continue to increase overall wealth it was determined after completing a financial analysis that selling the low capitalization rate property and reinvesting the net sale proceeds (IRC 1031 Exchange) into a higher returning income producing property (higher capitalization rate) in addition to increasing financial leverage (higher loan-to-value) would significantly improve cash flow.

The other option considered was to simply hold the property and enjoy the likely continued above market rate of appreciation. However, due to the questionable continued economic usefulness of this property without major capital investment or redevelopment presented its own risks.

The Decision: The decision was made to sell the 38-unit apartment property at a current top-of-market price and acquire through an IRC 1031 Exchange one or possibly two higher returning income-producing properties (apartments).

The bottom-line: The 38-unit apartment property was sold. A flexible closing date was maintained to insure a desirable replacement property was found. The proceeds were used to buy a well-maintained 104-unit property in Salem, Oregon. Overall pre-tax cash flow was improved almost threefold (3X) and the projected total overall annual return on invested equity-capital should be nearly 1.5X despite projecting a higher annual appreciation rate on the previously held property.

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Case Study #3 — John B.

Starting Situation (2004): Client owned one duplex and one four-plex in a highly desirable close-in SE Portland submarket.

The total combined value of the properties was +/- $620,000. The combined loan-to-value was 30-35%. However, even with relatively small loans (and payments) the annual pre-tax cash flow was only 3-4% on invested equity-capital. When analyzing projected overall returns factoring income tax implications, additional yield from the principal pay down on the loans and appreciation projections total annual future returns were likely to be in the high single digit range.

Primary Goal: Improve cash flow and overall return on invested equity-capital.

Strategic Options Considered: In order to improve cash flow and overall investment returns it was determined after completing a financial analysis that either selling the two small properties and reinvesting the net sale proceeds (1031 Exchange) OR keeping the existing properties and pulling some cash-out by refinancing and reinvesting the proceeds would both yield better returns than the current situation.

The Decision: The decision was made to keep the existing properties and pull cash out for reinvestment. The rationale was that the properties were worth holding even if the future wealth creation "engine" would be primarily appreciation. Hence, refinancing and reinvesting the cash in additional real estate could improve both cash flow and the overall rate of wealth creation.

The bottom-line: Both existing properties were refinanced. The proceeds were used to buy a 27-unit apartment complex. Overall pre-tax cash flow almost doubled and the projected total annual return on invested equity-capital was three times (3X).

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