Reallocating equity - Posted by Tim Stern

Posted by David Butler on May 28, 2007 at 17:01:11:

Hello Tim,

Unfortunately, there is far too much left unsaid to give more than the most basic of observations at this point. Not enough specifics about your specific objectives (defining what you mean by “cash flow” in this instance, as one objective for example).

Some observations to consider. Generally speaking, holding 20% equity in SFR properties, if purchased right going in, is a very sound target. That should already be generating some monthly cash flow, or providing a good break even scenario where the property is carrying itself. As to the Multifamily, if it is 4 units or less, the above would still apply. If five or more units, it is considered commercial property, where 25% equity is a reasonable target for holding a safe investment, and achieving a decent cash flow - all other things being equal.

On the surface, there doesn’t appear to be much “dead-equity” to be concerned with. And how do you envision a restructuring that would not free up cash flow on one hand, without adding more debt (and thus gobbling up cash flow) on the other?

There are ways to do a number of things, if the situation, and the objectives do not in themselves constrain the possibilities.

Just one possibility… putting the properties into a land trust, and then “condominiumizing” them by selling your existing tenants a beneficial interest in the land trust, either for future equity, or tax benefits they can use today (this is particularly effective if you are unable to fully deduct your annual operating costs and depreciation because you are over the gross annual income limits - but your tenants are not). The payments made to purchase these beneficial interests go straight into your pocket as well (a form of “cash flow” too, right?), and still leave you in great shape in terms of property ownership.

At the same time, if done properly, you can shift much of the burden of holding the property, on to your tenant occupants - much like a triple net lease works for a commercial property owner. That works to free up cash flow as well.

Other options can include substituting collateral to purchase another property, or pledging equity as additional collateral, for situations that can be structured to allow cash flow, while keeping your ownership position in the properties you already hold, very strong. Perhaps a 1031 exchange will be the best avenue in this regard - giving you cash flow, and more total portfolio value as well!?

Again… much of what might be done will depend in large part on your objectives, as well as the circumstances surrounding your current ownership situation. Hope this helps despite the limitations offered here, and best wishes for your continued success.

David P. Butler

Reallocating equity - Posted by Tim Stern

Posted by Tim Stern on May 22, 2007 at 14:02:53:

I have several properties SFR & Multi-Family with $4mm in mortgage debt. Approximately $1.2mm net worth. AS they say, you can’t eat equity so I am looking for a source of good advice on restructuring these assets for cash flow.