This is a San Diego county duplex. It’s for sale, asking about $470,000. The units consist of a 2 bedroom 1 bath, and a 1 bedroom 1 bath. It was built 65 years ago. The rents are $1,375 and $1,050, which are about right, give or take. I’m intimately familiar with the neighborhood, as I’ve lived and officed in and around it since 1979. I’ve jogged by this property countless times. My kids went to the school district. My boy played winter ball at the nearby Little League field. In fact, he hit his first ever homer there. It hit the scoreboard in right centerfield.
The landscaping is pretty cool, isn’t it? It’s not the norm in San Diego as many might think, but it’s not rare either. Makes for pretty good curb appeal, that’s for sure. Anywho, let’s get started.
A note here, for those readers who might think, even a little bit, that I picked this duplex for it’s crummy location etc. Not hardly, as I’d easily apply the BawldGuy Mom Rule to this property without the slightest hesitation. I know this area like the back of my hand, having lived in or nearby the neighborhood since 1967 when I was 16. What’s the BawldGuy Mom Rule for Heaven’s sake?
BawldGuy Mom Rule: Brown and Brown Investment Properties policy is that no client shall be advised to invest in real estate in which I wouldn’t put my 80 year old mom to live alone. Period, over ‘n out, no exceptions. Hence the name of the rule.
The numbers tell the story
Here are the assumptions used:
• They owe $100,000 on existing loan.
• This is the only property they own other than their home.
• Sales/Exchange costs will run around 10%. (We’re in termite country.)
• The investor is 50 years old.
At $470,000 +/-, the net proceeds from a sale would be approximately $323,000. They’d be moved directly from escrow to the Accommodator used in the exchange. (Another post altogether.) It’s from that account the second half of the exchange will be executed.
Maintaining the Status Quo
Having reduced the loan to $100,000, and if he’s like most investors, he’s already done the math figuring out the income this duplex will provide in retirement, sans debt. It’s even money it’ll be less than his projected Social Security check. In this case, $1,455/mo., not even $18,000 yearly. Sadly, he’s probably better off than most of his family and friends. But for fun, let’s say it’s $20,000.
His net worth, (only this duplex) is $470,000.
If he exchanges to a superior market
Here are the assumptions used:
• He’ll be puttin’ 25-30% down on any property acquired in exchange.
• All loans obtained will be 30 year, fixed rate, at 5%.
• His ‘depreciable base’ will be increased by roughly $700,000 or so.
• All retirement income/net worth numbers will be those at acquisition — no value appreciation or increase in Net Operating Income (NOI) will be applied, as per my policy.
I’d trade his equity (tax deferred, per IRC Section 1031) into four small income properties. The cost would average out to about $255,000 apiece. Three of ‘em would be with 25% down payments. The fourth would be using, give or take, 40% down.
The NOI for each would be a bit over $19,000. But we’ll be happy with the $19,000 for this example. Using the BawldGuy Domino Strategy he’ll have eliminated debt from all four properties in time for his 65th birthday/retirement party.
His two retirement scenarios in a nutshell
Status Quo — $20,000 a year in retirement income. Little if any of it tax sheltered. The property is now 80 years old, which virtually always means higher expenses than significantly younger buildings. Duh. We have a longstanding joke about old buildings. It’s possible the only reason they’re still standing is cuz the termites have agreed to keep holding hands. Bada boom!
His net worth, as noted earlier, is $470,000 — a kindness I extend to the elderly as policy. 
Exchange scenario: $76,000 a year in retirement income. Roughly a third of which would be tax sheltered for around 12 years or so into retirement. Better than a kick in the head, right? The buildings would be only 15 years old, about broken in. They’re family sized units (3 bedrooms/2 baths with 2-car attached garages for each unit.) so over time they would’ve had less tenants in each one. This results in less wear ‘n tear, and therefore lowered expenses overall.
His net worth in this scenario would be in excess of $1 million.
Income/Net Worth if he stays the current course — $20,000/yr — $470,000.
Income/Net Worth using my suggested strategy — $76,000/yr — over $1 million.
When I constantly beat the Get Outa Dodge drums, it’s cuz it’s a no-brainer. This guy would almost quadruple his retirement income while more than doubling his investment property net worth if he opted for the exchange route.
It ain’t rocket science by any stretch.
Hey! You don’t need rocket science to find me. Call 619 889-7100 and we’ll be chattin’ before ya know it. Or, if you like, click on the Contact BawldGuy button at the top of the page. Together we’ll figure things out and make it happen. Have a good one.