A little less than one year ago I decided I wanted to change my present circumstance. Actually I was doing quite well and most people in my circumstances may have stayed the course. I had 3 two-family buildings & one single family building that I was holding as investments. The net cash flow I was receiving from these investments was covering my personal mortgage payment as well as my vehicle payments with additional money collecting each month to cover any improvements or repairs that I assessed would be necessary.
So why the change?
Well succinctly, I love potential. In two of these investment properties, I had maximized the potential within the buildings and reached the pinnacle of rental income within these areas. No other potential was available to improve the capitalization rate. So I made the uncomfortable decision to sell my two best producing investment properties in order to continue my investment journey. Upon conception and through finalization of my plan to sell I decided I was going to use the IRS 1031 investment property exchange. This is an IRS program that allows you to exchange the equity you have built in the property you are selling and moving it into the property you are acquiring without tax implications. Now there is much more detail relative to this movement which I will discuss at a later time but for now know that was my course of action.
This was un-chartered territory for me. In order to set my nerves at ease I decided the best thing to do was to seek out consultation from those that are doing this exact thing as well as someone that has my best interest at heart. I quickly identified an associate of mine that I trusted. He is doing quite well. This man fell down on his luck and less than 5 years ago was dead broke. Today, armed with the decades of personal & familial experience he has built an impressive commercial portfolio consisting of approximately 100 units! This man lives in a different city, so I decided to spend a few days with him and observe.
I arrived to a warm welcome from him and his family. This man has been a family friend for as long as I can remember. His father and mine worked together (in real estate) decades ago and developed a close relationship which is evident by our continued connection today. We were quickly wisked away on a tour of how he started, the current holdings he has, how he put them together, and where he was going. There were many lessons I learned during this visit but the one I have decided to share with you today is about Ms Dirt.
Ms Dirt was identified by my friend to be used during any audit of a potential real estate investment. Ms Dirt is an acronym that helps you remember the principles to evaluate for any investment property. My friend uses this acronym to easily remember these important variables.
Ms Dirt is an abbreviation for:
In any evaluation of a property if you leave any one of these variables out of the equation the property can appear to a rock star. But with careful examination, comparing each property with the use of these variables will help you identify the true capitalization rate of each subject.
This assessment may seem elementary to you and even to me upon reflection. This reflection brings to mind John Wooden; Great accomplishments/tasks are accomplished by fundamentals done well, consistently (summarize).
The amazing success my friend was enjoying relates back to a simple equation anyone with basic arithmetic skills is able to comprehend. Now of course there is more to to his success than just this acronym, but it is apart of his evaluation of any property he is considering. Knowing his success as well as having my experience of exploiting the potential available in these buildings I am acquiring assured me that I have elected the correct course of action. My visit with my friend set my nerves at ease. Knowing that I was able to consult with this level of experience and knowledge gave me the confidence I needed to 'reach for the stars'.
The result - I sold my two investment buildings (which set a record for the highest sales amount in each respective area because of the maximum potential I had acquired in each) & set forth to use the 1031 Investment Property Exchange to replace these two buildings. More to come on that...
The research that I conducted set my nerves at ease and allowed me to move into an uncomfortable place with confidence. I placed my trust in those that have gone before me as well as the knowledge that I have acquired through my direct experience in this industry.