Embedded Files
In real estate, equity and wealth are synonymous. Equity represents the property’s market value minus any outstanding debts. Here are ways to build equity:
Value-Add Strategy: Increase a property’s worth by boosting rental income or making cost-effective improvements. For instance, you purchase a four-unit property for $300,000, with each unit renting for $700. After targeted repairs, you raise rents to $850 per unit upon lease renewals or tenant turnover. This adds $150 per unit, totaling $600 more in monthly income. This increased cash flow enhances the property’s value through forced appreciation, as opposed to relying solely on passive market growth. Typically, higher rents can increase a property’s value by about 15%. After raising rents on at least three units, wait a year to four years for passive market appreciation to further elevate the value before selling.
Example Breakdown: You buy a $300,000 fourplex, paying $75,000 (25% down), $10,000 in closing costs, and setting aside $15,000 for repairs/upgrades, totaling a $100,000 investment. After improvements and rent increases, the property’s value rises to $400,000. That’s a $100,000 gain on your $100,000 investment—a 100% return, and on top of it you earned additional cash flow and mortgage principal paydown over time!:)
Examples of 4plexes I bought and sold using the value add strategy:
1)3005 Cantabrian dr Killeen- Bought in mid 2017 for $ 185,000 and sold in mid 2019 for $244,500. Capital gain profit : $59,500
2)3403 Toldeo dr Killeen- Bought in oct 2017 for $145,000 and sold in mid 2019 for $228,000. Capital gain profit :$83,000
3)1405 Dugger dr Killeen- Bought in early 2018 for $195,000 and sold in mid 2019 for 254,000, Capital gain profit: $59,000
4)2811 Cantabrian dr Killeen- Bought in end of 2018 for $192,000 and sold in early 2020 for 261,000. Capital gain profit: $69,000
FEDERAL CAPITAL GAIN TAX AND 1031 EXCHANGE
FEDERAL CAPITAL GAIN TAX AND 1031 EXCHANGE
Subject to confirming with an accountant:
As of today, the federal capital gains tax rate is 15% (with some states—excluding Texas—adding 2–3% more). For example, on a $100,000 gain, you would normally owe about $15,000 in capital gains tax.
Fortunately, real estate investors have a very favorable option: the 1031 Exchange. This allows you to defer paying the tax by reinvesting your equity into another property (or multiple properties) whose combined purchase price is greater than what you sold the original property for.
Here’s how it works:
When you sell, your equity equals your profit (capital gain) + your original down payment.
Normally, you’d take that equity, pay the tax, and deposit the rest in your bank account.
Instead, through a 1031 Exchange, a qualified intermediary (exchange company) holds your equity and directs it into your next purchase.
This means you could sell one fourplex and immediately roll your equity into the purchase of two new fourplexes—without putting in any additional cash.
That’s why I call this strategy: “Buy one fourplex, get the second one free.
Page updated
Report abuse