1031 Exchange:HOW DO I BREAK EVEN?
Our investors trust us with their challenging issues and our experts make sure to add value by providing an apt solution. Whether you are planning to invest in real estate or you are a seasoned investor searching for a highly profitable investment vehicle, you must be curious about the potential of Delaware Statutory Trusts (DSTs) and the benefits offered. In this article, we have answered most frequently posed questions around DST’s.
Question:
How do I break even? I’m planning to invest $100,000 in real estate. My goal is to increase the value of my principal, and I also understand that no investment can guarantee the increase of my principal. I will perform the due diligence to make sure that the investment meets my goals and production expectations, but what if the actual production doesn’t meet my expectations? I am aiming for an increase, in case I fail, I should at least break even and not lose money.
Answer:
Two elements are essential to break even.
- First, you must receive the entire capital which you invested in purchasing the asset.
- Second, you must receive an amount equivalent to the principal payments against the debt on your investment.
For example, let’s suppose you invest around $100,000 in a DST with a 60% loan-to-value ratio, taking $150,000 in debt for a sum of $250,000 beneficial interest on a $10 million offering. After five years, 20% of your debt is paid off, reducing your debt by $30,000. Some investors will be pleased if the property sells for $8.8 million, sufficient to pay the remaining 80% of the $6 million debt and return the initial $100,000 invested. Make sure not to ignore the additional $30,000 equity, which has been re-invested on their behalf using debt payments. To break even, you must verify that the property sales value covers both the principal investment and the principal debt payments. Do not miss the selling and acquisition costs when calculating total gains and losses.
To ensure that you at least break even, always determine if the property can either sustain a necessary minimum sale value or appreciate to that amount. Consider the asset class to identify how time may impact a property’s value.
Multi-tenant assets like multi-tenant industrial or multi-family provide the potential for a rapid increase of net operating income (NOI) as short-term lease agreements of such properties promote regular and aggressive rental-rate increases. A property’s sale value increases with increasing rental income. However, such leases are sensitive to a negative shift in the economy, meaning lower sales value in an economic downturn.
On the other hand, Triple Net Leases (NNN) on commercial properties with single tenants provide slower rates of NOI increases because long-term lease agreements only offer one or two scheduled rental rate increases. Though such properties tend to hold their value because of long-term lease agreements and stable tenants, they fall short in producing significant appreciation.
Conclusion:
Real Estate know-how and effective planning are essential irrespective of the asset type you invest in. Proper management and ensuring that you meet operational expectations can increase the chances that you break even. Each DST program is unique, and it is crucial to evaluate each program individually to decide if its circumstances suit your needs and goals.