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Accumulating wealth through 'fixer' income properties

Rathin Neogy, MBA

'Fixer' income properties If one has a keen eye for picking up good "fixer" income properties that need some upgrading, this is a way to accumulate wealth fairly rapidly. It's important to work with a good realtor to build up your portfolio of "fixer" income properties that show potential for upgrading without a major remodel effort. Proper analysis is required of rental income and expenses so that with, say a 20 percent down payment, you benefit from the leveraging principle and still have positive cash flows.

You should look for properties that are well constructed but need general upgrading such as remodeling kitchens, bathrooms, painting and other relatively minor improvements. This way you would have increased your equity in the property substantially while raising its rental income potential. You can then refinance the property and use the liquid assets to acquire another one that needs upgrading. This concept is called pyramiding through refinancing.

Similarly, you can use pyramiding through selling, where you sell the improved property after a period of a few years for a substantially higher price and then use the proceeds to buy two or more income properties that need upgrading. By buying more income properties through the IRC 1031 exchange, one can postpone paying any capital gains taxes indefinitely.

The good thing about pyramiding this way is that equity is increased by upgrading the property and then, by refinancing, leverage is used to acquire more property where you are using borrowed money to help accumulate wealth. By holding on to such properties for a period of 3 to 5 years, you are also benefiting by the appreciation in value. In the meantime, you can increase rents commensurate with market conditions.

This concept works well in areas where the economy shows good long-term growth and general stability over at least a 10-year cycle. The investor could mix their real estate portfolio by buying both residential and commercial income properties.

Currently, in the author's opinion, San Diego shows good potential for continued long-term growth and stability. For example, according to an article in the San Diego Union Tribune of September 15, the median price for the county in September hit a record of $483,000. That represented an $11,000 increase from July and a 24.2 percent jump from a year earlier, the highest year-over-year appreciation rate since December 2002. This upbeat image of San Diego is also borne by Jill Morrow, president of Coldwell Banker, San Diego. She said on September 19: "Our weather, lifestyle, diversity, culture, low unemployment, continuing low interest rates and higher demand than supply continue to fuel our market. Yes, inventories are building and that is a normal market."

Sellers need the assistance of realtors more than ever to receive good counsel in determining the right asking price. They look to realtors for guidance and expertise.

The writer may be contacted on the following address:

Rathin Neogy
Broker Associate
Sterling Real Estate Company
Rancho Santa Fe

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