1031 exchanged into a T.I.C. property.....

[knucklehead 61]

so i sold a house & did a 1031 exchange into a T.I.C. property, (a 682 unit apartment complex) with all the equity from the sale ($360k). i get 7.5% return ($27k / yr = $2,250 / mo) direct deposited into my account. after 8 to 10 years the property will sell & i will get back my pro-rated amount ($360k + 8-10 years of appreciation. i plan to roll it into another 1031 & not pay any capitol gains taxes).
so my question is should i sell my other rental (approx. 250k in equity)?
i have yet to find the "bad" part of the T.I.C. investment deal.
right now i am kicking myself for not selling my taxable accounts & buying another T.I.C. as well. it is the only investment that i own that is not diving in value.
anyone else here have experience in owning a professionally managed, institutional grade T.I.C. property?

 

[calmloki]

so i sold a house & did a 1031 exchange into a T.I.C. property, (a 682 unit apartment complex) with all the equity from the sale ($360k). i get 7.5% return ($27k / yr = $2,250 / mo) direct deposited into my account. after 8 to 10 years the property will sell & i will get back my pro-rated amount ($360k + 8-10 years of appreciation. i plan to roll it into another 1031 & not pay any capitol gains taxes).
so my question is should i sell my other rental (approx. 250k in equity)?
i have yet to find the "bad" part of the T.I.C. investment deal.
right now i am kicking myself for not selling my taxable accounts & buying another T.I.C. as well. it is the only investment that i own that is not diving in value.
anyone else here have experience in owning a professionally managed, institutional grade T.I.C. property?

Very interesting idea. We have no experience with TICS - but have sold depreciated property and paid the tax - in our case after selling a long held $300k chunk we got to keep about $225k. On another ok but no great shakes profitable property owned free and clear we had an average profit of $14,367/year over the last 13 years - that's after doing the normal upkeep, all new windows, new roof, paint, carpet, etc - normal stuff over a longer period of time. We have that property currently listed for $335,000 and haven't had a nibble. If it did get a buyer at $305k and we decided to sell at that price and it were taxed as the last chunk was we would get to keep $228,750. If we did a TIC and got 7.5%/year on the whole $305,000 as you have done we would be earning $22,875/year - $8508 more than we have made, on average, over the last 13 years. So I've effectively been paying $709/month for the pleasure of doing my own landlording and maintenance. Whoop-d-fricking-doo. Another way of looking at it is that if we paid the capiital gains tax and invested our remaining $228,750 we would have to be making 10% to match the 7.5% from the TIC. Note that our average income of $14,367 over the last 13 years - exclusive of principle or interest payments - is probably pretty close to 7.5%/year guesstimated as the value of the place increased over the last 13 years to it's current (?) $305,000.

Looks like a heck of a deal! Of course, another way of looking at it is that the managers for profit who set up the TIC are able to buy a place and a job for $0 of their own money and borrow the purchase funds at 7.5% - pretty attractive rate for a commercial loan. What assurance do you have that the 7.5% will be a regular amount - or is that a projected amount? What if the vacancy rate goes sky high or a tornado takes off the roof? Would you be expected to pay for shortfalls? Is the complex brand new? When the property sells if it sells for less than puchase price is the amount prorated amoung the partners? How about if it sells for a profit? Or do you get a fixed $360k regardless?

I'm totally jealous if your deal is really as good as it looks....

 

[knucklehead 61]

the apartment complex we bought into was purchased for $48 million. this includes all fees, closing costs, & a few million for contingencies. (roof repairs, painting, paving, pool repairs, etc.) they are located about 5 miles apart from each other. the management co. is Mission Residential & they own a few hundred million $ worth of complexes in quite a few states. to say they are professionally managed would be an understatement. they send weekly email reports, monthly statements, & quarterly reports. very professional. the prospectus they send to review prior to purchase outlines in depth the complete business plan for the purchase, holding, maintaining, & final sale of the subject property as well as projected returns & costs. while none of it is guaranteed, so far it seems to be pretty close to bulletproof.

 

[knucklehead 61]

sorry, forgot to answer some of your questions...

Looks like a heck of a deal! Of course, another way of looking at it is that the managers for profit who set up the TIC are able to buy a place and a job for $0 of their own money and borrow the purchase funds at 7.5% - pretty attractive rate for a commercial loan. What assurance do you have that the 7.5% will be a regular amount - or is that a projected amount? according to the business plan the rate of return is fixed at 7.5 for the first 3 years with annual increases in years 4 thru 10. What if the vacancy rate goes sky high or a tornado takes off the roof? there is multiple layers of insurance for things like this. Would you be expected to pay for shortfalls? no, they have a couple of million $ held in reserves. Is the complex brand new? no, but less than 15 years old. When the property sells if it sells for less than purchase price is the amount prorated among the partners? yes, that would be the case, although it seems unlikely that a commercial property with positive cashflow would sell for less in 10 years. How about if it sells for a profit? yes, we would get back our $360k plus our share of the profits! Or do you get a fixed $360k regardless?

 

[calmloki]

You bring up another question - the purchase price. 682 units for 48 million. Subtract 3 million for fees and a contingency fund and you end up paying about $66k per unit for the 15 year old units. Does that seem to be pretty much in line with per unit costs where those apartments are located? I agree that in 10 years the value of the property should be greater than or equal to present value, given professional proactive maintenance and current value not being out of line with current market value. Did you see property tax statements or appraisals?

I'm liking the idea of getting a better return for less effort - just have a natural suspicion of anything that looks good...

 

[soupcxan]

I would be wary of TICs, especially in this environment. See this article:

How 1 Property Sank the Savings Of 35 Investors

 

[samclem]

I would be wary of TICs, especially in this environment. See this article:

How 1 Property Sank the Savings Of 35 Investors

Thanks, I knew I'd read that piece and wanted to post it here, but couldn't find it.

For knucklehead: regarding the sale date--is that a firm date at which the property would be offered for sale? How is the price to be set? With lots of you as TIC, and each having veto power over decisions (fire the manager? Replace or demolish the 4 units damaged by fire? Wait to sell because properties are in a slump, etc) I would think it would be very useful to have established, as part of the contract when you sign on, some type of more streamlined decisionmaking process (2/3rd vote, etc). Maybe that's not possible.

I'm suspicious of this idea, but don't have any firsthand experience with these TIC arrangements. How can the return be guaranteed when the vacancy rate could skyrocket--have you actually seen and verified this insurance policy you were told about? It would be interesting to see the policy, the exclusions, who pays the premiums and how do the TICs know that the premiums keep being paid, etc, etc. TANSTAAFL.

 

[Nords]

The marketing effort I've seen behind TICs makes me think that, like annuities, they're sold instead of bought. I'd be a little concerned about an investment whose primary advantage was sheltering the cap gains of other investments.

As a landlord, I'd be immediately skeptical of any property-management company that claimed to be in the business of maximizing my yield. Their only purpose for me is to borrow my money at below-market interest rates, and they have no incentive to pay more-- especially if interest rates are being lowered during a recession. Many of them are managers & operators, not equity partners whose interests are aligned with mine via investing a significant percentage of their own net worth. Add to that to the inevitable challenges of holding down maintenance & repair costs, coupled with tremendous unsupervised opportunties for minor graft & outright fraud... well... that's why I do my own maintenance & repairs.

One of our local realtors heavily markets a Mainland TIC to local investors. I attended a presentation and brought the room's average age down by at least a decade. The talk was full of soft words like "guaranteed" and "safe" and "tax sheltered". The only numbers were yields and tax avoidance, not actual profits or cap gains. I don't know if TICs are obligated to submit reports like publicly-traded companies, but there certainly was no way to verify the numbers that went winging by during this seminar.

The realtor shared one of his "fully insured" experiences with me. He put $200K, a very tiny fraction of his net worth, into an apartment complex. In suburban New Orleans. In July of 2005. They were insured for damage & repairs, but no one would make them whole for the two-plus years that he was stuck with "dead money" during the rebuild.. or the higher insurance premiums he's paying today. Just a part of the risks of the business, but a business that (at the time) did not significantly outperform a ladder of long-term CDs.