In this article, we will offer a few tips for building your wealth over time with a 1031 exchange.
Real Estate as a Wealth Building Vehicle
Real estate is a preferred vehicle for wealth building because you can defer your gains and continue to compound and build your wealth over time.
For example, let's say that we start off by purchasing a single-family rental. We're good stewards and managers of that property, and guess what? It goes up in value after a few years and we've acquired quite a bit of equity in that property.
Single Family to Multi-Family Property
Now, we're not complacent so we're not going to stay in that single family rental property. Instead we're going to defer the gains on its sale and acquire a fourplex or four unit multi-family property. We're going to take all of our proceeds from that single family rental, roll them tax-free into the new apartment building. Again, we're going to be good stewards and that property will continue to go up in value. After a few years of managing that property, it will have increased our equity position again.
Fourplex to 16-Unit Apartment Complex
Now, we're not complacent and we're going to continue to compound and build our wealth so we're going to dispose of the fourplex using a tax-deferred 1031 exchange and buy a 16 unit apartment complex. Again we're going to compound and build our wealth tax free over time. We're going to be good stewards and operators of that apartment complex and over time again we're going to build equity.
Parlay Your Investment Over Time
We're always going to be buying a bigger, better, more expensive property. Over the course of time we're going to parlay our initial investment from a single-family rental property into perhaps a hundred plus units. The reason that we’re able to do that is twofold:
- We’re using a very tax-efficient strategy where we’re able to keep our wealth building and compounding for us
- We’re using other people's money (OPM) to finance the bulk of our acquisitions. With only a little bit down (say 20%) we can take down a much more expensive property. The interest that we pay to the bank is tax deductible. Who really ends up paying the debt service anyway? It's our tenants. The tenants are paying the rent and we're using the rent to pay the debt service.
By building wealth through real estate we’re able to amass so much wealth tax-deferred so much more quickly than we could if we were burdened with laborious taxes.
- 1031 Hotline: If you have questions about building your wealth with 1031, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2017 Copyright Jeffrey R. Peterson All Rights Reserved