Guiding Principles of Investing
The typical real estate investor playbook when they actively own and operate investment property for themselves is to:
Hold properties long term
Utilize leverage as a tool for diversification rather than as a tool to prop up investment returns while amplifying risk
Shelter interim cash flow from taxes through depreciation
Leverage the power of 1031 exchanges to keep more of their profits at time of disposition, which in turn results in a larger initial investment in their subsequent purchases, and allows them to compound their wealth in an outsized way.
Transfer their holdings to their heirs after death so they benefit from a step up in basis and eliminate years’ worth of accrued tax liability developed over a lifetime of tax-deferred (1031) property sales
This is in stark contrast to the traditional real estate private equity model which:
Typically does not allow for 1031 exchanges, which effectively means that all the target IRRs that are brandished are before capital gains and depreciation recapture taxes are incorporated
Is laden with transaction expenses jamming acquisition, refinancing and disposition costs into a short 3-5 year window of time
Here at Echo Valley Real Estate we seek to take those lessons learned from generations of successful private real estate investors and create an investment offering that makes them accessible to the masses without the hassle that active property ownership presents.
How do we accomplish those goals:
We buy apartment buildings in need of an operational repositioning and hold them for the long haul. That typically looks like buying from a long-term owner who has been primarily focused on keeping occupancy up rather than pushing rental rates and has been focused on minimizing new capital investment into the project leaving revenue enhancing projects on the table.
The long term horizon of ownership coupled with a focus on buying apartment buildings with sizable deferred maintenance pairs beautifully with California’s Proposition 13 which caps annual increases on property taxes to 2 percent and heavily incentivizes renovation laden business plans. This cap on annual property tax increases, which is typically the second largest operating expense of an investment property, allows long time property owners to truly benefit from net operating income expansion – as revenue improvements consistently outpace operating expense growth over the long haul.
We invest alongside our partners, in neighborhoods we can drive to, and don’t sub out management responsibilities to other parties – this ensures that the goals of ownership and the goals of management are always aligned and minimizes miscommunication.
This might sound crazy, and frankly might be misguided, but we are not focused on growth. We are focused on planting well-timed seeds over a long period of time with a select community of individuals who share similar sentiments around investing.
We aim to structure our investments as TICs (tenants in common) which allow for each individual investor to hold their shares in whatever entity structure suits their needs best (Corp, LLC, etc) while preserving both the individual and collective group’s ability to sell at a later date and complete a tax deferred (1031) exchange into a future real estate investment offering.
More specifically this entity structuring prevents our investors from having to pay capital gains taxes and depreciation recapture tax at disposition allowing them to retain a higher sum at exit and compound their wealth at an outsized rate.
Additionally, our investment structure has proven to be a great estate planning tool with members regularly gifting their heirs shares up to the annual gift exclusion amount ($19,000) on a recurring basis – removing valuable assets from their estate
If you have any interest in learning more about Echo Valley Real Estate, or to stay in the loop for future investment opportunities, please feel free to submit a contact us form and a member of our team will reach out.