Case Study: GW Apartments

Objective: We assisted our client in a 1031 exchange out of a mostly depreciated 5-unit they held for 25 years and was owned free and clear. Due to the low basis, no debt and long-term ownership, the client was paying ordinary income tax rates on nearly 100% of their positive cash flow, leaving them with mediocre returns. Additionally, they had a single-family rental house that had low leverage and was performing poorly.

The Process: Pilot found the client a fully renovated 20-unit apartment building that was desirable due to its proximity to the client’s house and other apartment building. After a thorough analysis, it was determined that performing a 1031 exchange with an additional $200,000 in equity, would allow our client to acquire the 20 unit at a 5.22% Cap Rate with a new loan at 3.85%, fixed for 7 years. After getting control of the 20-unit, Pilot promptly listed the 5-unit and started marketing the property for sale. Our client simultaneously listed their single-family home with a residential broker and we coordinated timelines. We successfully completed the multi-property exchange in October of 2019, selling $1.8M of real estate and acquiring a fully stabilized $5.66M asset!

Outcome: With our client re-leveraging their capital, the new investment will increase cash flow slightly. More importantly, they will reset their depreciation therefore shielding a majority of their cash flow from income tax and increasing their after-tax return. In addition, they will have approximately $69,000 per year of principal reduction and the increased unit count justifies professional management.