|INCOME LAYERING WITH THE PACTRUST
Most SFR income property owners sell only the use and occupancy in their properties, never realizing
they are only selling a "part of the pig (as it were)." They then complain because their
property just won't make ends meet, or that income property ownership is hard or less profitable
than it should be. Others will only invest in commercial property because "SFR's are just too
prone to negative cash flow and excessive costs." All of this is because they don't know what
income layering is, and how much they actually have in their possession that is available for sale,
in addition to use and occupancy.
In essence, income layering is the concept of selling each aspect of the property individually for
a specific price, thus nearly tripling net rental income and eliminating expenses.
For an example, let's take a $100,000 property with $25,000 Equity and payments of $650 per month,
after the last rent hike, the property rents for $900 per month, with management and maintenance
running $100 per month, and a 2-payment per-year Vacancy Factor (Av. $130.00 per month).
So far, we have a $20.00 per month positive cash flow, leaving a net income of $240.00 per year.
Sound like a problem?
Well, to cure the problem, consider vesting the title of the property with a land trust, making
the tenant a beneficiary ion it, and then converting the simple lease to a triple-net lease and
selling the following items separately to the tenant co-beneficiary:
- Use and Occupancy – sells for $900 per month (that’s the base rent)
- Equity Build-Up from Principal Reduction - $75.00 per month (it’s worth $100 or so…good deal
for the tenant).
- Tax Write-Off - $200.00 per month may be worth, say, $250 or so to the resident)
- Pride of Ownership (i.e. including all of the above, and the "I own it" factor) - in
exchange for the resident’s handling all management and maintenance responsibility (thus eliminating
the $230 management cash drain for the landlord).
- All or part of the Appreciation (potential) - $150 per month (it may be worth a lot more…or
Now, think bout it…haven’t we effectively just gone from a $20.00 monthly net rental Income to
$905.00 per-month net...with no management, maintenance, upkeep, property taxes, insurance, etc., etc..
that’s what’s called a "Ho’buncha percent increase": and as for the tenant, his After
Tax Cost of Residence just went down from an After-Tax costs of $1,300 per-month to ZERO by the
end of, say 4 or 5 years (assuming decent Appreciation).
Now…just try to do THAT with commercial property.
And remember, too, that one doesn’t need to give up ALL the appreciation or all the equity build-up
from principal reduction…personally, I always keep half for myself. And, if I wanted to keep it all,
the incentive for the resident (reduced after-tax cost) would still be excellent. I can keep or sell
any of the layers for a profit without giving a single thing that I might need because anything I
might relinquish in the process is more than made up for in my elimination of costs and increased
cash flow. And, oh yeah, I don’t give anything up unless the tenant is willing to give me at least
5-10 percent of the property’s value up front (as a down payment or option fee) and to share all net
profits with me at termination.
Quick Start Success Pack by Bill Gatten
Bill Gatten, www.landtrust.net
is an accomplished Real Estate Investor, Author, Lecturer and
Sales Trainer. With over 40 years experience in banking, equipment
financing and leasing, and real estate investing, Bill is considered among
the top Creative Real Estate trainers in the U.S. today. His book, No Down!
No New Loan! is now in its second printing. A new book for investors is
due out in 2002: 'Making it BIG in Creative Real Estate...for the Cash,
Credit, Income and Experience Challenged.'
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