20 Year Financing Or 5 Year Special Assessment?
Our condominium homeowners association needs to replace the cement of our parking lots to the tune of about $600K. At first our Board of Directors planned to levy a $1500/year special assessment for about 5 years, and now they would like to finance the project for about $30/month for each owner for 20 years. The fiancing will not put any leins against current owners who may try to sell their properties.
Besides the obvious cost of interest of the 20 year loan, are there any other drawbacks? Our board is very pro-financing, and I am too, but it seems like to simple a solution.
Only thing I noticed is:
$30/mo X 12 mo X 20 years = $7200
$1500/yr X 5 years = $7500
Cheaper to finance....
OK, well I approximated. Since we have not decided on our plans, we do not have a locked interest rate, but there will be a cost of financing.
This must be one massive place to have $600K worth of concrete! 7-8K per unit is too much; you can do SFR driveways and sidwalks for less than that. Are they doing a road/entrance to the complex in addition to the parking spaces?
I know this is not related to your question...but the numbers seem out of wack to me.
What is SFR?
single family residence
You could exchange it for one multi rather than four duplexes. A real problem is identifying and doing sufficient due diligence on 4 properties within the 45 days (after sale) that you have to identify the replacement properties.
My first buiding was 8 units and I had it managed. In my opinion, duplexes are not too bad to manage yourself, but it can keep you busy if you have a lot of maintenance issues.
Remember that it is not just the "gains" you reinvest with a 1031 exchange. The replacement properties must cost at least as much as the price you got on the property you relinquished. Maybe you already knew this, but the way you worded your question made me wonder.
You say that you will need the cash flow. You say that you get $1200 from two free and clear properties, or you can get $1400 from four 1031 properties under professional management. You say that you will purchase the two free and clear properties with the AFTER TAX proceeds from the sale of your current rental.
For me, the answer is a no-brainer. Shelter the capital gains, 1031 into several professionally managed properties, and collect more monthly cash flow than you would get with your alternate plan.
If you want more convinving, let's say that your taxable profit will be $200K on the sale of your $350K rental property. After taxes (15% federal, 9% state), you have $152K left which you could invest in more rental property which you will own free and clear. Hold this property for 10 years and assume an average annual appreciation rate of 7.2%. At the end of 10 years, your property has doubled in value to $304K.
However, if you 1031, you acquire $350K in replacement investment rental property. After 10 years of 7.2% appreciation, your rental property is worth $700K.
These numbers only illustrate the power of the 1031 exchange to increase your wealth. Substitute your actual numbers in this example to see how your choices affect your long term wealth accumulation.