How to Recession-Proof your Properties by Reshaping your Real Estate Investing Portfolio

While we enjoy a rising market, it’s always a smart move to consider the eventual dip in the cycle that can severely cripple an investor if they are not forward-thinking in their preparation. Here are several strategies to help insulate your investments and mitigate financial fallout when the market takes a downturn.  To recession-proof your investments, consider the properties in your portfolio. Identify where you have made wise investment choices with appreciation that you can reallocate and put to better use. 

Here are my recommendations on how to make that gain profitable while recession-proofing your holdings.  

  1. First, stagger your sales. Sell the properties with the least amount of gain, depreciation, and the highest cash equity. For these particular properties, do not 1031 exchange, pay the tax. The properties with high-gain and low-cash equity are the properties you will want to 1031 exchange.  
  2. Use the cash from the taxed sales to pay down your debt on 1031 exchanged properties so that you can recession-proof those properties with a lower debt load. 

Pro Tip: You can allocate your proceeds in any way you want in a 1031 exchange. So why not buy two replacement properties – one for cash and one with maximum leverage. Enjoy the recession-proofed debt-free property and the extra ROI (Return On Investment) bang from maximum leverage on the other.

Remember depreciation recapture is taxed the highest. Capital gains are taxed the lowest. Equity is not taxed at all (unless it is profit). So, when trying to reshape your portfolio while minimizing tax, sell the properties that have the least depreciation recapture and the highest amount of equity (lowest debt). If you sell those and pay the tax while 1031 exchanging the others, you will minimize your taxes while sheltering the optimal assets.

For growing your recession-proof portfolio, another recommendation would be to let the market speak on each sale. There’s no penalty in starting and not completing a 1031 exchange. So let your 1031 exchanges commence on each sale, and if you find quality replacements in the 45-day identification period, then finalize your 1031 exchange. If not, then don’t turn in a list and let your 1031 exchange die on Day 46. Sure, you will have to pay the exchange fee to start a 1031 exchange, but there is no penalty from the IRS for not completing one. You pay the tax and a slightly reduced 1031 exchange fee (as it is a deductible cost of the sale). You would want to think of the exchange fee as buying you the identification period while you see if you can find suitable replacements.  

Pro tip: If you happen to be selling toward the end of the year and start an exchange, then let it die after Day 45, you will receive the proceeds early the following year, which means you won’t have to pay the tax until April of the year after that. So, for the price of a 1031 exchange, you will get to look at potential properties, and you will defer taxes for an additional year. 

My best advice to recession-proof your REI portfolio – keep your options open! Spreading out the tax by selective 1031 exchanges gives you a runway to do what you want with your properties. Look at each property individually, keep the investments with the best NOI (Net Operating Income), sell those with the least amount of gain, depreciation, and the highest cash equity. Look for investments in up-and-coming areas with low maintenance or reinvest in a different property type (if that is what you are looking to do). In the end, remember, no one ever went broke paying tax on profits. (It just feels like you do!)  

For help deciding which properties work best for you to 1031 Exchange, see my article: How to Build Wealth Now, Pay Taxes Later with a 1031 Exchange.

*Originally Posted on BiggerPockets.com

Should Real Estate Investors Tithe On Appreciation?

This topic is one on which I have often meditated. As a Christian, how should one tithe on their income as a real estate investor? Gross profits before expenses work differently when it comes to a real estate portfolio. The Bible tells us to tithe on a tenth of our gross income. Do we include appreciation? How do we honor God when real estate investing does not produce a straightforward income?

There are many ways to interpret tithing from a scriptural lens, so here are my two cents on how God has called me to live. First, there’s no right or wrong way in budgeting or giving. The right or wrong is in your attitude and agenda. Dave Ramsey and I agree that tithing is giving! In the boom years leading up to ‘08, my income was very unpredictable but pretty high. My family had a hard time budgeting our giving (welcome to REI). So, we tithed what we knew was coming in every month as a fixed base. Then we committed to banking 10% of everything else (a tithe above a tithe, I guess) and prayed separately for places to give. It was so fun! We bought cars for single moms, dug wells for orphanages, and bought gifts for AIDS camps in Jamaica. In early 2008, I was told to give it all for six months to a couple I had known for a long time who had suffered some catastrophic setbacks. That family got the last check—and that was also the last time we ever had a tithe above a tithe. The market crashed, we lost several zeros—but what a joyful and fulfilling experience of giving we had!

Now for some sad news and a reality check: Tithing and charitable giving have been hijacked by the government and the church. Giving for a tax write-off is giving to receive, and that’s not offering first fruits. In the same way, many churches want to guilt you into giving directly to their institution (mostly because they have initiatives that they feel are important). There’s nothing inherently wrong with that but the tithe is God’s, not the church’s. There is a distinction. Part of that distinction is that our greatest call is to give to the disadvantaged and those in real need, such as widows and orphans. This can be a great departure from the tithe to pay for gyms, lobbyists, or stained glass windows. 

It seems like the question shouldn’t be “How much do I need to tithe?” but, rather, “How little can I keep?” Look for opportunities to give and where He wants you to give. The rest is all noise.