Zero Cash Flow & 1031 Exchange- A Smart Option for Investors
Also known as “Zeros”, zero cash flow deal is structured as “ Bond” and then highly financed due the high credit rating of your tenant. In zeros, all the rent paid by the lessee or tenant goes to the institutional lender. These types of real properties are much beneficial for the investors, as they enable them to cash out their gain and postpone tax recognition. They are an ideal investment option, if you are focused on growing your portfolio but with the lesser risk. They must be backed by investment grade rated credit (AAA to BBB+) and a very long-term lease of generally 20 years. Zero cash flow happens when you have to subtract out a certain amount of money for vacancy rates, maintenance and repairs, taxes and insurance, property management, and other expenses that come with property.
Why Buy Zero Cash Flow Properties?
You are concerned with the fact that Cap Rates may go back to historic levels and you want to protect your equity. Imagine, if the Cap Rates go back to 8% from current 6% level, it is likely to represent a 33% reduction in property values. And if you own a property and have a loan of 67% or more, you will be wiped out. But in a Zero Cash Flow Deal, the income is pre-sold to the lender in the current low rate. Cap Rate and interest rate changes do not impact the value zero cash properties. If you want to grow your portfolio in the safest way, investing in these properties will let you leverage your tenant’s investment grade rating and buy property worth 10 times your equity without personal recourse.
Zero properties are in fact long-term lease products ( lasting for 20 years or more) in which cash flow is not currently desired. Once the loan is fully amortized, these types of real estate investments offer great potential residual value and attractive secure cash flows. They are the effective way of satisfying your 1031 and 1033 exchange replacement property requirements. 1031 exchanges and zeros are now widely used to defer recapture and capital gain taxes for the sale of highly leveraged properties. Zeros are very popular in the United States and many people are now investing in these properties.
Major Benefits of Investing in Zero Cash Flow Deals:
- Allow to leverage investment grade credit rating of the tenants and buy property worth 10 times their equity
- Enable investors to buy very depreciable basis’ with the least amount of equity
- Enable you to cash out your gain and postpone your tax recognition
- The loans are fully-amortizing, as they amortize 3 years before the primary lease term ends
- Offer high leverage (typically 85% to 90%) to cover large debt requirements with very low equity ( generally for 1031 trades)
- Tenant pays operating expenses, real estate taxes and insurance, maintenance, repairs, etc.
- Allow to buy an absolute net leased property for a less amount of equity
- The financing is assumable, fixed-rate, non-recourse, and often fully amortizing
- Low cost way to obtain the tax benefits associated with ownership of real estate products
- Lucrative for investors looking for a quick and effective completion of a 1031 or 1033 exchange
When to Invest in Zero Cash Flow Properties?
There are times when “Zero Cash Flow” property can be the most lucrative option. Now is the good time to invest in these sorts of real estate products and numerous investors in the United States are opting for such investments to fulfill their 1031 or 1033 exchange requirements. If used properly, they will allow to leverage a property with around 90% debt. And after you are done paying off the full debt, you would be left with a much beneficial property that is completely paid off, highly appreciated in value, and deferred in capital gains taxes. So, why not to utilize your money in hottest zeros today!
Buyer and Seller of Zero Cash Flow Properties
Generally speaking, zero cash flow deals are owned by large corporations, reits, funds, insurance companies and other businesses. They buy them to use for tax purposes and build wealth out of these zeros. Buyers of these properties are usually people or 1031 exchange buyers with the needs of lucrative real estate planning. Zeros are in fact highly-leveraged assets backed by a long-term lease guaranteed by a high credit-tenant. They are ideal option for those who look for tax deferral solutions.
What to Consider While Investing in Zero Cash Flow Deals
Investing in zeros comes with its share of pros and cons. If you are a new investor, it is important to act very carefully, else you may fall into a risky situation. Always opt for a property that is in a fairly good shape, so that you don’t have to put your money into it to get ready for the rent. Make sure your estate is in a good family rental area that is appreciating in value. Lease your property to the high credit rating tenant, who comes in and starts paying down the mortgage to the concerned lender.
Keep in mind that zero cash flow transactions require a skillful broker who can match the property to the investor’s needs, who knows how to make the most of the tax consequences, and who can advise on long term benefits and ownership issues related to the asset. Triple Net Investment Group has been assisting numerous clients in the purchase and sale of zeros since a very long time now. Get in touch with their experts to make the most out of zero cash flow and 1031 exchange options for you.