I get a lot of questions from clients about zero cash flow properties and the benefits of them. In today’s article I will break down what are zero cash flow properties and why I think they make sense in today’s market. First, what are zero cash flow properties anyway? These investments are highly leveraged property backed by a long term, bond quality lease guaranteed by investment grade tenant. These tenants are typically structured with a 20 year or more lease and have a high credit rating, at lease BBB. To learn more about credit ratings check out NNN Tenant Credit Ratings Explained. In this investment the lender finances 85 to 90 percent of the loan to value which equates to the property’s net operating income going to the lender and none distributed to the owner. Why would anyone be interested in a deal like this? Even though initially this might not sound attractive for an investor but their are a few benefits I would like to share with you.
You have the opportunity to own an investment with minimal amount of equity. Most zero cash flow properties are acquired with as low as 10 to 15 percent of the total value. Compared to other investments that may require 25 to 50% equity. This could allow an investor to acquire multiple deals of this nature, highly diversifying and spreading their capital. Secondly, the financing is typically fixed rate, non recourse, assumable and fully amortizing. At the end of the loan term the property is owned free and clear of debt. Along with previous mentioned points this structure is a low cost way to get tax benefits associated with ownership of real estate. Zero cash flow properties are very popular choices for estate planning, pensions and trusts. Investors enjoy the income generated after the debt is paid off. The remainder income is left to heirs
Zero cash flow properties are great uses for 1031 or 1033 exchanges. This allows an investor to quickly assume a loan at a low cost. With the structure of these loans it also allows for the option for the purchaser to re-size the loan to match the particular deal that are looking to trade into allowing for great flexibility. Their is also an option to refinance and cash out a substantial portion of equity after the exchange is completed. The cash from the equity can be used to purchase other cash flowing assets and remain complient of your 1031 exchange. To learn more about 1031 exchanges check out our 1031 Real Estate Tax Exchange section or articles in our NNN Buyers Guide.
Most Zero cash flow properties generate net taxable losses. These losses can be used to off-set like kind income in the investors portfolio. The losses can be very high in the beginning periods of the loan to the point where the combined offset from the depreciation and interest expense can exceed the rental income. At this period the property will generate “phantom income” in which case the rental payments equals the debt service. This occurs typically in year 10 to 12 of the loan as the reduction of the loan principal and decline in interest expense over the course of the loan.
Structuring zero cash flow deals requires a knowledgeable real estate broker who understands these type of investments and can advise investors on the long term ownership of these assets as well as to maximize any tax advantages.
Schedule your consultation today to discuss your investment needs and to get answers to your questions. We are the premier source for Zero Cash flow properties nationwide. We have access and maintain a large on and off market database of Zero Cash flow properties and we are certain we can fill your needs. Below is a short list of opportunities:
|Income||Long-term Capital Gains Tax Rate||Short-term Capital Gains Tax Rate|
|$9,950 and below||0%||10%|
|$9,951 - $40,400||0%||12%|
|$40,401 - $40,525||15%||12%|
|$40,526 - $86,376||15%||22%|
|$86,377 - $164,925||15%||24%|
|$164,926 - $209,425||15%||32%|
|$209,426 - $445,850||15%||35%|
|$445,851 - $523,600||20%||35%|
|At least $523,601||20%||37%|