Zero cash flow investments are a rare and complex type of transaction used by investors to defer the payment of real estate capital gains taxes. Because of the way they are set up, such investments not only provide numerous tax advantages but also serve as a tool for maximizing cash flow and meeting long term investment goals. Simply stated, zero cash flow investments involve using the gains from a real estate sale to purchase other highly leveraged properties backed by long term, highly creditworthy leases. The term “zero cash flow” comes from the fact that the investments are structured such that the rent from the tenant exactly equals the loan payment, thus resulting in a net income of zero for the owner of the lease.
Because of the numerous built-in advantages, zero cash flow investments are becoming increasingly popular with real estate investors, 1031 Exchange buyers and even private investors who are attempting to build long-term security. Some of the key features of zero cash flow investments are outlined below:
Because the rent payments from a zero cash flow investment go directly to servicing the loan, they result in a taxable income of zero for the investor. In addition, the combined effects of interest on the loan together with depreciation normally generate a net tax loss that can be used to offset other net gains.
Zero cash flow loans are usually fixed rate and quickly and easily assumable. Because they are secured by the leased property, the borrower has no personal liability in the event of a default.
Lenders are usually comfortable with financing as much 90%, loan to value, thus providing the buyer with the opportunity to purchase a property with a minimal cash investment of 10 – 20% of the property’s value.
Zero cash flow investment properties are highly marketable and can be quickly sold on the open real-estate market or back to the original seller, thus allowing the investor to pursue other investment options.
Because zero cash flow investment transactions can be closed very quickly and easily, they can be used to complete 1031 Exchange deals within the required time constraints. In addition, such loans come with the option of being sized to meet the desired debt to equity ratio of the particular 1031 trade.
Zero cash flow investment loans are usually fully amortizing with the payoff date set up to coincide with the expiration of the lease. Under these conditions, an investor who holds a property full term will have outright ownership of a secure investment property at the maturity of the loan.
Although zero cash flow investments offer many advantages, they are accompanied by numerous complexities which are most safely and effectively maneuvered by skillful brokers. Such individuals have the experience necessary to match potential investors with properties that will best meet their financial goals as well as the legal expertise and know-how to ensure that the underwriting and due diligence are carried out properly. In addition, professionals who have experience in the area of zero cash flow investments will understand how to maximize the tax benefits for their clients as well as advise them in areas such as long term ownership of the investment properties.
The experienced professionals at CGT Solutions have an extensive inventory of zero cash flow investment properties and have traded in excess of a billion dollars in zero cash flow investments. If you are interested in a zero cash flow investment in order to defer capital gains taxes or to meet the timing constraints of a 1031 Exchange, contact us today to receive a free gains analysis with solutions options.
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