Investor Sells Condo
To Buy a Bigger Home

The investor: John Franzman, 47, runs an insurance business in Denver, but has always had an interest in real-estate investing. He bought a house in the late 1970s as a college student and used the cash flow from rental income to pay for his education. Since then, he's completed at least a dozen property deals in the state, many of them through 1031 exchanges.

The property: A two-bedroom, two-bathroom condominium in Vail, Colo., a popular ski resort. Built in 1974, the 876-square-foot unit is located along a river, has a wood-burning stove, privacy decks and two master bedrooms and bathrooms. It is part of the Vail Racquet Club, a condo community with amenities that include tennis, swimming, skiing and other outdoor activities.

Purchase price:$220,000. Mr. Franzman bought the property outright in 2000 with proceeds from the sale of a property in Nevada. The condo is one of three transactions the Nevada sale funded, he says.

Additional investment: Other than paying for minor upkeep, furniture and $350 in monthly homeowner's dues, he didn't have to pay for any major work at the condo, Mr. Franzman says.

The strategy: His aim is to buy and hold properties until he can sell them at a profit and use the proceeds for bigger deals, he says. The Vail property was primarily an investment, he says, but he also used it himself. Income from the rental averaged $5,500 to $6,000 per year -- which more than covered the property's $350 monthly homeowner's dues.

Pitfalls: He sold the condo to free up money for another deal -- a large five-bedroom home in the Vail area, which he bought for more than $1 million with a partner. Because he knew his condo would sell rapidly, he didn't put it on the market after he had the new home under contract. Timing was delicate, he says, since the condo was part of a 1031 exchange. (A 1031 exchange is a transaction named for an Internal Revenue Service provision that allows investors to defer capital-gains taxes on an investment property by reinvesting the proceeds into the purchase of other property within a given period of time.) The deal worked well for him, but he says investors interested in doing 1031 exchanges should take into account how long property in their area takes to sell.

The payoff: He sold the condo for $405,000 in January 2005. He didn't use a listing agent, but paid the buyer's agent a 3% commission of $12,150. The property's annual rental income ($5,500 to $6,000) outpaced annual homeowner's dues ($4,200), leaving a profit of $6,500 to $9,000 from rentals, he says. Taking these costs and his rental income into account, his profit amounted to $181,850 to $179,350, not factoring in taxes that he paid on the property.

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