Atlanta Investor Bets
On the Florida Panhandle
by Jane Hodges
July 19, 2005
The investor: John McDonald, 55, an automotive consultant in Atlanta, sold his Atlanta-area car dealership in 1990 and sold the property for $3.7 million in 2003. To save on capital-gains taxes, he decided to buy residential real estate using a 1031 exchange -- a transaction that allows real-estate investors to defer taxes on gains from the sale of investment properties as long as they put the money into buying other investment properties of equal or greater value. He used the proceeds to buy 33 properties in the Fort Walton Beach area on the Florida Panhandle in 2004.
The property: Among these purchases was Hayley Marie Court, a new 13-duplex community in Fort Walton Beach. Eight units are two-bedroom, two-bath apartments with more than 1,200 square feet of space and tiled entryways. Five units have three bedrooms, each with about 1,600 square feet.
Purchase price: $1.275 million for 13 units: $90,000 for each of eight
two-bedroom duplexes, $111,000 for each of the five three-bedroom duplexes. Mr.
McDonald says his offer was $225,000 below the builder's asking price. The
builder accepted, Mr. McDonald says, because he proposed a rapid closing.
Additional investment: Since the properties were newly built, no repairs or renovations were needed, Mr. McDonald says. He incurred no carrying costs, he says, because the closings were timed with the completion of the construction, and his management company pre-rented the units. Mr. McDonald, however, did pay $6,000 for 1031-related legal fees, he says.
The strategy: Mr. McDonald says he plans to hold the properties. He estimates their market value has risen 51% to $2.5 million, and each unit is bringing in enough rent to cover expenses and provide a profit. The Florida real-estate market has shown rapid price appreciation, and Fort Walton Beach is no exception. Mr. McDonald says the area has plenty of worthy renters, including would-be home buyers who are renting while they wait out the area's competitive housing prices, and armed-services personnel with rental allowances to rent off-base while the military renovates base housing. (Eglin Air force Base and Hurlburt Field are nearby.)
The pitfalls: Some of the properties didn't close in time to qualify for his 1031 deadlines, because of utility, sewer and local zoning and permit delays that the builder encountered, Mr. McDonald says. As a result, he says, he faced some capital-gains taxes.
The payoff: Mr. McDonald says the two-bedroom units he bought for $90,000 each now have a market value of $170,000 each, and he can turn a monthly profit of $350 on each. The profit is even higher for his three-bedroom units. In total, he says, his duplexes generate at least a $2,800 monthly profit -- or $33,600 a year.
Do you think this was a good investment? Share your thoughts on this property.
-- Ms. Hodges is a free-lance writer in Seattle.
Email your comments to rjeditor@dowjones.com.
