As mentioned in yesterday’s post, while in Starbucks I met a local high school teacher, Rick, who was hunched over a buncha papers he was grading. We got to talkin’ and as one thing will led to another, real estate investing came up. (Yeah, I’m shocked too.) Turns out he owns a small local La Mesa, CA apartment building. I know exactly where it is — solid location. It’s well kept. He was raised in the biz by his dad, doing cleanup, repair and maintenance — against his will. 
Amen brother, we lived the same lives.
Breaking News: My old San Diego TC — Transaction Coordinator — just walked into Starbucks. Hadn’t seen Debbie in years. I’ve had TC’s since her, but none better, not even close. She was the real deal. So fun to run into her today.
OK, back to schlepping for Dad against our wills.
His units are now cash flowing about $5,000 monthly with $800,000 in debt. He says it’ll cash flow roughly twice that when the loan is paid off. He’s retiring in about 10 years. Oh, and for the record, the location of his units is such that I’d gladly have Mom live there alone. Just so ya know.
Ever heard the saying, “. . . like shootin’ fish in a barrel?”
Here’s what I’d advise him to do — while tellin’ him he should get the ball rollin’ sometime around 4:30 yesterday afternoon.
First, let’s establish where the bar is. If we can’t show him what appears to be a no-brainer strategy, then he shouldn’t do anything.
• Cash flow upon retiring should be significantly greater than $10,000 monthly.
• If possible, his equity should be equal to or greater than what would have been the case had he remained in La Mesa. (San Diego County)
• His units at retirement will be 36 years old — not encouraging on the operating expense side of the ledger. The props I’d have him trade into would barely be, well, 10.
• Executing my strategy would increase his tax shelter from, um, probably nothing, to somewhere around $20-35,000 annually. Not a lot, but better than the nothin’ he’ll have stayin’ put.
• Executing a tax deferred exchange (Section 1031 IRC) is also a no-brainer. His adjusted basis, after doing multiple trades over the years, is now probably enough to buy dinner for his immediate family at the local taco shop — about a $19.98 if he sticks with rolled tacos.
Using his valuation, his net tradable equity would be about $1,040,000.
The BawldGuy Domino Strategy
1. Sell his units, close them, while setting up a delayed tax deferred exchange.
2. The ‘uplegs’ — the properties into which he’d be trading, would be 10 very well located duplexes in Texas. Duh.
3. Nine (9) would be acquired with 33% down payments, using 30 year fixed rate loans at the current rate of 5.25%.
4. A 10th property would be bought for cash.
That ends Phase I of his Purposeful Plan — Here’s Phase II
Rick’s cash flow from Day 1 will be a bit over $83,000 a year, but that’s the figure we’ll use here. That’s $6,900 a month. We’re gonna round that down to $6,000.
Note that the cash flow, even with vastly increased debt is just under $2,000 more per month than his San Diego units are doin’ with just over half the debt. If you feel a trend developing, I suggest you go with the feeling.
Let’s start knockin’ down dominoes
Taking the $6,000 monthly cash flow and adding it to just one of the duplex loans every payment would result in payin’ off that property in just 26 short months. This would, of course, make it easy for Rick to then jump on the second duplex loan with more than $6,000 — probably about $1,000-1,200 more. That would then result in eliminating that duplex’s debt in less than 26 months, likely less than two years.
Pretty soon Rick’s payin’ off his loans faster than he can keep up. Well, pretty fast anyway. In any case, when he retires 10 years from Day 1, he’ll own the 10 duplexes free ‘n clear. His income from those puppies will be impressive, especially when compared to what it might’ve been had he opted for the status quo and stayed put.
The smoke-cleared bottom line? Let’s compare — it’s much more fun.
All assumptions on both property values and net operating income (NOI) is that from Day 1 neither ever goes up till the end of time. Long time readers already know that, but for those relatively new here, I’m OldSchool down to my DNA. In fact, many of my mentors were so old ‘n grizzled, they just called it School.
Here are the numbers Rick will have engineered when he retires in about 10 years.
Status Quo — $2 Million equity, debt free.
BawldGuy Domino Strategy — A few bucks over $2.5 Million equity, also debt free.
Status Quo — Roughly $120,000 in cash flow yearly. (No tax shelter whatsoever.)
BawldGuy Domino Strategy — About $183,000 in cash flow yearly. More tax shelter than Status Quo, but zero ain’t too hard to beat.
But wait, there’s more!
• Rick will also have a fine retirement coming from his decades as a teacher. If he wanted to he could supplement that income by starting an EIUL now, but planning to fund it monthly maybe 10 years past the day he retires. That would give him a solid 20 years, which would wind up generating a tax free income of several grand a month. Just a thought.
• By moving his equity to Texas now, he’ll enter retirement with literally 10 times the flexibility than if he’d stayed. Things happen that require largish lump sums to take care of. Wouldn’t Rick rather refi or sell just 10% of his real estate investment portfolio to take care of an unexpected need vs puttin’ a loan on his one and only piece of retirement income property? Flexibility in retirement can’t be overrated. Just ask those who didn’t have it when ‘it’ hit the fan.
• If Rick should want to acquire a second home after retiring, where would the cash come from? If he followed my strategy, he could sell/trade or refi just 10% of his portfolio and voilà! there’s his second home.
• Not sure whether Rick has any heirs, but let’s assume he has three. This is purely a subjective, though practical matter, but with 10 properties, he hands ‘em out equally with one left over, and avoids 90% of the decision making if the siblings don’t have the same outlook or agenda.
I’ll stop here, as I’m entering the well known War and Peace zone now. But I think you can see clearly — Rick will be far better off making the move to Texas. His current scenario is better than most — it’s just not the best scenario on his menu.
This works in the majority of markets around the country — some better or worse, but all with improved results compared to stickin’ with the status quo.
This hit you where you live? You’re not the Lone Ranger. Gimme a call at 619 889-7100 and let’s examine your situation. Can’t wait to hear from ya — and besides, I need a fix. Have a good one.
Related posts:
- San Diego Real Estate Investors — Pay Attention To Jon & Jill
- Attention Real Estate Investors – Buying For Cash? You May Wanna Rethink Your Strategy
- Real Estate Investors: How EIUL’s May Fit Your Purposeful Plan For Retirement
- The Folly Of Missin’ The Same Bus Twice — Pay Attention Real Estate Investors
- How A Purposeful Plan Makes Use Of A Partial 1031 Tax Deferred Exchange — A Case Study
About BawldGuy
Recent Comments