Gathering all of your information together in one place — Known more commonly as “Yer kiddin’ me, right?”

First off is your age(s).

This is crucial for many of the Captain Obvious reasons you’d suspect, but for some, other reasons as well. Under 40ish? The world is your oyster if you have at least starting capital, a reliable income, and reasonable financial discipline.

40-50? You can still kick major bootie in the arena of retirement income. You’ll just hafta get on your horse and hit the trail with serious intent. Regardless of those who’re constantly tellin’ us otherwise, real estate investing for retirement is definitely a contact sport. Never forget — one of the most important ingredients in every Purposeful Plan is FLEXIBILITY.

Over 50? That age group must pay rapt attention to three factors.

• You have access to investment capital

• You have the will to use it

• You realize that pesky birthday keeps showin’ up every dang year

If you’re already retired, but are deeply dissatisfied with your current income, you can probably count yourself among the younger age ranges. This is due to the real life fact that you are likely sportin’ a sizable amount of cash and/or equity in one form or another. It simply means you’ll be rearranging your net worth in order to better enjoy your many trips. That’s code for you hate your income now, and will move Heaven ‘n earth to double it if you could. If that hint wasn’t broad enough, that means you’re in bonds.

Under 30? At any one time this group represents around 10-15% of my clientele. Their potential for a magnificently abundant retirement is almost always virtually unlimited. Their weapons of choice are time and an almost always increasing income.

Next up — Make sure you completely understand what’s possible with your current 401k/IRA/Pension at work. For many this can prove pivotal. What can you borrow? CAN you borrow? Are they convertible to something else you’d prefer?

What about any annuities you may own? What are the terms — exactly? When do they kick in? Have they already kicked in? Is the income gonna be taxable or tax free? Is there a ‘cash value’ involved?

What do ya think of your current job?

This where the conversation can sometimes take a real turn into the Twilight Zone. They love it, but it doesn’t pay as much as another job they wouldn’t like as much. Or, it pays great, but I’m bored to tears, or worse, hate goin’ to work every morning. There’s a buncha different answers.

You should ask yourself the question if only to find out if you’d even consider making a change, if that change would enhance your actual retirement income, shorten the time ’til retirement, or both. It’s amazing what we’ll put up with when we’re focused and motivated. I’ve seen clients not only change jobs, but industries — then move to another state to boot. Ask yourself the question if only to check the box.

Are your retirement goals doable — are they realistic?

Here’s something I learned long ago that surprised me big time. About 30-40% of folks completely underestimate what’s possible. It’s understandable. After all, how is the average person supposed to know and understand all this stuff? Once you learn what’s possible, I’m bettin’ your approach will change too.

When I ask, “So, when would you like to retire?”, many quote me right back — “Oh, around 4:30 yesterday afternoon sounds about right.” If you’re 33 and can afford to start your plan modestly, retiring by 40 may be a tad ambitious. It’s all about playin’ the cards you’ve been dealt as wisely as possible.

Age can matter a lot, or not much at all. In the end though, age combined with beginning assets does matter when figuring the approximate distance to your personal finish line.

Then there’s ‘Whatever else pops up’

When you’re gathering information, it’s pertinent to include the fact that Uncle Henry will be gifting you $50,000 upon your 40th birthday. Or, that you and your three sibs plan on selling the house Aunt Frieda left you five years ago. There’s a million and one things that qualify as grist for ‘Whatever else pops up’. The point, is to include it if only to learn if it matters or not. You’d be surprised how many times my clients begin sentences with, “Oh, by the way, Jeff . . .” which have radically changed their entire Plan, or sent it happily careening in an entirely different direction.

BawldGuy Takeaway: I made Gathering Information a separate step for a good reason. More times than not a piece of that info can change an investor’s Purposeful Plan. It matters not whether it’s a huge change or not, cuz when you’re measuring time in terms of a decade or three, even small changes can result in wonderful results at retirement.

If you’d like to gather some info from me, it’s as simple as calling 619 889-7100. Rather jot me a note? Love to hear from you — just click the Contact BawldGuy button up top. Have a good one.

We’re finishing up Step #3 in the process of creating a Purposeful Plan. In yesterday’s post we created an investor, giving them a financial ‘status quo’ based upon my ongoing experience. Turns out they have decisions to make about the potential sources of their investment capital.

The decision is crucially important.

In this virtual case study, it’s sometimes possible that this decision can and will dictate the quality of retirement possible. It’s akin to laying a building’s foundation. The larger, deeper, stronger, and more reenforced it is, the larger the building can be built. It’s how real estate investors begin that will often ensure success, failure, or merely mediocrity. Many times the difference in starting with more or less available capital can literally make or break the end game goal.

Factors they are considering.

If they chose to follow my Plan, they’d be starting with a about $310,000 or thereabout. If they can’t make themselves pull the trigger on cashing out their 401k and IRA, but sell Teresa’s stocks, they’d have about $175,000 — leaving them, in both scenarios about $40,000 for cash reserves. We’ll deal with the expected performance of the capital held hostage in the 401k and IRA a bit later.

Beginning with $135,000 in additional capital will make a huge impact on the ultimate net worth and cash flow they’ll enjoy in retirement, 20 years down the road. Think about it in a different context for a minute. What if you got a 77% raise at work? That’s the difference in seed capital we’re discussing here. That’s the reason Rod’s and Teresa’s ultimate decision on this point is so critically pivotal to the eventual quality of their retirement.

NOT my way

Due to Fanny Mae insanity, a decision to begin with the lesser figure of $175,000 means they can barely acquire $675,000 in income property. And by ‘barely’, I mean by the skin of their teeth. The only thing makin’ it even feasible is that there are relatively rare duplexes available, sporting separate Tax IDs for each side. This means they can be bought ‘n sold separately if desired. It also means Rod and Teresa can design their acquisitions such that three of ‘em can be completed using just 20% down.

When these properties are freed of their loans, they’ll throw off annual cash flow of roughly $50-53,000. The equity at that point would be $675,000.

BawldGuy Axiom: When planning for future net worth and cash flow, it is my policy, never to be violated, to assume that both property value and NOI (Net Operating Income) will never increase. Basing present strategy(s) and tactic(s) on assumptions of rising prices and/or rents (NOI) is folly at best, and the road to acute disappointment at worst.

There are other factors for which we can’t account today. Such as . . .

? How quickly will they be able to eliminate all income property debt?

? Will they be able to improve their position significantly by selling/exchanging for more property in years to come?

? Once free and clear of debt, what will the interest rates be then?

Here’s the Purposeful Plan I’d lay out for Rod ‘n Teresa — at least in part.

They’d immediately acquire 4.5 duplexes. The down payments would range from 20-25%, tilted slightly to the higher. If they never did anything else ’til these loans were all paid off, their cash flow and net worth would look like this. Keep in mind the policy of no increases in value or NOI.

Yearly cash flow would be approximately $90-95,000. Their free ‘n clear equity would be a tad more than $1.2 Million.

Being my usual OldSchool self, they’d be able to eliminate the debt on two complete duplexes in roughly 5 years, give or take. Since they’re high wage earners, i.e., they’re barred by the tax code from using depreciation against their ordinary (job) income, it’s a virtual lock their CPA would approve the depreciation strategy of Cost Segregation. This would result in impressive annual dollar amounts of unused depreciation, which would patiently wait to be put into the game.

Keepin’ this part brief, in the 5 years it takes for them to pay off a couple duplexes, they’d have accumulated something like $180-200,000 in unused depreciation. This would likely be used (Who knows? My crystal ball is as reliable as yours, right?) to massively turbo charge their EIUL.

Oh yeah, their EIUL

Given their household income of $190,000, and their already demonstrated financial discipline, I’d say a conservative EIUL monthly premium of $1,000 would be a justifiably prudent start. Remember, since they gutted their job related retirement plans, they were also advised to halt any further contributions. So this monthly premium would, in reality, add less than a few hundred bucks to their monthly outgo. They’d be redirecting contributions to Rod’s retirement plan at work to their new EIUL.

Think 20 years of these monthly premiums. Their only decision would be whether or not to apply annual inflation bumps of 2-3% to the premiums. Though I haven’t bothered David Shafer to do the exact analysis, my recent experience tells me the annual tax free income using just a flat, unchanging premium, would be approximately $50,000. We’ll call it $4,000 a month.

Somewhere during the sixth year of their Plan, we’d probably (We never know for sure.) sell the first two debt free duplexes, offsetting any capital gains taxes (and other taxes as well) with our saved up depreciation. Invoking the policy of no appreciation ever, that would yield tax free proceeds of $500,000 — give or take. Mr. Shafer would then structure a brand new EIUL, calling for 5 equal payments of $125,000 — payable in 4 years and a day. (Don’t ask, it’s a regulation.)

The two EIULs will combine to deliver somewhere around $120,000 a year in tax free income, no doubt into their 90s. It could be more, but I’ll leave that to Dave. Just a week or two ago we did this analysis for a couple pretty similar to this one, and the annual income ended up being much more than this.

So now, to be fair, we need to assume they never exchanged or did anything different than the first scenario. So the income from the 2 duplexes we sold must be subtracted from the total real estate cash flow, earlier mentioned. That figure would be about $48,000 a year or so.

What we’re not accounting for in either scenario is what Rod and Teresa do with the impressive cash flows they’ll have from the time all debt is eliminated to the time they retire. My guess, and experience tell me they’d turn their sights on any balance left on their primary residence.

Income 20 years from now — 1st scenario

They’d have about $50,000 a year from their real estate portfolio and likely the same, though completely tax free, from the EIUL. That’s $100,000 a year, half of it tax free.

The 2nd scenario

They’d be gettin’ about the same $50,000 annually from their remaining income properties, as in the 1st scenario. But due to the well timed use of multiple strategies — what I’ve come to call Strategic Synergism — Their tax free income from a couple EIULs will be around $120,000 yearly. This brings their total retirement income to roughly $14,000 a month, or $170,000 a year. The really cool thing to notice is that just over 70% of this income is tax free — by definition. Not after tax. Not tax sheltered. Not tax deferred.

TAX FREE. Over 70%. Put another way, the executing the Plan I advised increased the amount of tax free income, as a percentage of the whole, by 40%. This is huge, especially when it comes to retirees.

Total income is a whopping 70% greater in the 2nd scenario. And yeah, I know, the money they left in the 401k and IRA grew. Not by all that much though. Remember, it only got to less than $200,000 in the first 20 years or so, and that was with employer matches and them pilin’ in their own money every month.

Step #3, if executed with serious intent, can sometimes make or break a magnificently abundant retirement.

In the end, ask yourself this question, as you compare the two scenarios.

How much is your employer retirement plan gonna get you by the time retirement rolls around?

Don’t let the answer deflate you. Let it motivate you to talk to me. Just use the form below to start the conversation…

Today let’s talk about the third step of any Purposeful Plan.

Step #3 — Identify your source(s) of investment capital.

Seems self-explanatory doesn’t it? Much of the time it is. There’s the cash in the bank. Maybe some stocks here and there. Or, takin’ advantage of today’s historic low interest rates, maybe the home equity is calling to you to put it somewhere else. You know, to more effective use. But, what most don’t even consider, is where many have bunches of available real estate investment capital — A 401k or IRA from a previous employer. An IRA sittin’ dormant for the last few years. Your instincts stopped you from continually adding to it, but you’ve been stymied from that point for awhile.

The case for gutting your 401k or IRA

Let’s build an investor, OK? Rod and Teresa are in their early 40s. They’ve been relatively successful in their careers. Rod makes around $120,000 in middle management. Teresa, who took seven years off ’til their kids all hit school age, is a self-employed commercial photographer, making roughly $70,000 a year. Rod has a 401k from a previous employer with around $190,000 in it. Teresa rolled her old 401k over to an IRA when she quit to stay home with her babies. The balance is just under $85,000.

They’ve built their savings, during their 21 year marriage, to around $175,000, give or take. A little bit here and there, add consistent discipline, and before ya know it, there’s a nest egg. Then there’s the stock Teresa has from her last employer, which is worth around $50,000 in today’s market. It hadn’t really risen much, then 2008 crushed its spirit. But hey, it’s still money, right?

This is where I tell ‘em to gut both of those plans like freshly caught trout. “Why on earth would we do that?!” is the usual response. I’ll repeat one of my policies not subject to exception:

No advice to a client to do anything with their real estate investment portfolio should ever be given unless it’s a no-brainer, easy decision. The projected results should provide significant improvement to the portfolio. Not marginal improvement. Not even moderate improvement.

BigTime improvement — or don’t do it.

If they followed that advice, they’d net somewhere between 50-60% of the current balances. I know, it’s brutal. The combination of being taxed and penalized doesn’t leave much. But the real determining factor must be the end game — retirement income. If retirement is set for their early 60s, say around 20 years from now, what will deliver better results? Will it be the total of about $275,000 in those plans? Or would it be $135-165,000 or so, after taxes and penalty?

Most investors, if they’re objective about it, realize the performance of their work related retirement plan hasn’t even begun to cut it. What I ask them, is whether they believe they can accomplish two things.

1. Grow that $275,000 to at least $1 Million, while remaining inside the retirement plans.

2. Generate significant and reliable retirement income when needed.

Over the next 20 years their return would hafta be consistent annually to hit the million dollar mark. If they added $1,000 monthly, it’d surely boost annual yield. This assumes they started with the aforementioned combined balance of $275,000. That assumes no losing years — ever. If a repeat of 2008 comes their way, it better be a mild version. Makin’ up lost ground isn’t terrible cuz you need to generate larger yields. It’s cuz while you’re gettin’ back to where you were, you keep havin’ those pesky birthdays.

‘Course, if they actually do manage to amass that million bucks in the next couple decades (They won’t, but we’ll say they will.), what will the retirement income be? If those couple decades began 20 years ago, their income, using universally recommended vehicles like bonds, would be based on 2-3.5% yields. Put the ugly way, that means they’d be retiring on around $20-35,000 a year, before taxes. I’m impressed. Are you? Don’t answer, it’s rhetorical.

On the other hand, how might they end up, opting for half a loaf, but invested in real estate, with maybe an EIUL on the side?

We’ll use an after ‘gutting’, after tax & penalty net of around $135,000. Add Teresa’s $40,000 from her stocks (after tax). Take about $135,000 from cash savings. That gives ‘em roughly $310,000 or so. It also allows for $40,000 in their Sominex Account, which everyone knows, of course, is cash reserves.

Tomorrow we’ll put all this together, to compare reasonably predictable results. This is important, cuz ’til we decide the source of their investment capital, we can’t begin selecting appropriate strategies. This is a must in Purposeful Planning. That is, every step must be given very serious attention. Missed possibilities can rarely be recovered.

Step #1 in getting started is to use the form below so we can have a quick friendly chat about your situation…

It’s fun watching conversations go from, “I think we can do this little bit” to, “We can do that? Really?! Sweet.”

I’ll be talkin’ soon about a youngish couple who’ve now been clients for a short few months. They’re textbook examples of what happens as real analysis weaves its way through the financial forrest of facts and fiction. When I say fiction, I mean in the sense that sometimes we find what we thought was this way, is actually the other way, plus a couple right turns. Add a little knowledge, a little expertise and experience, and before ya know it, KaBoom! Your Purposeful Plan is suddenly bursting with the promise of a magnificently abundant retirement.

As long time readers here know very well, I’m an addict to this stuff. Nothing beats sharing the fun epiphanies of first timers or those with just a bit of experience, as they begin gettin’ a glimpse of what’s truly possible. It’s amazing what happens when knowledge/expertise/experience meets desire/discipline/determination.

I wouldn’t trade those sudden moments of clarity for anything. They’re priceless, and the real pay for which I work. Gettin’ regular folk from where they are when we meet, to the retirement they’ve envisioned is more fun than I can convey. What I do is the furthest thing from work.

Try to imagine the thrill of tellin’ a 30-somethin’ mom that she has enough cash flow to become a stay-at-home mom with her two year old. Absolutely freakin’ best day of that year, no contest. I was walkin’ on air for a week.

If you’re 45 or younger, start the process of clearly understanding where you are now, financially. Sit down and apply truly serious thought to when you’d like to retire, and with how much income. DON’T prejudge what’s possible.

Over 45? Do the same thing — but double time it.

Once you’re done with that, gimme a call at 619 889-7100. Click Contact BawldGuy up top if you’d rather write me. Together we’ll figure out what it’ll take to get ya from today to the best retirement possible. Have a good one.

For those who’ve never seen a quick, down ‘n dirty explanation of a Purposeful Plan, this should help.

The Purpose of any such Plan is to get where you are today, to retirement. The idea is to make the trip safely, always aware that Murphy knows where we all live, and is a very vigilant pain in the butt. Two goals are what fuels most of us when retirement is the topic.
Retirement is appreciated sooner rather than later — and — a magnificently abundant income is held in high regard.

I’m gonna be going over the steps of Purposeful Planning this month. I’ll be weaving in a few ongoing case studies involving real people. We’ll be able to see how the process works, beginning with, “This is Jeff . . .” when the phone rings.

The first coupla steps are to figure out two things. One you know pretty much intrinsically. Are you a first time investor, some would say, novice? Do you own investment property already? Several? More than several? What’s your level of ‘investor know-how’? It’s important to not only know what you know, but also to know the questions for which you don’t have answers.

Most importantly, however, is to understand there are answers to questions out there, you don’t even know to ask. Those are the answers that can and often will make or break your retirement plan.

The second step is to figure out exactly where you are now, financially. Like any other trip, we can’t get from ‘A’ to ‘B’ if you don’t know precisely where ‘A’ actually is. Sounds simple, but not having a complete, in depth understanding of where you are now, will almost always end up causing problems down the road.

That’s it for today. Next time we’ll look at steps 3 and 4.

I’m thinkin’ your next step is to gimme a call. You’ll find me at 619 889-7100. If you prefer, click the Contact BawldGuy button up top, and jot me a note, long or short. Have a good one.

Same about expectations on investing for retirement.

Some years are really good while others pale in comparison. But, unlike skiing, if you don’t set it up correctly the bad years can really hurt you. Here is what generally happens in bad years. People question their strategies [which is good], and many simply give up and stop what they are doing. This is even more intense when people are invested in instruments that go negative dramatically.

A critical point when thinking about investing for retirement

Somewhere along the way people’s expectations were set that this couldn’t happen. This is, perhaps, the critical point when thinking about investing for retirement. Set your expectations realistically and use strategies that don’t trigger psychological pain in bad years. If you have well placed real estate, then you might suffer some downward movement in your received rent during a recession, might even have some issues with vacancy rates, but this should have been all cooked into the numbers. Same with EIULs.

You might have a couple of years of no-gains, but on the other side you will get good gains. Same with your rentals. As long as you have set your expectations correctly, you will be fine in the long run and not do something dumb. And you made good progress even during recessions, just like my son improved his skiing even during a short season! Sometimes because of your expectations you don’t realize how much progress you really made.

BawldGuy Here: This might be one of Dave’s most valuable posts so far this year. The ups and downs of the national and sometimes local economies come and go like the seasons. That’s exactly why real estate and EIULs are worth their weight in gold. Over the long run, for different reasons, they both yield the results expected by investors. The investment world, like anything else is relative. When compared to the multitude of options from which the investor has to choose, real estate and the EIUL have been kings of the mountain so long, few even know what vehicles are next best.

Some Questions

Turns out they were brothers. They told me to ask ‘em anything, so I proceeded to do just that.

• What’s your current financial picture?

Cash reserves? Available investment capital? Assets convertible to cash without muss ‘n fuss? Gross annual income from work? Any real estate investments? Etc.

• Outside of housing expenses, how much debt do you have?

• Are you currently contributing to a 401k or IRA? How much? Balances?

• When do you want to retire?

• How much income is the minimum for you to feel comfortable?

• How much capital — not touching generous cash reserves — is available for real estate investing?

• How much money, if any, can you comfortably afford to add on a periodic basis to any cash flow toward the goal of debt reduction?

There were many more questions, but you get the gist. Turns out they’re in San Diego visiting their mom, Dad having passed away some time ago. They promised to get in touch once they’ve returned home. One thing they said though, caused me to pause and reflect.

They said the phrase with which I’d begun, Purposeful Planning, gained more meaning as I asked each successive question. One of ‘em put it this way.

Heck, most people make out a plan to retire, even if it’s only in their head. But there’s a difference between planning — and doin’ it with a clearly defined purpose. It’s not like we haven’t had a purpose, we do. But after today, I can see how it makes a big difference when the plan itself is done as deliberately, detailed, and methodically as you’ve suggested.

That’s a loose but accurate paraphrase of his observation. He was so painfully honest, it made me wonder if I’ve underestimated how many out there are truly analagous to a cork floating on the ocean, going wherever the current takes ‘em. Betcha they had retirement plans too.

Take both words in Purposeful Planning literally. Take them that way separately and together. The older you get the more crucially important it becomes that your plans for retirement succeed. The more nebulous your plan’s origins, the more likely it will disappoint.

BawldGuy Takeaway: A detailed, methodically mapped out plan for retirement with a concisely stated end game — read: purpose — will virtually always generate superior results. I see it every day. Find out where you are now, financially, then proceed from that point.

It’s also critical to note that Purpose should always be viewed both as a noun and a verb. It’s one thing to have a purpose when mapping out a plan. It’s quite another to execute that plan ON purpose. Corny? Maybe. But true just the same.

Sure, it gets complicated once you arrive at the ‘how to’ part of the plan. The multiple strategies necessary for complete success must be understood to be executed properly. (Duh) Your retirement will prove far too pivotal in your life to be approached in any other way.

Don’t you agree?

Hey! Let’s agree on something else. You, calling me at 619 889-7100. You’d rather write me? Click on the Contact BawldGuy button at the top of the page. We’ll go into Purposeful Plan mode together. Have a good one.

There are three basic factors to consider when deciding to sell/trade or keep a local income property.

1. The true quality of it’s location.

2. The true quality of it’s construction.

3. The current age of the property.

Location quality

In my experience, this often morphs into too much of a subjective choice. A little over eight years ago when I decided San Diego income properties were not measuring up, it became imperative to establish a universally objective way to ‘appraise’ location quality. This ‘rule’ had to effectively and accurately assign the level of quality to any particular property in any state/county in the country.

The BawldGuy Mom Rule was born.

Mom turns 81 this spring. If I wouldn’t put her into a property I’m considering for a client, the property is no longer considered. No exceptions, no excuses — next property please. Before the rule was made policy, it was a coin toss as to what I’d find when a team member in another state would tell me it was ‘blue chip’. Or, a ‘slam dunk’ location. Or my favorite, “Jeff, it’s a no-brainer. You don’t even need to fly over to see it Trust me.”

Now? They know what’s comin’. They think twice before tellin’ me they’d put my Mom into this golden location. Funny how puttin’ a face on a policy, along with the the concept of ‘Mom’, changes everything in an instant.

So, back to your local portfolio.

Would you put your mom or grandma into your income properties to live alone? If the answer is an instantaneous and confident ‘yes’, you’re one up in your decision making process.

Construction quality

Let’s not play games with this one, OK? Most of us know quality vs crappola when it comes to construction. Is the foundation solid? How many corners were obviously cut during construction? Remember, you’re not lookin’ at the quality for now. You’re lookin’ at it for 15-30 years down the road. Is the quality of a nature that you wouldn’t mind owning it and possibly managing it in 2025? Ah, that puts a different spin on it, right? Not being straight with yourself on this topic will almost surely bite you in the butt later on. You’ve been warned.

The current age of the property.

The vast majority who call/write me say their properties were built in the 1980s or earlier. If you’re already 40ish, planning to retire at around 60, think. Those properties that’re 35 years old today, are gonna be over half a century old at retirement. Think operating expenses. They’re gonna be measurably more than they are today — duh. That directly impacts your bottom line retirement cash flow negatively. The older the units, the more likely it is you’re dealing with functional obsolescence. It could be floor plan, basic design, unattractive kitchen setup, and that’s just three simple examples. It directly affects both the number and quality of tenants you’ll be attracting.

Expanding operating expenses combined with a decrease in the size of the tenant pie, not to mention tenant quality, ain’t something you wanna generate on purpose. Yet that’s virtually guaranteed to happen in most cases. It’s a downward spiral I’ve not seen reversed in my decades of experience.

A final word

When appraising quality of location, here’s something to consider. Average to below average quality locations tend to go downhill over the long haul. Not always by any means, but more likely than not. Take a look at what were perceived as ‘average’ areas in your town when you were a kid. How are they perceived now? I know where I lived during my last couple years of high school was considered fairly average in the late 1960s. Now? When you say that city’s name, foreheads furrow, and frowns appear.

Neighborhoods that were universally thought of as ‘Average +’ are still considered as at least average if not the same as 30 years ago. If they were considered ‘blue chip’, they still are. Are there exceptions? You bet. But in my experience this has tended to hold true everywhere I’ve been.

What speeds the downturn of an area is when poor quality construction begins to ‘out’ itself. Word gets around, and before ya know it, it’s become common knowledge around the community at large. For the record, that’s never a good thing.

Add functional obsolescence to the equation? Admit defeat and get outa there.

Take a look at your local real estate investments with these three factors in mind. Be brutally honest in your analysis and conclusions. You’ll have a much better idea of what you should keep and what should be sold or exchanged.

Here’s the next thing you might wanna do: Call me. I need a fix — every day. 619 889-7100 will find me. Or, you can opt to click the Contact BawldGuy button up top. Either way, we’ll figure things out together. Have a good one.

Then there are some people who are doing nothing currently and want to start to save for retirement.  But, how do they get over their fear of making a mistake?  The fear paralyzes them to the point of just not doing anything year after year.

I recently did an illustration for a client that demonstrated taking out distributions from their life insurance policy starting at age 60 and at age 67.  The difference was quite stark as the amount difference was almost twice.  If they waited to the normal social security retirement age they could have enough to live on.  If they started earlier then not so much.  Needless to say this was a person that had not started their savings plan yet.  He was quite surprised at the difference.  The reality was it was just math that was doing him in.  That extra 7 years allowed his money to compound significantly more and then he would only have to plan on taking distributions for seven less years.

Of course the kicker is that he wants to wait another year before starting.

He just didn’t get it that time = money lost.

So don’t let hesitation rob you of a comfortable retirement, call me or BawldGuy soon!

Here’re Dave’s questions, verbatim, with text before and after, edited out. You can still see his comment in its entirety by going to the link above.

Let’s assume one buys a $250,000 home in Austin. He puts down 20% and gets a 30 year loan at 4.62% for $200,000. He rents it out for $1375/month. He has plenty of cash stored away in case of an emergecny. Here is how my numbers would look:

mortgage=$1,025/month
insurance=$45/month
taxes=$100/month
maintenance=$100/month
property manager=$108/month (8% of 1 month’s rent)

TOTAL=$1378

Basically, it would be a breakeven. So, what you are really saying is that it is perfectly OK to not cash flow. As long as one buys in the right location and has the right time frame, then the plan would still work out over the long run. Is that correct? Are my numbers somehwat close to being correct for buying a nice home in a good area in Texas?

Where do I begin?

I’ll take most of the blame for this one. You’re foundational assumption is inaccurate — the property of which I was speaking wasn’t a house. It was a duplex. The rent wouldn’t be $1,375/mo. It’d be anywhere in the range of $1,225-1,3550/mo per side. So, if you used a recent, real life example, it’d look something like this.

Paid $255,000 — rented $1,350/side — $2,600/mo — $31,200/yr, gross rent. Expenses would run in the neighborhood of $11-12,000. This would include everything. My clients only pay 5% management fee.

Let’s say the Net Operating Income (NOI) is around $19,500 or so. At 5% interest your monthly/yearly debt service, at 75% LTV, would be $1,026.67/12,320. You can readily see there is some decent cash flow there. Again, I take responsibility for you thinkin’ it was a house, and not a duplex.

But you ask a great question, Dave. Is break even OK? Well, yes, and no.

In today’s investment climate, I’d be far less inclined to advise clients to accept a break even property. On the other hand, the key question would have to be — What would the specific circumstances be? In past eras I’ve literally begged a few, select clients to purposefully buy multiple properties with a combined negative cash flow that’d make your head spin. But those were way different times than we have today — and that’s an understatement if there ever was one.

BawldGuy Axiom: The real estate investment strategies applied for a particular investor must be selected with an intimate knowledge of the economic climate, IRS rules/regs, and the general/specific investment context of the times. A Purposeful Plan using multiple strategies synergistically, is only effective when they’re all applied in the correct context. For instance, a strategy with appreciation as a crucial factor in today’s investment reality would be, um, ill advised. (Captain Obvious alert!)

Back to our regularly scheduled program.

Investors in those days could depreciate property twice as quickly. There were NO limits on how much depreciation they could apply to their ordinary (job) income. There were NO limits to how much they could make in ordinary income in order to make use of depreciation. Those two factors aren’t in play today — period.

Combine those facts with the reality of the cartoonish appreciation of that time. (Mid-late 1980s.) Back when I was tellin’ a very few select clients to purposefully acquire relatively large negative cash flows, their properties were goin’ up in value 8-15% a year, year after year. Even applying the bottom of that range for five years on a half million dollars of property — roughly $1.5-2 Million in today’s San Diego values — they’d see their property values balloon by nearly 50%. At 10% a year, their $500K in property would rise to about $805K, a 61% increase in five short years.

But that didn’t tell the real story, at least not from the investor’s point of view.

What I didn’t tell you earlier, is that in those cases my clients were easily able to buy properties with just 10% down payments! That means that in five years, heck, just three years, at 8% annual appreciation, their $50K beginning equity position was improved to roughly $180K! Put another way, their invested capital, (I’ll use $60K to account for acquisition closing costs.) was literally tripled in just three years.

Their negative cash flow? Completely eliminated in two very concrete ways.

1. Their income taxes were drastically reduced, in many cases by nearly 90%. In essence, they had merely traded income tax dollars for short term negative cash flow dollars. Quoting one of those clients, “Where do I sign up?!”

2. In an inflationary economic environment, rents tend to float up with the rising prices at the grocery store. This tends to add velocity to the elimination of negative cash flow. Go figure. (See? Give Captain Obvious an inch, and he takes a mile.)

BawldGuy Takeaway: No real estate investment strategy can ever be implemented effectively sans the context of the current economic realties, IRS rules ‘n regs, and the investor’s specific financial status quo. Without knowing those factors in rich detail, you might as well blindfold yourself and throw darts at a list of investments, locations, and strategies.

Sadly, that’s almost what so many seem to be doing the last several years. Strategies don’t exist in a vacuum. Economic realities are ever changing. What was a great market in which to invest a decade ago, is now a graveyard for investment capital and retirement dreams.

Thanks again, Dave, for your kind words and excellent questions.

Call me with your questions! I need a fix, and I need it now. My number is 619 889-7100. Your other option is to click the Contact BawldGuy button up top, and write me. Have a good one.