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.

Passive Activity Loss rules and At Risk limits were created to dissuade investors from using these limited partnerships. The feeling was they lacked economic substance — in other words they were not created to make a profit.

I think most investors are aware of what the Passive Activity Loss rules are, but these days many seem unaware of how the At Risk limit can impact any real estate losses in a given year.

Passive Activity Loss rules refresher:

Passive Activity Loss rules have to do with an investor’s level of participation in their investment activities. An investor who is not actively involved is not allowed to take any losses in a given year. An investor who is considered active can deduct up to $25,000 in losses, but will have this reduced by 50% for every dollar of AGI exceeding $100,000. Clearly then an investor with AGI of $150,000 is unable to take any passive loss in a given year.

A few investors may also rise to the level of material participation. These investors would be considered Real Estate Professionals as defined in the tax code. Few investors spend enough time in real estate to be considered Real Estate Professionals and I’ll leave this topic for another post.

At Risk Limit

The At Risk limit is based on the amounts an investor has invested in a RE property. It also deals with loss limits that might be contractually created. Limited partnerships were created to limit the liability of the limited partners. These at risk rules specifically limit any loss to the amounts contributed or loaned to a partnership adjusted by each year’s gains or losses.

While limited partnerships are little used these days, there are still ways that some investors use to limit their losses. The use of nonrecourse loans (financing secured only by real estate), stop gap agreements, loan guarantees and other agreements.

How do these rules limit loss recognition?

The At Risk limit must be considered first. If the loss for the year exceeds the partner’s basis in the property, then the loss must be limited to the amount of the basis. Under some circumstances losses can be subject to At Risk recapture.

The Passive Activity Loss rules then apply to the loss amount as set by the At Risk limit.

Parting Thoughts

Investors seeking knowledgeable professionals can quite easily avoid some of the pitfalls of the At Risk limits. There are many ways to limit risk when investing without creating additional taxable income.

• The age range is late 40s to late 50s.

• Their net worth, read: available investment capital sans home equity — is less than $200,000. Sometimes way less.

• They have qualified retirement plans — 401k/IRA — with lousy returns, relatively low balances, and pretty grim lookin’ futures. If you’re almost or over 50, less than $200,000 is a sign you need a new game plan. Actually, less than $500,000 if you’re keepin’ score.

Fact: The average American man, 58 years old, has less than $100,000 in their qualified retirement plan, usually a 401k. Red flag.

Fact: A disturbing percentage of Boomers 47-58 years old simply don’t know how they’re supposed to right their ship as it relates to retirement income. What they do know is what doesn’t work.

Fact: The #1 conclusion generated by this sobering realization is that time is no longer their friend. The ticking in their head keeps gettin’ louder as each new year hurtles towards them. This isn’t the recipe for improved sleep.

Fact: They own little, or more likely, no real estate outside of their home.

What to do?

The first thing is to take a step back, breathe deeply, and know there are steps you can take to reverse this trend. You must, however, understand that being decisive is an absolute must from this day forward. By that I don’t mean to ‘react’ as much as I mean act deliberately. On these pages it’s known as Purposeful Planning. Have a plan — execute it with great purpose. Live off the results.

Let’s get specific.

So far, you’ve come to terms with your new reality — time ain’t your friend. Also, you must throw out what you’ve been doin’, cuz it’s what got you here. Surprisingly, for many that mindset has turned out to be difficult to create. Comfort zone is one thing, but when you’re close enough to retirement to see it threatened, ya gotta throw out your playbook and start over.

Einstein may’ve helped us more with his definition of insanity than with any of his genius mathematics.

Paraphrased: “Insanity is doin’ the same thing over and over again and expecting different results.”

1. Real estate, excellently located, in regions welcoming to both business and capital should be the foundation of your new approach. If you can’t wrap your head around that, I’m not sure what will ensure a livable retirement for you.

2. You may be lookin’ at redirecting your years long distribution pattern for after tax job income. That’s a sugarcoated way of sayin’ some sacrifices might be in your future.

3. Above all, you simply cannot have any more losing years. You don’t have one more treadmill minute left. The execution of your Plan better be bulletproof.

Finally, I’m here to tell ya, one Boomer to another:

All is not lost. You can salvage your retirement. Will it be the one you’ve dreamed of for so long? Maybe, but probably not. Still, it’s been my experience you can turn things around with a decisive attitude, seriously knowledgeable planning, and a laser-like focus on execution.

Here’s my first piece of advice:

Get started yesterday afternoon around 4:30.

Or, you can simply accept the fact you’ll be schlepping your way through a crummy retirement.

Tick Tock.

Speaking of tick tock, isn’t it about time you called me? Let’s get things turned around. My number is 619 889-7100. My guess is that things aren’t quite as dire as you might think. Wanna write me instead? Find Contact BawldGuy up top. Have a good one.

There are a number of ways real estate can create current income. The best examples would be through wholesaling and flipping. In this post, I want to look at rental property which can be selected to emphasize income or capital growth.

Rental property has four ways to create wealth or income.

• Cash flow
• Appreciation
• Equity buildup
• Tax savings

An investor can attempt to maximize one or more of these aspects of real estate. For those wanting to create the most current income would emphasize cash flow. An investor looking for capital growth might emphasize appreciation and/or equity buildup when selecting a property.
Regardless of your investment strategy, tax planning is an important consideration that needs to be planned for as well. Your Purposeful Plan should take advantage of tax strategies that minimize taxes during the investment period.

There are many choices you, as an a real estate investor make during the year that can have varying effects on your tax situation.

• How active you want to be in managing properties
• Financing decisions and choices
• Timing of income and expenses
• How security deposits are handled
• Use of a home office or storage area
• How property is sold
• Hiring contractors or employees
• How personal property will be depreciated
• How to take title to a property
• How to handle easements and encroachments
• When or if to do a 1031 exchange
• Should an installment sale be considered
• How seller financing might affect the transaction
• How to handle casualty losses or thefts
• Regularity of buying and selling properties
• Flipping some properties and renting

There are more considerations but this gives you an idea.

The choices you make can improve your current income picture or assist in capital growth. One needs to remember that capital growth is far more than property appreciation. Every payment made on a property builds equity. Many investors will have a loss carry forward that can be used to reduce future capital gains and depreciation recapture which aids in capital growth.

BawldGuy Here: Don’t let that last sentence get past you. I’ve written a post that should be published Tuesday on BiggerPockets that will, in rich detail, address how using multiple strategies synergistically can work to create stellar results. One of the strategies I’ll be talking about involves the concept of ‘loss carry forward’.

In short waiting until tax time to do your tax planning is a sure way of limiting your choices and will lead to less than optimal investment results. Every investor’s situation is different and for some, tax planning will be less necessary, while for others it can make huge differences.

Good tax planning though starts with having an investment plan and looking at your whole situation so that each transaction can produce the maximum benefit for your current and future investment situation.

Why?

The answer is simple, but multi-faceted. I’ll be brief. (Hey! I heard that snicker in the back.)

1. The vast majority of property out west is relatively older. In San Diego, anything built in the 80′s is called newer. If it makes sense to keep a property for the duration numbers wise, but it’s 40-100 at your retirement, your cash flow will suffer noticeably.

2. San Diego’s strong point from the early 70′s till the latest bubble burst was appreciation — reliably so — more than most markets. That be gone, people. I’m too experienced to say forever, but appreciation that matters won’t be around SD for quite awhile. There was no other reason to own property there, even when times were good.

3. We’re now several years into the ‘correction’. San Diego (California in general.) was never a place to buy a home for investment, i.e. for tenants only. The price/rent ratios since 1972 ranged from just plain stoopid to insane. 2-4 units were better, but only relatively, and only when compared to props in SD.

Take a typical duplex here — please.

Before the correction, at the peak, duplexes within a mile or two from my office sold for $525-625,000. And no, not makin’ that up. The rents? Usually $11-1,300/side back then. Even using today’s much lower interest rates, say 5%, the investor had to put 45% down — wait for it — here it comes — to break even. ‘Course the interest was higher then, so figure a minimum of half down — with no cash flow. That was based on a $575,000 price.

Now?

The same duplex (literally) would now sell for roughly $375,000. The rent would be around $1,200/side. That means if you put 25% down you’ll break even at 5% interest. Whoopty Do!

It’s location is mediocre, maybe half a slice better.

It’s freakin’ 60 years old. Rhetorical question: Why do folks buy this crapola?

The majority of these museum pieces have floor plans that have zoomed right past functionally obsolescent to I Love Lucy comic relief. Try no garbage disposals or dishwashers. Kitchens so small, when two people are in ‘em at the same time they better be in love. Most modern one bedrooms sport more square footage than many of these two bedroom dinosaurs. Again, literally.

OK, enough already. I think you get the idea. Long term investment in San Diego and regions like it will deliver a retirement income far short of what’s easily possible in other areas. And with the same amount of capital. It matters not whether you’re using cash or equity — Get . . . Outa . . . Dodge. Preferably around 4:30 yesterday afternoon. Tick Tock.

Short Term

Let’s first establish what ‘short term’ means in clear, unambiguous terms. In the context in which I mean here, it’s less than six months. Usually way less. Invoking the 80/20 rule, I’d say 4-12 weeks is reasonable. Longer than six months? Something hasn’t gone according to plan. Murphy could be in the neighborhood.

Though my resumé includes rehabbing apartments, a medical office building, 2-4 unit properties, and, no kiddin’, a rooming house, I’m not the guy to call for the buy/rehab/sell for unconscionable profit strategy. Although I harbor great respect and admiration for those who pull that off consistently, with the exception of the examples above, I’ve always thought that segment of the real estate investment universe was/is sorely misunderstood in terms of risk.

Way misunderstood, as in, many went into it thinkin’ their risk was far below what it was in real life. That is until real life sucked the spirits from their souls. But the public doesn’t hear much about those folks.

I like SoCal for short term profit.

That said, I prefer (Read: Will at all costs.) to avoid properties in need of fixing. Since no plan for short term real estate profits ever works 100% of the time, assessing risk with professional accuracy is the linchpin to its success. (Notice I said short term. Long term is much more reliably subject to solid gold fundamentals — what I call the physics of economics. Short term stuff is more, “Buy low, sell high” in nature, and relies almost exclusively on the investor’s ability to accurately KNOW both the low and the high. Far more difficult than most suspect.)

Since even conservative short term real estate investing brings risk to the table (duh), compression of that intrinsic risk can be found in the details. Maybe the most common mistake made in short term agendas is sacrificing location quality standards. This is almost always due to the investor’s thinking that since they’re only gonna be there a very short time, location quality becomes less critical, or has less impact on their success. After all, “I’m not gonna be the one left holdin’ the bag, so why worry about it?” In my office we call that utterance, famous last words.

Insisting on no rehabbing required, at worst superficially light, cosmetic fixing, will also reduce your risk. Don’t play head games with yourself on this one. “Heck, it only needs a ‘quick’ kitchen remodel”. Believe me when I tell ya, that’s an oxymoronic sentence if there ever was one. Ever come across an anthill with two ants? Me neither. There’s ALWAYS more. Learn to say ‘Pass’, and go to the next one.

Having built-in buyers for market price is good if you can make it happen. Talk about compressing risk. That goes a long way. But even then, like the bumper sticker says, ‘Things Happen’, or something to that effect.

Risk can be reduced incrementally in many ways when investing for short term profits. I’ll be puttin’ groups together to spread that risk around pretty soon. One of my motivations is to provide a vehicle for long term investment clients who would like to increase the velocity of their Purposeful Plans for long term retirement, but don’t like going down that road alone, without an expert at the helm.

The San Diego market, and those like it, are indeed a paradox. Long term investment do not and will not go well there, while short term investment attached to reduced risk is doing well, and should continue to for the next 2-5 years.

Next up: How to combine long term real estate investing for retirement synergistically with short term strategies. This adds a page to your options menu that can serve to not only hasten your final day at work, but increase your ultimate retirement income too.

Stay tuned.

Meanwhile, back at BawldGuy Ranch, operators are waitin’ with bated breath for your call. 619 889-7100 will get us talkin’ about how to get your retirement headed in the right direction. Or you can send me a note by clickin’ on the Contact BawldGuy button up top. Have a good one.

Here are some things to ponder — food for thought if you will.

• Know where you are now. Rudimentary? You bet. But try gettin’ to any ‘Point B’ without knowin’ your ‘Point A’ and see how it works out.

• Understand how crucial it is to comprehend the difference between capital growth and cash flow — when to use one or the other — and when to shift gears from one to the other.

• Yeah, we realize you’d like to retire around 4:30 yesterday afternoon, but given your current reality, how long till you might reasonably retire, given your end game financial goals?

• What capital is available to you today? What equities could/can/would you tap to increase your initial investable capital?

• What’s your range of comfort — your comfort zone? This will come up often, believe me. It’s important to stay within that self-defined zone. It will dictate how well you retire, and often how quickly. Whenever there’s a conflict, comfort zone should always be the trump card.

• Cash Reserves — this is not an option. A real estate investor without reserves — generous reserves — is a fool. Period. Harsh? You bet — but ask those who’ve been visited by Senior Murphy and didn’t have generous reserves, how it worked out for ‘em. How important do I deem reserves? If you don’t have any or even what I consider adequate? I simply will simply refuse work with you. Yeah, it’s that important.

• Flexibility — Having a Purposeful Plan is one thing. Expecting the execution to be unaffected by Murphy and his minions is fantasy. It’s not only negative events that require a flexible attitude. It can be an incredibly positive opportunity that comes your way. But in my experience, those windows are often narrow.

There’s more to gettin’ from Point A to Point B, but you get the drift, right? Almost everything you’ll find yourself doing will adhere, more or less, to the ongoing paradox that is real estate investing. What you’ll be executing will be simple in nature — but commonly not so simple when it’s you gettin’ things done. What most clients learn pretty quickly, is the difference between watchin’ those in the arena, and being in the arena themselves.

BawldNotes: Next week I’m back in Texas with a twofold agenda. First and foremost will be to have my own boots on the ground, vetting management firms in a couple new areas. Very few factors affecting real estate investors are more important than professional management.

Also, I’ll be attending a professional to-do in San Antonio. It’s called a ‘barcamp’ — pros teachin’ pros. I was at the seminal barcamp many years ago in San Francisco, and a bunch since then. The best part? Rubbin’ shoulders with those in the industry. Nothin’ better than swappin’ war stories at Happy Hour with fellow professionals who’ve also been in the arena a long time.

I’ll also be paying off a bet I lost to Chad Emerson of Prime Lending in San Antonio. Those who are regular readers know Chad’s the guy I rely upon for my clients’ income property loans.

If pondering these concepts has driven you to action, please, gimme a call. 619 889-7100 will find me every time it’s tried. Or, simply click on the Contact BawldGuy button up top and send me a note — brief or epic. Have a good one.

Allow me to suggest an alternate title for this piece.

How ’bout — My Name is K-Mart, But My Friends Call me BlueLight.

BawldGuy Axiom: If you’re investing for retirement, and contemplating a significant move/change, it better be a slam dunk no-brainer. Retirement planning isn’t a game.

The Status Quo

Net equity of $170,000 — and long term capital losses on every sale. Adding insult to injury, twice mind you, is that our investor (We’ll call him, Kam), will be losing real money, not just ‘tax return’ paper money. Selling the properties will bring real financial loss to him. Knowing this, let’s now segue into the question that must be answered with an enthusiastic “Yes!!”

Does taking losses on several properties in two states qualify in terms of the next 20 years as a slam dunk no-brainer move?

The Facts

Kam might have 30% equity in his CA rental. Cash flow is marginal at best. In Florida, one rental is debt free, the other two provide some spendable net equity. That’s easy for me to say, as the word ‘net’ is so, non-threatening, isn’t it? In Kam’s case it means he’ll probably hafta come up with $10-20,000 to close one of ‘em to avoid a short sale. His cash flow is iffy there too. Yeah, the free ‘n clear unit works — when it’s rented. When the smoke clears his annual cash flow these days runs around $10,000/yr if everything goes as planned. (Hey, I heard that snicker in the back row!)

What to do with the $170,000?

How ’bout a couple Texas duplexes in one of the hottest regions in the country? I’d have him put 30% down which would result in him not having to come outa pocket to close. The cash flow for the two will be roughly $12-14,000/yr. Since Kam already owns a few Texas properties in different locations, his aggregate cash flow plus donations from his own paycheck will result in owning all his investment properties free ‘n clear in considerably less than 20 years — via the BawldGuy Domino Strategy. Based on experience, I’d say 13-16 years depending upon Murphy.

So, in his case, it’s not just the long term positive turnaround of replacing poor investments with quality, it’s the long AND short term impact on his portfolio as a whole.

Short Term

In roughly 6-9 years he’ll have completely paid off both the duplexes acquired via CA/FL. The results of that are:

1. Cash flow of roughly $37,000 annually vs Who knows but not much, and surely not relatively reliable had he not taken the losses.

2. His original net from the sales of his problem babies, $170,000, will have grown to well over $500,000 — with not a penny of projected appreciation — in less than a decade.

3. He’s improved the quality of his properties’ locations to the point of being cartoonish. They’re all located in areas in which people choose to live, vs are forced to live. Huge difference.

NOTE: Before you say it, I’ll recognize the 6-9 year part really isn’t, in the pure sense, short term. But in the context of Kam’s Purposeful Plan — about 20 years — it can be viewed that way in this scenario.

Long Term — This is where the Firestones really hit the pavement.

Due to his willingness to bite the somewhat painful bullet in CA/FL sooner rather than later, his entire portfolio benefits stupendously. This manifests itself in terms of cash flow and net worth as he nears retirement. There’s also a 50/50 chance, maybe better, that he’ll be able to retire sooner than originally planned.

Years sooner.

In Kam’s case, his combined retirement income, including EIUL, should easily exceed $200,000 annually. Oh, did I mention that roughly 50-60% of that will be tax free and/or after tax?

We haven’t even touched the issue of tax shelter, which might be off the charts if we decide to use Cost Segregation. Combine CS with the capital losses he’ll be taking this year and maybe next year, and his options will almost literally be off the charts.

Turning Capital Losses and Tax Shelter planning into Purposeful Planning bonanzas.

This post is already hurtling at breakneck speed towards 800 words. In view of that, I’m gonna address the tax shelter portion in another post, and very soon. Understand, it’s not an afterthought in any way. In fact, for many, including Kam, it could provide a very welcome ‘turbo charge’ to his end game.

I’m really lookin’ forward to writin’ that one.

If you see yourself in Kam’s position, let’s chat. Gimme a buzz at 619 889-7100, and we’ll put our heads together. Or, send me a message by clickin’ on the Contact BawldGuy button up top. Have a good one.

You see, as more and more people find out about the ability to self-direct their retirement assets, they become enamored with the process, want to get their plans established and then ask, “Now what?” While not discouraging in any way the establishment of these plans, one must take the responsibility to not only learn everything they can about such plans (and there are some definite things to learn), but also be productive and prudent with their planning so they really hit the ground running when their account has been established or shortly thereafter. And, by running, that doesn’t necessarily mean going out and investing right away, but knowing what conditions, terms, etc. you are wanting and/or needing to be met before you make an investment into a non-traditional asset.

As an example, if one is interested in investing into Real Estate, determine what kind of real estate into which you are interested in investing. There are many types and avenues for RE investing. Are you looking at flips, rentals (single family or multi-family), commercial, etc.? Ask questions and get educated…..if you are already reading this blog on the BawldGuy’s site, you already have a great source and outlet for information. Don’t ever be afraid to ask and inquire….remember, it is your retirement funds, not monopoly money.

Also, when considering self-direction, in my humble opinion (and just an opinion of this author….you always want to do your own research and due diligence….there, how is that for a disclaimer), you absolutely want to have a plan that allows you freedom and flexibility. Let’s use two examples of where this freedom and flexibility may be vital.

1) Personal “Checkbook” Control of Your Retirement Funds –- In self-direction, IF you didn’t have “checkbook” control of your retirement funds and you had to request a check or a wire transfer every time you wished to execute a transaction, does that really provide you total flexibility and freedom? Probably not. Think of all the various examples of how that can be problematic for your investment strategy. Further, consider the potential time conflicts involved with such a process and making sure or feeling comfortable that a transaction has been executed on “your clock”, not that of the custodian.

2) Non-Traditional AND Traditional Assets within YOUR Plan -– I use this example all the time and the numbers really don’t matter. But, let’s say you had $1,000,000 in your retirement account and you wanted (as an example) to invest $200,000 in some real estate with a guy named Jeff Brown. Well, you still have $800,000 remaining that you MAY want to invest a portion of those monies into some form of stocks, bonds and mutual funds. Wouldn’t YOU want control of that process AND not have to worry about paying additional fees (over and above brokerage commissions) to a self-directed IRA or 401K custodian? Of course you would.

Bottom line is to think forward.

Whether you seek financial planning advice or not, you want to have a clear thought process on what you want to do and be disciplined in your due diligence moving forward. BUT, move forward. Remember the simple but oh so true comment: NO ONE ever cares as much about YOUR money as YOU do. It has always been true and will always continue to be true.

BawldGuy Here: Around here, we’ve call this concept Purposeful Planning — but not for more than nearly 30 years or so.