Here’s the challenge.

Please, start askin’ around. Talk with friends, neighbors, family, folks at work, the innocent bystander behind you in line at Starbucks. Search everywhere ’til you find someone who has firsthand knowledge, no hearsay allowed, of a retiree, or retired couple who’re takin’ home at least $36,000 a year from their 401K. The next one I meet’ll be the first.

Look, I know they’re out there, but my point is that they’re the exceptions proving the rule. The rule? Yeah, the rule. Normal for folks who relied on their employer’s 401K isn’t anywhere near that sort of income. Imagine what it must feel like. You’re almost ready to retire. You call the guy who’s been guiding you for years. He says the ‘safe rate’, the yield at which he judges your principle to be relatively safe from market erosion, will take your half million bucks and give you back about $15-20,000 a year if you’re lucky.

That’s another question you might wanna ask. Find out how many folks have managed to hit the half a million dollar level in their 401Ks.

Given today’s rate for the 10 year Treasury — an eye-popping 1.9% — how you even get that much income becomes a pretty good question. I wonder if the advisor has a pretty good answer.

One of the most disturbing facts I’ve uncovered over the years, is that the average American man with a 401K, has less than $70,000 in it at age 58.

The second part of this challenge is to ask yourself a question.

Forget that financial advisors say to expect a conservative 4% yield on your principle at retirement. Forget that the highest, most conservative Treasury note is less than half that. Most of all, forget that the poor retirees who’re livin’ off that pitiful yield, are doin’ so — what for it — after they pay taxes on it. Oops. Talk about adding insult to injury. First you hit retirement after surviving the roller coaster of stocks ‘n bonds for 20-30 years. You’re proud of what your hard work and stick-to-it-iveness has produced — $500,000. At the current 1.9% 10 year Treasury yield, that’s not even $800 a month — and that piddlin’ amount is before taxes. Can you say, “Welcome to Wal-Mart’?

So, here’s the question.

Given the current balance in your own 401K, what’s a reasonable prediction of your end game retirement principle?

Bonus Question

Combined with your (muffled giggling in background) Social Security check, imagine what quality of retirement you’ll have — OR — IF you’ll be able to retire at all.

If the concept of 401Ks/IRAs had proven to have been a rockin’ success, heck, even a kinda sorta, maybe success, I couldn’t pose this challenge. But we all know it’s a losing proposition for the vast majority of Americans who keep havin’ those pesky birthdays every year. Yet, year in and year out, they contribute. Why?

Let me know about all those happy campers you find who’re livin’ the retirement of their dreams, thanks to their 401Ks.

You can also call me, to let me know your retirement isn’t lookin’ so hot about now. Together, we’ll check out the lay of the land and figure out a plan to vastly improve your end game. Call me at 619 889-7100. Or simply click on the Contact BawldGuy button up top, and start writin’. Have a good one.

Here’s the main theme of what you can expect to read. If you own property 30-80+ years old, with dated floor plans, and other functionally obsolescent components, the post will be talkin’ directly to you. If you have sufficient equity in your portfolio it’s past time, as in WAY past time, to move that equity to a vastly superior region.

Your retirement is at stake — either its quality, or possibly its postponement. That’s a bold statement, I know. But if you’ve been reading here for even a short while, you already know I don’t make wild assertions I can’t back up — and with empirically documentable facts. Most San Diegans, and those in similar markets, can easily increase their ultimate net worth, but far more importantly their end game retirement income by movin’ their equity elsewhere.

By increasing retirement income, I mean by a minimum of 50% — double and triple in some cases. Most investors also find they’re upgraded the location quality. Your retirement becomes more important, more crucial to you with every passing birthday. To those in the markets about which I’m speaking, I hope this upcoming post speaks to you in a way that inspires at least an investigation into your options.

OK, that’s it for today.

Except, of course, reminding you that calling or emailing me is the fix I crave daily. Addicts have no pride. My number is 619 889-7100. If you prefer, send me a note by clicking the Contact BawldGuy button up top. Have a good one.

So Charlie came to me already the proud owner of an ancient three unit, located in his hometown in New England. He liked the idea of investing in Texas. Liked even better the concept of having a Purposeful Plan. Having lived frugally he’d saved more than enough to acquire a new duplex there. It closed awhile back. Part of his Plan was to get an EIUL (Equity Indexed Universal Life) started, once he’d closed his first purchase in Texas.

He gave David Shafer a call and together they started the process. Charlie called me out of the blue today to let me know it’s done. Here are the details. I think you’ll find them more than a bit interesting.

His monthly premium is $1,000 monthly. David structured it for 30 years. Charlie is to pay the premiums for 15 years. Then he’ll simply let everything simmer for another 15 years. Just before turning 60 he’ll begin to receive the income developed by the EIUL. In Charlie’s case it’ll be about $100,000 a year — for the rest of his days.

However, I’ve suggested a twist.

As young as he is now, Charlie will no doubt have employed strategies allowing him to sell one or two properties while paying very little or no capital gains taxes or depreciation recapture. I would have him execute this move virtually simultaneous to the end of his EIUL premiums. My experience says the dollar figure resulting from the sale(s) should be about $250-500,000. It’ll depend on how David says to get it done, but bottom line, those funds will be put into his policy either in one lump sum, or over four years and a day.

I’ll let David chime in at this point if he wishes, but my educated guess is that putting that much cash inside the policy 15 years or so before income is triggered, would increase the yearly income substantially. I wouldn’t be surprised at all if it increased by more than 100%, especially if the amount was at the range’s high end.

Charlie will likely carry out a tax deferred exchange in the not too distant future, using his New England triplex. I strongly suspect that by the time he’s in his 40s he’ll own many small income properties, finished off his EIUL premiums, and moved an equity or two into the EIUL. Let’s have some fun and look into our cracked crystal ball to discern his potential retirement income at age 50 and upward.

Retirement at 50

I’m gonna assume, being relatively conservative, and using my knowledge of Charlie’s ability to save, that he’ll have acquired no less than half a dozen small income properties. Probably more, but let’s error on the understated side of things. A tad over 20 years from now his real estate income might look like this.

Income of approximately $120,000 a year. That number is also fairly understated, but it’s one with which I’m comfortable publishing. It assumes that in 20 years his Net Operating Income (NOI) on all properties never increased, not a penny. Much of that income would be tax sheltered.

The decision Charlie would make at that point was whether he would sell one or two of them to pay the aforementioned lump sum EIUL payment. Ah, but there’s another option I’ve been keepin’ under wraps.

By the time he’s 50, Charlie will’ve owned these properties free and clear. Some for a few years, some for 7-12 years. Do ya see what’s comin’?

See, if he’s able to eliminate debt on all his properties by the time he’s 45, which is even money from where I sit, he’ll have more options available. Let’s take a look.

• Instead of selling a property or two, he can simply kick back and actually increase his premiums over the next 15 years. What would happen if he took $5,000 a month out of the $10,000 monthly cash flow and for the next 15 years applied it to his EIUL. This is where we must call on David Shafer to put in his 2¢ when he has time.

• Another option would be sell just one property, put the proceeds into the EIUL as a lump sum, then take the same $5,000/mo mentioned above for the next 15 years. There’s simply no way that either of these choices will not literally blow up his retirement income in the most positive of ways.

Bottom Line

As posted here Tuesday in ‘. . . Theoretical Retirement’, these numbers result from analysis solidly anchored in the principle that the real estate investment properties acquired stand the test of time — wait for it — AS ACQUIRED.

In other words, and in plain English: No appreciation and no escalation of any kind to the NOI.

Charlie’s ultimate income won’t be known ’til he actually retires. We do know what is a reasonably reliable lowball figure though. If he acquires just six properties, sells just one when he’s 45, keeps the rest while doin’ nothin’ else, his real estate income should be roughly $100,000 a year.

If he then elects to carry out my second option, his EIUL should be around $200,000 yearly, give or take. (That figure is an educated guess on my part. I plan to ask David for more or less exact numbers, which I’ll then publish.) Oh, have I been remiss in not mentioning the fact that all income derived from his EIUL is freakin’ tax free for life? Or that when he dies, his heirs won’t pay a dime of taxes on it?

When Charlie’s celebrating his 60th birthday, he’ll be smilin’ big time. His monthly income should be in the neighborhood of $25,000 a month — over 65% of it completely tax free. NOT tax deferred, or tax sheltered — TAX FREE.

Happy 60th birthday, Charlie.

You lookin’ for a birthday like that? Duh. Gimme a call and together let’s start makin’ it happen. You’ll reach me at 619 889-7100 — OR — send me a note using the Contact BawldGuy button up top. Have a good one.

• 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.

Anywho, I wrote about an ongoing case study over there this morning. It’s about combining several strategies dynamically to improve your end game results, which is spelled — Retirement Income.

BawldGuy Heads Up: Tomorrow (Wednesday) I’ll be out of touch with the world completely. Gettin’ some dental work done, and they wanna knock me out to do it. Works for me.

I’ll be available for calls beginning at noon Thursday. ‘Course by then I’ll be Jonesin’ for a fix. You can help me with that by callin’ me at 619 889-7100. Or you can, if you prefer, send me a note using the Contact BawldGuy button up top. Have a good one.

I have never been a big proponent of deferred annuities. Immediate annuities have a place for folks who want to assure themselves of a certain level of income for life. But deferred annuities in my opinion are more problematic. Variable annuities have the same problem as mutual funds with the big market downturns dramatically effecting outputs. But the biggest problem with deferred annuities is that they must be backed by short and immediate term products, which will give folks lower rates of return. The indexed annuities will always have much lower cap rates than the indexed life products for this reason. With an annuity the company must be prepared to give the money back at any time and therefore must use investing strategies that allow that type of liquidity.

Taxation

The other issue is that there is some taxation on annuities. Generally, any accrued interest will be taxable when income is taken.

For me, the deferred annuity is really no better than the current options most people have in their 401K/403Bs. It is being sold as a safer investment that beats the returns on certificate of deposit’s, but that is a pretty low bar to overcome.

For those who are in good health, Equity Indexed Life Insurance should be considered. Tax free income — low overall expenses — no negative years — and insurance that can protect one’s dependents or help heirs/designated beneficiaries.

BawldGuy Here: Please, do yourself a favor and don’t gloss over ‘no down years’. That factor alone is often the difference maker. Every time you have a down year in stocks or bonds you instantly climb onto the ‘investor treadmill’ runnin’ as fast as you can to get where you were before you had the ‘down year’.

For those who’ve never been on one, treadmills get you nowhere, but fast, and you get pretty tired during the process.

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.

There are multiple schools of thought related to investing in real estate for retirement. Two dominate.

One says you buy property, holding it forever. When you’ve saved sufficient capital to buy additional property, you do — then hold IT for evermore too. The idea is you allow rental income to pay off debt as quickly as possible, arriving at the point of a debt free cash flow machine. Do this a buncha times and you’ve built the foundation for a nice retirement income stream.

Or so the doctrine goes.

The other school’s doctrine teaches cash flow comes from the yield on capital or equity in an asset. The bigger the capital amount or equity in the asset, the greater the income, measured in dollars. The ‘yield’ itself is expressed in terms of a percentage. For example, 7.5%. This commandment says that since the yield is equal, more or less, for a more substantial or less generous figure, why not arrive at retirement with the largest amount of capital and/or equity possible?

The million dollar questions?

The ‘Buy & Hold’ school (BHS) gets you there. But in what condition? Furthermore, how much cash flow relative to the ‘Capital Growth First’ school (CGF)?

Buy and Hold

Limited to how fast investor can save capital for down/closing on each purchase

Properties are old, having high maintenance/expenses when investor retires

100% of income is devoid of any tax shelter — right when they need it most

Properties more likely than not to exhibit functional obsolescence upon retirement

Older properties generally don’t compete well for highest quality tenants

Props are old when you retire, & only get older each year — not a good trend

Rents will be less likely to keep up with the competition — or inflation

That’s the short list, but you get the idea. Buy and Hold should be called Buy and Mold.

First — Capital Growth

By ensuring a more or less superior capital growth rate — net worth increases

Capital growth is maintained by exchanging equities when the market dictates

Exchanging keeps the power of prudent leverage working

This results in significantly larger capital/equity base

Larger capital/equity base = larger income in terms of dollars using same yield % at retirement

Arrive at retirement with higher income, mostly tax sheltered

Able to execute strategies completely unavailable to Buy & Hold

Again, that’s a short list. You can readily see the advantages.

Here’s an example with some real life numbers for illustration. Sadly, the investor used in the example chose to stay his buy ‘n hold mold course. Here’s what coulda happened if he’d switched strategies.

Considering Real World Examples

“Wayne”, 71, came into my office many years ago — a genuine born again buy ‘n hold guy. His pride ‘n joy was a fourplex, purchased in his 30′s, now free & clear, spinning off a net income of roughly $2,900 monthly. This is in addition to two other income sources — Social Security and a taxable annuity.

Wayne’s paying a lotta taxes on the annuity income and the fourplex — neither of which is keepin’ pace with his cost of living. He retired in 2005. He bought the fourplex in 1975. We both live in San Diego, so I’ll be using that market to illustrate. The principle works for most any market — especially over the long haul.

He paid just about $80,000 back then. Upon retirement the value was nearly 10 times that. Where would he be today had he gone the capital growth route? So happy you asked.

The market would’ve signaled him to exchange his increased equity position in the first quarter of 1979, give or take. Having put 20% down, his equity at that point would’ve been around $100,000 — more than five times his originally invested capital. His cash flow for the period won’t be added into that, except for the paying of closing costs on his newly acquired exchange property(s).

He now owns about $400,000 in multifamily properties. He’s conservative, so due to interest rates at that time, he puts 25% down. He then waits for the next time the market signals him to make a move. It’ll be longer than four years this time, as the recession exacted its toll. Meanwhile, his units are rented, with slightly increased rents over the long term. The recovery arrives around the end of 1983. He waits, wanting to be sure. Values again start rising. Still, he waits. In roughly July of 1988 he triggers another tax deferred exchange with the following results.

Note: From roughly 1985 to the beginning of 1990 appreciation rates in SoCal were double digit, more or less depending what specific market. San Diego did, um, well.

His exchangeable net equity at that point was approximately $275,000. Again, he chose to put 25% down on his exchange uplegs. (newly acquired properties)

Let’s pause at this juncture to figure his capital growth rate.

It’s been 13 years since he began with about $18,000 to close his first investment back in 1975. He now has $275,000. That’s an annual capital growth rate, exclusive of tax benefits and cash flow of about 23% — a figure nobody with a three digit IQ would predict in public, but historically accurate nonetheless.

Anywho, he now owns about $1.1Mil dollars of multifamily properties. They not only pay for themselves, but cash flow — not heavily, but enough to make him happy. For the record, he does two things consistently along the way — one I recommend sometimes, and one on which I insist. He has way more than adequate cash reserves. I call it a Sominex Account, as when Murphy visits, you can still sleep at night.

The recommendation at this point is to apply a portion of the cash flow to the loan balance. Back then it was almost a built in practice for my clients, due to interest rates 2-4 points higher than today’s. It just made sense. It’s called keepin’ your eye on the ball, which in this case is growing the guy’s capital/equity safely over the long haul with retirement always #1 on the hit list.

Around this time the S & L Crisis hits San Diego like boulder hits a bug. It was beyond horrible. Not only did we experience what everyone everywhere else did, we had the added thrill of losing two huge employers overnight. Talk about both barrels of the shotgun goin’ off point blank. Vacancy rates went from virtually zero to 10-15%, oft times more depending upon location. Rents plummeted even more in some cases. Bottom line? Wayne’s cash flow went from cool to break even faster than Rubio’s makes fish tacos.

This forced a holding period of about 10, no, more like 12 years. What’s an investor to do? Life happens. It certainly did back then. It seemed Murphy squatted in San Diego the whole time. Ever heard of O’Toole’s corollary to Murphy’s Law?

“Murphy was an optimist.”

Wayne executed another trade, tax deferred, in the early spring of 2000. His portfolio by then had risen at a more modest rate than in previous times. Real life. It’s now worth a total of $1.6Mil — give or take. His net tradeable equity is roughly $645,000. Relatively speaking, interest rates are a bit less, but he insists on a 30% down payment, overruling my advice to try 20% this time. It’s his money, so guess how much he put down? He’d been made nervous by his experience of the early 1990′s. Um, me too.

When the smoke cleared he ended up with $2.15Mil in multifamily property. It wasn’t cash flowing much, give or take $25,000 a year. His retirement was, according to him, a long way off. He changed his mind about that later.

In fact, he decided in early 2004 to call me about setting in motion his transition from capital growth to cash flow — he wanted to retire no later than spring of 2005, about 30 years after buying his first investment property. After much analysis and a few meetings of the mind, we agreed — he needed a property outside of California. The prices were simply outa whack in the Golden State, a fact of which we were both painfully aware. The search began.

First we had to ascertain how much equity we had to trade — cue the HappyFeet music.

Seems his luck had turned around again. From his latest acquisitions in 2000 his portfolio had grown in value from $2.15Mil to the neighborhood of $4Mil. His net tradable equity was about $2.2Mil. Let’s take a pause for the cause here, alright?

Is that a white flag I see being waved by the buy & hold crowd? Just askin’ . . .

We didn’t care much about growth now, as we wanted stable markets, not much prone to big swings either way, historically. Idaho, Texas and Kansas/Missouri ended up on the short list. We really liked Texas though, which is where we landed. We ended up with about $5.5-5.7Mil in cash flow properties. (Larger properties this time.) The cash on cash return averaged around 7-10% conservatively. This resulted in a yearly cash flow, the majority of which was tax sheltered by the way, of $140-200,000 yearly.

For discussion sake, discount the low part of that range by half. You still end up with $70,000 a year at retirement — mostly sheltered — not in ancient properties with ever rising operating costs. Even discounting the low end of the income range by half, he still finds himself with just short of double the retirement income he did applying the buy and mold, um, hold school of thought.

Of course, he won’t hafta discount all that mostly sheltered cash flow. A retirement income of five figures monthly. Sweet.

Here’s the real plot twist. Just as he did on the way there, Wayne can still apply a prudent amount of cash flow to the premature reduction of debt. Each multifamily property he pays off will increase it’s cash flow to him by a factor of 2-4. Nothing like getting a $500-1,500 a month boost in income on a regular schedule.

Real life for Wayne

Back to Wayne’s current reality. He’s now retired on just under $36,000 a year from his fourplex. His SS income and annuity supplement this. However, as pointed out earlier, every single dollar of the annuity and the real estate is taxable. Ouch. Furthermore, he’s now discovered, much to his chagrin, that he didn’t retire — he started serving a life sentence.

His option from Day 1 was to end up with so much sheltered retirement income that his SS check would simply be spending money.

So I restate the principle: Worshiping cash flow when capital growth is the appropriate approach will not have the happy ending you envision.

What school of thought do you favor? Let’s talk about your specific status quo and figure out what might be on your menu. Gimme a buzz at 619 889-7100. Or, if you’d rather, click on the ‘Contact BawldGuy’ button up top. Have a good one.

How long till you retire?

The answer often falls in the 10-15 year range. Let’s construct a scenario that mirrors many of the callers’ circumstances. The facts will be as follows:

Their property is worth about $300,000.

Net Operating Income (NOI) about $15,800 a year.

If sold, net proceeds would be roughly $270,000 or so.

Here’s pretty much what I’d suggest they strongly consider. It’s a no-brainer from where I sit, and I suspect from their viewpoint too.

I’d have them execute a tax deferred (1031) exchange (finding a buyer for their property first) into three duplexes in Texas. The new properties offer NOI’s of roughly $18,360 apiece. If the investor put a down payment of about 1/3 the price for each, their net proceeds of $270,000 would cover pretty much everything required to close, including all related costs.

Here are the numbers in a nutshell without goin’ all medieval on ya.

Each property would be cost just over $250,000 — and the loans would be a tad over $168,000 each at just 4.625%, amortized at only 15 years. The cash flow from the three combined would be a latte less than $700/mo., but we’ll round down to $500. We’ll also assume the investor can easily, comfortably add another $500 monthly to the cash flow.

Enter — The BawldGuy Domino Strategy

The monthly cash flow, $500, plus $500 a month from the investor allows $1,000 to be added to the monthly payment of just one of the duplexes. This will be done till it’s paid off completely. That’ll take less time than you might suspect — 7 years and 3 months.

One domino down — which means that duplex is now adding a few lattes over $1,500 monthly to the cash flow. Suffice to say that the second duplex is paid off much more quickly, while the third and final duplex is paid off almost faster than you can watch it happen.

Bottom Line

In this scenario, which is pretty OldSchool conservative, all three properties would be free and clear — no loans, sans debt, adios lender — in less than 12 years — 11 years and 2 months to be precise.

Furthermore, instead of a retirement income of less than $16,000 annually, it will be a month’s worth of lattes over $55,000. In other words, well over triple what they would’ve ‘enjoyed’ had they insisted on sticking with their wonderful debt free original property.

Epilogue — The increase in their annual depreciation (read: tax shelter) allows them to receive at retirement, more sheltered income than what woulda been their total annual cash flow had they opted for the status quo.

Again, this move is a no-brainer any way ya wanna look at it.

BawldGuy Takeaway: Contrary to popular belief, owning free and clear income property isn’t magical in and of itself. Having cash flow and being debt free 10-30 years before you retire will — in the vast majority of cases — actually sabotage what coulda been, and shoulda been a vastly superior retirement income.

Then there’s a little somethin’ I’ve not yet brought to your attention. Instead of hittin’ retirement with an equity of $300,000, they’ll have just over $750,000 of equity following this plan. That’s more than double, people. Think double the security when retired. Put into perspective, if an emergency arose after they retired, they could easily pull out more money than their entire equity woulda been had they stayed put with their original property.

Also, notice how relatively devoid of any real sophistication it took to execute this plan’s strategy. We’re back to Grandpa’s day, when basics couldn’t be ignored, and rent increases and/or price appreciation were merely daydreams folks had while sittin’ on the front porch.

Next time you’re relaxin’ on the porch, gimme a call, ok? You’ll find me at 619 889-7100 — or simply click on the Contact BawldGuy button up top and send me a note. Have a good one.

First off is a proposed project in the Austin area — give or take Round Rock. I’m jazzed cuz the rents in that part of Texas have been goin’ off the charts in the last year or so. Depending on the neighborhood, 10-15% increase and more, year over year. Frankly, rents are increasing all over Texas, but the rental markets in the Dallas/Fort Worth MetroPlex, Austin, and San Antonio stand out. Which, of course, is why I’m here. I’ll let you know what I saw, and my opinion of any projects worth talkin’ about.

Kinda sorta segue

BiggerPockets blog just published a post I wrote this week about an ongoing case study. It takes on the issue of 401k’s and IRA’s vs puttin’ your hard won capital to work in vehicles that have a far better performance record. I think you’ll be happy you read it.

If you retired today, and wished to put your retirement nest egg into something conservative and reliable, say a 10 year bond, read on. Today’s rate closed lower than 3%. In other words, if you’d managed to put away $1 Million in your qualified retirement plan, 401k/IRA, you’d be retiring on less than $30,000 a year — before state/fed taxes. Still think that ‘impressive’ company match you’re so impressed with is gonna make the difference for ya?

Think again.

Tomorrow my lunch will be paid for by my favorite Texas lender, Chad Emerson. Back around the first of the year, we disagreed on the direction of interest rates, especially for the period ending Memorial Day. I bet him a meal that investor rates for 1-4 unit properties would hit 6% by then. He was convinced otherwise. We’re both glad I won, considering the results, but I’m no doubt a bit happier.

Ironically, and when it happens is anyone’s guess, I now believe rates will bounce along their bottom for a short while (Month or two?) — then begin their journey upward. Once that happens in earnest, I suspect they won’t revisit today’s rates soon. Hope I’m the one who’s wrong this time, but I don’t think so.

I’m still answering my phone, even though my boots are on Texas soil. So gimme a call, OK? I still need my daily fix. 619 889-7100 will find me. Have a good one.