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.

• Markets like San Diego — hit hard by the market correction, but still offering relatively unattractive price/rent ratios.
• Places like Las Vegas/Florida and other ongoing nightmares. Vegas, for instance, is over 13% down year over year. Every year I get folks in the area tellin’ me I’m missin’ the boat there. Every year I simply point to two lines on the chart. One is the price trend just mentioned, which has been consistently heinous. The other is the leadership position they maintain in default notices filed. It’s sad.
• Most of the rest of the country — areas with uninspiring demographics, employment, and overall, unimpressive macro economic factors in play.

Why Texas stands out

Check out nearly any survey showing employment; value trends; population growth; economic diversity; rents; taxation of both people and business; and, well, you get the idea.

When we talk about job creation in the private sector, where it counts, in the last year or so, Texas has created more new full time jobs than the other . . . 49 states . . . combined. That’s not opinion, or smoke ‘n mirrors. In fact, it’s the #1 so-called stat there is when deciding where to invest your hard earned capital.  Let’s compare that to California, a state on the sorry end of the spectrum.

In the first quarter of this year, 168 CA businesses (100 or more employees) either decided to expand, but not in CA, or left the state altogether. (Fled would probably be more precise.) That was just 90 days. I’m waiting to learn the numbers for the year. Got a feelin’ it ain’t gonna be pretty. Much of the state is under the pressure of double digit unemployment rates. The state is notorious — infamous is probably more accurate — for taxing and regulating businesses into the ground. It takes forever to get things done.

Take developing real estate

In California, if you buy the land, you’re considered a magician if you’re breakin’ ground in less than 12-30 months. Then there are the extra required reports, taxes for everything that doesn’t move, and fees to the myriad state, county, and local bureaucracies. Besides adding costs to the developer/builder via wasted time, it adds even more cost due to the many superfluous fees. God forbid an endangered species of cockroach is discovered.

That adds the cost of the new cockroach altar the contractor must build.

Developing property in Texas is more about fillin’ out paperwork than anything else. Buy the land, adhere to the zoning, show your plans, pay a few fees, then break ground. It usually takes less than 90 days. I’ve recently seen property in Texas (Austin) close escrow on the land acquisition, go through the building department for approval, and close escrow on the finished units in less than six months.

That was possible in California when the Dodgers were still in Brooklyn.

Maintaining Value

I’ve been in Texas now for goin’ on five years. The next appraisal reflecting a decrease in value will be the first. That’s an incredible statement, given the economic climate in which we find ourselves. In fact, values have inched up the last year or so. The rental values? Again, nothin’ but level or increasing — mostly increasing. Meanwhile, vacancy rates are falling. Austin? Try around 4% or so. In a recent project just north of San Antonio, a new unit was leased for $75 over what was projected. That’s just under 6% more than they thought. Boots on the ground research predicted the higher rent, but nobody would believe it.

Sure, in some places, San Diego’s one of ‘em, rents are edging up a bit. But it’s due to the virtually impossible dream of adding new inventory to the market place. No new competition in almost 30 years — ya think that might cause rents to rise a bit? Problem is, the units are becoming more outdated every year. It’d be funny if it wasn’t becoming so sad.

The bottom line

On every level I’ve analyzed, every boots on the ground research survey I’ve personally conducted since 2003, there’s been no state belonging in the same breath as Texas. The quality of locations offered is off the chart. This very positively impacts the tenant quality attracted to projects. The bang for the buck, an economics technical term, is huge, relatively speaking. A 3 bedroom/2 bath + 2-car garage with a fenced back yard — located in a neighborhood loaded with $250-500,000 homes — rents for $1,225-1,350 a month. Yet the investor pays just under or just over $250,000.

A crummy 55 year old duplex a half mile from my office sells for nearly half a million bucks. It offers a 2 bedroom and a 1 bedroom, along with all the really cool design features available when I Love Lucy was the #1 show on TV.

THAT’S why I keep tellin’ you to get your capital/equity to Texas.

Let’s figure out your situation together. Gimme a call at 619 889-7100 — we’ll put our heads together to figure out what’s on your menu. Rather write me? Click on the Contact BawldGuy button up top. Either way, it’s all good, as I need a fix. Have a good one.

The landscaping is pretty cool, isn’t it? It’s not the norm in San Diego as many might think, but it’s not rare either. Makes for pretty good curb appeal, that’s for sure. Anywho, let’s get started.

A note here, for those readers who might think, even a little bit, that I picked this duplex for it’s crummy location etc. Not hardly, as I’d easily apply the BawldGuy Mom Rule to this property without the slightest hesitation. I know this area like the back of my hand, having lived in or nearby the neighborhood since 1967 when I was 16. What’s the BawldGuy Mom Rule for Heaven’s sake?

BawldGuy Mom Rule: Brown and Brown Investment Properties policy is that no client shall be advised to invest in real estate in which I wouldn’t put my 80 year old mom to live alone. Period, over ‘n out, no exceptions. Hence the name of the rule.

The numbers tell the story 

Here are the assumptions used:

• They owe $100,000 on existing loan.
• This is the only property they own other than their home.
• Sales/Exchange costs will run around 10%. (We’re in termite country.)
• The investor is 50 years old.

At $470,000 +/-, the net proceeds from a sale would be approximately $323,000. They’d be moved directly from escrow to the Accommodator used in the exchange. (Another post altogether.) It’s from that account the second half of the exchange will be executed.

Maintaining the Status Quo

Having reduced the loan to $100,000, and if he’s like most investors, he’s already done the math figuring out the income this duplex will provide in retirement, sans debt. It’s even money it’ll be less than his projected Social Security check. In this case, $1,455/mo., not even $18,000 yearly. Sadly, he’s probably better off than most of his family and friends. But for fun, let’s say it’s $20,000.

His net worth, (only this duplex) is $470,000.

If he exchanges to a superior market

Here are the assumptions used:

• He’ll be puttin’ 25-30% down on any property acquired in exchange.
• All loans obtained will be 30 year, fixed rate, at 5%.
• His ‘depreciable base’ will be increased by roughly $700,000 or so.
• All retirement income/net worth numbers will be those at acquisition — no value appreciation or increase in Net Operating Income (NOI) will be applied, as per my policy.

I’d trade his equity (tax deferred, per IRC Section 1031) into four small income properties. The cost would average out to about $255,000 apiece. Three of ‘em would be with 25% down payments. The fourth would be using, give or take, 40% down.

The NOI for each would be a bit over $19,000. But we’ll be happy with the $19,000 for this example. Using the BawldGuy Domino Strategy he’ll have eliminated debt from all four properties in time for his 65th birthday/retirement party.

His two retirement scenarios in a nutshell

Status Quo — $20,000 a year in retirement income. Little if any of it tax sheltered. The property is now 80 years old, which virtually always means higher expenses than significantly younger buildings. Duh. We have a longstanding joke about old buildings. It’s possible the only reason they’re still standing is cuz the termites have agreed to keep holding hands. Bada boom!

His net worth, as noted earlier, is $470,000 — a kindness I extend to the elderly as policy.

Exchange scenario: $76,000 a year in retirement income. Roughly a third of which would be tax sheltered for around 12 years or so into retirement. Better than a kick in the head, right? The buildings would be only 15 years old, about broken in. They’re family sized units (3 bedrooms/2 baths with 2-car attached garages for each unit.) so over time they would’ve had less tenants in each one. This results in less wear ‘n tear, and therefore lowered expenses overall.

His net worth in this scenario would be in excess of $1 million.

Income/Net Worth if he stays the current course — $20,000/yr — $470,000.

Income/Net Worth using my suggested strategy — $76,000/yr — over $1 million.

When I constantly beat the Get Outa Dodge drums, it’s cuz it’s a no-brainer. This guy would almost quadruple his retirement income while more than doubling his investment property net worth if he opted for the exchange route.

It ain’t rocket science by any stretch.

Hey! You don’t need rocket science to find me. Call 619 889-7100 and we’ll be chattin’ before ya know it. Or, if you like, click on the Contact BawldGuy button at the top of the page. Together we’ll figure things out and make it happen. 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.

• 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.

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.

Two in one day, talk about endorphin overload.

OK, so what I’m avoiding saying is that I just don’t have a post in me today, and my contributors are busy takin’ care of their own businesses. Still, if ya wanna talk, and are willing to wait till Tuesday, you can reach me at 619 889-7100. Some like sending me a note via the Contact BawldGuy button. We’ll talk about how to get you to the retirement you’ve always thought was yours for the taking. 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.

Though there are many solid things you can do to enhance the likelihood of sellin’ your properties in loser locations, the one that works virtually every time it’s tried is pricing. As in LOW pricing. Sure, new paint, carpet, sprucin’ up the yards, and makin’ sure everything works well greases the wheels, but if the price doesn’t wow ‘em, they’re on to the next batch of 10 before you can say, but . . . but . . . wait . . .

Assuming your end game is to take whatever net equity you salvage to a better suited, more dynamic market, financing a sale yourself defeats that purpose by definition. Allow me to construct a scenario based upon recent experience and calls.

Imagine you’re stuck in two states

We’ll set up the scenario today, then suggest a solution(s) in the following post.

Our investors owns a few props in one state, and a lone property in his home state. Both areas have been hit hard, for former far more than the latter. Problem is twofold.

1. Both markets aren’t seller friendly. Duh.

2. Prices continue their southward trek in both states, which means the net equity seems to be shrinking measurably almost by the clock’s minute hand.

Their total equity in the game for all rentals combined was roughly $3-400,000 a few years ago. Now? try $170,000 if the stars line up in his favor. In fact, one of the rentals would require him to bring $15-20,000 to the table in order to close. Not appetizing, is it?

The most important question.

If they all sold tomorrow in what, and where should the investor invest the pitifully small ransomed capital?

The bonus question would be crucial: Is the move itself a slam dunk no-brainer?

If that last question can’t be answered both quickly and enthusiastically, YES!! — then don’t make the move. Tomorrow will look at how this investor can indeed rise from the ashes of a plan gone horribly wrong.

If you’re thinkin’ this post was written directly to you, what’re ya waitin’ for? Call me — 619 889-7100 will get me. Or just 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.