How Real Estate Investors Really Get It Done – Attn: Newbies

This might turn out to be a short series, so if it seems there should be more info, your instincts are right on. There’s so much for the new investor to know. Let’s begin by invoking one of my all time favorite axioms.

BawldGuy Axiom: It’s hardly ever the answers to your questions that end up producing dire consequences. It’s usually (80/20 rule?) the answers to the questions you never knew to ask that end up ruining your day.

I’ll assume you either A) Have the necessary capital to acquire your first property(s) or B) The equity/assets to provide it. Most folks without the hard cash, tap into their home’s equity — if it’s prudent under their unique circumstances.

First, let’s get some myths out in the open.

  • It’s axiomatic that the real estate investor should acquire only high cash flow properties.
  • When you buy income property it’s common sense to buy local so you can keep an eye on things.
  • Tax shelter, by definition, comes with real estate investment property.
  • Holding periods are generally planned for in advance.
  • Tax Deferred exchanges (1031) are indicated by default when capital gains are an issue.
  • You are forced to hold on to real estate investments long past retirement due to taxes on capital gains.
  • Having a cash reserve is a luxury. If you buy right, ya don’t really need much in reserve.
  • Those are merely a handful of myths so many investors still believe. If you took the strategies which are unknown to the vast majority of real estate investors taken from the truths those myths hide, most investors would significantly increase their ultimate retirement pot of gold.

    Let’s talk about one of them now.

    Look, my grandpa also told me cash flow is the gold standard of any real estate investment, no exceptions. If I heard it once, I heard it a hundred times a year from adolescence on. Born not long after the turn of the century (Um, that would be the 20th century.), that school of thought pretty much dominated. Over time however, retirement strategies have been created, tested, and shown to be successful without worshiping at the altar of cash flow from Day 1.

    Cash flow and capital growth are the two main goals of investors. It’s the timing of both that is most critical to you. Before I continue, don’t walk away from yer laptop thinkin’ BawldGuy said cash flow is bad, or worse yet, to be avoided. What I AM sayin’ is that if maximizing your retirement cash flow is your goal, and you’re 10-40 years from retiring, cash flow ain’t yer friend — capital growth is. Going for cash flow at that point will retard capital growth.

    NOTE: To ensure there’s no misunderstanding here — I’m not advocating the avoidance of property that pays for itself. A little cash flow is definitely a good thing. But in your ‘capital growth’ years, look at cash flow as seasoning. Too much and the meal is ruined. Just enough and the meal is enhanced.

    The process of creating maximum income for your retirement is simple as pie. Gettin’ it done is not. Cash flow is — directly put — a yield on a pile of cash — capital if you will. Nothing more, nothing less. It’s really not complicated, though it seems many insist on making it so. Follow me here.

    Since cash flow is a yield, let’s say the yield is manifested as ‘interest’ on an amount of capital. Regardless of the interest rate, the guy with a million bucks gets the same interest rate as the gal with half a mil. Clearly, the difference then is in the dollar amount generated, which is obviously more for a million dollars than for half as much. Double Duh.

    So if you’re say, 22 years from retirement, your agenda is to grow your seed capital into as many huge piles of big bucks as you can — safely. The more piles you create, and the bigger they are, the more ‘Golden’ your retirement years will be. Those who choose instead to spend those same 22 years bowing down to cash flow will end up with far less income at exactly the time they needed the most income.

    The reason that last statement is true is cuz maximizing cash flow retards capital growth — and vice versa. Don’t say anything. It’s like fire and water. Add one to the other and one of them loses — no exceptions.

    Make sense?

    Let’s have a one on one conversation. Call me at 619 889-7100. Have a good one.

    7 thoughts on “How Real Estate Investors Really Get It Done – Attn: Newbies

    1. Pingback: Top 10 real estate posts of the day for 11/18/2009 : Tempe real esatate and free home search

    2. Stan Thompsen

      I understand the point you’re making, but what can an investor (focused on capital growth) reasonably expect with regard to cash-on-cash yield? Thanks.

    3. BawldGuy Post author

      Hey Stan — That’s a whole different post, but here’s the short answer.

      If you’re investing in west coast real estate you’ll be putting 30-40% down to break even. FAIL. Still, there are a few regions offering modest cash-on-cash yields. Boise, a handful of areas in Texas, Kansas City (but harder to find for sure), and 2-3 others.

      Modest cash flow using 20% down might be 3-7%, most fallin’ in the low to mid range. Of course, in many of those areas the rents have risen the last year, an anomalous event compared to most of the country. It means the cash flow part of your return will, more likely than not, increase over time, as opposed to most other regions where rents are feelin’ the pinch of headin’ down the supply & demand highway in the wrong direction.

      Bottom line? As long as the property is paying for itself, plus a little, you’re good to go — assuming a capital growth agenda and sufficient Sominex Account. The rule is don’t kid yourself about the numbers

      Make sense?

      Don’t be a stranger, OK?

    4. Stan Thompsen

      Makes sense, thanks! And thanks for the prompt reply.

      One last question: for the 20% down, 3-7% yield scenario, does that include paying someone else to do property management?

    5. Joshua

      I always hear the term.. rents are rising. In real life I’ve never heard of anyone ever raising the rent in my experience. I’ve spoken to other landlords (property owners) and they always wait until a new tenant comes in for fear that if they raise the rent now their tenants might leave.

      Can you please do a post on how to determine if we should raise the rates, the best way to do it in avoiding such an outcome?

    6. BawldGuy Post author

      Actually, it’s been awhile since I posted on that topic. I’ll do it next week, so if you haven’t seen it by Wednesday, give me a nudge. Thanks


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