Old School Real Estate Investing

So as this is my first post on my first (and only) blog, and I should probably tell you why I’m hosting a blog, and what you can expect from me. I can’t say much of what I’d really like to on a website, or typical marketing. Besides, this isn’t for marketing anyway. This is for me to be able to rant and rave about what I do for a living, hopefully with more than a little wit and wisdom. You’ll find out I don’t have problems venting, and you’ll always know where I stand.

First, is it me, or does everyone everywhere think they know which way is north on the map with real estate investments? I swear, if one more person corners me at some social gathering just to tell me how they’ve ‘found the next Golden Goose’ I’m gonna scream. What makes it worse is that half of these Donald Trump types are agents and brokers who should know better than to spew their ignorance in public. I remember thinking last weekend that if this guy just spent a few minutes talking real estate while walking on my front lawn, I’d have the greenest lawn in the neighborhood. I guess the problem is that there are so many myths out there being repeated as solid gold truth, that sometimes I’m not sure where to start. Maybe the old school new school debate is as good a place as any.

What’s the old school anyway? Well, it’s a lot of things, some pretty good, but there wouldn’t be a new school if we all thought the old was doin’ the job. And believe me it isn’t. Not by a long shot. The OS says you invest in real estate, and you never, ever, for any reason other than emergency, sell any of it. You hold it, refinance it, and invest in more. Tax deferred exchanges are a terrible way to plan they say. Ultimately they want you to end up with most of your income properties with very low debt and high cash flow, which sounds good as you read it, but doesn’t quite pass the comparison test. Of course this school comes from what I’ve christened ‘Grandpa Economics’, which we’ll have more about later.

So what’s wrong you say with owning a bunch of income properties with low debt and high cash flow? Isn’t that what we’re all trying to accomplish in the long run? Think about it for a second. Ask yourself exactly what it is you want accomplished with your real estate investments by retirement time. You want reliable monthly cash flow right? You’d like it to be a whole bunch, right? Do you care if you have more than $1.98 in debt on each property? No, you don’t. What you care about is the monthly cash flow. Let me make the question crystal clear. Would you rather have $5,000/mo. in retirement income relatively low debt, or $20,000/mo. while owing millions? Go ahead, take your time, no rush. Believe it or not, about one out of 12 or so investors actually choose the lesser income! Why? How can that possibly be? Because debt is evil and even though the income is four times as much, it just can’t be right. Heard your own grandpa say things like that? Bet you have.

Enough about that for now though. I’ll get back to grandpa later. Though if you must, I do have a podcast (audio recording–you do not need an iPod to listen. You can listen to it on your computer.) devoted to the subject. It can be found at Grandpa Economics

Here’s another OS favorite – everything you buy has to have great cash flow or it shouldn’t be purchased. The last time I heard this in person was about a year ago at a ‘private’ seminar. One of my clients thought I’d be interested in hearing what some of my collegues were saying out there, and invited me to go with her and her husband. It was hilarious. Now, you need to know my clients were in their mid-40′s, and planned to work until about 55. They’d been with me for a few years and had done extremely well. Although they were believers in the plan we’d been executing for them, they were very interested in my take on this guy’s approach. After all, cash flow sounds like a pretty good idea, right? If you say so.

So we go and listen to the guy, and sure enough he goes on a rant about how too much leverage is so foolish, (true, but in what context?) and that income property was meant to throw out cash flow to the investor. Wow! You’re going too fast – what a nugget. He had an complex set of parameters which showed investors whether a property would perform as required. When he finished he wondered if anyone had questions. My clients both looked at me immediately with opposite looks. ‘Susy’ looked terrified, while ‘Mike’s’ eyes said go for it. He saw my hand and asked me to speak up. I asked, “If my wife and I are in our mid-40′s making six figures between us, and aren’t going to retire for another 12 years, should we go for cash flow or growth?” The first thing you noticed was the very interested looks of the other dozen or so people in the room. Next you knew that if someone dropped a feather on the carpet you would hear it for sure. Susy was trying to become her chair, and Mike was grinning from ear to ear. (I really like Mike.) His answer was illuminating. He said that if you didn’t get the minimum required cash flow, then there was absolutely no reason he could think of to still invest in the property. He went on to say that any broker who said anything to the contrary was doing his clients a disservice. Since my expression must have been incredulous, he asked me if I had another question. I did. If I had invested (We’re talking about San Diego here.) in 2000 in a couple duplexes using 10% down, and both of them broke even, where would I be today, 2005, compared with following your advice by having purchased only one duplex with at least 20% down?

I pause here to tell you that was how Mike and Susy started with me. So when I asked this question you could see the light over Susy’s head go on. Mike though, was staring at the carpet, his shoulders rising and falling at a scary rate, while Susy was elbowing his ribs without mercy. Susy then looked at me with eyes that begged me not to pursue this line of questioning any further.

The guy now looked at me with gunfighter eyes and answered me. “You would have benefitted from years of solid and reliable cash flow, great appreciation, and by now would no doubt have owned at least two more duplexes!” The crowd was pleased with that answer, and looked expectantly at me. I just said, “That’s incredible. In only four years I could already have gone from one to three duplexes, and all with good cash flow. Thanks.” I thought Susy was going to kiss me right then and there. Mike just made a face.

In 2001 they had come to me from a newspaper ad asking if I had a duplex they could buy. I asked them why not two? They were now curious, and to make a long story short, by 2005 they had parlayed their original capital (Less than $70K) into over $600K, and owned properties in two states. They did all this with units that broke even or had very little cash flow. A couple properties even had a temporary negative cash flow while they did a little cosmetic freshening.

Old school – there’s a lot it offers which is still of great value. Comic relief for example.

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