When speaking to audiences in historically high appreciation areas, it’s common to hear them ask questions about regions I currently recommend, as they’re wondering about long term increases in value. Their real problem? They’re lookin’ for appreciation at the cost of capital growth — theirs. They’re literally penalizing themselves to the tune of millions over the long term. In baseball terms, high batting average is cool, but how many runs a hitter knocks in is the real gold standard. No? Ask yourself if, for the big game you’d want the guy hitting .355 with 67 RBI a year, or the .272 hitter who drives in over 120 runs a year?
Go ahead, take yer time. No rush.
Not a difficult decision, is it? ‘Course not. It’s obvious on it’s face. Why? ‘Cuz in baseball the winner is decided by how who has the most runs at the end of the game — not the team sporting the lineup with the highest batting average.
Appreciation = .355 Hitter whereas Capital Growth = Killer RBI Guy
In real estate investment terms, in real life, here’s how it shakes out.
Let’s say you’re in the Bay Area of NoCal, poppin’ your vest buttons ‘cuz properties are selling with much appreciation since you bought ‘em so many moons ago. Income properties there require 40-50% down payments to break even on a month to month operational basis. Let’s use 40%.
Investing $100,000 at 40% down buys you a $250,000 property. (Those in SF or Palo Alto can stop laughing at that price — it’s just an example.) If the first year’s appreciation rate is 10%, your capital grew by $25,000. On the other hand, if you’d have bought properties in one of the regions we currently recommend, you’d have acquired $500,000 of new property — sporting more cash flow than you’re ‘enjoying’ at 40% down. I won’t even speak of appreciation — for comparison or any other reason. It’s silly on its face.
What I will point out, is that in the end, you’ll have far more cash flow at the point you retire, by avoiding the formerly high appreciation markets who’ve kept the incredibly terrible price/rent ratios they’ve always had. I know i’ve picked on the Palo Alto area here, but San Diego ain’t much better, believe me.
Over time, the only hope for California and places like it, are to resume double digit appreciation year after year. Don’t wanna burst yer bubble, but the odds are better the Padres and Chargers will win World Championships in the same year.
All things being equal — which they aren’t and won’t be — what’d'ya think of the increased flexibility that owning multiple props provide? Oh, did I forget to mention double to quadruple the tax shelter? Oops, my bad.
BawldGuy Axiom: Appreciation is for show — Capital Growth is for dough.
Purposeful Planning understands this truth. Sadly, there are now thousands of real estate investors learning this lesson the hard way. Their retirement income will be the victim, if they don’t modify their outlook. That’s a nice way of sayin’ you’re sabotaging your own retirement if you’re buying appreciation instead of capital growth.
Of course, (And I know this.) you’re scratchin’ your head, wondering how your capital can grow if there isn’t any appreciation. That’s another post entirely. Suffice to say, as in baseball, where winners are the ones with the most runs on the board, not the highest batting average — winners in real estate investing for retirement are the ones with the most retirement income, not the highest priced properties.
For those anxious to start growin’ their capital, your first step would be to gimme a buzz at 619 889-7100. Besides doin’ me a favor, providing me with a fix, we can talk about your specific situation and how to get you headed towards the retirement you’ve envisioned. Have a good one.
Related posts:
- Want Your Capital To Grow? It’s NOT Just About Real Estate Appreciation
- Real Estate Investors: A Simple Way To Increase Your Capital Growth
- The Capital Growth Oriented California Real Estate Investor — Oxymoronic
- Growing Real Estate Investment Capital With Little Or No Appreciation
- As A Real Estate Investor Ya Gotta Pick — Capital Growth or Cash Flow
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