Dad made around $400,000 a year selling houses in San Diego — in the ’60′s! His operation can’t be duplicated today. If it could, that annual figure wouldn’t be enough to represent his monthly income, as he’d be making $5 Million yearly. Wow!
And yet, one of my most lucid memories is of him reprimanding me for seeing a penny on the ground — and walking by it. The guy was making just under $200/hour in 1967, and he’s lecturing me about walking by a penny. He literally waited in silence, half way up the back stairs to his second story office, while I bent over to pick the dang thing up.
Dad was serious as a heart attack.
He was born in the spring of ’29. I often said, “Once the world found out, a huge depression hit.” I won’t repeat his rejoinder here. When you grow up, as he did, spending your first 16 years in either the Great Depression, or constantly aware of the potential consequences of being on the losing side of a world war — you don’t cavalierly walk by a penny.
This is a roundabout way of pointing out how his generation came by their predilection for cash flow. Eat peanut butter and onion sandwiches for lunch 5-6 days a week and see how you view the financial world. (True — I couldn’t make up something that vile.)
What I don’t get, is how real estate investors, who were born years after the end of World War II, sometimes a few decades after, seem to worship cash flow. They do it to their distinct detriment — most of the time unaware of how much they’ve proactively retarded their own invested capital’s ability to grow.
BawldGuy Axiom: To the extent an investor goes for cash flow — capital growth suffers — and vice versa. There’s no escape from this investor fact of life. As a matter of fact, it’s why, I’m told, it’s ok to call it an axiom. It’s self evident.
Example: Put 10% down payment on a real estate investment property vs 20%, and what happens in each scenario? Understand — the investor in question is 41 years old. He’s earning just over $95,000 a year. He’s saving over $10,000 a year — he doesn’t need cash flow. In fact, let’s be even more real here.
It’s more likely than not, he’ll never make less
money per year than he’s making now. It’s not universally true — but it holds true most of the time.
He needs capital growth. At his age, he’s trading hundreds of thousands, more likely, a million dollars (or two, or…?) for a thousand or two a year in cash flow that will literally fall through the cracks it’ll be so insignificant to him.
It’ll be used for pizza and beer money for Heaven’s sake!
If the properties in both scenarios go up 10% in value the first year, his capital has grown at a 100% rate in scenario #1 — but only half that — 50% — in scenario #2.
Extrapolate that out for 20 years and a few tax deferred (1031) exchanges — and, as Senator Dirksen liked to say, (paraphrased to fit this context) “Son, a million dollars here, a million dollars there — why, pretty soon yer talkin’ real money.”
Real money — unless you’ve fallen in love with cash flow to your lifelong regret. The problem is, most investors never realize this mistake until they’re retired, and find themselves talking one day, with another investor — who bought his pizza & beer out of his weekly paycheck.
Boiled down to the end game — here’s what really happens.
Every million bucks of net worth blown by an investor’s love affair with cash flow, means another $5-7,000 a month in retirement income he’ll never get to enjoy.
The million dollar question?
Did all that pizza & beer taste like a million bucks?