Real Estate Investors Staying Local Endure Lousy Cash Flow – Worse Retirement

Live and invest in real estate in places like San Diego or Palo Alto California? Then you know exactly to what today’s title is referring. Living there is Paradise, but your income property? To be kind, it ain’t what it could be. Even after this correction, as persistent as it’s been, your properties still don’t spin off the income they should, given your current net equities.

Then there is the issue of age, a sore subject in many places, but none more so than San Diego County. Residential income construction has been little more than a faint rumor since Regan’s second term in office. In fact, if you don’t count the ultra-elite apartments which have been built on the coast and in Mission Valley, pretty much nothing of even minor consequence has gone up since around 1987. I know, cuz I’ve seen ‘em not go up.

Let’s talk real life numbers here, OK?

Let’s say you bought a well located La Mesa (SD) duplex back in the first quarter of 2003 for give or take $325,000. It’s now generating roughly $27,000 a year in Gross Scheduled Income. (GSI) After vacancies/expenses you’re lucky or fudgin’ if you say your Net Operating Income is more than about $17,000. The ugly truth is that you’re still breaking even after seven long years. Even though you probably put down at least 25%, surely more, your loan balance now hovers in the range of $200-220,000. Though it once rose in value to approximately $550,000 (!) it’s now worth up to $400,000, though that’s not likely. Let’s say it’s value today is $375,000 or so.

Even allowing a $200,000 loan balance, that leaves you a net equity of $145,000. Put another way, that means you have $145,000 on a treadmill to nowhere, producing no, as in zip, zilch, nada cash flow.

It was older than you when ya bought it back in ’03 — now it’s probably 50 years old, most likely older. Ever wonder what it would be like to own property younger than your kids? Or how much more rent you might get if your floor plan wasn’t on all the I Love Lucy episodes? Maintenance and repair of very old properties is bad enough without having to simultaneously contend with functional obsolescence.

What could that $145,000 get you once you get it Outa Dodge? Glad you asked.

Try $900 in cash flow — a month, not a year. You’d own two duplexes, while having divorced yourself from management. Ah, now yer smilin’.

Also, it’s at least as well located as yours in San Diego or Palo Alto and the like. It’s new. It’s probably got more bedrooms per duplex than yours, not to mention garage parking for a couple cars — for each side. Heck, in SD landlords are proud if they have a one car carport.

Since you’re not planning to retire for another 10-20 years, let’s see what you could do with this one tax deferred exchange, over time.

If you took roughly $800 monthly and applied it religiously to principal reduction on your loans, you’d be free ‘n clear on both units in just over 11 years — from now. But what position would you be in then? And more importantly, how would it be different from remaining in your current property?

I hate doin’ this, but let’s take a look. Caveat: This could get ugly.

The outa state duplexes would, if their NOIs never increased over the 11+ year period, generate before tax cash flow (BTCF) of about $36,000 yearly. 40-50% of that would be sheltered.

Your San Diego duplex? Come on, really? Ya wanna go there?

The poor property is now likely to be 60+ years old. You don’t think your expenses, as a percentage of income will be higher than they are now? Bet on it. Also, the tenant quality will have dropped a bit, as folks who have the money you want doggedly insist on things like semi-modern kitchens, and floor plans that don’t remind them of Grandma’s house. Plus, if you haven’t modernized both the plumbing and heating, you’re in for a drop in your bank account’s balance.

Bottom line? If your duplex nets you more than $15-20,000 you’re supremely fortunate. Also, your tax shelter will be pitiful, relatively speaking.

Ready to cry Uncle! yet?

If I’m describing you and your investments in San Diego or anywhere like it, we should definitely talk. You’re not only suffering from subpar performance now, but your retirement is gonna be WAY disappointing.

You can reach me at 619 889-7100. You have an 80% chance I’ll answer myself — remember, I’m OldSchool. Have a good one.

Related posts:

1. Real Estate Investors — Is Your Addiction To Cash Flow Lowering Potential Retirement Income?
2. Real Estate Investors: Chasing Pretend Cash Flow Surest Path To Pretend Retirement
3. Real Estate Investors – Don’t Be Seduced By Rickety Cash Flow
4. How To Use Cash Flow To Sabotage Your Retirement — OR — The Faster He Peddles The Behinder He gets
5. Here We Come San Diego — Move It Or Lose It Local Real Estate Investors