Lots of people have been stunned in terms of their relative financial security — especially those whose retirement plans depended largely upon Wall Street. Over and over I hear, “We can watch our stock/bond values so much more closely than we can with real estate.” Boy, ain’t that the truth?!
Segue to total SmartAlec mode.
So, when you were watchin’ your million dollar stock portfolio turn into $600,000 — did watchin’ it add or diminish your sense of financial security?
End of SmartAlec mode, and a thousand apologies.
Here’s the thing. Let’s say you took that money along with whatever you have in real estate equity that makes sense to sell/exchange, and acquired a strategically grouped set of properties — some of which would be bought for cash, some with what I’ll coin as ‘LeverageLite’. That would translate into 30-50% down, depending upon each investor’s specific circumstances. Furthermore, in anticipation of retirement, you applied cash flows to payin’ off the props with debt.
But then Murphy shows up, twirling his sinister mustache, chuckling to himself as he brings with him yet another economic downturn.
This time though, you just keep executing your Plan. Maybe it takes an extra few years to pay off the props you mortgaged, but they still get paid off. Let’s say that downturn trimmed 25% off of the value you paid at acquisition. So what?
If you have a property for which you paid $5X that generates $7-10,000 monthly in cash flow, but it’s now worth only $3.5X, does the $7-10,000 still spend OK for ya? (Slipped in the SmartAlec again, didn’t I?)
BawldGuy Axiom: Retirement income is what gives us security, not the value of the asset from which the income is generated. We spend cash flow, not a bookkeeping entry showing value.
The real estate investor who goes from $2 Million in value to $1.5 in the short passage of several months, still spends the cash flow each month. Even if her rents fall, compared to what would’ve been her income from Wall Street, she’s in great shape. Imagine experiencing a 20% cash flow reduction and still having $80,000 a year — much of it tax sheltered.
That’s security.
Gimme a call and let’s talk turkey. 619 889-7100 will get you to me. Have a good one.
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I love this post! Keep preaching brother; it’s all about after tax cash flow!
Another brilliant piece of writing. I have many, many clients who have lost more than 50% of the *ahem* value in their RE holdings and are still raking in the monthly checks. Even some of the properties that have lost significant value to them were purchased for peanuts in 1988…they can be sold with 1031 and and proceeds used to take advantage of the *circus*. I wish I had more time to read your blog, its always very enlightening. Keep up the good work.