As if it was yesterday, I can still hear one of the grizzled veterans of real estate investment brokerage admonishing me for even pursuing alternatives to their holiest of holy beliefs — you buy and hold — forever. Some wouldn’t even allow discussion of tax deferred exchanging. You bought — you held — you refinanced if necessary, (of course it was always necessary) — rinse and repeat into eternity.
35 years of that strategy, ending in 2010 would yield very predictable results. If you’d kept your capital in San Diego as most locals do, you would’ve been the punch line for a good news/bad news joke — though it wouldn’t be funny ‘ha-ha’.
The good news is, they were on the happy end of some pretty impressive capital growth. Even with the recessions and other economic bumps in the road since 1975, they consistently made a boatload of money. One might say, without argument from me that it’s great news not just good. They refinanced and bought more property in 1978. Then again in 1986 and 1988. They then weathered the whole S & L thing, remaining inactive ’till about 1999 or so. They again pulled more capital from their various properties, investing in still more local income producing real estate.
This was repeated once, maybe even twice in the next 4-5 years. Their Plan calls for retirement next year. Most, maybe 75%, of their properties are cash flowing nicely. Of course, the props held the longest and with the most time having passed between refinancing are the real cash flow cows. That’s the end of the good (great?) news. More than respectable capital growth for 35 years, along with generous retirement income — with excellent timing too.
Now for the bad news.
All property acquired between 1975 when they began, and 1986 is without, sans, missing, tax shelter of any kind — period, over and out. Every single dime of income generated by those properties, and they’re highly likely to be the ‘cash cows’, is naked when it comes to tax shelter. The depreciation on those properties ran out, give or take, from 1999-2007. It’s as if the investor preferred to enter retirement with as much of their income naked to taxation as possible.
Unintended consequences can be um, unpleasant.
All the properties acquired in the late 1980′s through 2003 or so, will run out of available tax shelter from roughly 2014-2030. This means the majority of their retirement income will be taxable from Day 1. As the props purchased latest begin to throw off ever increasing cash flows, they likely will have overcome any remaining depreciation — a truly sad state of affairs.
BawldGuy Takeaway: Those who put far more effort into Purposeful Planning their retirement through real estate investments than simply buying and holding will reap three major benefits not enjoyed by the practitioners of said strategy.
1. Far more capital growth over the long haul — the short one too.
2. More cash flow before AND after taxes at retirement — far more.
3. The additional menu option of taking a sale at any point along the way, including at retirement — while paying little or no capital gains taxes. In other words, they won’t enter retirement, or endure the majority of that retirement dealing with shelterless income.
The buy and hold forever crowd hits retirement running — away from April 15th every year until they die. Not a happy thought, is it?
Unintended consequences ambush real estate investors for many reasons. The #1 reason by far is adopting strategies devoid of answers to questions they didn’t know to ask.
Call me with your questions. 619 889-7100 Or send me an email. I’m pretty good at getting back to you. Have a good one.
Related posts:
- How Can San Diego Real Estate Investors Improve Their Current Strategy?
- What Real Estate Investment Strategy Works In Slloooowly Appreciating Markets?
- Want Dire Consequences? Apply Grandpa Economics As Your Retirement Strategy
- Purposeful Planning Part Last — When’s Holding Period Over? What Now?
- California Real Estate Investors Using 1031 Exchanges To Turbo Charge Portfolio
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