One of the downsides to retirement in the United States is all the options available to make it happen. There are qualified plans — 401k’s, IRA’s, etc. There are those who don’t trust that approach. They prefer to invest in the stock and bond market on their own. Long term is their battle cry. Then there’s what Grandma ‘n Grandpa told us to do, which was save our money for a rainy day. I guess they expected retirement to bring perpetually wet weather.
Grandpa always laughed when I used to say that.
The rest have opted to rely on long term real estate investing as the foundational source of their retirement income. History, and my personal experience has shown that over time real estate has been far more reliable, relatively speaking, than any of the alternatives. But still, it’s telling when we listen closely to how those favoring the Wall Street approach tell their story.
Theory vs Reality
Here are some phrases that often prove to be silent killers of retirements.
• “Given recent returns, your capital should grow to $X amount in Y years.”
• “Dividends/Rent (income) has always risen over time. Given that known fact, you’ll be able to use the increased income to more quickly eliminate any debt.”
• “Therefore, once your retirement becomes imminent, you simply take the massive capital gains (profits) and convert them to a solid income stream at X% yield.”
These statements purport to be factual, when in fact they’re more theoretical in nature. Worse, the case is built theory upon theory upon theory — all of which must behave as predicted for the plan to succeed.
Having done this for a living since freakin’ forever, I can testify that for every year real estate prices dropped, there have been about 4-5 years of appreciation. In fact, ’til recently, appreciation was sometimes 10% per annum or higher, whereas any years of decrease were measured in single digits. (I’m speakin’ of SoCal, not the country as a whole. But the nation’s trend has been the same.)
The Paradox
On one hand we’re told if we don’t learn from and understand history, we’re dooming ourselves to repeat the mistakes of others who came before us. On the other hand as investors we’re constantly being preached to about how ‘the past doesn’t predict the future’. Geez, Louise, Myrtle — pick one, ok?!
For years I struggled with those seemingly contradictory gems of wisdom. Then one of my mentors, long since passed but never to be forgotten, explained the flaw causing my consternation.
History does indeed teach us much if we’re willing to learn. However, you’re definitely not using that wisdom when you’re predicting the future, even more so when that future is 10-25 years away. It’s silly.
His point, made so elegantly at the time, much better than I just paraphrased, for sure, was, as he used to put it, duck soup. (easy) Knowing history intimately allows us to identify similar scenarios when they arise. We can then respond accordingly. But when we, in our hubris, attempt to predict the long term future, we deserve what comes next.
I learned that back in the 1980s. I relearned a little later. Said in BawldSpeak, my crystal ball is as cracked as yours, period.
Therefore . . .
• Do not predict rising rents.
• Don’t assume appreciation in value.
• Revel in them when they bless us with their presence, but don’t assume anything.
In my opinion, as a real estate investment analyst since the mid-1970s, this is a cardinal principle.
When analyzing any real estate investment, do so completely unfettered by any assumptions of improved value or income. If the investment can’t stand the test of time as acquired, move on to the next opportunity. I’ve yet to run into an exception.
This is why, though over the years I’ve been ridiculed by many, I refuse to advise clients to invest in anything based upon a foundational expectation — premise if you will — of appreciating value or rising NOI (net operating income). I simply refuse to put my name to it.
Don’t invest your hard earned capital based on theoretical assumptions. It’s either a solid investment on its own, or it isn’t.
Remember — your retirement isn’t theoretical.
Here’s a reality, I’d love you to call me about your situation. My number is 619 889-7100. Rather write me instead? The Contact BawldGuy button up top will get it done. Have a good one.
Related posts:
- When Does A Retirement Become A Fantasy Instead Of A Reality Waiting For The Right Time?
- Denial — Facing Reality — Enjoying A Long And Healthy Retirement
- The Relationship Between Time And Retirement — Reality VS Perception
- Real Esate, The Media, Reality, And The Greenest Grass In Your Neighborhood
- It’s Boots On The Ground Time – Some Thoughts On Theory VS Analysis
About BawldGuy
Unfortunately, no investment will “stand the test of time as acquired”, as you stated. That is because inflation will dismantle or destroy every investment that can not at least keep up with it. When assessing any investment, it would be disastrous to ignore the necessity of replacing the income taken by the silent thief. That ability, in turn, depends on the potential or lack of potential for continually increased income.
That brings us back to the inevitable “crystal ball” you referred to – which I prefer to replace with lots of competent due diligence – applying as much IQ as I can muster, plus beg, borrow or steal insight from others who are competent and successful.
Peter,
You are concerned about inflation. As you should be. It really is, as you say, “the silent thief”.
Funny thing about the value of real estate, especially rental real estate. Unless you start dumping toxic chemicals on it, both the value of the property and the rent it provides have a tendency to very nicely keep up with (and usually exceed) inflation.
Hey Peter — Though experience demonstrates rents and property values tend to follow inflation, it’s the analysis at the point of acquisition that matters most. Will the income property purchased today keep up? Probably. However, predicting that isn’t a tack I’m willing to employ. But let’s look at reality.
A fourplex acquired 8-10 years ago in San Diego cost roughly $375,000 or so. The income at the time (GSI) was about $35,000. The NOI was, give or take, about $22,000, self managed. They would’ve been adding any cash flow plus some of their own monthly income to the payment. By now they’d have paid it off.
Assuming no increase in either value or NOI their original $80,000 (+/-) plus a grand a month (their money) in loan pay down would’ve morphed into $375,000 of net worth and nearly $2,000 in monthly cash flow.
Don’t know about you, but $80,000 + $1,000/mo for 10 years turning into the above numbers sounds as if that investment ‘stood the test of time as acquired’. Most folks would take that outcome in a heartbeat compared to the results with which they’re dealing inside their 401s/IRAs.
The above example is an actual client with an actual property. It did indeed stand the test of time ‘as acquired’. The numbers are the numbers.
Still, what was the client’s actual experience?
The post bubble value of the fourplex is around $625,000 or so. The GSI is, give or take, around $51,000. His loan is gone. His cash flow, even professionally managed, is about $32,000 annually, almost $2,700 a month. This proves what Brent observed in his comment, and what I said to begin this one.
But my main point is this: Real estate absolutely DOES stand the test of time ‘as acquired’, especially when compared with the menu of investments available. The numbers tell the story, and can’t be refuted.
There’s nothing ‘unfortunate’ about it.
Hey Brent — Your point is well taken, as I mentioned in my reply to Peter.
Still, as stand alone analysis will prove, and even more so when compared to non-real estate investments, real estate proves itself over the long haul without increases in value or income.
Think about it. The example in my comment to Peter sported a vastly inferior price/rent ratio to what’s available in today’s market, and it still passed the test without imputing inflation. Imagine how well today’s purchases will look with their much more attractive ratios.