There are many schools of thought when it comes to investing in real estate for retirement. Two of them dominate.

One says you buy property and hold it forever. When you’ve saved up enough to buy another one you do — and hold IT forever. The idea is you allow rental income to pay off debt as quickly as possible, arriving at the point of a free and clear cash flow machine. Do this more than once and you have the basis for a nice retirement income stream. Or so the story goes.

The other says cash flow comes from the yield on either capital or equity in an asset. The larger the capital amount or equity in the asset, the larger the income in terms of dollars. The ‘yield’ itself is expressed in terms of a percentage. For example, 8%. This school says that since the yield is the same, more or less, for a larger figure or a smaller figure, why not arrive at retirement with the largest amount of capital and/or equity possible?

The ‘Buy & Hold’ school (BHS) gets you there. But in what condition, and how much cash flow relative to the ‘Capital Growth First’ school (CGF)?

Buy and Hold

That’s the short list, but you get the idea. Buy and Hold should be called Buy and Mold.

Capital Growth First

Again, that’s a short list. You can readily see the advantages.

Now let’s look at an example with some real numbers for illustration. Dan is a real guy. His real purpose in consulting me in my office was to get me to tell his son the buy & hold approach was the only way to go. 90 minutes later his son was smiling, and he was stunned at what I’d said. To this day I’m unsure of whether he was more surprised by WHAT I said or cuz I’d easily proven to his son his Dad’s way was the surest path to a life sentence, not retirement. Dramatic? Sure — but relatively true just the same.

“Dan”, 72, came into my office a several years ago — a real born again buy ‘n holder. His pride and joy was the fourplex he bought when he was in his 30’s, now free & clear, generating a net income of roughly $2,900 monthly. This is in addition to two other income sources — Social Security and a taxable annuity.

He’s paying significant taxes on the income from the annuity and the fourplex — neither of which is keepin’ up with the cost of living. He retired in 2005. He bought his fourplex in 1975. We both live in San Diego, so I’ll be using that market in this example. The principle works in any market — especially over the long haul.

He paid about $80,000 back then. Upon retirement the value was 8-10 times that. Where would he be today if he’d gone the capital growth route? So glad you asked. :)

The market would’ve told him to exchange his enlarged equity position in the first quarter or so of 1979. Having put 20% down, his equity at that point would’ve been around $100,000 — more than quintuple his originally invested capital. His cash flow for the period won’t be added into that, except for the paying of closing costs on his newly acquired exchange property(s).

He now owns roughly $400,000 in 2-4 unit properties. He’s conservative, so due to interest rates back then, he puts 25% down. He now waits for the next time the market will speak to him. This time it’ll be longer than four years, as the recession took its toll. Meanwhile, his properties are rented, with slightly increased rents over the long haul. The recovery hits around the end of 1983. He waits to be sure. Values again begin to rise. He waits. In early summer of 1988 he executes another tax deferred exchange with the following results.

Note: From roughly 1985 to the beginning of 1990 appreciation rates in SoCal were double digit, more or less depending what specific market. San Diego did well.

His exchangeable net equity at that point was approximately $275,000. Again, he chose to put 25% down on his exchange uplegs. (newly acquired props)

Let’s pause at this point to assess his capital growth rate. It’s been 13 years since he began with about $18,000 to close his first investment back in 1975. He now has $275,000. That’s an annual capital growth rate exclusive of tax benefits and cash flow of about 23% — a figure nobody with a three digit IQ would predict, but historically accurate nonetheless.

Anywho, he now owns about $1.1Mil dollars of property. It not only pays for itself, but cash flows — not heavily, but enough to make him happy. For the record, he does two things consistently along the way — one I recommend sometimes, and one on which I insist. He has way more than adequate cash reserves. I call it a Sominex Account, as when Murphy visits, you can still sleep at night.

The recommendation at this point is to apply a portion of the cash flow to the loan balance. Back then it was almost a built in practice for my clients, due to interest rates 2-4 points higher than today’s. It just made sense. It’s called keepin’ your eye on the ball, which in this case is growing the guy’s capital/equity safely over the long haul with retirement in mind.

It’s at this point the S & L Crisis hits San Diego like sledgehammer hits a thumbtack. It was beyond terrible. Not only did we experience what everyone everywhere else did, we had the added excitement of losing a couple huge employers overnight. Talk about both barrels of the shotgun goin’ off. Vacancy rates went from virtually nonexistent to 10-15%, sometimes more depending upon your location. Rents tumbled even more in some cases. Bottom line? This guy’s cash flow went from cool to break even faster than Mickey D’s makes a Happy Meal.

This forced a holding time of about a decade, more like 12 years. What’s an investor to do? Life happens. It certainly did back then. It seemed Murphy camped out in San Diego the whole time. Ever heard of O’Toole’s corollary to Murphy’s Law? “Murphy was an optimist.”

Dan executed another trade in the early spring of 2000. His portfolio by then had risen at a much more modest rate than in previous times. Real life. It’s now worth a total of $1.6Mil give or take. His net tradable equity is about $645,000. Relatively speaking, interest rates are a tad lower, but he insists on a 30% down payment, overruling my advice to try 20% this time. It’s his money, so guess how much he put down? He’d been made nervous by his experience of the early 1990’s. Um, me too.

When the smoke cleared he ended up with $2.15Mil in property. It wasn’t cash flowing much, give or take $25,000 a year. His retirement was, according to him, a long way off. He changed his mind about that later.

In fact, he decided in early 2004 to call me about setting in motion his transition from capital growth to cash flow — he wanted to retire no later than spring of 2005, about 30 years after buying his first investment property. After much analysis and a few meetings of the mind, Dan and I agreed — he needed a property outside of California. The prices were simply outa whack, a fact we both agreed on immediately. The search was on.

First we had to ascertain how much equity we had to trade — cue the Happy Feet music.

Seems his luck had turned around again. From his latest acquisitions in 2000 his portfolio had grown in value from $2.15Mil to the neighborhood of $4Mil. His net tradable equity was about $2.2Mil. Let’s take a pause for the cause here, OK?

Is that a white flag I see being waved by the buy & hold crowd? Just askin’…

We now didn’t care much about growth, as we wanted stable markets, not much prone to big swings either way historically. Idaho, Texas, New Mexico, Montana, Ohio and Kansas/Missouri ended up on the short list. We really liked KC though, which is where we landed. We ended up with about $5.5-5.7Mil in cash flow properties. The cash on cash return averaged around 7-10% conservatively. This resulted in a yearly cash flow, the majority of which was tax sheltered by the way, of $140-200,000 yearly.

For discussion sake, discount the low part of that range by half. You still end up with $70,000 a year at retirement — mostly sheltered — not in ancient properties with ever rising operating costs. Even discounting the low part of the income range by 50%, he still finds himself with just short of double the retirement income he did applying the buy and mold, um, hold school of thought.

Back to Dan’s current reality. He’s now retired on just under $36,000 a year from his fourplex. His SS income and annuity supplement this. However, as pointed out earlier, every single dollar of the annuity and the real estate is taxable. Ouch. Furthermore, he’s now discovered, much to his chagrin, that he didn’t retire, he just started serving a life sentence.

His option from the beginning was to end up with so much sheltered retirement income that his SS check would simply be spending money.

So I restate the principle: Worshiping at the altar of cash flow when capital growth is the appropriate approach will not have the happy ending you envision.

Next — How does the real estate investor manage to increase annual depreciation while simultaneously taking capital gains tax free along the way?

You can contact me at 619 889-7100. Merry Christmas! Have a good one.

It amazes me how many times investors opt for local properties when they have empirical evidence showing they’ll do way better in a region a state or two away. It just doesn’t make sense. This is especially true when technology keeps us so informed, usually in real time. Living in Iowa and investing in another state isn’t anything like it was 30 years ago. Back then an investor had the phone and snail mail.

BawldGuy Axiom: The most apathetic player in any Purposeful Plan for retirement is your capital. It cares not how, why, or where you use it.

Today an Atlanta based investor can own several small properties in Boise, Dallas/Fort Worth, Kansas City, pretty much wherever, and with email, faxes/scanning, and websites be very well informed in almost real time. Pictures can be sent, conferences with management can be held, and decisions can be made while you’re on the 12th tee for Heaven’s sake.

Don’t let your equity stagnate in a local market just because you feel so comfortable. Your money doesn’t know where it is. It doesn’t get cold or lonely. What it does is grow or stagnate. If you’re in a region giving you a lot of nothing right now (and the foreseeable future) give serious thought to getting your equity outa Dodge and into a more stable, growing region. Whether you’re growing or not you keep having birthdays, right? Right.

Now, I ask again. Do you want a local $10 or a far away $20? The money doesn’t care. Your retirement does. Call me and let’s talk about your retirement — 619 889-7100. Have a good one.

For the record, San Diego is not, by any stretch of the imagination, the Lone Ranger in this. It’s true for California in general. Look at where you live. Is the median price of a home affordable for the typical family? No? See, it’s a matter of degree. San Diego is ecstatic cuz their median home price is now under $400,000! What’s your region’s median price? If it’s much over $200,000 the regular folk are beginning to be crowded out. If that’s the case, your 1-4 unit residential income properties are already becoming less attractive.

Enter what appears to be a paradigm shift — in fact two .

Since we can all remember, real estate investing has been a local exercise. You decided to invest, picked an attractive location and property, then pulled the trigger. For regular folks the option of investing outa town, much less in other states, clearly wasn’t on their menu.

Paradigm Shift #1

San Diego is no longer a slam dunk region in which to invest, especially for retirement. The factors needed to produce a minimum acceptable capital growth rate are plainly out of the picture now. When a down payment of 35-45% is required to simply break even on a 1-4 unit property, it’s time to look elsewhere. Also, there’s the problem of an already aged (as in way to old) product. Pick whatever San Diego neighborhood you prefer, and the youngest properties will still be 20-30 years old. In fact, many of the areas traditionally most attractive to investors are old by definition. Why would you buy a 30-60 year old duplex, put 35% down, then have operating expenses higher than the national norm due to age? Also, and this is crucial, the price to income ratio, regardless of age, is vastly inferior to many regions with better economic futures.

For instance, Boise, Austin, Dallas/Fort Worth MetroPlex, Kansas City, and a few other regions offer much younger (sometimes new) properties for 50-65% or so of San Diego’s (Or say, Palo Alto) prices — but for about the same rental income.

BawldGuy Axiom: When analysis clearly indicates one property, or one region is inferior to another, either believe your analysis or ask yourself why you did the numbers in the first place. The facts are the facts.

Paradigm Shift #2

Just as the world is much smaller than it was 50 years ago, the same is now true when it comes to buying and selling real estate. Real estate investors can now buy, sell, refinance, and exchange real estate in multiple states without leaving their living rooms. It’s a matter of understanding what’s possible, what’s available now on your menu. Once you grasp the potential you have at your disposal, your horizons will expand very positively.

BawldGuy Takeaway: A real estate investor’s insistence on remaining in their own relatively expensive backyard, is now an inferior option when compared to newly available alternatives around the country. You needn’t be ‘area bound’ any longer. Your menu has expanded.

Give me a call at 619 889-7100 or email me. Together we’ll figure out what your potential is. Have a good one.

There are many areas like San Diego, where many of these calls originate. When duplexes are still selling for $300-450,000 with Net Operating Incomes (NOI) of $15,000 or less, the numbers simply don’t work for 90% of the investors out there. When it still requires 35% down just to break even every month, folks tend to look elsewhere — especially these days. There are several pockets around the country where a 20-25% down payment will yield positive cash flow from Day 1. Ironically, those alternative markets are more likely than not to offer better relative locations along with higher quality tenants to boot.

Two of those regions, broadly speaking, are Texas and Idaho. Had a conversation today with my Boise Team Captain, who gave a current example of what’s now available there. A 2 year old fourplex for $300,000 (maybe less) with annual gross scheduled income (GSI) of about $31,000. That would translate, give or take, to roughly $18-20,000 in NOI annually. How does that hit your bottom line?

At 20% down it barely cash flows, and with 25% down it cash flows $1-200 monthly. That would include vacancies, operating expenses (including professional local management) and debt service. Let’s compare that to someone in San Diego who owns a couple debt free duplexes. Their combined value is now around $900,000 — they’re well located and kept up nicely. Their combined NOI is now running around $37,500 — which is also their annual cash flow. It’s not sheltered any longer, as their depreciation ran out long ago — so that’s a pre-tax figure — not a good thing.

If they were to get rid of those in a 1031 exchange, the net equity generated would be approximately $800-825,000 — depending upon any required repair work, pest control, etc. Let’s use the smaller figure, alright?

Let’s say they stick to their guns, and don’t borrow any portion of the purchase prices on the properties to be newly acquired. Often that’s a mistake, but let’s talk about that some other time. They could easily afford a couple very well located Texas duplexes for under $500,000 total. They would then buy a Boise fourplex for $295,000. The Texas properties would be new, the Boise fourplex would be 1-5 years old. How would this shake out for the investor?

Their current cash flow is running at around $37,500 a year — again, pre-tax. The younger of those two duplexes was built in 1962. The operating expenses are gonna keep rising, so they better hope the income keeps up. Of course, that’s gonna be harder each year, as the units get older and older.

The two Texas duplexes will net them about $34,000 annually. The Boise fourplex will kick in another $18,000 or more. That’s a combined $52,000 a year in income compared to their present figure of $37,500 — an increase over $1,000 a month. Another way to look at it is as a percentage increase of over 35% in their annual income! For most folks this isn’t chicken feed — it’s a huge improvement in their potential day to day lifestyle.

As time marches on, if they remain in San Diego, or wherever their units are, the money required to make them viable will increase to the point of significantly diminishing returns. This isn’t news to them, cuz they’ve been putting that thought out of their minds for quite some time now. They know exactly what I’m talking about. This proposed move is a no-brainer not only from a cash flow standpoint, but from a future operating expense point of view.

Properties either new or nearly new, simply don’t cost as much to maintain. Think about it. 20 years from now the Texas/Boise properties STILL won’t be half as old as your current rentals are today. Does that stop ya cold, or what?

But, what if you borrow money to buy the new stuff? Glad you asked.

Being fairly conservative, what if you put about 1/3 down on 7 Texas duplexes and a couple Boise fourplexes? This would take less than your whole 800,000+ net equity. Your NOI on all that property would amount to about $155,000 annually. Your total debt service (at 6.25% interest) would amount to about $42,000 or so.

Here’s the really happy ending.

Your depreciation would go from a big fat ZERO to about $50-55,000 a year. Big deal you say? Here’s the big deal.

You would’ve gone from cash flowing $37,500/yr without a cent of tax shelter — to $42,000/yr TOTALLY tax sheltered. In California, the taxes, fed/state, would reduce the cash flow hugely — probably in the neighborhood of at least a combined 25% or so. That’s on top of your ever dwindling net operating income due to consistently increasing operating expenses, not to mention repairs and outright replacements.

Let’s now compare your after tax income, you know, the only income you can actually spend? Now it’s about $28,000/yr. Doing the exchange will increase that to $42,000/yr. This doesn’t take into account the decreasing cash flow from San Diego properties due to ever increasing operating costs as properties age mentioned above. Notice how I keep pickin’ that scab?

These are the cold hard facts. So, tell me — doesn’t it make sense to make a move? This decision falls into the category of no-brainer. Oh, by the way, the newly acquired annual tax shelter now allows your cash flow to grow by roughly 15-20% before you’d be paying taxes on even $1. In my office we call that the result of Purposeful Planning. These things don’t just happen — they’re made to happen through prudent Planning followed by experienced implementation.

If you own properties in relatively higher priced areas like San Diego, with little or no debt, and have already retired or are about to, this may be a fit for you. Look at the numbers, run them yourself, then ask the same question I have: Why wouldn’t you make this move?

Please, call me at 619 889-7100, as I’d love to talk with you about your situation. You can also choose to go through the Contact BawldGuy button up top. Have a good one.

How could things be any better? The answer? Easy.

Let’s do this by employing just a little Socratic questioning.

What would have happened if you’d exchanged your triplex at the appropriate time for twice the property?

Would you have been better off with little or no cash flow but, with properties in a growth region still rising?

Leaving Socrates for a moment…..

If you had executed the above proposed exchange when appropriate, and your newly acquired units went up in the intervening time, (which they would have) how much more would you be worth? Even if they didn’t, you improved the location of your portfolio significantly. Those who took their capital from hard hit regions (usually high priced too), to more stable and emerging growth regions, are now far better positioned — even with the correction — than if they hadn’t gotten outa Dodge when they did.

So I ask again, how much more would you be worth?

Might the answer be easily enough to bring on regret? Or, put another way — far better than now, cuz you stayed in San Diego?

Back to Socrates for a minute or so…..

Now that the San Diego market is dead in the water for the time being (as it relates to investment property), what should you do with those units? Whatever they’re worth today is significantly less than they were say, two years ago when I begged you to exchange to a better home for your equity. How will the market react to your three units selling for far more than they’re worth today? Will anyone even want them? Heck, if they’re in San Diego, they’re currently worth between $500-700K.

Would you, in your right mind, consider paying considerably more than that in 5-10 years? No? Neither will most of the other investors in their right minds. And if your next argument is they can’t go any higher, then tell me again — why do you keep them? Keeping these units is a losing proposition any way you look at it. Wait a minute here — what were we talking about in the first place? Oh, right. So, what’s a common mistake real estate investors make?

Here’s a sobering thought: Income property is all pretty much local now. Live in Palo Alto and really like those fourplex prices in Boise, Texas, Kansas City? Go ahead, buy three. That said, and it happens daily, compare your units to what’s getting’ you all excited. Yours are older than Moses’ first pull toy. Theirs? Um, aren’t. Their fourplexes are often less than your duplex — so tell me again why they’re gonna rush to San Diego, or wherever to buy your stuff? Really?

Folks fall in love with cash flow when they’re in desperate need of capital growth.

The irony is this usually happens when they are making more money on their job than ever. This distracts them from keeping their eye on the ball that matters: Capital Growth. This distraction results in the loss of at least six figures and sometimes, when taken over several years, a million bucks.

I’ve seen local investors literally lose significantly more than a million dollars as they watched incredible opportunities go by them. It wasn’t that they didn’t want growth. It wasn’t that they were unaware of their need for growth. But man, that cash flow.

It’s like a drug — a drug that pays you to get high every month. And how do you beat that? I’ll tell you how.

Imagine keeping those San Diego units (or units in any other area with high prices) for another several years. You’ve already lost hundreds of thousands by keeping them way too long. If you keep them another five years you’re just compounding your losses.

But you thought compounding was a good thing.

It is when opportunity isn’t ignored in favor of the addiction to cash flow. Think about what’s really happening. You’re opting for $5-10K in annual cash flow in place of capital growth which would eclipse that paltry figure like $100 eclipses $5. Do you really prefer monthly spending money now over a fantastic monthly income in retirement? Of course you don’t.

Here’s how you correct that mistake. Get your units ready to sell. Put them on the market. Move your net equity to a solid and secure growth market. Watch it grow. Imagine a retirement rich in income and freedom of movement. Look back at what your retirement would have been like if you hadn’t experienced the capital growth the last 10-15 years before you quit working.

Stop looking — it’s not pretty.

Quit your cash flow addiction cold turkey. ‘Rehab’ doesn’t take that long and it’s very profitable. And I promise it won’t hurt.

Chasing cash flow when you don’t need it at the expense of vastly superior capital growth is a huge, dream-killing mistake. Many investors have retired with what they thought was a nice income. They had no idea that income could have been three to six times as much. But it’s too late for them.

Consider this an intervention. Kick your addiction to cash flow. It’s literally costing you hundreds of thousands of dollars.

I have just two more words for you.

BawldGuy Rehab.

Be the Captain of your own rehab team. Call me at 619 889-7100 and we’ll get it started. Have a good one.

Here are Another Investor’s Devil’s Advocate positions, followed by my thoughts. For the record, AI is one smart cookie. A very experienced investor with a keen analytical mind. Talking with AI is one of my new favorite things to do. So, here we go — AI’s point by point Devil’s advocate position — and my answers.

1. People want to live in SD.

True enough, but so what? In the 30+ years I’ve been an investment broker here, the tenants you describe simply don’t rent 2-4 unit props as a rule, or apts. either. They rent houses. Even at current prices, a well located SFR will sport pmts of $1,800 monthly. That’s before any expenses or vacancies. Buying cheaper homes for the more attractive price/rent ratio will be in relatively inferior locations. It’s surely a judgment call, but I pass.

2.. The best jobs attracting talented people are in SD.

That’s been true since Moses’ son died. Still, because of the dearth of residential development the last 20+ years here, the price/rent ratios literally forced me to take my company and its business out of state. The Texas economy is no longer hostage to energy. This was recently illustrated when prices went into a free fall from $140 to $40 in the blink of an eye. Our Texas properties either felt nothing, or lost the occasional oil related tenant, who was replaced in a timely manner with a quality tenant — at the same rent or higher. That argument is DOA.

3. Supply is constrained because there’s no more land in SD. That may be the biggest myth in SD real estate. It’s been a mantra for a long time, even as huge developments keep coming on line. The low supply of residential income property is indeed a fact of life here, but not for the reason you put forth. It’s been an economic decision by the builder/developers, plain and simple. The same land will hold apartments, condos/townhouses, duplexes/fourplexes, or single family homes. Developers opt for the largest profit, go figure. If the rents are so high vs price, and the quality of tenant is so attractive, why have they universally decided against building residential income? Their choices speak for themselves. It’s not a scarcity of land. In fact, pretty much the only residential income built in the last decade or so has been either luxury, or what I call ’super luxury’ apartments. The rents on them have been in the stratosphere, which is the only reason they were built in the first place — which conveniently illustrates my point.

4. Future value. If you hold coastal CA fourplex ’till it crumbles you’ll have development opportunity.

For most investors that’s either a mirage, a pipe dream, or the impossible dream. ‘Coastal’ properties are simply unaffordable to at least 90% of real estate investors. The days when 20% down payments made sense for a coastal fourplex are the poster child for ‘Death on a Cracker’. If you’re investing for retirement AND you can afford the coast, so many stars must align for that plan to come together, it’s far to big a risk. Capital growth is the name of the game for the first 7-8 innings of any Purposeful Plan which has retirement as its Point B. Huge down payments on ancient buildings make no sense, and the risk is not justified when compared to what’s available elsewhere.

5. Marketablity — relying on the infusion of Asian investors/capital for future sales.

As an investor banking on real estate investments in income producing property, does one really wanna rely on some future hope of foreign capital to still be around and interested years, maybe decades down the road? Talk about relying on an incredibly narrow piece of a skinny pie. I remember when Japan was gonna take over the world economically. How’s that workin’ out for ‘em lately? No, I prefer to rely on the fundamentals of supply/demand, reasonably predictable (is there such an animal?) markets, and large Sominex Accounts.

“For these reasons, prices should increase faster here (SD) in the future as they have in the past.” Another Investor

Unlike Phoenix, Boise, most of Texas, and other regions, SD hasn’t been building ’starter’ homes in any real volume. In fact we had our first ‘tract’ of million dollar homes come on line not that long ago in the North County area. Gimme a break. Our median home price, though battered into submission, is still in the mid-300’s. Compare that to the above mentioned locales. The Phoenix market is hot, as long as you’re talkin’ about homes under $100,000 — hardly comparable to San Diego. In Boise I consistently track the 2-4 unit market. Their present price/rent ratio is roughly comparable to what we’re consistently able to find in Texas. 20% down to 30 year fixed rate loans will yield solid capital growth while also generating positive cash flow. What a concept. Still, we’ll wait for Boise to settle down.

If prices do go up faster in San Diego in the future, it’ll only be repeating history. I took Brown and Brown outa SD precisely because of the relatively high appreciation rates, which I realize is more than a tad paradoxical. But think about it. Regardless of rising rents, historically low vacancy rates, and the predictably skewed supply/demand factor, the ultimate result down the road is a price/rent ratio that’s more of a punch line to a bad joke, than something about which to brag.

But most of that begs the question I raised in the post: Given a ‘dead heat’ in the analysis of all properties, why would an investor choose predictably increasing operating expenses, future if not current functional obsolescence, and/or capital expenditures?

As you said AI: “Your capital growth may not be best served by buying properties here. You gotta sit down and thoroughly review the numbers. Cash flow, equity build-up, and appreciation all have to be considered, and when they are, you may be surprised at what will grow your net worth the fastest.”

Which is exactly what I was trying to say. But the local biases of investors seem to either cloud or completely overlook the ‘black widows’ in the equation. I love your comments, and appreciate you taking the time to act as Devil’s Advocate. Stellar Job, AI.

Speaking of equations, let’s get one goin’ for you that has a magnificently abundant retirement to the right of the “=” sign. We’ll talk as soon as you call me at 619 889-7100 or email me using the Contact BawldGuy button up top. Have a good one.

Tonight’s post is meant to be a reminder. It’s nothing earth shaking, and I’ll probably wonder a bit. It needs to be said during buyers’ markets. Understand the underlying truth to the message though. There’s nothing worse than buying a stud horse, then learning too late you really have a pig in a poke.

In markets like we’re currently enmeshed (love that word), the siren call of what the investor might perceive as monster discounts are often more like a strong riptide. The warm inviting water, the rollin’ waves, and pretty soon yer 300 yards from shore with no earthly idea how you got there or why — or how to get back to shore. When you head into an area offering those kinda discounts it’s crucial to take a step back to access what you’re really lookin’ at and where it is — and what the fundamentals are screamin’ in a loud and clear voice.

In most regions we’ve seen, there are pockets, often several more or less contiguous neighborhoods seemingly immune to this market correction. That’s true in San Diego. One example is where my aunt ‘n uncle live, in La Costa. The correction has made only a courtesy dent in their home’s value. Not so in most other areas in the county.

San Diego’s no different than most other cities/counties around the country. However, I’ve learned most folks are unaware all areas haven’t been treated equally. It’s my contention when folks find out which areas have been hardest hit, they head that way with a gleam in their eye.

They don’t stop to ponder the why’s and wherefores though, which so many times can lead them into the aforementioned riptide — real estate version.

Paradoxically, time after time it makes sense to sidestep the property with the ‘Is that a misprint?’ discount, and satiate your lust for bargains with the simpler, less titillating wicked cool discount. This is more frequently true than most people realize. It may be especially super turbo-charged true when today’s data is factored in. Think about it. Though new urban legends are being established almost daily in places like Michigan, what with homes being bought for a buck and the like, places like San Diego, Austin, Boise, Kansas City, Phoenix, and probably where you live, have their share of ‘deals of the century’. But are they?

If they were, why are there so many of ‘em? This is much like the draw to relatively high capitalization rates in any particular area. Like moths to a flame, investors can’t resist double digit cap rates. That includes me. However, since I realize why in most cases the rate is so attractive, I steer clear. Valuable income property sells at a ‘can’t be beat’ cap rate ‘cuz either the area, or the property sucks like Dyson. That’s cool for a Dyson, but not for the new owner of the newly acquired piece of garbage.

Unless you have a buyer ready to go at a much higher price than you’re payin’, or the area is a slam dunk when it comes to location, or you have solid data showing it’s in the ‘can’t miss’ path of growth — take a pass. There are other exceptions of course, but you get the drift. Grandma wasn’t lyin’.

Horrible tenants, increased expenses, unplanned negative cash flow, all because of the deal you couldn’t resist. Over the years when buyers’ markets make their cyclical appearances, I’ve seen way more investors lose money, if not property, as a direct consequence of a deal they once described as smokin’. Your retirement is far too important to risk finite capital on properties blinding you with their incredibly low prices.

And no, I’m not saying you can’t find deals our there of mythic proportions. I’ve seen ‘em. But contrary to what many investors believe, they don’t grow on trees. You’ll find that those who’re talkin’ about ‘incredible’ deals fall into two broad categories. Those who haven’t yet figured out how badly they’ve screwed the pooch, and those who in fact know what they’re doing. The latter is in short supply. I predict there will be a rebound a few years from now. It will be folks who bought real estate at what they thought was half off — but turned out to have discounted their retirement income instead.

Not all low prices are stellar values. Most are just cheap crap on a cracker. Figuring the difference between the two on your own, ain’t recommended. Just sayin’.

Hey, I have an idea. Let’s talk. I know where there’s some pretty nice deals. Have a good one.

I’ve never been one of those real estate cheerleader types. You know the ones, there’s never a bad time to buy real estate, yadda yadda. When the market’s sucky that’s what I call it. You can’t go through as many bad markets as I have and do otherwise.

Those who’ve been buying real estate investment property lately are gonna feel pretty good about themselves a few years down the road. Even back in the post recession years of ‘74-75, or after the S & L Crisis resolved itself, the perfect storm we see today never materialized. The missing link? The permanent loss of historically reliable investment regions like say, the entire west coast for instance. Or how ’bout the emergence of new ‘destination’ regions in Texas, (Dallas/Fort Worth) Idaho, (Boise) and Kansas City to name a few? But the real difference is the long term fixed interest rates available for investors.

Just to be consistent and on point for my San Diego readers — Get Outa Dodge — and get out now.

Thanks — I needed that. Now back to our regularly scheduled post.

First Sam Zell says what I’ve been saying for months. The housing market isn’t nearly in as bad a shape as mainstream media wants us all to believe. In fact he said a recovery would begin this spring. I think he’s pretty aggressively optimistic to say that, but he’s the billionaire, so I’ll let time tell us if my 3rd to 4th quarter scenario is correct or not.

This was followed shortly thereafter by the markets in Texas I like so much experiencing incredible real estate growth, even more impressive population growth, and a precipitous drop in vacancy rates. Oh, and did I mention the simultaneous increase in apartment construction there? Oh yeah — good times.

This week two giants also decided it’s time to buy. As David Stejkowski duly noted, both Shorenstein and Blackstone have raised prodigious amounts of capital for the acquisition of billions in commercial real estate.

And here’s a gift for San Diego readers who are owners of local income property. Allow a short preface. Your properties are worth significantly less today than they were three years ago. Yet, if you had the choice, you wouldn’t buy your own property for even today’s value. I’ve asked that question of a couple dozen local real estate investors, and with two exceptions, they all admitted they wouldn’t think of buying their own properties again — even at today’s discounted values.

Read this quote from Mr. Shorenstein and think of what you should be doing with your San Diego income property. (Hint: Get Outa Dodge)

Shorenstein, son of company founder Walter Shorenstein, told the New York Times in 1995: “If somebody is willing to pay a lot more than I would pay, then we’re a seller.”

That quote was taken out of an article published two days ago in the San Francisco Chronicle, entitled — Waiting for real estate bounce. Read the article to learn how Shorenstein is thinking about this market.

Bloomberg tells us about Blackstone’s $10.9 Billion in today’s update. Blackstone Group for those reading the name for the first time, is the world’s largest leveraged buyout fund.

So, there you have it. Sam Zell — Shorenstein Co. — Blackstone Group — all saying the window of opportunity is upon us.

Put that together with what Wall Street has been saying, especially today, and one could conclude the Bulls are about to make their final move against the staggering Bears. The jury is still, of course, out. But I’ve been saying in these pages for the last 90 days or so, that this is the final skirmish between the two. It appears to me the Bulls have the Bears in the corner hoping for a last minute miracle.

Finally, without wavering, I’ve been backing Fed Chairman Bernanke since Day 1. He’s made the correct moves, all the while listening to critics who wanted him to do their bidding on their schedule. He’s done it his way. We won’t know for awhile, but it’s my contention we may look back at the first 92 days of 2008 as the period the good guys triumphed, led by Bernanke.

I’d give you a much clearer picture, but since the crystal ball hasn’t come back from the shop, this’ll have to do. But, just before I put it in the shop, I looked to see what might be next for the general lending outlook.

BawldGuy Prediction: On or before July 4th, real estate loan underwriters and their bosses will have rolled the clock back to basic sanity. Meaning? Loan programs now unavailable will reappear. Virtually impossible underwriting requirements will quietly be retired. Lenders will wake up, realize it says L-E-N-D-E-R on their foreheads. The next thought will be how little they’ve been acting like a lender. Then they will find ways to lend.

Why?

BawldGuy Axiom: Lenders lend.

Why?

Here’s the short version.

Your half million dollar duplex has monthly rents these days of $1,800-2,500 or so. For easily less than half the value of your property, you can own a duplex (and brand new, not ancient like yours) with monthly income of $2,000-2,400. Does yours offer 3 bedrooms and 2 baths? And an attached 2-Car garage? In a neighborhood you’d allow your 70-something mom live in by herself?

I’d put my mom into these properties to live alone. In Phoenix they started calling it BawldGuy’s Mom Rule. If I wouldn’t put Mom there, don’t tell me about the property. That policy cut out a whole lot of useless conversations.

If your small 1-4 unit residential income property has a net equity of $60-500,000 you’ll be able to move that equity, tax deferred no doubt, to areas in the country allowing for leverage San Diegans can only experience through time travel, or Grandpa’s stories. Your capital growth rate will soar. Oh, you’d rather have a whole bunch of cash flow? How ’bout doubling to quintupling your current cash flow?

San Diego income properties simply cannot compete with other regions. It’s not possible. And if your Plan calls for you to sell your San Diego stuff in the next 3-10 years, here’s something to think about.

If they’d be ah, ill advised to buy your property today, at it’s lowest value in quite some time, how silly is it gonna be for them to buy it in another decade? It’s ancient now, right? If it’s value goes up in the next 10 years do you believe they’ll pay even more? Really? It’s my professional opinion they won’t — even if they were all the colors of the rainbow.

The bottom line is this: We can get you Outa Dodge — significantly increase your capital growth rate and/or cash flow — plus your tax shelter — while dramatically improving your chances for a magnificently abundant retirement.

Let’s continue with an example of what’s possible.

Let’s use your duplex mentioned above, with loans totaling $250,000 — here’s what you can do.

Your net proceeds from a sale will be more than you might expect because of our new business model. Instead of having sales/closing costs of around $40,000 or so, they’ll be far less. Brown and Brown no longer takes a listing commission of 3%. Tell me that isn’t cool. More on the details later. (Or, here’s an idea — you can contact us and we’ll give you the scoop way before everyone else finds out.)

Even with the normal brokerage fees your net proceeds from a sale will be about $210,000 +/-. With that capital we can tax defer you into $1-1.5 Million of very well located property — brand new too. And that’s not all, not by a long shot. The problem is, most folks don’t know what to do, where to do it, or who can help them get it done. In what direction should they go?

You’ll increase your annual depreciation by over $40,000 — not an insignificant improvement.

The difference is we’ll take your equity from here to there for a whole bunch less — and with way better marketing. We suspect our new model will end up costing our San Diego sellers about 75-90% less on the listing side of the commission. There’s nothing we can do with the buyer’s agent’s cut.

I mentioned marketing. We think those who have been selling small income props have been getting short changed on the quality of marketing. This has resulted in most of these props not selling, or taking forever. We’re gonna change all that — or at least that’s what it says right here.

Back to saving money.

This will result in a savings of well over $10,000 per property at the half million price range.

We’re serious about this.

Are you serious about your retirement plans? Are you seriously counting on San Diego to yield the retirement income you’ll need? If you could safely double, triple, quintuple your retirement income — never mind, silly question.

What are you waiting for? Contact me — we’ll sit down and let you know what’s possible. Most San Diego property owners can make surprisingly significant improvements in their capital growth rate, cash flow, tax shelter, and retirement income.

We’ll be standing by — there’s a pretty convenient Contact BawldGuy button on the upper right side of this page. Says ‘Contact BawldGuy’ and everything.

It works too.

What would motivate you to trigger a tax deferred (1031) exchange into another region in another state? I promise to give you more than one reason.

We’ll get back to that.

There are a couple reasons, generically speaking, motivating folks to invest or execute a tax deferred exchange. One is to end up with more money than they have now. The other is to create more cash flow (income) than they have now. Sophisticated stuff, eh?

The people reasons are infinite, and for the most part absolutely appropriate. Obviously whether for growth or income, retirement is the #1 reason people invest in real estate. The end game is always the same — the highest retirement income possible. They also want to easily pay for their kids’ education. Or be able to take care of their parents if necessary.

Let’s take a mini-detour here for a BawldGuy Axiom: More is better than less. Sooner is better than later. More, sooner, is much mo’ better.

Paradox: Sometimes selling for less, means ending up with more.

Focus on what’s happening now. Loan underwriting has been tightened. (New candidate for understatement of the year.) Selling real estate has become more difficult, or as we’ve discovered in some markets, more than difficult. Prices have gone down — more or less in different markets. The plain truth is, your property isn’t worth what it used to be. Usually though, it’s just not that big of a deal.

Let me show you why.

Investors who wish to sell in this market think denial is a valuable trait. They don’t respond well to the naked facts of today’s market reality. Sometimes they’re even unkind. That’s because maybe they haven’t thought this market all the way through.

Now it’s time to ‘get back to that’.

I’ve been through this kinda market a few times before. You know, the whole been there, done that thing. The script doesn’t change. The scenery is different, but that’s about it. This correction is worse than ‘74-’75 — but not as ugly as the early ’90’s. Many, including Warren Buffet most recently, have made the observation that the early ’80’s were worse. It’s not close, at least so far.

There are some real perks to a down market for those in the right position, and armed with a well thought out Purposeful Plan.

Let’s talk about what the right position is.

The rightest position is having a boatload of cash burning a hole in your Levi’s. Next best? An investment property(s) with sufficient equity to do some serious damage. The next in line is your home with lots of accessible and affordable equity. Affordable meaning, of course, you can make the potentially increased monthly payments that could result when taking money out.

For now, we’ll bypass 1 & 3. Both involve showing up as the Buyer With Cash, which in this market, doesn’t exactly make you a pariah. Instead, let’s talk about the investors holding income property with a good bit of equity.

Let’s not get caught in the trap in which amateurs sometimes find themselves. They’ll use a formula found in some real estate investment book, telling them to make their move once their equity reaches a particular percentage of the property’s value. For instance, 40%. That figure might work well in one region, while it’s seriously way late in another.

There are too many factors involved to handcuff yourself to impotent one size fits all templates. Numbers may or may not work the same in different regions. Kingman, Arizona ain’t Mansfield, Texas. Southern California isn’t Boise, and Kansas City is just not comparable to Phoenix.

This is where the pro comes in. I’m in San Diego. Let’s say you’re in, ah, Kansas City. A duplex in San Diego goes these days for $450-700,000 give or take. In Kansas City you could probably go to Duplexes R Us and get 2-3 duplexes for that much. So if you have a SD duplex worth $600,000 with only $200,000 gross equity, the average owner would probably role their eyes at the thought of exchanging their equity elsewhere — especially in this market.

Looking more closely, we see the net equity of the SD duplex is a little over $150,000. If that were a brand new KC duplex, with a value of $235,000 and the same percentage equity to value — the net would be far less, around $60,000.

Let’s also agree the prices for both properties are easily less than they’d have received a couple years ago. Hence, the anxiety. “Why should I exchange, losing money in the process?” Of course, that’s a false statement based upon a false premise. (Again, more on that one later.) Because your value has fallen from its high point, doesn’t mean you’ve lost money. It simply means your crystal ball failed you — again — not telling you the exact day the damn thing was worth the most.

What’s the most relevant question at this point?

Easy.

Will a tax deferred (1031) exchange result in your position being significantly improved? Yes? or No? If it’s not a no-brainer — don’t do it.

In many of today’s growth regions an exchanger can better their position — sometimes more than significantly. The SD investor? (Or, just for giggles, how ’bout the Palo Alto investor? Their prices make San Diego look like the Dollar Store.) He could easily go from selling a single, 40 year old duplex to owning nearly $1.5 Million in new or nearly new properties. The KC guy? His net wasn’t nearly as much, but given the same opportunity, they could just as easily acquire triple (or almost) the value of what they left — really. No kiddin’.

Still, I hear the whispering.

That is pretty cool, but don’t you understand, we’re taking a ‘loss’ here. Why do that?

I’ll let the ‘loss’ propaganda pass. You don’t think anyone’s actually feeling sorry for you, do you?

In today’s markets, we’re negotiating deals for our clients, some as buyers, some as exchangers, saving them literally thousands of dollars. In some cases, this is not only in property value discounts, but upfront money too. Money in various costs and immediately require capital expenditures. Even when the deal is fine without a discount, our clients are miles ahead of where they started.

Huh? What’d he just say?

Either no closing costs, or 60-80% reduced closing costs.

Other credits based upon the property and lender.

In the most recent transactions — most recent meaning they haven’t even closed escrow yet — the average upfront savings (credits/upgrades) per client turns out to be over $15,000! Add to that the properties were bought as duplexes but will be sold as two separate units, and what have you discovered?

Again — easy.

All that money you ‘lost’? You made it all back and more simply by closing escrow on your exchange.

We won’t even talk about the next 10 years, except to make one observation. The difference in capital growth and additional cash flow over that period of time, will be easily measured in hundreds of thousands, if not in excess of a million dollars. It’s my intention you take that statement literally. Your choices could be crying in your beer about ‘what could have been’, or breakin’ out the champagne to celebrate your great judgment.

In the case of the SD investor, who thought they’d lost over $50,000? They gained $60,000 by their ability to buy with almost no closing costs, loan points, or paying for various upgrades. I’ll grant you it sounds pretty mundane, so I’ll make you a deal. If you don’t want the savings, pass ‘em on to me.

So far, I’ve already had a client who was able to purchase an extra ‘bonus’ property as a direct result of all the savings on his earlier purchases. That extra property will result in at least an additional half a million bucks over the next 15-20 years. Again — please take that statement literally.

Seriously, most of the properties available today, can be acquired with prudent leverage — as were the properties mentioned above. In fact, each of those properties, very conservatively speaking, were put into escrow for our clients with low downs, and fixed rate loans. They all break even or better.

Now, I double-dog dare you to tell me again about how much you’ll lose by selling your properties?

If you come here regularly, you know I like to have fun while passing on my experience and expertise.

Today was no different, but there’s a serious lesson to learn here.

Even without gaining any of the advantages shown so far, you can still sell for far less than you think your property’s worth and come out way ahead.

Think about what happens when you triple the value of what your equity controls. In SD you’re going up what, 0% a year lately? It’s far more likely decreased in value, and you’re acutely aware of that fact. Imagine our guy with the SD duplex, selling for $600,000 — ending up with nearly $1.5 Million in property. At only 3.5% appreciation the first year of ownership, he’ll have made more than $52,000 in increased value. Surveys show that beats 0% on $600,000 11 times outa 10.

Furthermore, they’re now in a much more flexible position, as instead of one property, they now have six. They’re all new. Their tax shelter has nearly quadrupled. Their capital growth rate has almost shot off the chart. And please folks, remember that capital growth, NOT appreciation is the name of the game.

Oh, and by the way — their yearly after tax cash flow has gone from about $5,000 to $15,000.

Not exchanging out of areas like California (Which includes you, Palo Alto.), Arizona, the northwest, and almost the entire midwest, makes no sense.

This is the kinda market where selling for a so called loss is actually the most profitable thing you could do. Really. Moving your equity, when it’s (And therefore, you too.) essentially mired in quicksand, puts your Purposeful Plan back into the game. Until you, as a real estate investor, realize this, your Plan will remain on hold. (stuck?) Meanwhile, your life isn’t on hold, and more importantly, well — tick tock. Another year, another birthday.

Time stops for nobody.

Don’t be captive to the whims of the market. Instead, turn this market into your personal capital growth machine. Learn how to win by selling for what everyone else thinks is a loss.

In this market you can truly lose your way into a far superior position.

Try it, you’ll like it. Be dumb like a fox.