Investors look at the big picture, then drill down in order to come as close as possible to comparing apples and apples. Factors like location, income/price ratio, tenant quality, current and potential trends, property age, demographics, and many more play huge roles in the decision making process.

Does this describe your region? It’s a description of the vast majority of San Diego’s income property.

San Diego still sports small income properties (1-4 units) with prices reflecting price/rent ratios of 10-13 or worse. Strike 1.

Typically the age of these properties range from 20 on the low side (rare indeed), to over 50 years old. This just about guarantees future if not current functional obsolescence, significantly higher operating expenses, and/or all three ’till the investor bites the bullet, spending the boatload of capital it’ll take to provide the remedies. Strike 2.

Trends in San Diego since the mid-1980’s show a distinct preference for builders/developers putting up owner occupied housing, not duplexes/fourplexes or apartment complexes. The analysis is what drives their decisions, and regardless of the current downturn and impending recovery (don’t read anything definite in the word ‘impending’ please), I don’t see the numbers favoring a change in outlook any time soon. Strike 3.

The depreciable base of San Diego property is usually much lower than the competition in outa state regions. Why? Simple, a 40 year old property will make it difficult for the investor to claim a low percentage of land value to acquisition price. The higher percentage applied to the ‘improvement value’ of a property, the higher the annual tax shelter. Strike 4.

I could go on, but for to what end? This is why I’m willing to help local folks who simply can’t be talked out of their local bias, but insist they understand they’re buying what I rate as B-List product. It wasn’t very long ago that I wouldn’t even entertain the idea of being a party to San Diego property acquisition. As I said earlier, San Diego ain’t the Lone Ranger when it comes to these points. If your area meets some or all of the ‘downside factors’ mentioned above, you might wanna start treating that denial you’re harboring.

It’s down the road, when you’re ready to make the next move that the unsavory consequences of your current acquisitions will come home to roost. Sidestep those woes today by opting to overcome your biases for local B-List product. There’s plenty of A-List stuff to go around — really.

‘Nuff said.

Ready to get started — or to make your next move? Maybe you’re wondering if a move is even in your best interest at this point. Find out by talking with me. 619 889-7100 will find me every time just as an email will. 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.

Memories are short, aren’t they?

In the best of times cash reserves are a must. There can be no debate on this point. Brown and Brown has been touting this from every mountain top we can find. If reserves are a must in the best of times, how critical are they today? Right, don’t answer — it’s a rhetorical question.

Our company policy is very clearly stated: No Sominex Account means we can’t work with you.

Why such a ‘take no prisoners‘ policy? I’ve lost property myself, and it ain’t fun.

The question arises — how much in cash reserves do I need? That depends. But here’s the rule you surely want to follow: Error on the side of too much, not too little. It’s just common sense.

If you’re a big wage earner and don’t live up to your eyeballs you may not need as much as others. Still, Murphy knows where all of us live, and sooner or later it’ll be your turn in his barrel. Count on it, as nobody escapes The Barrel.

If we could prepare for these random attacks of what Grandma used to call real life, I wouldn’t be recommending you harbor such generous cash reserves. See how it works? Preparation isn’t possible, hence the reserves.

Also, if you’re looking to get a deal on some of the builder inventory around the country, you should pad your Sominex Account. Here’s why.

Though sometimes builder properties come with refrigerators, window coverings, and complete landscaping, sometimes they don’t. If you’ve acquired a 3 bedroom home, an apartment sized refrigerator just ain’t gonna cut it. A side by side will cost you at least a grand, and probably more. Window coverings shouldn’t be had on the cheap either, as they should be congruent with the quality of the property and tenant. Landscaping is often the difference between a potential tenant stopping and looking or driving by to the next place on their list.

Many of our clients invest in several properties each in multiple locations. Knowing in advance how many properties with which you’ll end up is obviously crucial to the decision on the size of your Sominex Account. For instance, in certain regions most of the tenants assume they must have their own refrigerator. (80%) Since some builders willingly pay some or all of the buyer’s closing costs, the investor has already saved between $3-7,000 per property. That alone can finance an appliance, and maybe some window coverings. If you’re really fortunate the builder will deliver the place to you fully outfitted, landscaped, and devoid of closing costs.

The fly in that sweet honey is the dim view most (all?) lenders take — especially these days. Duh. Most will put a ceiling on what they label as buyer credits. Usually it tops out at around 3%, though not long ago there were some allowing 4-5%. The atmosphere changes a bit when dealing with a portfolio lender. Don’t get Happy Feet just yet though, ‘cuz sometimes they’re more liberal, sometimes more restrictive.

Still, if you’ve allowed for a generous Sominex Account, the savings you reap from investing in multiple builder properties can actually add up to an extra property or two. We recently had a client who was able to acquire an extra property due entirely to credits and savings in upgrades. It matters.

You’ll notice I haven’t set up a specific formula for the purpose of calculating the size of your reserves. And you’ll not see one here. Each investor is different, with different financial circumstances, earning power, and sometimes most importantly, different comfort zones. Here are some examples of Sominex Accounts I’ve recently approved.

Client acquires 4 properties and has $100,000 income — $40,000

Client acquires 4 properties with $60,000 job — $50,000

Client invests in $10 Million of property — $300,000++

Client acquires 2 properties with $48,000 job — $40,000

Your Sominex Account should be established both in size and in deed before you make the first offer on any property whatsoever. If you must decide between getting that extra property at the cost of thinning your reserves — always, sans a guaranteed cash windfall in the very near future, land on the side of your reserves.

I’ll share a little secret with ya. Your Sominex Account is mostly so I can sleep.

Let’s get this year started with a conversation about your magnificently abundant retirement. That even sounds cool, doesn’t it? Anywho, use the Contact BawldGuy thingy and let’s kick some major retirement butt. Have a good one.

No, this isn’t about the glass being full or empty, half or otherwise. It’s about dealing with what is, and making decisions based upon what is, not emotion.

Here’s a totally unrelated example of emotion based pessimism vs the ability to see reality, while effectively probing for avenues of potential success. What? Huh?

There was once a 13 year old playin’ centerfield in an all-star baseball tournament years ago. His team found itself in the position of no outs and bases loaded — in the top of the 1st inning. He was waved in by the manager to get them out of the dilemma. (A pitcher when not an outfielder.) What to do? Since he’d paid attention to the base runners while in the outfield, he’d noticed the runners on 1st and 2nd were both pretty cocky.

To make a long story short, in the next three ‘pitches’ he picked off the runner on 2nd, then the one on 1st. The next batter, lookin’ to make up for this in one swing, feebly popped up. Four pitches, three outs, no runs. The same exact scenario played out the next day. The results were the same, except for one run on a seeing eye 17 hopper through the infield. Six runners, no outs, one run scored.

The point?

How easy would it have been to arrive at the mound thinkin’ why me? Seriously, from a pitcher’s point of view, bases loaded with nobody out is as bad as it gets. The reality though was what this kid observed objectively. His goal was to allow no runs. His analysis was geared to that end. He searched for weak points ripe for exploitation.

Warning: Dangerously sharp segue ahead.

Isn’t a 3½ year real estate market correction with major lending hurdles the equivalent of bases loaded, no outs? Uh, yeah, it is. Though many of those on the sidelines waiting to see when the recovery begins, have well thought out reasons, the vast majority of fence sitters are simply afflicted with emotional pessimism. We can be pessimistic about the weather. We can be pessimistic about a lotta things. But much of what folks call pessimism isn’t about objective thinking.

It’s about the decision to redefine pessimism as reality.

Or, put more plainly, avoiding reality.

Are there times to sit on the real estate investment sidelines? You bet there are. I literally took two years off in the ’90’s. The ‘Gone Fishing’ sign was up so long it almost faded completely. This correction, in my opinion, is not one of those times. Not even close.

The big investment capital in the ’90’s disaster went one of two places — to the sidelines, or buying up relatively large commercial/retail properties from the government’s now infamous RTC. (Resolution Trust Corp.) Not true in today’s atmosphere. Not by a long shot.

Today there are a handful of growth regions, true growth regions, where developers and builders are getting into virtual fist fights over well located land for immediate development. Why on earth would that be the case? For the same reason it’s always been that way. The product is selling — in some cases at a fairly impressive rate. The financing you ask? How about a huge, very well known lender aggressively courting a builder to become the preferred lender for his project? That happened with me almost in the same room, virtually speaking, a couple weeks ago. After I heard from the builder I wished I’d been there.

The funny part is, the builder turned ‘em down. And he should of. What seemed to be a good marriage was really a kinda sorta good match. The terms were vanilla, and the only real enticement was a promise from the lender to pay the builder’s title policies. Big deal. Investors are the borrowers. What have ya got for them, Einstein?

Reality: Demand in bona fide growth regions has been, and remains demonstrably strong. Prices haven’t dropped. Vacancy rates have remained stable or even shrunk. Rents in some projects have actually increased this year significantly. (3-5%)

Reality: Lenders are now openly and sometimes mercilessly competing for business. Not for San Diego income property — but for income properties worthy of the name. And in areas benefitting in a big way from the public’s attraction to it. Remember — lenders lend. When they find a high quality product, well located, with a great bottom line, they run, not walk to make the loan.

Reality: (A ‘portfolio’ lender is one who lends their money, and keeps the loan, rather than selling to a secondary market entity such as Fannie Mae.) Portfolio lenders in these select areas are openly courting investors who are already over the Fannie/Freddie property limit. That would be 4, including primary residence. The latest lender with whom we spoke said the limit was $4.5 Million in loans per investor.

Works for me.

Reality: If you own income property in San Diego, Palo Alto, or markets similar in their insane price/rent ratios, your best move is Outa Dodge and into one of the growth areas. Where? You could head to Austin, Dallas/Fort Worth (MetroPlex), or Kansas City. Those aren’t the only areas, but you get the idea. You can own younger, well located investment real estate that beats areas like San Diego every way from Sunday. It’s not a fair fight — or a debate either — in my opinion.

Reality: By remaining on the sidelines you’re possibly endangering not only the timing of your retirement, but the ability to retire at all. Much like the results of Grandpa Economics, your retirement’s projected income will either be severely retarded, or retiring at all will be postponed.

Reality: If you’ve lost money on Wall Street, or are invested in San Diego income property (or areas like it), maybe the most important ‘reality’ with which you must come to grips, is this: Time is not your friend.

BawldGuy Axiom: Though pessimism has many meanings, most of the time, if we’re honest, it’s the disease that takes over when one decides reality is too tough for them to handle.

Since I first started sayin’ these things to local San Diego real estate investors, those who’ve remained frozen in time by indecision have lost an additional 20-30% of their properties’ value. If that describes you, don’t fret. No use beatin’ yourself up rehashing the past. Look to your future and decide to move your equity to regions in which lenders are battling to be.

Here’s tonight’s final reality. If you contact me I will be there. The window of opportunity is still open. The ‘hordes’ haven’t figured it out yet. They will though, and that’s when time will really become a disagreeable fellow. Let’s talk. Give me 15 minutes of your time. You’ll at least learn I’m real. Have a good one.

Behind the scenes you can imagine the panic as so many of them shed their brave fronts while lookin’ to the calm, experienced leaders with the real power to take charge. The real power is now tellin’ the faux power how it’s all gonna shake out. It’s been like this since one man had power over another. But I digress.

No matter where twisters show up, weak or strong, they’re local in nature. There are no exceptions, nor have there ever been. Real estate behaves similarly. Grand Rapids, Michigan can be depressed, while Mesquite, Texas is thriving. This dichotomy can exist in times both boom and bust. It’s quite a paradox at times, to say the least.

See? Local in nature. If yer wondering why you haven’t heard about some of the regions currently kickin’ major booty lately (that’s a technical real estate term), it’s ‘cuz the LameStream media doesn’t think it’s worthy news. Go figure.

Here’s another poser for ya. Why, in certain areas, is builder confidence up nearly 20% lately? Why are some lenders workin’ themselves silly to bring new investor loans to certain select markets? Why indeed. We all know why. They smell profit. When it comes to builders building and lenders lending, they share a very positive attribute with the great white shark — they smell profits miles away before anyone else does.

Now before ya go off about the current lender/builder mess, let me explain. I’m talkin’ ’bout the astute lenders who still have their pants on, and not around their ankles. The builders? I know the media hasn’t told ya, but I’m tellin’ ya now. There are a few out there whose product has never stopped sellin’ from the first day this correction began, and continue to do so now. There are places where some builders, starin’ each other down, are literally about to get into legal fist fights over large pieces of land. In one case, I know the principals.

In a conversation Wednesday afternoon, I learned a lender, (must remain anonymous for the moment), who is about to allow my clients to buy as many real estate investment properties as they wish. Let that sink in for a minute. How’s that possible? Are they nuts? Why would they even consider implementing that policy, and on their own to boot?

As usual, the answer to this question isn’t complicated. They smell profit. They know what’s happening in their neck of the woods, and it’s been goin’ on for quite awhile now. They’re tired of being restricted by the secondary market and it’s choking underwriting regulations.

It’s their money, and they’ll lend it where they see fit. And there it is. They’re not gonna sell loans made to our clients. They’re keepin’ ‘em. It’s not like the lenders who loan a buck, sell the loan, then loan the same buck again, over and over. Nope, these guys are doin’ it the Old School way. My kinda guys.

Think they’re the Lone Ranger? Not even. Find the regions where quality product exists along with the empirically provable demand for it, and you’ll find a lender knockin’ on yer door with a wheelbarrow full of cash. These lenders realize they’re in the eye of the perfect local storm, and they’re not gonna be caught five years from now lamenting their lost opportunity.

BawldGuy Axiom: (As I write this, I’m almost laughin’ out loud.) Rain falls down. The sun sets in the west. And….wait for it…..here it comes…..Lenders lend.

The builders I mentioned? They’re just a couple weeks or so from breakin’ ground — again. Meanwhile, back at BawldGuyRanch, the LameStream media is sellin’ ad time while they peddle fear, panic, and meltdown. Surprise, surprise, surprise.

By the way, the part of the highly revered billionaire investor who writes a three comma check for a stake in an ‘endangered’ industry’s company is being played this time around by Warren Buffet, who’s obviously playin’ himself. Sure, he negotiated what understatement would describe as a sweetheart deal with fabulous terms. Still, ya think he’d put $5 Billion into Goldman Sachs if he thought it was in danger? Really? Mr. Buffett is a lotta things. Here are two things he definitely isn’t: stoopid, or a gambler.

But again, I digress, though it was fun.

As a real estate investor yourself, or if you’re thinkin’ of investing for the first time, you are now living in what the Chinese have called ‘interesting times’. Those who recognize real opportunity when they see it, are investing in the few regions around the country that have proven already they’re ahead of the curve.

Is the current economic crisis like a tornado? In terms of real estate and lending it sure is. Would I tell ya to invest in real estate located in hard hit regions like San Diego? Perish the thought. But this economic tornado hasn’t and won’t touch down over the entire country. I’ve seen this movie three times before, and all three had windows of opportunity both chronologically and geographically.

This one isn’t any different.

That’s my way of sayin’ the time is now and I know where to invest in real estate. The supply is not infinite by any definition. Lenders want qualified buyers in the Old School tradition. But the gettin’ is good, and now’s the time. When lenders are knockin’ on your door with cash, you might wanna take the hint — know what I mean, Verne?

In order to create your personal perfect storm, here’s what ya do. Begin a conversation with me, and we’ll Purposefully Plan your retirement within an inch of its life. I’m lookin’ forward to talkin’ with ya. Have a good one.

‘Course, since random is the theme today, pictures shall be congruently random also.

Gray Bomb

Though I’ve written here often on what drives my decisions to recommend one property/region over others, it still boils down to the same basics it always has. Jobs, job creation, commerce, etc. The continued migration of large population segments from the north, most of the midwest, and the northeast towards sunbelt regions is still strong and will continue to be. No surprise there.

The phrase Gray Bomb though, will begin to have more and more meaning and impact upon real estate as time does its thing. Boomers are now pretty much graying right in front of us. I know, ‘cuz I are one. Though there’s absolutely no gray on my head. (Thanks Schick) They’re making life decisions regarding their retirements, which are impacting the economy in general, and real estate markets specifically to an ever growing degree.

This isn’t new of course, but it’s beginning to become a much more important factor in how Brown and Brown views data these days. When shrapnel from Gray Grenades land in concentrated bunches, it’s news the real estate investor should follow with real interest.

The New Reality For San Diego Income Property Owners

If you’re one of them, you already know the jig’s up. Unless a buyer plans on living in your units, investing in them is foolish on every level. They’re too old, over priced compared to the income they provide, and the informed buyer can acquire 2-5 times the property elsewhere for the same amount of cash. A speaking of gray? If most San Diego’s small income properties were any older, even termites wouldn’t want ‘em any more.

What does this mean to you? Simple — you need to find a local real estate investor who disagrees with this assessment, and let them buy it. Take the proceeds and tax defer them (1031) to one of the growth regions outside of California. This isn’t a close call, and you know it. So bite the bullet, and get it done. The longer you wait the greater injury your inflicting upon your retirement. And yes, it’s that simple — and that crucial.

Our Experience So Far In Texas

Since our first foray into Texas, beginning last year in Austin, we’ve expanded into various locations on the southern border of the Dallas/Fort Worth Metroplex. Our clients have already invested in several million there and in Austin. (Just three properties in Austin so far.) The vacancy rates have dropped while the rent-up time has shrunk to almost no time at all. Most of our Metroplex transactions are closing escrow with renters there, or about to move in. Very cool. Rents are already up too — by 2.5% since we began buying. Works for me.

Inspectors are finding the normal minor problems, which has been a huge blessing in disguise. It’s been nothing short of inspiring the way the builder has lived up to his word — in spades. One time, due to a scheduling snafu, they responded with three people to gang tackle any problems on the spot. Though the original scheduling screw up wasn’t their doing, they put a killer smile on our client’s face — half a world away on another continent. It was seriously impressive.

Our clients are still getting title policies paid for plus an additional 2% closing cost credit on almost every transaction. One client was literally able to buy an extra duplex with his savings. How cool is that?

We’re now inches from opening up the region just north of the Metroplex — in more than one development. We’re busy shining our boots for our on the ground visit in the next few weeks. I can already taste the chicken fried steak and garlic mashed potatoes. I’ll have to increase the cardio part of my workouts by about 20 miles daily. Geez.

Where We’re Pokin’ Around

We’re eyeballin’ a couple different parts of the Kansas City area. No answer yet. Columbia, South Carolina is pinging our radar fairly steadily these days. If you’re from around there, or know somebody who is, have them contact us, so we can speed up the normal process. Also, there is serious interest at the Brown and Brown think tank in parts of North Carolina. We’re doing the research now, though we like to error on side of slow but sure vs fast and sorry, know what I mean, Verne?

And don’t tell anyone, but we’re tryin’ to sneak into a certain pocket in the northwest, a previously fenced off area, at least in our thinking. Cool place and all, but the price/rent ratios have been for the birds. The rest of the year is gonna be taken up with airport logistics, and rackin’ up more frequent flyer miles.

And that’s all the random I have in me. See ya tomorrow, especially those wanting to talk about their future — that’s spelled R-E-T-I-R-E-M-E-N-T.

Though in the last year or so we’ve been able to secure clients some impressive discounts, most of the circumstances making those discounts possible have changed.

Let’s think this through. Demand for well located real estate is increasing in the regions in which we do business. This is a good thing. Take Austin — a place we no longer do business. Don’t get me wrong, we love the place, but the demand has increased to the point prices have made it relatively unattractive to investors. The rent/price ratio has degenerated to the point where investors must now put enlarged down payments in order to break even.

See? On one hand you have the good news showing the Austin area roaring back from the market correction. On the other hand you have the consequences of that same good news. A double edged sword just waiting for the inexperienced investor. Higher prices driven by significantly increased demand, outpacing rents, (Increased rents will very soon follow, but not fast enough in Austin.) results in investors looking elsewhere. Why spend your hard earned capital in Austin for $X worth of property, when you can go to friendlier areas and acquire $2X worth of property? If capital growth is numero uno on your agenda, investing in half the property you could prudently afford makes zero sense.

Now let’s consider the project begging folks to buy their stuff at deep discounts. What does that tell ya? The market hasn’t been impressed with the product. Compare that to the region where the units are selling and renting off the street, and at prices builders aren’t feeling pressure to discount. And never forget a foundational truth: They’re discounting ‘cuz the folks who you want to sell to in a few years, don’t like them. Ignore that at your own peril.

Think long term — very long term.

The idea is to invest in areas in which demand will remain at the highest possible level. When it comes time to execute a tax deferred exchange, turbo charging your capital growth rate, you want your properties to be in high demand. Duh. Does it not make sense — what appeals to buyers and renters today, will also appeal to them five years from now? Good schools, proximity to diverse and plentiful employment, shopping, entertainment, and well, you get the picture.

The paradox here is that deep discounts though enticing, most often mean demand is waning. Not always mind you, but most of the time. There’s a big difference between getting a great deal on price, and getting a so-called deep discount on property which wouldn’t sell except for that discount. When investing in new properties in the current atmosphere, builders not able to sell properties without slashing their prices, aren’t doing you any favors.

They’re dumping their overpriced product on inexperienced investors who’re excited about paying what’s actually market value disguised as an incredible deal. Treating the acquisition of vehicles designed to take you to a magnificently abundant retirement as if it were a Blue Light Special is not recommended.

Brown and Brown passes on far more projects than we recommend. Lately it’s around 7:1 or so, maybe higher. So many of them are, uh, dogs. No thanks. Not only that, but the deep discounters almost always try to entice us by offering off the hook compensation. I mean humungous fees. Wanna know why we still refuse? (Beside the fact it’s just the right thing to do.) It’s because it’ll not just be your problem a few years from now. It’ll be ours too. We’re the ones who will have to figure out how to sell these white elephants, bought at such a ‘great price’. Since our entire philosophy is to stick with our clients from their first investments ’till we leave their retirement party, that wouldn’t be very wise on our part, now would it. (And by the way, you will invite us to your retirement party.)

It’s at that point you’ll be asking us what the heck we were thinking back in ‘08.

What’s better you ask?

These days, buying well located, quality built properties for slightly under the street price is a pretty smart way to go. High quality tenants paying premium rents are what pays off in the long haul. Big demand today in the path of growth means bigger demand tomorrow in a matured yet still newish region. Ensure you’ve acquired units which are in demand at the more affordable price ranges and you’ve really done it right.

It’s the big picture view that wins out for the investor looking towards retirement.

Getting rich quick isn’t the way to go. You’ll take it when it comes your way, but it’s not part of any prudent Purposeful Plan. The Plan is based upon building wealth through the use of tried and true principles — what I’ve called Investment Physics.

In seminars I call it getting rich slowly and on Purpose. The smart money allows the market show them where to go.

An appreciation spike or two during your 10-30 year investment journey is of course welcome, but should never be anticipated. My experience shows these spikes occur at least once every decade, sometimes twice. This correction however, has led me to predict (believe) the next 10 years may not have any spikes. So when I lay out each client’s Plan, it’s never mentioned or accounted for in any way. Nobody ever gets upset when these spikes show up. If, on the other hand, I didn’t think the reasonably expected appreciation rate over the long term wouldn’t be at least 3-6%/yr., I wouldn’t be there in the first place.

Make sense?

Following a disciplined Plan over a long period of time will get you where you wanna be.

Going for the lowest price will often take you on trips to places you simply don’t wanna be.

BawldGuy Axiom: Investment Physics, when applied in a Purposefully Planned and well disciplined manner will always produce superior results over the long haul.

Defying gravity ain’t the approach you wanna take.

Step back and look at the big picture. Unintentionally discounting your retirement income by chasing price rather than adhering to Investment Physics is ironically too expensive at any price.

Contact me and together we’ll paint your own personal big picture. Think Big Picture = Big Retirement Income.

Has your retirement Plan been put on hold while you wait for ‘normal’ to resume? Normal isn’t coming back — it’s being redefined by the pretty lady you’ve always loved — San Diego’s real estate investment market.

How many ways has she chosen to break your heart?

By swaying developers to build everything and anything but residential income property.

By allowing existing income units to age for the last 20 years without providing new product.

By ensuring over time your units will require huge down payments just to break even.

She’s deliberately allowed neighboring states to compete effectively against your product.

And maybe worst of all — she’s made these changes permanent.

She’s still leading you on, making you believe she’s still your girl when she hasn’t been for a few years now.

Lies are the only way she keeps you hanging in there, hoping against hope she’ll come back to you.

Show her she’s not so smart, and you won’t believe anything she says. She’s long gone, walked away, and isn’t the least interested in coming back. Developers know this, and have for some time. They haven’t built residential income properties in any kind of numbers that matter for the last 20-25 years. They’re her new love — you’re already forgotten. Don’t allow her to keep you here with her lies.

The San Diego real estate investment market has left you. The sooner you acquiesce to that reality, the sooner you’ll be able to adjust. Your birthdays are gonna keep comin’ and goin’ whether you adjust or not. She ain’t comin’ back. There are more fish in the sea.

Leave her — she left you long ago. There are others who want your capital and will treat you the way the San Diego market used to. Make the move — contact me — I’m a great matchmaker.

For those who remember this song when it was new, notice the ‘go-go’ dancers. They’ve sure evolved since then, haven’t they?

Way back in the days of pen and paper, the only acceptable way to acquire concretely reliable rent info was to hit the pavement — literally. Grab yer clipboard and yer basic comfortable shoes and start walkin’ and knockin’. I’ve been doing exactly that since the late ’70’s. It’s not sexy work, trust me. Though most people are more than happy to help, some folks can get downright rude.

BawldGuy Axiom: Nothing beats first hand research done at street level, in person — nothing. The gold standard for research is always first hand — their lips to your ears — in person. Hearsay just doesn’t cut it.

Still, when a client asks us what makes us so confident in our rental figures as stated on our after tax cash flow analysis, we grin and pull out ours, or sometimes our team’s rental survey. (Note: The minute I find out a team member hasn’t done a required rent survey, they’re fired.) This isn’t done by phone, fax, email, or channeling the local apartment tenants in an area. You do what needs to be done — you knock on doors yourself.

Management firms will tell you, “You’ll easily command $XXXX a month in rent for that unit — no problem.” When it ain’t their butts on the line, it’s never ‘a problem’. Most management firms make their rental decisions based upon their own relative convenience. I ran my own management division for a decade and know what it takes — and it ain’t hangin’ ’round the office when you’re not sure of what the rents should be.

Agents/brokers will be smother. “Our experience in the area says you should get this amount.” Whereupon they give up a number. Rely on that number the same Mom relied on me having all my homework done before bedtime.

Builders are the comedians of potential rents. It’s long been my theory they size you up and decide in the middle of their answer what rent figure to give you. If they discern I’m from California, it goes up at least 10%. Exceptions: I’ve met two builders in the last 18 months who gave me rents backed up with empirical evidence — one in the Kansas City area, and one in the Dallas/Fort Worth Metroplex area.

Short diversion.

The first thing a California real estate investment broker/advisor learns when leaving the state is the strange thing that happens to their forehead — In bold lettering a message appears. CALIFORNIA FRUIT LOOP — I’LL BELIEVE ANYTHING.

Tomorrow I’ll give specifics on how I’ve conducted rent surveys over the last 30 years. I’ve learned a ton, and it’s all come in handy. Meanwhile, keep this in mind: Buying investment property without slam dunk, sun-settin’-in-the-west reliability is foolhardy at best and a quick way to lose a bunch of your hard earned money at worst.

Remember: It’s called income property for a reason.

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.