Posted on April 19, 2008 @ 9:27 pm - Written by BawldGuy
The other day I was having a great conversation with one of my clients who happens to share my passion for baseball. They’d not known about my ‘baseball life’ as a former umpire. I’d worked my way up as far as one could go, umpiring every level of NCAA (college) ball, up to Division I.
Anywho, we got to tradin’ baseball stories, as her brother had played college ball in the midwest. Can’t remember the college for which he played, but it turns out they played in San Diego all three years he was there. It’s possible I umpired him. Go figure.
The present real estate market in San Diego, (Palo Alto too) and those who own income properties here, remind me of what a very experienced head coach once told me. We’d been going over a complicated, and controversial call the week before. He was sure my line of sight had been blocked, getting it wrong, while I knew for a fact my line of sight was unimpeded and I gotten it right. That’s baseball in a nutshell.
I miss it like breathing, but too many conflicts with my business schedule finally forced an early retirement. Also, I got tired of being afraid of my own assistants, who would look at me the morning after weekday afternoon games with death stares you never wanna experience.
During our discussion the coach made a comment I’ve always remembered. Read the rest of this entry »
Posted on April 12, 2008 @ 1:29 pm - Written by BawldGuy
I hesitated more than a little before publishing this post, as it’s never my intention to make folks feel badly, even if unintentionally. The thoughts in this post come from a good place in my heart. The San Diego (or Palo Alto?) real estate investors owning income property have seen the changes happening in real time. I’ll confess my slowness in seeing the writing on the wall here. Let’s face it — we’ve been spoiled since, well, forever.
What’s been more resilient than California real estate? There are some regions sporting a similar track record, but when the roll is called, it sure doesn’t take very long. We, me included, have been lulled into a false sense of security by decade after decade of solid if not spectacular returns on our investments here.
Still, it’s not that the page has turned, but the book, and therefore the story and its ending has been changed.
This is the weekend, so I’m having some fun at San Diego’s expense, and mine too, to be sure. 20/20 hindsight tells me Read the rest of this entry »
Posted on March 27, 2008 @ 11:40 pm - Written by BawldGuy
Though we’ve been to Austin, Dallas/Fort Worth, Kansas City, Boise, Phoenix, Palo Alto, and the list goes on, we’ve pretty much ignored San Diego real estate investors for nearly five years. Our plan calls for reentry in April or May. And no, we’re not gonna be tellin’ folks to buy San Diego investment property. It hasn’t made sense for a few years now. In fact, we don’t think it will ever be wise to invest here again.
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.
Posted on March 8, 2008 @ 6:46 pm - Written by BawldGuy
Now that most of the country’s real estate is, uh, taking a breather, as is the stock market, I thought it was perfect timing to reissue a post I published about nine months ago. The post has been modified as little as possible to reflect the current times. None of the pertinent numbers have been touched.
I’ll make one comment before beginning: Remember the #1 factor in long term investing — Keeping your eye on the long term, the big picture. Know what I mean, Verne?
OK, let’s get going.
A long while back I published a post discussing the so-called debate, Real Estate VS Stocks as investment vehicles. It’s time to remind folks, as stock tips are flying everywhere again, that the stock market just doesn’t compare, especially for regular folk just looking to ensure the retirement they’ve been planning for years. Of course, this dovetails with what I was talking about the other day — 401(k)’s. They thrive or fail based upon the stock market. If in the last 10 years of your work life, the stock market takes a snooze, so does your retirement. Name the last time real estate took a decade off. Right, not even. Since the end of World War II, the next time real estate stays down, or flat for a decade — will be the first time.
Now that the stock market has done a solid imitation of the real estate market, I’m hearing more and more from folks who honestly think there’s a real comparison between their stock portfolio’s potential and their real estate investment plans. The whole, ‘We’ve reached the bottom, and now’s a great time to get into the stock market.’ Before I begin, there’s something I wanna make perfectly clear. You can get very wealthy in the stock market. Over the long haul, you can drag a bunch out of the vault for yourself. That said, you have to know which stocks to pick, when to buy, and who in management might undermine your long term plans. And much of the information on which you will want to base that info is zealously kept from you.
Your real estate portfolio is also subject to outside factors, but not nearly to the extent as the stock market. You can pick where, when, why, how, and in the end, do it all with reasonable confidence that the big picture will show you with an even bigger smile. One area is down, the next isn’t. San Diego is down now, while much of Texas is the real deal. Phoenix is waiting to bounce back, while Kansas City just keeps cooking along.
As I write this the DOW is just at or a touch below 12,000
— a hefty decrease compared to a year ago. Now everyone is trying to figure out if real estate measures up. This is predictable every time the stock market goes bullish or bearish in a big way. The mainstream media chimes in with their take on what investors should do. Those without a dog in the fight (read: any real understanding) offer the most humorous reading. The media often takes ignorance to levels air breathing mammals can’t survive.
The journalist usually ends up concluding the investor has to choose what’s better for their particular situation. That’s media-speak for “I had to write a piece on this topic and don’t know what I’m talking about, but it sure sounds good, doesn’t it?” Let’s put this subject to bed once and for all. We’ll put them in the most transparent way possible, side by side so anyone can discern which way is north on the map. Of course I’ve always maintained the media hasn’t ever done their research diligently on this topic, but we’ll give it a shot anyway.
Stocks vs. Real Estate
Here’s how we’ll do it. I contacted my Financial Planner as a source for an historically reliable annual growth rate in the stock market. I decided to use the S&P 500. For the past 55 years or so it has performed at a growth rate of approximately 8% annually. (It’s actually somewhat higher, maybe 8.5%.) Sounds impressive, but of course that’s not every year, just like real estate doesn’t always go up 40% a year. In fact, let’s be honest and say right up front that both real estate and stocks experience downturns from time to time as part of the normal business cycle. Duh. Don’t the current circumstances faced by real estate investors today speak for themselves? Ask your neighbor, the stock investor what he’s thinking about his portfolio these days.
Pick any growth region you want. Go to any 10 year period at random. In San Diego that’s a fun game I play with my new clients. They usually pick the period ending with a real downturn. It doesn’t matter. The rises have, historically speaking, given more than the downturns have taken away — by orders of magnitude almost. Nothing in San Diego has gone up as little as 5% yearly, in any decade you’d choose. It just hasn’t happened. I’m beginning with the year I got in, which was 1969. Almost four decades is long enough to make a point, don’t ya think?
Let’s set the parameters first. I’m going to grant annual growth of 10% for 10 years for the S&P. That’s about 25% over what they done over the last half century. We’ll use $100,000 as our opening capital investment amount. For real estate we’ll use an average annual appreciation rate of only 4%, buying small income properties using 10% down payments. (Note: This isn’t theory, I’ve been executing this exact scenario successfully for decades now, and have done so recently (How’s 14 times in the last few weeks?).)
As stated above, we’ll use an annual appreciation rate of only 4%. I’ll assume the stock’s annual return will be able to maintain a 10% annual growth by selling and buying different stocks as the professionals see fit. I’m also assuming the real estate investor will do one tax deferred exchange at the end of the fifth year. Though I won’t impute any costs to the buying and selling of stocks, I will burden the real estate investor with a selling cost of 8% when he exchanges.
Let’s see what happens.
After 10 years (rounding to the nearest $100) the stock investor has $259,400 — a profit of $159,400 over the 10 year period. A 10% annual growth rate on the originally invested capital.
Real estate has ended up with $458,000 - a profit of $358,000 for the same 10 year period. A 16.435% annual growth rate on the originally invested capital.
We gave stocks the benefit of 2.5 times the growth rate we gave real estate.
This still doesn’t take into account the benefits received from the real estate that don’t exist with stocks.
- Any income derived over that period generated by the real estate would not be taxable because of depreciation.
- All excess depreciation would then be allotted to the ordinary income (salary from job) of the investor, resulting in thousands of dollars in taxes not paid.
- On the other hand any dividends derived from stocks are taxable. With rare exceptions the only way the stock market investor gains any tax shelter is when he loses his money, which is far more likely in stocks than in real estate, especially over the long haul.
Now imagine what this same $100,000 could have done for you, if you’d been pressing the right buttons for the last decade with your real estate investment portfolio. In my experience, even with some bumps along the way, 10 years of prudent and Purposeful Planning, (using the Flywheel Principle) almost always results in multiplying your original capital 5-20 times, depending upon the region, your timing, (sometimes lucky is good) and how vertical the rises were in that particular 10 year period. The immediate decade past would have resulted in your $100,000 turning into at least $1.5-2MIL — if you were paying attention and exchanging when it made sense.
Note: It’s my very strong belief the next decade or so will not bring us any huge run-ups in real estate. I think even the normally high appreciation regions probably won’t experience any significant upward spikes.
What’s really cool about real estate is the ability to buy based upon regional performance. For instance, if you bought investment property in Ohio in 1997 vs buying in San Diego, you’d have been very disappointed. Real estate is local, whereas stocks are, well, stocks. By understanding the fundamentals of different regions, an investor can more intelligently place his capital. A great example of this is when we took our clients out of San Diego five years ago, and exchanged them into other, lower priced growth regions. Many of them can now look back with 20/20 hindsight and see how their capital growth rate was significantly higher outside of San Diego. This doesn’t take into account the relatively lower prices, and the far superior price to rent ratios they enjoyed elsewhere. Their cash flow, if that’s what they wanted, was easily superior when the properties were not in San Diego, or areas like it (Palo Alto?).
Before anyone jumps in to defend stocks, don’t bother. You can make a lot of money with them. But the bottom line is, you can’t use leverage without going over the top with risk. Your weak dividends are taxable. You provide no tax shelter during the holding period. If you picked one industry leader over another, you might have made it big — unless of course, you picked wrong. Folks don’t need a crystal ball with real estate — plus they have prudent leverage.
Ah, leverage. Real estate without leverage, is like — buying stocks. It’s the difference maker.
This is why folks like Ben Stein, a man for whom I have almost unlimited respect, avoids any mention of leverage when he compares the two investments. (And he made himself wealthy almost exclusively through stocks.) He knows if he did, stocks would be embarrassingly left behind. Even conservative leverage puts the regular investor way ahead. Leverage is the unfair advantage we have. And we allow it to move Heaven and earth for us, until we arrive at our magnificently abundant retirement.
Then we bask in the glow of the life we’ve earned — through real estate.
Let all this percolate for awhile. Then ask yourself whether or not you should begin taking your retirement a lot more seriously. Contact me — I’m easy to talk to.
Posted on March 3, 2008 @ 10:18 pm - Written by BawldGuy
Palo Alto is as advertised — gorgeous, eclectic, and a paradise in which to live. Where else do four year olds compete in chess tournaments? Or how ’bout the median priced home — only $2.2 Million. And the restaurants? I didn’t see it, but I’d bet there’s one serving Northeastern Kansas City BBQ influenced by Southern Niger Goat Cheese stir fry.
And for the record — Kevin ‘Lost Boy’ Boer rocks. More on him later.
We met some real estate pros who flat know the region and all its nooks and crannies. In fact, we didn’t meet on agent in three seminars who wasn’t impressively knowledgeable and experienced with all that is Palo Alto. I’ve not experienced that in my travels to various other regions. It was refreshing.
On the way back to our hotel after dinner Saturday, Josh asked Kevin about some older, and frankly rather plain looking condos. He also wanted to know about the houses around the curve. Both were ‘across the street’ from the freeway — not one of yer best locations.
Seems these plain vanilla condos went for around the mid-600’s while the homes, vanilla at best and not large by anyone’s estimate were valued in the low-800’s. Apparently we were slumming, Palo Alto style and were unaware.
Back to ‘Lost Boy’ Boer.
If Kevin had to use his car to find his own butt, he wouldn’t be able to even if he had a GPS and a guide. Talk about wrong turns? Seriously, Josh and I think he believes wrong turns are good luck. When he picked us up at the airport to take us to our hotel, we made three wrong turns and could still see the planes taking off. All this while he’s holding the GPS! And he lives there.
You’ll have to ask Kevin about the day he got his driver’s license in Niger, as it’s a classic. The epilogue is the best part. We should all prod him to post on it. Being a preacher’s kid can make life, uh, more cumbersome at times. I totally empathized with him on that score. Been there, done that.
As you’ve seen here, deep after tax cash flow analysis is often required when deciding if a particular project is up to snuff or not. Excel is used in concert with my trusty hp 12C. I muddle along with the application, but get the job done right. Kevin has Excel in his DNA. Lord Almighty!
During the seminar I’d look over after I’d said something about depreciation, or a factor in income & expenses and his fingers would begin flying over the laptop’s keyboard. In seconds, no exaggeration, seconds — the projector’s screen would show an example of what I’d just alluded to — from a blank sheet dead start.
Holy Spreadsheet, Batman. Scary, very scary. Also massively impressive.
The question and answer periods for all three seminars lasted from 1-2 hours. The questions were pretty incisive and challenging, always a good sign. We’ll be returning to Palo Alto soon.
Thanks from the heart to you Kevin. You took expert care of us and were fast on your feet when thinking on the run mattered. Upon leaving Palo Alto we felt we’d made a new friend. Regardless of Murphy camping at your door, the weekend was a fabulous success, almost entirely due to your efforts. The quality of the agents you brought to us was magnificent, which says much about your standards as well.
If you’re ever in the Bay area anywhere near Palo Alto — give Kevin a buzz. You won’t be sorry. There is one caveat…
Just don’t let him drive you anywhere.