This is located in the North Dallas area. Each side has 3 bedrooms and 2 bathrooms. You can see the garages. 20% down will yield, give or take, about 6-9.5% cash on cash — given today’s interest rates. Most are in such demand — Investors and tenants — that they frequently sell before they’re even built. They’re just as frequently rented before the dust clears after escrow closes. Sweet, eh?

In fact, one of these just closed last week. Our client was amazed when he learned the new first tenant was moving in about three days later. Woulda been sooner, but the tenant had to wait for the weekend to move.

The Amenities

Here’s a shot of what has consistently attracted tenants to this neighborhood. Though the address is absolutely one coveted by many in the general Dallas/Fort Worth MetroPlex, once they see the amenities, their main concern is being accepted as a credit worthy tenant. This pool area is just one of many superbly designed amenities.

Compare this to the usual motel-like pools offered as ‘amenities’ in many so-called upscale developments. They only wish they could offer something this cool and spacious.

What you see here is the community kitchen tenants can use for whatever event they may be hosting. We’ve all seen these in various developments in our own hometowns, right? Are they equipped with two huge fridges like this? Not freakin’ likely. Combined with the adjacent dining area, a very nice wedding and/or reception, or New Year’s Eve party would rock. I know a couple folks who own catering companies. One of their most common challenges is a far too small kitchen for a far too large crowd. Not here.

This next one is of the dining room area contiguous to the kitchen. You can easily see how it’d be perfect for pretty much any social gathering you’d ever wanna put on.

What an inviting ambience — a very adaptable environment. You can’t see the fireplace in this shot — but it’s there and obviously adds to the mood of any gathering when the weather is cooler. Most of the great rooms provided by developments we’ve inspected around the western U.S. have been mundane at best, and claustrophobic at worst. As you can readily see, that’s simply not likely in this room.

There are 3-4 other rooms of pretty good size, just down the hall from the kitchen pictured above. Here’s one of ‘em. Besides the normal stuff, baby showers, birthday parties and the like, it’s perfect for seminars, business conferences, club meetings, or whatever else we could come up with. These rooms have a capacity of around 130 or so. Notice, as in the other rooms, how high the ceilings are. Some may say that’s of little or no consequence, but to someone who speaks around the country, and attends various conferences on a more or less regular basis, it matters — big time.

The next couple shots are literally unique to my experience. The first one is of the computer room. A dozen or so computers with printers etc. for the residents to use at their will. What is so cool about it is how many kids use it to do their homework, print it out if necessary, then adjourn to the real reason they walked over there in the first place. I suspect the kids go there, not cuz they don’t have their own ‘puters at home, but cuz their friends go there too. The second pic is of the — I kid you not — video game room. No, not makin’ it up. The ‘wallpaper’ you see is not only not boring, but soundproofing. See the black leather chair? It’s a gaming chair — with all the controls required to play whatever game you’ve loaded.

Are you freakin’ kiddin’ me?! Where was that room when I was in school?

Please — I dare ya — tell me you’ve seen a weight room like this in any place not considered a slam dunk luxury development. I’ve been to dozens over the years, and the only ones that rivaled this one were condos on San Diego’s coast or in comparable locations. This is far and away the best workout room I’ve seen since I’ve been takin’ clients outa state. That’s almost seven years. I love this gym.

Look what they put up at the pool for the kids! Gotta think a half hour to 45 minutes max, and your rugrats will be ready for some ‘quiet time’. I can see their eyes when they first spy this incredible setup — probably turned into banana cream pies. When I was young, only special carnivals and such places had stuff like this. Tell me you wouldn’t sneak on it yourself, pretending to show your kids how it’s done.

Note: Remember — click the pictures to get a full size shot. They’re worth it.

About 10-20% of my clients actually fly to wherever I recommend they invest. Those who have made that choice recently, and have decided to check out North Dallas, have come back completely blown away. They’ve not seen amenities like what they were shown by my team. Much like they do when tenants take a look-see, the place sells itself. Numbers are fine and dandy, but seeing is believing.

Hey you! I need a fix. Please, gimme a call, OK? Try 619 889-7100 and you’ll find me. Have a good one.

I wanna be a 23 years old major league pitcher with an indestructible right arm capable of throwing 140 pitches every fifth day at roughly 97 mph. Oh, and I wanna be able to have pinpoint control with not only my fastball, but my killer curve, and my virtually un-hitable sinking change-up.

I know, I’m bein’ a first degree smart-aleck. But you get the gist, right? Nobody — well, almost nobody, is sayin’ that appreciation can’t or won’t ever become reality again. But there are a couple lines here that’ll need to cross. The line that stretches down the road year after year ’till appreciation returns — and the line dictating when you shuffle off this mortal coil.

We used to say something quite different when we talked about San Diego real estate. Since I first entered the business, it was common to hear the old veterans talk about how if you invested in an investment property today, in 10 years, regardless of the predictable cycles, you’d have experienced a significant increase in value. That was indeed true from the late ’60’s through the the first few years of the 21st century.

Alas, those who still believe that ship hasn’t sailed will suffer the consequences at retirement — that is, if they can retire, having waited for a ship that now lies on the ocean’s bottom.

For the foreseeable future, let’s say the next 5-10 years, it’s more likely you’ll learn to successfully dribble a football than see a rise in your income property’s value in the next 5-10 years.

‘Course that’s just an opinion. My crystal ball is as accurate as yours, right?

I’m predicting a further drop in real estate prices in most, not all regions, and have been since the first of this year. I think in places like SoCal it could be 10% or more, we’ll hafta wait and see. What that means in practical terms is that those who buy ‘at the bottom’ may soon learn, as those who bought in San Diego and places like it in 2007, that prices could indeed continue dropping. I warned them then as I’m doing now. If you’re wanting to buy a home or a 2-4 unit property in which to live, go ahead, cuz over the long haul it’s your home, not an investment.

Please believe me when I tell you, the days of reliable appreciation are over, and for a long, long time.

Think about becoming a west coast investor today. You close escrow in early October, payin’ $250-255,000. Over the next 1-2 years your property loses 8% in value. Now, in order for you to benefit from any future appreciation the property must first appreciate 8.7% to make up for that 8% drop. If after your first couple years the value did decrease by 8%, a credible scenario in my view, it’d take another couple years at 5% annual appreciation just to get you to ground zero — your original purchase price. (20% down payment is assumed here.)

That sequence of events took four years and you’ve gone nowhere. If the market then blessed you with five years of 5%/yr appreciation, your place would then be worth about $322,500. So, in nine years you would’ve netted, before taxes that is, (but after 8% costs of sale) roughly $146,000 from the sale of your property. (That includes the loan balance having been reduced.)

That’s a bit over 11% a year. (I’m using simple math here to make a point.) Sounds relatively OK to better than OK, right? Well, not really. Here’s why.

Those who refused to buy into the hope for appreciation, bought in regions where solid location and positive demographics produced cash flow from Day 1. Think in the example above in San Diego. They made a bit better than an 11% annual return based upon the purchase/sale prices. There was no cash flow. In fact, I quietly assumed they had a break even, which in SoCal is a bad joke when using just 20% down. For those who’ll wanna comment about how they’ve recently done just that, I’m only talking about locations where the investor need not shoot their way in and out of the neighborhood. Minor detail.

Remember: If ya wouldn’t put Mom or Grandma there to live alone, ya didn’t get it from me.

Back to that impressive 11%+ annual return.

Real estate investors currently acquiring income property in areas justifiably known as growth regions, are cash flowing at a 5-10% cash on cash rate annually — with 20% down. Now don’t say it, cuz I can see your wheels spinnin’ away. Wait just a minute here, BawldGuy, 11% is 11% no matter how it’s sliced, right? Yeah, but at this point we should discuss how in the real world sometimes one man’s 5-10% beats another man’s 11% eight ways from Sunday.

It’s all about doin’ things on Purpose, and with a Plan.

The guy choosing San Diego or pretty much anywhere else on the west coast, is gonna hafta put at least 30-40% down payments just to break even in good areas. For instance, those banks who lend to self-directed IRAs and Solo 401Ks? They won’t even talk to those who wanna invest in California unless they’re willing to put at least 50% down. Still, let’s disregard reality for the moment, and say 20% broke you even.

So what?

The investor who bought the cash flow property is applying that cash flow each month to the reduction of the loan balance. Let’s look at how they fare over the years. I’m assuming no increase in value for the cash flowing property, or any increase in the net operating income whatsoever over the entire holding period.

In the first example our San Diegan realized an 11%+ return annually after nine years. We assumed they lost 8% in value the first couple years. We’ll assume the same for our cash flow investor to make it fair. It’s irrelevant, but we’ll do it just the same.

In nine years the San Diegan’s fantasy property (Sorry, couldn’t hep myself) has a loan balance of $170,100. The growth region/cash flow investor has a loan balance of just $115,000.

Oops — seems a few hundred a month of ‘meaningless’ cash flow has increased our growth region investor’s equity by roughly $55,000 over his San Diego counterpart.

Let’s fast forward 7 years and 9 months later, OK? (This is fun.)

It’s now been 16.75 years since these two investors made their respective choices. Let’s look at how they each fared.

The San Diegan now owns a property with a loan balance of approximately $127,600 or so.

The other guy? He doesn’t owe one thin dime. His cash flow is well over $1,500 monthly at this point. The San Diegan? He’s still thrilled his property is breakin’ even.

Remember, we allowed for no appreciation in value or net operating income. But if we allowed the San Diegan to increase his NOI by half over the 16.75 years? He’d still only be cash flowing about $560 a month — a far cry from the $1,500 our growth region guy enjoys. Further more, unless he takes a page from our cash flow dude, he’s still gotta wait almost 14 more years to be free and clear.

Bottom line?

The cash flow investor in this example has a gross equity of $250-255,000 in 16.75 years — without dollar #1 of appreciation. His capital, not counting any cash flow, grew from about $55,000 to say, $252,500. That’s an annual capital growth rate of 9.5% — again, without any appreciation whatsoever.

BawldGuy TakeAway: If you own property in San Diego, or pretty much anywhere on the west coast, please, I beg you:

Get Outa Dodge Now.

Take your investment capital and/or your current net equities in local income properties and put them where they’ll actually produce the results you wanted in the first place.

Stop tryin’ to dribble a football. It can’t be done. So why do so many keep tryin’?

Let’s talk about your situation, OK? What’s your plan? Gimme a call at 619 889-7100 and we’ll figure things out together. Come on, I need a fix. Have a good one.

The friction, of course, is caused by the practical need to get things rollin’ with a sense of urgency, while keepin’ at least one foot firmly entrenched in the Zone of Comfort. Frequently this results in the investor takin’ a step back to define exactly which comfort level they’re gonna salute, cuz there’s a couple, not just one — and their demands are often in conflict with each other — irritatingly so.

We all have that Right-Now comfort zone. We like to do things like, ‘test the water’ or ‘check things out’ in terms of process and results. It’s not by any means a stretch to say that this is, more or less, universal — not to mention, prudent. Problem is, when we’re talkin’ about our own retirement, it dawns on us that insisting on the appeasement of our Right-Now comfort demands can take us completely out of our too fast approaching Retirement comfort zone.

What to do?

I often suggest an old fashioned gut check. Preparing for and investing for the purpose of building a wicked cool retirement when time ain’t yer friend, is gonna involve choices. Do ya wanna be a tad outa your current comfort zone — or — be comfortable now — knowing your retirement will be less than it coulda been? It’s a tough call forced on many who wake up one day realizing they need to ‘power up’ their current Plan. I get calls from those folks the next day, all the time.

Here’s some advice based on over 40 years of experience.

Learn the difference between feeling anxious about doing more now than perhaps you’d prefer, and doing something that is flat our too risky, and born of panic instead of a Purposeful Plan. The difference is huge. The former is anxiety, generated from a personal preference. The latter is your gut tellin’ you to slow down and back the heck away from the cliff’s edge.

The two are worlds apart.

Overcoming your personal preference for doing less than is indicated as necessary to accomplish your goals, given your timeline, is doable on an objective level. You can empirically see the prudent moves resulting in the retirement you’ve always envisioned. It’s kinda like workin’ out in the gym, right? Some physical stress today, for what you confidently perceive as worthwhile rewards tomorrow.

Playin’ the silly game of catch-up by doing things you know aren’t wise, is analogous to the gambler tryin’ to make up his losses by doublin’ his bets and throwin’ caution to the wind. Whether you have lots of time, or are watchin’ the last grains of sand in your retirement hourglass hit the pile below, this approach is never, as in never ever the way to go.

BawldGuy Takeaway: Whatever answer you choose is probably gonna be right for you. You wanna make sure whether current comfort or a comfortable retirement is more important to you. Comfort means different things to different people, so understand — there’s no right answer for everyone. It’s gotta feel right for you. Just understand the more or less predictable results of whatever decision you make.

As you’re pondering how to make serious progress towards retirement the next 8-15 years, don’t let the loud ticking of Big Ben intimidate you. But do understand the message it’s delivering — loudly and clearly.

Wondering what you can do to get your retirement Plan back on track? The first step is to gimme a call at 619 889-7100. Have a good one.

Prices started rising in what would be the first of a long cycle of up a bunch, down a bit, up a bunch more, etc. I’m not sure it was indeed a paradigm shift as a matter of fact, but to them that’s exactly what it was. One of ‘em was so put out by what he saw through the rest of the 70’s he retired earlier than planned, headin’ back home to Wyoming.

Having just turned 25 in the summer of ‘76 when this new reality shifted into overdrive, I can attest to the wonder we all felt. We spelled wonder — bewilderment.

Runaway appreciation had arrived big time.

Those who adjusted to the new reality did exceedingly well. Those who didn’t? From the mid-1970’s to 200? they literally left million$ on the table.

So when the title of tonight’s piece asks, “How’d WE get where we are today?” I’m pretty much talkin’ ’bout you and the mouse in your pocket.

For many of those who began investing on or before say, 2002, some decades before that, this adjustment has been painful. Capital growth has been the engine driving real estate investment portfolios since Ford was in the White House. Those who made proper and prudent use of their capital in order to best take advantage of the almost guaranteed annual appreciation, made impressive strides increasing their net worth. (He said with equally impressive understatement.)

They’d buy an income property for around $40,000 in spring of 1976, sell for around $78,000 in the early summer of 1978. At 20% down plus closing costs, their total capital outlay to buy had been roughly $9,000 or so. The net check at sale just 26 months later was, give or take, almost $40,000! They did it again, this time acquiring much more property — maybe $150,000 +/-.

Then the cycle turned on ‘em. It was just as vicious as the upswing had been exciting. But most just rode it out ’till around the end of ‘84 or so, when interest rates had begun to show they were happily headed for single digit status again.

Happy days.

As we all know, this cycle repeated itself such that investors accepted it as the norm — or worse — their birthright. Then the current market correction hit with brutal force.

But, as most of our grandmas told us, there is almost always good to be found in bad times.

Grab yer pencil and paper cuz here it comes.

If you’ve owned your income property long enough to have seen your equity grow impressively, you also know it’s still much larger than when you started, even now.

This is good news, people.

You can take advantage of this monster shift in the fabric of the real estate investment universe. This shift has blessed us — again, that’s you and the mouse in your pocket — with a once in a lifetime opportunity.

Many are now able to adjust their previously executed investment plans, to increase the potential income when they reach retirement. Between the silly low interest rates, and the textbook positive price/rent ratios available in excellent locations, you can double or even triple what your retirement cash flow might’ve been.

I mean this in a completely literal sense.

Your window of opportunity is open — for how long is anyone’s guess. Cracked crystal ball and all.

The Perfect Storm for which many of you have been waiting is here.

Interest rates? Low 5’s. Prices/Rent ratios? Good enough to yield cash on cash of 7-10% using just 20% down payments. Location quality? Let’s not mince words, OK? There’s not one income property I’m talkin’ about here in which I wouldn’t be happy to let my 79 year old mother to live in by herself. No ambiguity whatsoever. And for the record, I love Mom a whole lot.

It’s my professional, experiential opinion that those who missed out on almost 40 years of healthy appreciation, will not have been as disappointed as today’s investors who miss out on the current window of opportunity.

It’s that good.

Please don’t mistake my appraisal of today’s real estate investment atmosphere as an easy road to huge retirement income. It’s not. But those who carefully construct a truly Purposeful Plan will indeed give themselves the opportunity, the likelihood of enjoying a magnificently abundant retirement.

Am I talkin’ to you and the mouse in your pocket?

If so, gimme a call at 619 889-7100 and we’ll see what’s possible together. Have a good one.

It means — for the most part — takin’ less money for your current units than you might think they’re worth. But, if you think you’re takin’ thousands less than you should, but are gonna increase your benefits big time in the future, why are you sweatin’ it? Relax — breathe deep the gathering…hugely increased retirement income.

I’ll be illustrating this point more than once this month. The Reader’s Digest version goes like this.

If you take thousands less to sell — or sell more quickly, and you’re able to secure historically low interest rates, while simultaneously ensuring your ultimate long term retirement cash flow will be 2-4 times higher than if you opted for the status quo — what in the world is making you hesitate?

Race that buyer to escrow, and pray every night before you go to bed that they close as agreed. Your upside is far greater than his — far greater.

Gonna use a local income property as an example soon. Meanwhile, call me sooner. 619 889-7100. Have a good one.

They all said one of two things — one of ‘em said both.

“As one of your posts challenged us to do, we looked all over our local market for something into which we could exchange our equity(s). It’s been ‘X’ months (fill in the blank) and there’s just nothing worth trading for.”

OR

“Your post askin’ us if we’d now buy the units we’ve owned for quite some time, even for what they’re worth after this market correction? No! As in, not in this or any other lifetime.”

As might be predicted, the San Diego-based investor said both.

Wanna see exactly what I’m talkin’ about, here in San Diego? Wanna see how silly prices still are, even after losing 30-40% of their value? Go to my company’s website brownandbrowninc.com, click on ‘Search’ and look around in the 2-4 unit section. Do the numbers on a few of ‘em. If you’re curious cuz maybe you think you’ve found a good one, call me so I can tell you why it’s really not.

Compare prices and rents — particularly their relationship — with your market.

I especially recommend this to San Diego income property owners who still believe there are properties out there that would make sense to own.

Many, if not most are more than a little surprised to learn what they can accomplish with one tax deferred exchange. In one case, I may have found the perfect example of how a local real estate investor can ship their equity Outa Dodge — literally doubling the retirement income they would’ve had to live with if they opt for the status quo. They weren’t exactly chagrined at the prospect of not managing property ever again, either.

I’ll close with this observation.

One investor has a well located albeit ancient, smallish income property, owned just over a decade. The debt is roughly half, give or take, of current market value. Two of the duplexes I spotlighted last month — using just 20% down payments — would produce 75-100% of his current cash flow. And for the record? He manages them himself.

Take advantage and search the San Diego market for your kinda property, then compare it to some of the properties I’ve recently written about.

Once you’ve seen enough, and are ready to cry Uncle! — Gimme a call at 619 889-7100. Have a good one.

And there’s the rub.

Lip service is given to the intimate relationship between risk and return, but often not much else. What’s worse, both risk and return are just as often misjudged by the investor as a result of their analysis of a given property. Though I used to believe risk was more routinely misunderstood, I’ve come to believe it’s probably the return side of the equation.

Risk seems more a victim of denial than anything else, though that’s purely an experiential observation from where I stand.

It’s that pesky relationship risk and return have had goin’ hot ‘n heavy for centuries that can and will chew you up ‘n spit you out if you ignore it. None of us are immune to the very simple reality which says the higher the risk, the higher the return. That truism goes hand in hand with the golden triumvirate of Mr. More is better than less, Mr. Sooner is better than later, and Mr. More, Sooner, is much mo betta.

There’s a thought process that seems to convince many real estate investors the extraordinarily high return their analysis shows them as reality, is somehow attached to a risk normally found runnin’ with a significantly lower return. We all wanna believe we’ve discovered the formula for finding high return properties without the ever congruent risk attached thereto.

It doesn’t happen people.

BawldGuy Axiom: Grandma wouldn’t lie. The higher the return, the more risk you’re gettin’ yourself into. High return? Low risk? Recheck your return. Something ain’t right, and it’s probably you.

I’ve done the same thing more than once. It finally hit me — either I was foolin’ myself, my numbers weren’t real, or my assessment of risk was, to be kind, substandard. It was the latter, by a landslide. Since that epiphany so many many years ago, I’ve done my darnedest to understate return, and overestimate risk. I try not to go overboard, but it’s been a practice with which I’ve become comfy.

Look, boiled down to its essence, the idea is to become as wealthy as possible — but slowly, not by next Thursday.

BawldGuy Axiom: The shorter time span demanded by investors to attain their growth goals, the higher the risk factor must be to achieve those goals. And the choir sings all four verses to, “Duh!”

Risk and return go hand in hand whether it’s high or low — it’s like gravity — you won’t defeat that investment principle regardless of what you think you may have found. Much like gravity, it doesn’t care what you think — it just is. Go figure.

BawldGuy Takeaway: Your analysis of a given property should always have as its foundation, the laws of Investment Physics. When the conclusion is high return with low risk, you’ve very likely discovered an inherent flaw in either your assumptions, your numbers, your conclusions — or all three. Analysis must forever and always be brutally honest, letting the chips fall how they will.

It simply cannot be scripted.

When investing in real estate for your retirement, allow me to suggest you keep some principles in mind.

1. Your #1 job is to do everything within your power to protect the original capital you’ve invested. Return is secondary. Nothing trumps this principle once your capital is invested — ever.

2. The assessment of risk, should be, um, relatively reliable. It’s the numbers you use for income, vacancies, and operating expenses now — what you predict for future years — that have the ability to make or break you. Don’t be artificially draconian, but be real. More on this topic next week.

3. When you’ve come up with your estimate of the property’s inherent risk and projected return, and it seems too good to be true, remember what Grandma told you, OK? Cuz she wouldn’t lie to you — if it seems too good to be true, it probably isn’t true. Find the flaw — be relentless in your search.

You might ask, “What’s too good to be true, BG?”

Let’s say you’ve found a property and decided the risk is very acceptable, in the high level of the ‘low range’ so to speak. You conclude the after tax internal rate of return (IRR) for a projected holding period of 5 years, ending with a sale, will be 17% annually.

Ya screwed up somewhere, cuz that ain’t gonna happen. High return properties carry commensurate risk — make that be your mantra.

BawldGuyCaveat: Though high return does indeed mean the risk is also high, please don’t make the common mistake of reversing that principle, cuz it simply doesn’t work that way. High risk MIGHT mean high return — OR low return — OR, God forbid a complete boondoggle loss of everything you invested. A reasonable return with comfortable risk, over the long haul, is what works.

Remember: Get rich slowly — not by a week from next Tuesday.

Finally, ponder what Grandpa told me the first time I visited him after switching to the investment side of real estate:

“Remember, it’s not called ‘risk capital’ for nothin’.”

‘Nuff said.

Let’s take a look at your portfolio, or get one started. Call me and we’ll laugh and scratch awhile. 619 889-7100 — Have a good one.

And there’s the rub.

Lip service is given to the intimate relationship between risk and return, but often not much else. What’s worse, both risk and return are just as often misjudged by the investor as a result of their analysis of a given property. Though I used to believe risk was more routinely misunderstood, I’ve come to believe it’s probably the return side of the equation.

Risk seems more a victim of denial than anything else, though that’s purely an experiential observation on my part.

It’s that pesky relationship risk and return have had goin’ hot ‘n heavy for centuries that can and will chew you up and spit you out if ignored. None of us are immune to the very simple reality which says the higher the risk, the higher the return.

That truism goes hand in hand with the golden triumvirate of more is better than less, sooner is better than later, and more, sooner, is much mo betta

.

There’s a thought process that seems to convince many real estate investors the extraordinarily high return their analysis shows them, is somehow attached to a risk normally found runnin’ with a much lower return. We all wanna believe we’ve discovered the formula for finding high return properties without the ever congruent risk attached thereto.

It doesn’t happen, people.

BawldGuy Axiom: Grandma wouldn’t lie. The higher the return, the more risk you’re gettin’ yourself into. High return? Low risk? Recheck your return. Something ain’t right, and it’s probably you.

I’ve done the same thing more than once. It finally hit me — either I was foolin’ myself, my numbers weren’t real, or my assessment of risk was, to be kind, wanting. It was the latter, by a landslide. Since that epiphany so many many years ago, I’ve done my best to understate return, and overestimate risk. I try not to go overboard, but it’s been a practice with which I’ve become very comfy.

Look, boiled down to its essence, the idea is to become as wealthy as possible — but slowly, not by next Thursday.

BawldGuy Axiom: The shorter time span demanded by investors to attain their retirement goals, the higher the risk factor must be to achieve those goals. And the congregation says, “Duh!”

Risk and return go hand in hand whether it’s high or low — it’s like gravity — you won’t defeat that investment principle regardless of what you think you may have found. Much like gravity, it doesn’t care what you think — it just is. Go figure.

BawldGuy Takeaway: Your analysis of a given property should always have as its foundation, the laws of Investment Physics. When the conclusion is high return with low risk, you’ve discovered an inherent flaw in either your assumptions, your numbers, your conclusions — or all three. Analysis must forever and always be brutally honest, letting the chips fall how they will.

When investing in real estate for your retirement, may I suggest you keep some principles in mind.

1. Your #1 job is to do everything within your power to protect the original capital you’ve invested. Return is secondary. Nothing trumps this principle once your capital is invested — ever.

2. The assessment of risk, should be relatively reliable. It’s the numbers you use for income, vacancies, and operating expenses now — what you predict for future years — that have the ability to make or break you. Don’t be artificially draconian, but be real.

3. When you’ve arrived at your estimate of the property’s inherent risk and projected return, and it seems too good to be true, remember what Grandma told you, OK? Cuz she wouldn’t lie to you — if it seems too good to be true, it probably isn’t true. Find the flaw.

But, you ask, “What’s too good to be true, BG?”

Let’s say you’ve found a property and decided the risk is very acceptable, in the high level of the ‘low range’ so to speak. You conclude the after tax internal rate of return (IRR) for a projected holding period of 5 years, ending with a sale, will be 22.7% annually.

Ya screwed up somewhere, cuz that ain’t gonna happen. High return properties carry commensurate risk — let that be your mantra.

BawldGuyCaveat: Though high return does indeed mean the risk is also high, please don’t make the common mistake of reversing that principle, cuz it simply doesn’t work that way. High risk MIGHT mean high return — OR low return — OR, God forbid, a complete boondoggle loss of everything you invested. A reasonable return with comfortable risk, over the long haul, is what works.

Finally, ponder what Grandpa told me the first time I visited him after switching to the investment side of real estate: “Remember, it’s not called ‘risk capital’ for nothin’” ‘Nuff said.

Let’s take a look at your portfolio, or get one started. Call me and we’ll laugh and scratch awhile. 619 889-7100 — Have a good one.

Epiphany: They don’t see or hear the train hurtling right at them head-on. I’ve witnessed this first hand many times in the last few years. This conversation made me realize how many people are 5-15 years from what they think is a hard-earned retirement, when they’re really that close to a dream crushing train wreck.

Let’s not drag this out. Does this describe you?

• You, and your spouse if you’re married, are in your mid-40’s to 50’s.
• You own your own home with zero to 50% debt.
• You have as much as $400,000 in some sort of retirement plan. The average is way under $100,000.

Stretch that out over say a 30 year retirement. Not real pretty is it?

The point: If you’re not able to save much money now while you’re spending more after tax than you’ll be earning in retirement before tax, your retirement isn’t going to be what you’ve envisioned.

Take whatever time you have left and grow your net worth as safely and as quickly as you can. Time is not on your side — it’s not your friend.

If you start now, do the right things, in the right order, with discipline, you can live a retirement even better than the one you picture. But you have to start. And before you start — you have to make the decision.

Nothing good comes from train wrecks. Drinks with umbrellas on sandy beaches, holdin’ hands while enjoying the sunset — a lot more fun.

If this has hit you where you live, gimme a call at 619 889-7100. Have a good one.

Sometimes we get too close to a thing, and wonder how anybody could look at two things and not see huge differences — if they indeed exist. My mistake, if you’ll allow me to self-diagnos, is (using baseball analogy in Lani’s honor) akin to me constantly makin’ the point that Major League Baseball (MLB) is vastly superior in quality of play than is seen in the Rookie ‘A’ Ball League in East Toilet Seat, Montana. Problem is, if the reader isn’t either a baseball fan, or would like to be but has no context in which to compare, merely reading about it doesn’t quite do the job.

I get it — mea culpa.

Jason Robins called me earlier this year about improving the current Plan he and his wife, Marianne had in place for their retirement. Though that Plan and their current Purposeful Plan is more involved than just this portion of it, here’s what they’re doing with Jason’s rental property.

It’s a single family residence in Washington (state) which has produced roughly $2-300 monthly cash flow, though Jason admits some months it’s a whole lotta break even. To their credit the house was kept in as close to excellent condition as possible. Jason is a salesman who pretty much makes his living on the road, while Marianne is a long time banking pro, very good at what she does. Here’s a picture of the rental.

Oh, did I forget to say it’s 85 freakin’ years old?! Hellllllo San Diego real estate investment property owners.

In a nutshell, it’s about 760 square feet with two bedrooms and a bath. It sports original fir ‘n oak floors, and a decent sized 1-Car detached garage. The neighborhood is better than decent, as it was worth braggin’ about in the listing — always a good sign. It sold for the low $200’s, less than $210,000 once it was re-roofed as part of the sales contract. He netted enough, give ‘r take to acquire a couple Texas duplexes — he may add a bit to make it happen.

Here’s a picture of one of ‘em — if only one side.

His equity to value ratio on his Washington house rental was roughly half or so. He’s puttin’ 20% down on a two of the above pictured duplexes, located in two separate locations of the Dallas/Fort Worth ‘MetroPlex’. His cash flow will approximate $5,000 a year for each — a total of $10,000 annually. This is based on today’s interest rate (Hat tip to Chad Emerson) which is 5.25% — 30 years fixed rate.

Here’s how the numbers look when the two properties are combined.

Gross Scheduled Income — $61,200
Vacancy/Oper Expenses — $24,480 Includes Professional Management
Net Operating Income — $36,720
Annual Debt Service — $26,506 5.25%/30 years/fixed rate
Annual Cash Flow — $10,214

Their tax shelter has improved significantly also. The Washington house delivered about $5,000/yr in. That figure should now be enhanced by $10,000 a year or so. Remember, he’s doing a tax deferred exchange so he’s bringin’ his ‘old’ basis with him. Any new depreciation is generated by the amount of new debt he acquires — X the percentage allowable for the improvements of the property into which he traded. Land isn’t, for the most part, depreciable. (Surely you can infer that’s a whole ‘nuther post, right?)

They’ll be taking the cash flow along with a modest $500 a month, and adding to the monthly payment of one of the duplexes. This will result in that loan being eliminated completely in just over 8.5 years. Then they’ll take the increased cash flow and the same $500 a month to finish off the other duplex.

Here’s how that’ll play out.

Balance at the point the first duplex is paid off — $169,870. The cash flow from the newly free ‘n clear duplex is $18,360/yr — or about $1,500 a month rounding down. This duplex’s annual cash flow is $5,000 or about $400 a month rounding down. Add the $500 a month previously used against the first duplex and they’re now applying an additional $2,400 to the month payment.

Let’s see what happens and how quickly.

In just over 4 years (49 months) that duplex is also completely debt free. In other words, in just under 13 years they will have engineered an annual cash flow of nearly $37,000 — a large minority of which will be tax sheltered for quite awhile.

Show me where you can put in about $110,000 +/- today, add $500 monthly to it for less than 13 years, and end up with over $3,000 a month in income. Since they both make decent income at their jobs, and don’t live according to the ‘Keep of with the Jones’s’ philosophy, that $500 extra outgo a month won’t be a problem. Furthermore, if they wish, they have other significant assets which would easily provide them the option of making this happen slightly earlier.

Let’s look at the differences both now and in the future — comparing keepin’ the status quo vs making the move to the Texas income properties.

Cash Flow

Stay = Max of $3,600 yearly.
Trade = About $10,000 yearly.

Tax Shelter

Stay = $5,000 a year.
Trade = An additional $10,000 a year.

Future Retirement Income — Oh sure, NOW yer payin’ attention.

Stay = About $8,400 a year — none of which will be tax sheltered.

Trade = $37,000 a year — much of which will be tax sheltered for about the first 14 years of retirement.

Let’s see here…

There is one huge benefit they’ll be giving up, which has been causing them many anxious nights. They won’t be able to drive by their new units.

Don’t ya just feel their pain?

You can do what they’re doin’. It starts with a call — 619 889-7100. You’ll be helpin’ me with my daily fix. Have a good one.