Do-Overs? Not When It Comes To Time Or Foundations

Posted @ 10:59 pm - Filed under 1031 Exchanges, Real Estate Investing, Retirement Income, Investment Lessons, Capital Growth, BawldGuy Axiom

So far this week I’ve had the same conversation four times. It’s about getting started, or resuscitating an investment plan built on a foundation of sand. The details leading up to the decision are different but they all arrive at the same bottleneck. How conservative or aggressive should they be?

Continuing with the metaphor of construction, the first piece of business is to decide how much property you should acquire your first time out. Whatever your decision, you’ll be living with it until the day you retire. There are no do-overs once your foundation is poured and set. Once in, the size of your foundation dictates how large a building you can construct.

Let’s say two 40 year old investors both have $100,000 — one invests all of it while the other only $75,000. What’s the big deal? Nothing at first. But go down the road just about 19 years or so. So everything is perfectly clear, the extra $25,000 isn’t ‘extra’ at all. It’s not needed for anything. Not living expenses — not for cash reserves — it’s completely available for investing in real estate. Here’s what happens given the following assumptions.

Only 5% annual appreciation for the entire time period

2% closing costs in both acquisition and sales

6% commission paid on all sales

Tax deferred exchanges used to avoid capital gains taxes

6% fixed rate amortizing (30 yr.) loans

10% down payments across the board

What did the extra property mean in real terms when they turned 59 years old?

It meant an extra Million Bucks — $1,000,000 from that one extra property.

Now apply an 8% annual return on that extra Million and that guy is now retired with an extra $80,000 a year in retirement income. Really.

BawldGuy Axiom: More is better than less. Sooner is better than later. More sooner is much mo’ betta.

The lesson to learn here is simple, but crucially important. The more capital you invest when ‘pouring your foundation’ the bigger the building you’ll have when you’re done. And one more thing. You can’t make up for it by adding properties along the way using more capital. You’ll always be behind where you could have — would have — been.

How you get started, or in some cases how you breathe life into a plan is to invest every dollar you possibly can. You can replace or redo many things — but there are no do-overs when it comes to time.

This entry was posted on Wednesday, February 27th, 2008 at 10:59 pm and is filed under 1031 Exchanges, Real Estate Investing, Retirement Income, Investment Lessons, Capital Growth, BawldGuy Axiom. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.