How To Use Cash Flow To Sabotage Your Retirement — OR — The Faster He Peddles The Behinder He gets

Posted @ 11:07 pm - Filed under Cool Info, 1031 Exchanges, Selling Income Property, Cash Flow, Retirement Income, Buying Income Property, Market Correction, Investment Lessons, Capital Growth

Let’s take a look into some real estate investment concepts. Recently I wrote about some of the more common real estate investment terms. ‘Times Gross’ and ‘Cap Rate’ were just two of the terms covered.

Today let’s look at one of the misnomers we run into.

For instance — ‘Everyone knows when analyzing income properties, they should cash flow, or you shouldn’t even consider buying them.’

Like a security blanket, they just won’t let go.

This is usually invoked in somewhat somber tones. Imagine James Earl Jones in a voice a couple levels above a whisper, and you’d have it perfectly casted.

If there’s a more simplistic approach to investing, I’m not sure what it would be. Certainly an investor avoids negative cash flow, with rare but obvious exceptions. The whole concept of cash flow is misunderstood on so many levels. It’s no wonder beginning investors end up slapping a governor on their capital growth rate — and doing so without the slightest hint of the negative consequences.

Give $50,000 apiece to a couple investors. They buy the same income properties — the only difference being how they’re bought. Will they cash flow or not?

Cash flow is a good thing — when it’s time to retire. Getting a tan is a good thing — at a nice warm beach. The right approach for the correct agenda.

Investor #1 put’s 10% down on two properties, both of which generate under $1,200 a year in cash flow. We call that a break even in the real world.

Investor #2 put’s 20% down on just one property which will throw off around $4,000 yearly, or nearly double the cash flow.

They’re both 40 years old, and married with kids. They make $60-70,000 a year, and manage to save a little. They’re not gonna end up with a grand retirement income in that scenario without investing in something, and growing their capital. Well, they could, but they’d have to wait ’till their 95th birthday to retire.

If we assume a 5% annual appreciation for five years, Investor #2 will benefit from a little over $66,000 in increased value. #1 of course, will do twice that.

When they trade up the gap will grow. After 20 years the difference will be accurately described as night and day. Investor #2 will be woefully behind. Investor #1 will be sending out retirement party invites.

The huge difference, or through #2’s eyes, penalty, was made possible by the needless, and totally unnecessary pursuit of cash flow. That pursuit alone will run his ultimate retirement income aground like a misguided ship at sea — and he’ll unfortunately be a witness in real time. Depending upon the luck of the draw — appreciation over the 20 year investment period — #1 will end up with at least $1 Million. It’s probable the final figure will exceed $2 Million — and with a market run-up or two, up to $3-4 Million.

Investor #2 won’t do half that, though arithmetically you might draw that conclusion. You’d be incorrect. #2 won’t come close to that. His best case scenario is more likely than not less than $1 Million after the same 20 years.

Compounding equity by definition means it’ll keep increasing on a larger number each year. Of course, if there’s a downturn, like now, that growth would be interrupted. It will turn up again eventually, and the compounding will then resume it’s march onward and upward.

In 20 years they’re 60 years old.

Investor #1 will most likely be able to generate $60-100,000+ a year in retirement income.

#2? In all likelihood he’ll have to delay retiring for 5-10 years. If he’s satisfied with a mediocre retirement income, he could retire the same time #1 does.

His predicament was guaranteed by his consistent decision to opt for unnecessary cash flow. His mistake was compounded every time he exchanged up. This isn’t the really cool compounding investors crave. It’s kinda like the old joke — the faster he peddled, the behinder he got.

Only he won’t be laughing.

Bonus misnomer of the day

If you own income property worth less than a couple years ago, you can improve your position.

Sell your property, take the equity and trade it (if a tax deferred exchange is warranted) or just sell and take the proceeds to a better market. Don’t hesitate — don’t over analyze it — just do it. The more quickly you act, the sooner you’ll be on the way to the retirement for which you invested in the first place.

You have many options, places where opportunities abound. The longer you dawdle, the older you’ll be when you’re finally able to retire. Harsh words, I realize — but true enough.

Don’t let this hurdle cost you the race — get outa Dodge and start growing again.

Or you can opt for the status quo and live #2’s experience.

When you chase cash flow for the wrong reason(s) or stubbornly remain in a losing situation, you may experience a sudden epiphany.

The faster you peddle, the behinder you get.

Not funny, is it?

Here’s a couple pieces of advice — value it or not, as you will.

Stop chasing unnecessary cash flow.

Get outa Dodge if the values have been falling.

This entry was posted on Tuesday, December 18th, 2007 at 11:07 pm and is filed under Cool Info, 1031 Exchanges, Selling Income Property, Cash Flow, Retirement Income, Buying Income Property, Market Correction, Investment Lessons, Capital Growth. 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.