Jon And Jill Are Leaving Grandpa Economics Behind — What’s Next?

Posted @ 12:03 am - Filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Retirement, Real Estate Markets, Sominex Account, Depreciation, Capital Growth, Goals, BawldGuy Axiom, Tax Shelter

If you wanna catch up, please read the post preceding this one, as it sets the table for tonight’s post. The pics for this post are for us to share as completely unrelated enjoyment.

OK, let’s get this road on the show.

I”m going to give a snapshot of what I plan to tell Jon and Jill.

At 42, they’ve given themselves a head start over most by having already invested in real estate. Also, they have cash savings of around $50,000. This will act as their Sominex Account. (Cash Reserves) You know, sleep at night? They also own the family home free and clear. (Grandpa cheering in background.)

Their stated goal is to retire sooner, rather than later. Jon is not lookin’ at 65 as retirement time. If he could retire around 4:30 yesterday afternoon he would. Our end game is tax sheltered cash flow for retirement. Duh. First however, we must grow their capital. All retirement income is, is a yield on capital. The yield is, give or take, the same for $3 million as it is for $300,000. The idea is to be the guy with $3 million. The yield’s the same, but the dollars? Not the same.

The net equity in their rental house is around $200,000 — give or take. It will go on the market immediately. Since they paid $250,000 for it, they’ll sustain a long term capital loss. A tax deferred exchange will not be necessary here.

My advice will include taking some of the equity out of their free and clear home. Though they can easily afford $2,000 a month in a new house payment, I’m recommending they borrow $200,000 which at today’s rates will run them around $1,200 monthly.

The idea isn’t to see how close to the cliff you can get.

Now — what to do with $400,000 of real estate investment capital?

Allowing for closing costs, and the current chaos masquerading as real estate lending, we’ll assume total purchases of about $2 million. This will be spread over several properties, probably 7-9.

This will have not changed his net worth in any measurable way. At this point we’ve merely shifted some of their net worth to assets far better positioned for safe and prudent capital growth. By investing in real estate income property located in emerging growth regions, they won’t be waiting who knows how long for their San Diego property to rise $50,000 — and that’s just to get up to what they paid for the dang thing.

The markets in which they’ll invest have already gone up not only in value, but in what they command for rent. Any appreciation the last couple years is impressive indeed. We tell clients our crystal ball is as cracked as theirs, but anyone expecting more than 3-7% annual appreciation is playin’ a dangerous game. It’s completely possible the first year yields no appreciation whatsoever. Of course, even in that scenario Jon and Jill will be way ahead of where they would’ve been had they stayed in the real estate anchor known as San Diego.

BawldGuy Axiom: With exceptions rare as hen’s teeth, San Diego is where real estate investment capital goes to die. Wanna live here? There’s only one downside to living in San Diego — where ya gonna go for vacation for Heaven’s sake?

Let’s see what happens with 5% a year for five years. That would mean their capital went from about $400,000 to about $958,000 (includes principal reduction on loans) — or an annual capital growth rate of roughly just over 19%. That doesn’t count any tax shelter (depreciation) driven tax savings or cash flow during that period.

If I were to counsel a tax deferred (1031) exchange at that point, their post exchange (after costs of sale) net annual capital growth rate would be just over 13.5%.

Works for me.

What wasn’t mentioned in this scenario is the unused depreciation, which would be available at somewhere in the neighborhood of $250-300,000 at the end of the projected five year holding period. Before we continue, projecting holding periods is humorous at best, and foolish at worst. I’ve been wicked wrong — both ways, too soon and too long — in predicting so-called holding periods. Go ahead and do it, ‘cuz we do all the time. Just realize that number ain’t worth the paper it ain’t written on. The market, and only the market, with rare exceptions, are what tells us when to make the next move in a Purposeful Plan. It’s either the right time, or it isn’t. How long it’s been? Not relevant.

Markets don’t care ’bout our silly schedules. Just sayin’…

Tomorrow I’ll run a comparison analysis which will seriously consider the alternative of keeping the status quo for five years. No really. Stop laughin’ this instant!!

I’d love to get you back on the right track — if yer thinkin’ you’ve lost yer way on the road to retirement nirvana. That’s my way of sayin’ Contact Me and we’ll shoot the breeze about your personal situation. That’s the first part of the answer to, “What’s next?” Have a good one.

This entry was posted on Thursday, October 2nd, 2008 at 12:03 am and is filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Retirement, Real Estate Markets, Sominex Account, Depreciation, Capital Growth, Goals, BawldGuy Axiom, Tax Shelter. 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.