Real Estate Investors — If You Homer, Don’t Worry About The Color Of The Bat

Posted @ 7:24 pm - Filed under BawldGuy Axiom, Capital Growth, Cash Flow, Depreciation, Goals, Purposeful Planning, RE investment strategies, Retirement Income, San Diego Property Owners, Tax Shelter

Here’s a very solid comment with an often asked question posed by Matthew. He was commenting on the post immediately preceding this one.

I know that what you are saying is true overall and the economics work out positively, but I do have one question. It seems that when many real estate agents recommend purchasing property as a tax shelter, they neglect to mention the interest that you are paying the bank over those 30 years. How does the interest paid (vs. buying all cash) figure into the equation? I am just thinking about the approximately $250,000 in interest that they’ll be paying if they get the 50% loans.

Originally, the primary goal of the investors in the example had been retirement income — laudable if before tax income was by definition synonymous with after tax income. Alas, for far too many that’s woefully untrue. I’d advised this retired couple to acquire two properties using 50% down payments. The result, without going through the details was a significant increase in after tax monthly cash flow.

BawldGuy Axiom: Properly tax sheltered retirement income is rarely the outcome of a happy accident. There’s no bumper sticker saying — Tax Shelter Happens.

Matthew clearly understands the point I was making. His question relates to the ‘many agents’ who ‘neglect’ to mention 30 years of interest now incurred by the advice to ‘purchase property as tax shelter’. Fair enough, Matthew. Solid question, here’s my solid answer.

Let’s look first at the title of this post. A batter homers. While rounding the bases he’s concerned he didn’t use the black bat he normally prefers, but had instead homered with a teammate’s unpainted model.

Let’s all agree without dissent — the color of a hitter’s bat is irrelevant to his newly attained primary goal: that of hitting a home run.

Let’s now view the interest paid over 30 years in the last post’s example as the home run hitter’s bat.

This is where my Cat Skinning nature comes to the fore. Did you homer or didn’t you? If you did, we can laugh about the pink bat you used later — or not. The primary goal was achieved — you skinned your cat.

Would the elderly couple in the example give up all their newly created after tax cash flow so as not to be forced into paying all that interest the next 30 years? Would you? No? Didn’t think so. Why?

‘Cuz in this scenario interest paid over the long haul is a false issue — period, over and out.

Is this always the case? Perish the thought. Of course not. Interest rates are almost always crucial to the decision making process for any given real estate investment. Duh, right? However, I’ve gladly paid double digit interest in order to skin a particular cat. More than once.

BawldGuy Axiom: The color of your bat will remain a false issue — at least as long as you keep hittin’ ‘em outa da park.

Now, about those agents who recommend buying for tax shelter without mentioning the interest.

Can we agree most agents don’t really know investments enough to give advice? There’re a lot of us in numbers, but percentage-wise? Probably less than 1% of the agent population. The real principle I’d love you to take away from this discussion is that buying property for tax shelter should be the exception, not the rule. Capital growth and cash flow are the two primary reasons to invest in real estate. Yer gonna get tax shelter whether you want it or not — and if ya don’t want it, I know plenty who’ll take it.

Can, no, should tax shelter be a critical part of your Purposeful Plan? It better be. Just understand it’s not the be all end all of investing. It’s a tool to be used when appropriate, nothing more or less. It’s like wearing a cup i baseball — most players don’t think about it ’till they can’t find theirs and it’s time for the game to start. Then it becomes crucially important.

The case in question was an obvious exception to that rule. They’d ‘planned’ themselves into their own personal corner of ‘tax hell’. The easiest way out was to convert current poorly performing assets into totally tax sheltered income. Objective analysis showed conclusively 50% down was easily superior to free and clear — for them, in their circumstances.

It’s all about skinned cats. Nobody cares how they got on your wall, until they verify they are indeed on your wall. Same with baseball — did you win or not? Folks are interested in the primary result — and only then do they proceed to the nuts ‘n bolts.

In the case of the elderly retired couple, the only skinned cat worth anything to them was a significant and long term increase in their after tax retirement income. That cat proudly hangs on their wall now, thank you.

Let’s skin some cats together. Call me at 619 889-7100 or send me a quick email. Have a good one.

This entry was posted on Tuesday, May 26th, 2009 at 7:24 pm and is filed under BawldGuy Axiom, Capital Growth, Cash Flow, Depreciation, Goals, Purposeful Planning, RE investment strategies, Retirement Income, San Diego Property Owners, 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.