The Learning Curve of a Recovering Attorney Turned Real Estate Investor — Escaping From Dodge

Posted @ 12:51 am - Filed under 1031 Exchanges, Selling Income Property, San Diego Property Owners, Real Estate Markets, Cash Flow, Retirement Income, Depreciation, Capital Growth

How’d you like to wake up one day and discover your incessant pursuit of cash flow as #’s 1,2, and 3 on your A List agenda has probably cost you well over $2 Million? You think that’s pretty rare? It’s nearly as common as folks taking 20 seconds to order what passes as ‘coffee’ at Starbucks.

For the record it takes me about .9 seconds to order coffee there — Grande coffee please.

Matt and I met not quite three years ago. He owned a four unit property in San Diego in a great location not far from Balboa Park. He wanted my opinion — what should he be doing? I told him, and let’s just say he wasn’t too motivated to make it happen. He didn’t buy what I was saying back then. Long story short, that non-move probably cost him in the neighborhood of $1.5-2 Million — a dollar amount with which he fully agrees.

Matt is a very, very smart guy. As a recovering attorney, (his phrase — no offense David) he’s pretty much a self taught, pretty successful investor. In fact, since quitting his other life, he hasn’t worked in the real world since. He’s bought land in Wisconsin of all places, split it and sold for enough to live handsomely — or at least pay the bills and save some to boot. He’s invested in a large state (has a football team that just embarrassed Arizona to death on national TV) to the extent the cash flow is not only impressive, but also pays the bills — all under the cooling umbrella of some pretty impressive tax shelter.

Don’t get me wrong here. When Matt moved from the old life to the new one, he wanted at least enough cash flow to make it worth his while. In the end though, he discovered he’d become at least a little infatuated with it. When this happens investors often unknowingly chase after quarters at the cost of dollars.

He’s bought, fixed, and sold probably a dozen houses. He had to, as he needed to constantly keep producing income on which to live. He succeeded. Now he realizes there were at least a couple of those houses worth keeping. Ya think? Lord in Heaven! If he’d been able to keep just two of them, he’d have several times the equity he’s about to trade from his four unit property. Furthermore, he’d then have the where-with-all to produce literally six figures more a year in cash flow than he enjoys now.

But I digress. A quick note before proceeding. Matt knows all this, because as I’ve already mentioned, he’s a very bright guy. Today on the phone there were a few times his quick, almost instantaneous understanding of fairly sophisticated concepts saved us time. He gets it. I think he probably got it the first time I ran it buy him. Like in church as a kid, the old ladies in the second pew used to say — “He had a head belief, but not a heart belief.”

Sometimes being a PK comes in handy.

Yep, Matt not only taught himself, but figured out how to make a living as a real estate investor ever since. Thousands of people say they want to do it. They’re positive they can — but never quite put the Firestones on the pavement. Know what I mean, Verne? Matt figures most stuff out, and then figures out how to make it work for him. ‘Course it doesn’t hurt to have a wife with a reliable job as a teacher. All these years and I’ve never met her. We’re gonna remedy that real soon.

So what’s the problem?

It’s recently has Matt fully grasped how the constant obsession with cash flow has cost him millions. The only real estate he’s ever really kept, went from under $300,000 to $1 Million — more than tripling value. Ironically, it’s my opinion he kept it only because after fixing it up and increasing the rents, he fell in love with the dang cash flow. It’s human nature. Cash flow acts sometimes almost like a fantasy come true — kinda like surfing on air.

By not executing a tax deferred exchange when I advised him to do so, his capital is now literally a comma short of what it should be right now — accounting for the market correction.

We’re gonna rectify this oversight in the next several weeks. His four units sold recently — for the same million bucks they were worth when we first met. His equity isn’t as large as you might expect since he refinanced for a much larger amount. Nevertheless, we’re heading outa Dodge, as investing in San Diego would be foolishness on a grand scale.

If you own property in San Diego, California in general, or any place with stoopid high prices — find the exit door and use it. Denial or infatuation with cash flow doing nothing for you now, is the reason you’ve lost a ton of money in the last several years. Cash flow is wonderful when you’re retired. When you and maybe your spouse both have jobs enabling you to endow retirement plans, save for your kids’ college education, and generally enjoy life — cash flow shouldn’t even be on your B List.

BawldGuy Axiom: To the extent the real estate investor goes for cash flow — their capital growth will be inhibiited — and vice versa. Corollary: You’re not the exception.

If you’re really, really thirsty, do you spend the next few minutes searching the fridge for a carne asada burrito? No, you don’t. You grab some water, or whatever else is available to quench your thirst.

You need to grow your capital for the expressed purpose of creating the largest monthly cash flow — at retirement.

We’ll probably increase Matt’s tax shelter to the tune of roughly $30-40,000 yearly. His capital growth rate? How do you fail to improve on zip zero nada? His capital has been floating face down now for quite awhile. That’s what happens when you allow your real estate investment capital to remain in San Diego.

Over the next few years we suspect his capital might grow at a rate of 20% yearly, probably much more. I’m trying to be conservative here. In any case, by the time we make the call to get rid of what he’s about to acquire, his capital will have grown phenomenally. That’s kinda misleading though, isn’t it? Any capital growth rate would be phenomenal compared to a market like San Diego. That’s where investment capital goes to die.

Ouch! Did he really say that?

He did indeed — and that’s why Matt can’t wait to take his moribund equity and haul buns outa Dodge.

What’s holding you back?

Please don’t say cash flow.

This entry was posted on Friday, January 11th, 2008 at 12:51 am and is filed under 1031 Exchanges, Selling Income Property, San Diego Property Owners, Real Estate Markets, Cash Flow, Retirement Income, Depreciation, 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.