This will be short and sweet for a couple reasons. First, tonight’s post is over at BiggerPockets Blog. If you’re not acquainted with it I give my full and energetic endorsement to it. I’ve been writing there for a couple years, or at least in a few weeks. It’s the best membership site for real estate investors in the country.
BawldGuy Heads Up: Tomorrow (Wednesday) I’ll be out of touch with the world completely. Gettin’ some dental work done, and they wanna knock me out to do it. Works for me.
I’ll be available for calls beginning at noon Thursday. ‘Course by then I’ll be Jonesin’ for a fix. You can help me with that by callin’ me at 619 889-7100. Or you can, if you prefer, send me a note using the Contact BawldGuy button up top. Have a good one.
Sometimes we’re so close to something day to day that a question can get us doin’ the RCA Dog impression without warning. One such question is probably one asked of me the other day — which I thought might be on more than just her mind. She asked,
“When you say the ‘after tax’ cash flow is $X, what gets taxed, and is it like my paycheck’s ‘after tax’ sadness?”
Well, sometimes it’s the same. For many however, the after tax cash flow is actually greater than the before tax cash flow.
How can this happen?
Long time readers know what I think about worshipping at the altar of cash flow — it can wound, even maim what coulda been a magnificently abundant retirement. I’ve written often on the subject. It’s my thinkin’ that the one I wrote a couple years ago was possibly my best effort.
It talks about a couple guys who came into my office quite some time ago. Real folks, in the flesh, with real agendas and money to back ‘em. A father and his son — from different schools. I learned much about human nature from those two.
BawldGuy Here: I first published this piece about six months ago. I was thinkin’ it was time to put it up top again. Hope it sheds some light for ya.
There are multiple schools of thought related to investing in real estate for retirement. Two dominate.
One says you buy property, holding it forever. When you’ve saved sufficient capital to buy additional property, you do — then hold IT for evermore too. The idea is you allow rental income to pay off debt as quickly as possible, arriving at the point of a debt free cash flow machine. Do this a buncha times and you’ve built the foundation for a nice retirement income stream.
Or so the doctrine goes.
BawldGuy Axiom: To the extent the real estate investor pursues cash flow, they hinder capital growth. The converse is equally true.
Let’s construct an example to illustrate the principle.
At 42, you own your own home, but will be buying your first income property. Your plans are to retire at 62, if possible — giving you 20 years to get the job done. You have no problem going to 65 if it makes sense. You have a total of $200,000 for down payment(s) and closing costs to get you started. If you opt for bigger down payments and higher cash flow, using accumulated cash flow for future purchases, you’ll begin with two initial acquisitions.
Several times a month a reader, or maybe a client referral will gimme a call and a great fix by asking if I could, “just tweak our plan a bit to make it perfect.” So many times they’re under the mistaken belief that owing to (Stellar pun, Jeff.) the fact they own a $300,000 income property debt free, their retirement plan is only subject to minor adjustments. Sometimes that’s the case, though in my experience rarely. The answer to my follow-up question dictates my advice.
How long till you retire?
Cash flow is a wonderful thing. Capital growth is truly something to celebrate. Yet both can derail your retirement faster than you can watch it happen in real time. So many real estate investors behave as if both concepts exist in a vacuum, unaffected by all other factors. One of those factors is time — and I’m here to tell ya, time won’t be ignored. Much like gravity, those who ignore it’s powers will either pay a stiff price, or look back and realize they were incredibly lucky.
Let’s don’t talk in terms of age, but instead, years before retirement. If you have more than 10, surely 15 or more years till that day, puttin’ cash flow at the top of your priority list will be the kiss of death — to your retirement income. Of course, that doesn’t matter much if your agenda isn’t to maximize cash flow at the point of retirement. I’ll assume your #1 goal is maximum reliable income at the point of retirement.
As mentioned in yesterday’s post, while in Starbucks I met a local high school teacher, Rick, who was hunched over a buncha papers he was grading. We got to talkin’ and as one thing will led to another, real estate investing came up. (Yeah, I’m shocked too.) Turns out he owns a small local La Mesa, CA apartment building. I know exactly where it is — solid location. It’s well kept. He was raised in the biz by his dad, doing cleanup, repair and maintenance — against his will. Amen brother, we lived the same lives.
Breaking News: My old San Diego TC — Transaction Coordinator — just walked into Starbucks. Hadn’t seen Debbie in years. I’ve had TC’s since her, but none better, not even close. She was the real deal. So fun to run into her today.
OK, back to schlepping for Dad against our wills.
His units are now cash flowing about $5,000 monthly with $800,000 in debt. He says it’ll cash flow roughly twice that when the loan is paid off. He’s retiring in about 10 years. Oh, and for the record, the location of his units is such that I’d gladly have Mom live there alone. Just so ya know.
Ever heard the saying, “. . . like shootin’ fish in a barrel?”
It’s amazing to many these days, who gets described as either ‘rich’ or a ‘big’ wage earner. To put things in perspective, at a recent happy hour a buddy, visiting from outa state, was reminiscing about his career. He’d started it in the middle 1980′s. He sells very high tech, expensive medical equipment. He recalled bustin’ his buttons one year when, for the first time ever, he’d earned a little over $100,000. Since then he’s become what I’m sure anyone would call a big wage earner — he banked over $350,000, not counting his year end bonus last year. Yet he was lamenting how he’d missed his goal to make much more than that. Go figure.
It offered two bedroom units on each side, both of which sported fireplaces. It was very well maintained. The rents at the time of sale were $765 a side. Heck, it’s even at the end of a nice, quiet cul-de-sac. With forced air heat and central air, neither harsh Ohio summers or winters were gonna get the best of any tenant. Also, they’d given it the ‘once over’ before selling. Redone driveway, modernized windows, and the like.