« Stick a Fork In Me TodaySome Much Needed PlainSpeak For Real Estate Investors »The Perfect Positive Storm For Real Estate Investors?
Posted @ 3:44 pm – Filed under 1031 Exchanges, Buying Income Property, Capital Growth, Cash Flow, Palo Alto, RE investment strategies, Retirement Income, San Diego Property Owners, Self-Directed IRA, Solo 401k, Tax Shelter
Beginning in 1976 or so, real estate investors, especially in markets like San Diego, the general SoCal region, much of NoCal (Palo Alto is an example), and a few other regions around the country, began to be conditioned to expect values to rise significantly over time. In fact, from 1976 through the end of 2005, their expectations were met without a single exception, long term. The cycle became not only reliable, but predictable. Appreciation, often double digits, would raise values for 3-4 years, much longer for this last one. Recession would cool things off, prices would either flatten out, maybe recede a bit. But they would always resume the seemingly inexorable march to ever higher prices.
Though they were never termed bubbles, or at least I never heard that term used during those three decades, one wonders now if it was really one long generational bubble — inflating cyclically, but never bursting. Surely fodder for a conversation over beers. The relevant point to this discussion is that 30 years of conditioning is hard to break, from a human point of view. Besides, who’d wanna break it?
Bottom line, that long chapter is now finished. Those who haven’t, or won’t acquiesce to that simple reality are already doomed to the consequences.
1. No more appreciation, or not enough on which to base your central strategy. In other words? Your stuck with income property(s) no thinking real estate investor would consider seriously. Down payments of 30-50% just to avoid negative cash flow? Really?
2. By remaining in formerly super-appreciating regions, you’ve assured low cash flow, higher operating expenses, and faltering tenant quality. Time ain’t gonna heal this either.
3. Adding insult to injury, those owning these properties for very long periods will also find what cash flow they do enjoy to be completely devoid of tax shelter. The paradox of increased rents with decreased after tax cash flow will be the result for many — not a happy circumstance.
4. The longer the investor insists on ‘waiting things out’ the more potential buyers will see the light, and eliminate the entire region from their menu. Once this happens, and it’s in full gear now, it’s heralding the last train Outa Dodge. From that point on, sellin’ your income property will depend completely on the greater fool theory workin’ in your favor — not a marketing plan most would choose.
5. Down the road, retirement income will literally be at least 50% less than it coulda been — and that’s a conservative estimate. The longer it is ’till you retire, the bigger that chasm is gonna be. For many, unfortunately, it’ll be delaying their retirement, and workin’ longer — definitely not a happy thought for anybody.
6. If your income property is old today, say 30 years old or more, what’re they gonna be like 10-20 years from now? You really want all those completely predictable headaches?
Hello? Positive Perfect Storm?
Got my first real estate license in October of Nixon’s first year in office, 1969. I forget what the exact interest rates were then, but 8.5% or so seems about right. Fast forward to around 2002 — rates slipped to below 6%! Understand how that news affected me. For over three decades I’d never, not ever seen an interest rate below 7%. As in I thought pigs would fly before I’d see real estate interest rates below 7%, much less below, gulp, 6%!! Then a good friend of mine lucked out, finding a four hour window when she refinanced her home at 5% — are you freakin’ kiddin’ me?
My knee jerk response was that all these years my faith has been well placed — their is a God, and he loves me.
Today? If ya play your cards right and call the right guy, you can get a conforming home loan (primary residence only) for 4.75% Be still my heart. This translates into roughly 5.375% +/- to the real estate investor putting 20% down. So…
Storm #1 is WAY low, pigs’re flyin’ low, there is a God low, interest rates.
Contrary to what the LameStreamMedia might have you believe, there are solid income property lenders out there who’ll lend you 80% of the purchase price if the subject property is indeed spinnin’ off, you know, actual income.
Storm #2 There are lenders eager to lend you the above mentioned pig-flyin’ money.
You have a rental home, or maybe a couple duplexes in your town. Let’s us a home for example. Even post correction, it has about $115,000 in net equity. Sell it while ya can — I’ll turn it into a tax deferred exchange if need be — and there are stellar properties out there waitin’ to make your portfolio shine again. One client is in the middle of a 1031. His property sold and closed escrow. He’s identified two brand new duplexes in Texas, awaiting their closing.
His cash flow will increase from bare over break even, to almost $10,000 annually. His tax shelter will increase 2.5-3 times. His portfolio’s value has gone from just over $200,000 to half a million. The cherry on this tasty triple layer cake? No more management for him.
Storm #3 Well located properties in regions with strong/diverse economies can be acquired for 20% down (more if it makes sense to the investor’s Plan), yielding cash flow from the get-go, while increasing most investor’s annual tax shelter by a minimum of 50%, usually more.
Low rates + cash flow property allows my favorite cash flow strategy for retirement — which results in arriving at retirement with free ‘n clear properties, made that way through cash flow.
As a teenager the first couple years in real estate, I often heard ‘coulda-woulda-shoulda’ stories from old-timers. They had an opportunity to buy a couple acres in Mission Valley for a few grand — didn’t — and now it’s worth more for 1,000 square feet of the same dirt than they coulda had it for.
Heard the same stuff in the ’80’s after the 76-79 run-up in prices. Then again in the ’90’s following the 85-90 price explosion. You can imagine what I hear these days from ‘investors’ who passed up a $200,000 San Diego duplex only to see their buds pay $500,000 four years later. I tried to tell ‘em, but lead a horse to water, etc.
This positive perfect storm offers you a window of historic opportunity. Trade yer under-performing equity(s) for equally or better located units, increased cash flow and tax shelter — plus the knowledge that you now have a strategy in place that will result in a far better retirement than you’re headin’ for now. If you have approximately $165,000 at your disposal in one form or another, you can create a retirement income easily over $50,000 a year in a relatively short period of time — 8-15 years depending upon your particular financial realities.
We’re gettin’ this done for people all over the country — as you’re readin’ this. The cash flow their Purposeful Plans call for, assume no increase in value — OR — Net Operating Incomes. In other words, we counsel our clients not to insert any expectations whatsoever of improvement in today’s numbers. Now, do I think those numbers will increase? Yeah, but only a fool would cook those assumptions into their analysis. Your retirement income is too important to make it hostage to an ever-rising market.