I’ll begin this with a mea culpa. I don’t want folks to take this the wrong way. I’m an OldSchool Alum, and though I learn new things all the time, realize that fundamentals don’t change. When we fall off our garage’s roof we don’t fall sideways, we fall down — pretty quickly at that. The underlying principles making up long term real estate investment success haven’t changed for centuries. There’s a saying a couple of my mentors taught me long ago that has stayed with me. It says that the fundamentals of real estate investment success will not be mocked. The problem arises when investors think they’ve found a winning formula, only to learn they succeeded for awhile due to other outside factors in that market. They merely lucked into a beneficial tide which carried them to a better place.
A painful example of that phenomena was the San Diego real estate market. From late 1975 through the latest Mother of all Bubbles, a new understanding by San Diego investors of how powerful fundamentals are, has been acquired. But violating fundamentals on purpose is foolish. Most investors are far from foolish. In fact, they constantly strive to add to their store of investment wisdom — something I suspect is especially true of BiggerPockets members. After all, that’s why most become members. They want the facts. They want what works. They wanna learn the very basics to which this post alludes.
Fundamentals Work Every Time — Whether the Investors Knows They’re Violating Them or Adhering to Them or Not.
The ongoing Do-It-Yourself (DIY) movement in flipping, wholesaling, and long term investing has produced some truly outstanding successes. In fact, many of ’em will tell ya straight out they’re now highly successful for the third time, having crashed ‘n burned their first couple tries. When goin’ on a learning curve DIY style, the lessons sometimes — almost always? — come the hard way. Speakin’ only for myself, the lessons I learned through the School of HardKnocks tended to stick with me. They were often harsh and expensive. They hurt. They were completely unnecessary too. If I hadn’t been so cocksure of myself, and listened to my mentors, I wouldn’t have put my fingers on that red hot stove. Those insisting on doing everything themselves — if they survive — end up as impressively wise investors. Notice the key phrase there — if they survive? Most don’t. We don’t hear from the ones who get wiped out cuz, well, they were wiped out. The only reason I wasn’t permanently financially deleted was because of the infinite patience of those mentoring the young man who foolishly thought he knew everything he needed to know. That, and they liked Dad.
The problem with the DIY approach is, as Grandma warned us, “We can’t know what we don’t know.” I’ve come to put it another way. “You’ll never find the answer to a question you don’t, and likely never will know to ask.” Knowledge is power, and the lack thereof can be, and often is a time bomb. Thing is, it doesn’t hafta mean abject failure. It can mean a particular investor does what they know for 15-30 years, ending up with a very tidy retirement income — say $10,000 a month. However, if they’d known the page and a half of questions they never knew to ask, that income very well coulda been double to quadruple that amount — literally.
The “buy and hold ’til the Second Coming crowd” shortchanges itself at almost every turn. The strategy says to buy when you can, hold ’til ya die, and keep doin’ it as many times as possible. The rule says you stop when you can’t buy the next one and get it free ‘n clear by retirement. Sounds pretty good, right? If you’re one of the lucky ones who can afford to buy a house every year or so, at a good price, on affordable terms, yeah, kinda sorta. The idea catchin’ on lately — not new by any stretch — is to buy about 10 homes or so, pay ’em off, then retire like a king or queen. Again, sounds great, right? Let’s summarize the results in a ‘what coulda been’ scenario.
Beginning at about 35 or so you bought a rental house every year or two. You had 10 by the time you reached 50ish. The following 15 years was spent payin’ ’em off like a possessed banshee. Retirement arrives. The gross rental income from your efforts come to around $12,000 monthly, a handsome sum indeed. After vacancies and operating expenses your take — before taxes — is around $8,000 or so, and that’s generous accounting. Then you’ll find yourself each year at tax time payin’ state and federal taxes of roughly $36,000, leaving you with around $60,000 a year in after tax retirement income from your efforts. Congratulations, as you’ve surpassed probably 80-90% of your peers.
But What If . . .
- You used a couple of your homes to create a tax free income, using a completely different vehicle?
- You took advantage of the 1-4 times during the 30 years of investing to trade up — conservatively — to more property?
- You incorporated multiple strategies to create capital gains that would remain untaxed.
- You were told of various tax code regulations that allow you to enhance your future income/net worth — without taxation?
The list goes on, but you get the point. The vast majority of those able to invest multiple times in real estate have the ability to generate far more than they realize, when it comes to retirement income. The obstacle they can’t overcome is the knowledge they don’t possess, and probably never will. DIY only carries us so far. Within any given group of investors, a particular monthly cash flow can appear to be impressive. Nevertheless, when all the information applicable to a given investor’s situation is actually available — and understood — the difference in the ultimately obtainable retirement income can be remarkable. In fact, in a current real life, ongoing case study, one investor who’s already obtained the aforementioned 10 properties will end up with roughly $25,000 a month in retirement income. Approximately 53% of that income will be tax free by definition. About 35-40% of the remainder will be tax sheltered for many years.
Same 10 properties — but 2.5 times the income — and most of it shielded in one way or the other from taxes. Moreover, their after tax retirement income will easily be more than triple the amount generated by their counterpart, who insisted on doin’ everything themselves. It reminds me of the story one of my favorite mentors told me once, about the young gunfighter and his mentor.
One day the young student decided he’d become the fastest gun around. He’d paid attention and concluded he’d reached expert status. He called his mentor out to the street to settle it once and for all. The mentor, wise with years of experience and the lessons learned from his mentors, tried to talk the young buck out of the fight. The youngster would have none of it, though. He said, “I’m younger, have faster reflexes, and you’ve taught me everything you know. I’ll win this fight, old man.” Upon which his patient mentor replied, “Young man, I taught you everything you know, not everything I know. Walk away, son.” Oops
Long ago, I was that young man. I refused to back down — three times — and lost three properties, the last one in the early 80s. It was then that I finally accepted the fact I simply couldn’t teach myself, couldn’t do it myself, and should take advantage of the gracious mentors who were all too happy to pull me up to their level. Don’t believe those who tell you DIY won’t allow you to be successful. Hard work and a learning curve combined with unholy persistence will overcome much. But understand this: Those who know the answers to the questions others don’t know to ask, will do astonishingly better than those who don’t. When we insist on learning on our own, or learning from others who’re merely ahead of us in the DIY book, far too many pivotal questions go unasked for far too long.
And that’s the real ‘how to’ of real estate investing.
Photo: 401(K) 2013