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Most Investors Wanna Talk About Everything Except . . . RESULTS!

by Jeff Brown on July 8, 2014 · 20 comments

  
Most Investors Wanna Talk About Everything Except . . . RESULTS!

As the story goes, Dad was earnestly explaining to his sixth grade teacher why his assignment wasn’t completed on time.

After finishing he was confronted by a no nonsense look from the eyes of a man who didn’t brook excuses other than death or dismemberment. He solemnly leaned over his desk, pointed his finger at the cringing 11 year old, replying, “Don’t make excuses, Brown. Make good!”

If I’d received a thousand bucks for every time I heard that story, I coulda paid cash for my first home as a high school freshman. In our home, excuses were for those who simply couldn’t produce as expected.

It was far better to simply admit failure, ask for help in illuminating the reason for said failure, then go to the ends of the earth to produce those results the next time out.

Why Do We Fail?

Is that the gazillion dollar question, or what?

Let’s eliminate the obvious first. There are those among us who’re apathetic. When they say they don’t care, they’re givin’ us the straight scoop. But why then do almost 90% of us either retire poorly, or worse, must work ’til their age or health won’t allow it?

Let’s talk about the empirical numbers first, shall we? In a recent Forbes piece, the highest estimate available for ‘average 401k balance’ at age 65 is $100,000 — quadruple what independent experts have estimated. But, let’s believe the retirement planning folks on this one, ok?

Whatever your age as you read this, does having just $100,000 in your 401k plan at 65 scare you, big time? If we were to query a million 65 year olds today as to what led to that sad reality in their lives, we’d be hearing the same type answers Dad gave to the teacher in that — wait for it — little red schoolhouse. Yep, one teacher, eight grades.

Related: Real Estate Failure: My Story

Thank the Lord, that teacher refused to accept anything but the expected results assigned to the students to produce. To his death, Dad insisted that teacher profoundly altered the course of his life. He became a results oriented machine.

Excepting those who don’t even fake the effort towards a decent retirement, why the universal lack of results? It’s something that’s busted my chops since I transitioned from houses to investment property, back when Ford was in office. Dad first told me his take on the question during our first lunch together as partners in our new real estate investment firm, back in January of ’77. Loosely paraphrased,

“As a people we’ve lost the belief in the proper ways to achieve what we want. Principles are principles, and no amount jawboning will change that one fact. There’s a proper way to do things, sometimes more than one proper way. But when we deviate, for whatever reason(s), we doom ourselves to either mediocre results at best, or abject failure at worst. The phrase ‘thinkin’ out of the box’ has guaranteed more failures than Marie Calendar has pies.”

When I pressed him on that, he freely admitted that thinkin’ out of the box has begat countless positive breakthroughs in almost every aspect of our lives. What he meant was that it had become the go-to excuse for taking shortcuts, or simply not ensuring what was the genuinely correct way to successfully complete a given task, no matter how big or small.

However, he never failed to point out that even when outa the box thinking was applied, applicable principles were not violated in the process. For example, bodybuilding has been improved infinitely in just the few decades I’ve practiced it. Yet, the one fundamental principle — ‘hurting’ the muscle cell so that it ‘rebuilds’ itself bigger ‘n stronger — has never changed. In other words, the actual muscle building happens outside the gym. Muscle destruction is what we do inside the gym.

There’s No New way to Retire Well via Real Estate, Notes, Insurance, and the Rest. Period.

Wanna know why it’s gettin’ harder ‘n harder to flip properties in most markets?

Cuz the bulk of the flippers still standing are the hardened pros who’ve survived the last several years of bone crushing competition. Same with long term investing for retirement income.

Those who’ve followed the advice of the cash flow sages have learned the hard way, (or will, and usually too late) that the timing of cash flow matters. It matters? Yeah, like having brakes on our cars ‘matters’. Or, if you’d rather, think of something as miraculous as penicillin. It will injure our health if wrongly timed, or if used to battle the wrong illness. It’s an antibiotic that if wrongly applied can cause serious damage.

Related: Investing for Cash Flow or Appreciation – What’s the Difference?

Those who chronically mistime their retirement agenda to achieve cash flow from Day 1 soon learn they’ve not only severely retarded the potential for ultimate retirement cash flow, but often find themselves the not so proud owners of decrepit, old, and costly properties in less than stellar locations, attracting tenants not found in the Happy Dance Songbook of real estate investing.

Or how ’bout the principle of leverage? Everyone knows leverage is all about down payment, right?

Who doesn’t know that?!

And there resides the cancer that will eventually triumph over all the good intentions of real estate and note investors everywhere. Regardless of the down payment utilized, if the property’s yield isn’t greater than the cost of money, you lose. Every time, no exceptions.

We simply can’t succeed in the long run when our modus operandi is consistently flawed to some extent. What exacerbates this is when market forces overcome investor errors, as we’ve seen three separate times in the last 40 years.

Thousands of investors since the mid 1970s have tragically thought themselves astute investors, when in fact the market appreciation rescued them from themselves. When appreciation ceased being their parachute, they hit the ground with a cringing thud.

Long Term Success in Real Estate and Note Investing for Retirement Income is Mind Numbingly Boring!

Think of the areas in our lives in which we’ve become legitimately successful.

No bodybuilder will tell you that being in the gym 5-6 days a week is exciting. It’s not that we don’t/didn’t enjoy the results. It’s that the real work wasn’t exhilarating. In fact, if you were serious, it often felt like flirting with death. :) Same with running. Are you a runner? Done a few marathons have ya?

Were ya just thrilled to the bone upon awakening Sunday mornings so you could get that thrilling 20 mile training run in? No, most of the time you weren’t. But you loved the feeling of being in better shape, and were indeed thrilled by how you felt as you crossed the marathon finish line. Having competed in both sports, I can look you straight in the eye and tell you how boring so many of the weight workouts and long training runs were.

But, like bodybuilding and running, real estate and note investing for retirement isn’t about having loads of fun on the way. It’s about RESULTS. Even though gettin’ there was many times so boring your IQ dropped, the results were well worth the years of effort. The short cuts so many of us use to create wealth and robust retirement income, are in actuality fantasies missing the happy ending.

If we wanna be the average 65 year old American with not much to show for 30-45 years of hard work, then keep on violating the principles the proper approach dictates. Keep on following the DIY crowd into Mediocre Land. At some point we all realize that time is no longer our friend. What we don’t wish on anyone is having that epiphany with just $100,000 — or much less — in our retirement accounts.

It has always been about RESULTS, as it’s never been about anything else.

Tell me about some results you’ve gotten as a real estate investor.

Be sure to leave your comments below!

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{ 20 comments… read them below or add one }

Ben Leybovich July 8, 2014 at 12:02 pm

Jeff,

There are seasons in life, and it behooves all of us to recognize our current season. The problem with cash flow, as you see it (since I know how to read between the lines) is the following:

Most people sacrifice quality in order to achieve cash flow, and this is more true at the current time in the cycle – you are right about that. You are also right in assuming that for a retail investor, it’s much better to spend $220,000 for a brand new duplex in TX with a yield of $2,400/month. Why – because though CF is nothing much to write home, by the time this thing is paid off on an accelerated AM, it’s still gonna be a nice structure. This equals retirement safety – right on!

Some of us are more sophisticated than retail investors, and that’s why you call some of us “exception that proves the rule…” :)

Love you Jeff. Don’t have much time to read, and when I do it’s usually you. I hope that understanding “Jeff speak” is indicative of seasoning for a young guy like me…

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Jeff Brown July 8, 2014 at 12:40 pm

Hey Ben — By far and away you’re the exception to the rule, and that’s a salute from me to you.

The ‘retail’ investor label is a misnomer, and here’s why. It’s not that they’re not as sophisticated as those buying properties in inferior locations for less money, it’s that their model simply doesn’t call for location quality compromise. When long term investors buy well built income properties in exceptionally high quality areas, there is no wholesale price for investors such as yourself, as sellers have their choice of buyers. The only reason any sophisticated investor can buy at what you call wholesale, is cuz serious long term investors either wouldn’t buy ‘em, even at wholesale value, or perceived the value to be lower than the seller. Sellers who sell at very low prices AND provide seller financing are what we in the biz call desperate. :) By the time you show up, you’re the only game in town. That simply doesn’t happen with the other so-called ‘retail’ model.

As far as the timing of cash flow, your timing has been spot on since Day 1, based on your motivation. All you’ve done is use your specific model to knock cash flow outa da park. :)

The one thing I’ve learned about retirement cash flow: Nobody cares from where it comes, as long as it hits their bank account each month, and reliably.

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Greg July 13, 2014 at 2:01 pm

I’ve never understood the term “retail investor”. By several articles Ben has written, I’m a retail investor by any measure. I prefer the term “macroeconomic investor”. I invest where macroeconomics dictate will the best yield. Right now, that’s Texas. Texas has had the highest job growth in the past few years, compared to all other states combined[1].

So…I can either invest a lot of time and effort locally, or I can take my investment capital to Texas and invest there. One option requires that I invest a lot item, even potentially ending my successful career as a software engineer to get the maximum cash flow. The other option says I can invest where I’ll get higher yield, better tenant options, and newer, fresher properties, if I’m willing to sacrifice a certain overhead for others to manage it.

I went with the latter, and the results have been great. I’m not some “retail investor” that is buying what ever I can find. I have bought properties that were built for investors. They were checked out by Brown & Brown, the company that passes on something like 70% of the builders they meet. And I bought new properties with high quality vs. those 60-year-old, 2000 sq. ft. houses I see getting renovated on HGTV that go for $750,000. (What?!?)

I have already been hit by Murphy twice, and was down to 75% occupancy in both occasions. But because I had a pro advising me to stuff a big chunk of cash in my piggy bank, I STILL had positive cash flow in during both situations. While I was also paying an $1000/month on one of those rental property mortgages.

I had a good 401K. It was half there to the magic $1MM. But I changed companies and also discovered things weren’t moving like they should. I pulled all that cash, paid total cost of 37% loss, and now have virtually recouped the losses in total cash flow + estimated equity[2].

I also have an EUIL which I’ve increased twice by 4% in monthly payments. That replaces the money that has been going into my 401K. By my own calculations, the average 30-year-window performance of the S&P500 is 7.17%, with 68% chance of being between 5.66% and 8.68%. The EIUL’s 30-year-window average is 8.2%, with similar odds of landing between 7.74% and 8.66%[3]. The EIUL has much better odds of staying on target.

The only left is adjustments coming in the way of first position notes. I only wish I could get that small chunk of change stuck in my current company’s 401K to relocate.

[1] – 2006-2011 shows higher net job growth than net job growth from all others states combined http://www.politifact.com/texas/statements/2011/may/29/texas-public-policy-foundation/texas-public-policy-foundation-says-texas-created-/
[2] – http://www.turnquistwealthbuilders.com/2012/10/rebalancing-my-portfolio-part-3-rental.html
[3] – https://github.com/gregturn/finance

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Jeff Brown July 13, 2014 at 2:45 pm

When the smoke clears, and the volume returns to normal, it’s ALL about results. Great stuff, Greg.

Brad Boone July 8, 2014 at 12:08 pm

You should have to write here daily.

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Jeff Brown July 8, 2014 at 12:41 pm

Thanks so much, Brad. I used to write 6-10,000 words a week. It finally fried my brain.

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James Pratt July 8, 2014 at 2:57 pm

Interesting post Jeff. Most people (about 80%) do what they are told to do (sheep). Taking a different path cares the heck out of them. They’ll end up on the government plan- handouts.
Could not see putting x$ into a savings plan hoping the financial adviser was right, it’s my money, I’ll invest it!

Investing in RE and having a doable plan has given me a fairly nice retirement at a fairly young age. There are hundreds of ways to invest in RE, mine is SFR with good monthly cash flow.

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Eric July 9, 2014 at 6:02 am

Timely analogy as I just finished a grueling squat session. I’ve asked you numerous questions in the past and your advice, although I’m not versed in investing, seems truly sound and genuine. If your into physical culture you must look into Dan John, he’s the you of the coaching world.

IIf I could bother you here, I do have a question. My wife and I have been talking and we want to pull out our equity very soon before the market Dips again. We are early thirties and I’m hoping for about 40k in a heloc. We are very risk adverse since we’re a one income family, but we just want a secure long term plan. How would you proceed, or is this just an awful idea. I appreciate any feedback, and we will be calling you down the road, your message and cander resonate very much with us. Thank you.

Eric reichelt

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Eric July 9, 2014 at 6:22 am

An add on, your recent articles scare me to death. I make an average blue collar salary and I just don’t how to to improve my outcome.

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Jeff Brown July 9, 2014 at 9:08 am

Hey Eric — There’s not nearly enough info for me to advise you at this point. Go ahead and email me. We’ll set aside some quality time, put our heads together and figure things out.

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Greg July 13, 2014 at 2:03 pm

Eric,

The first article I read from Jeff BRown also scared me. Scared me enough that I sat up, took notice, and finally put a plan in action. It has taken me four years to get in motion with Jeff Brown and Dave Shafer, but things are WAY better off. And these two guys aren’t focused on helping über rich people, but instead “common folk” like you and me.

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Tom July 10, 2014 at 11:26 am

For me a good article causes me to sit back and reflect on the content, as well as the applicability to me. This article definitely did that! I’ve been spending a lot of time over the last few months thinking about the “right” investments for me (class of property, location, etc.). It’s always helpful to get the opinion of someone more knowledgeable than me (which for me includes a large % of BPers!).

One question I always ask myself when I see “average 401K balance” is how that was calculated. Considering how frequently individuals change jobs, you can easily end up with multiple 401k’s, possibly rolling to different IRA’s, etc. Ultimately it is difficult to get a clear picture since the “average 401k balance” isn’t important … it’s the “total assets / cash flow at retirement” that matters. I’m sure the person with one 401K that has a $250K balance (for an average of $250K per 401k) would gladly trade with the person that worked at multiple employers and has 5 different 401k’s each with $150K (even though the study might show this individual with an “average balance” of $150K since the other 4 accounts could be in different types of accounts, at different brokerages, etc.).

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Jeff Brown July 10, 2014 at 11:52 am

A very astute observation, Tom, and one I’ve asked myself often. In the end though, at least from where I stand, even if the ‘average’ was indeed around $250k or so, the results in retirement wouldn’t be a lot better as it relates to actual retirement income. Though most of us can surely appreciate the difference between $4k and $10k yearly income (4%), we can also see how most would be sorely disappointed at those results having come from 20-40 years of discipled savings and sacrifice. Make sense?

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Tom July 10, 2014 at 12:22 pm

Agreed! I don’t know many people that would feel comfortable on $10K a year … unless you really wanted to relocate to a super low cost of living country. Not saying that I wouldn’t … but I would want it to be my choice not because I had no other option.

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Greg July 13, 2014 at 2:05 pm

Tom,

One key source Jeff and Dave will reference is know as the Federal Reserve Bulletin. It’s a report generated every three years, and it’s based on surveys. I dug up the latest and read it for myself.
Hope that answers the source of “average 401K fund”.

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Dennis July 16, 2014 at 6:42 am

Isn’t all this talk of 401k’s and IRA’s a waste of effort? Don’t you think the final plan will most likely end with seizure of all retirement accounts by Uncle Sam? I was pondering this when our President mentioned his “MyRA” plan during one of his speeches. The solution to SSI, and redeeming of the large glut of Treasuries held by the privately owned Federal Reserve Bank, and China would be easily resolved with the forced purchase of these notes via our retirement accounts. How else could the president claim MyRA assets would be secured in a vehicle where one could not loose their principle?

I am sure folks who have worked and planned their working carriers around a sound retirement won’t mind funding the retirements of those less fortunate who did not bother to plan.

It’s not like there is a precedent for doing so, with the seizure of gold in 1930’s or again the default on treasuries in 1971. Cyprus was an excellent model of how it is done, without even the slightest aggressive action by the populace.

Don’t worry I am doing as all of you, except with the addition of diversifying outside of main stream vehicles, that are not so easily confiscated.

Not crazy here, would you agree we have left the principles set up by the founding fathers in the rear view mirror?

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Jeff Brown July 16, 2014 at 9:05 am

Without a doubt, Dennis. I’m thinkin’ the line in the sand will be drawn when it comes to after tax plans like Roth.

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Dennis July 16, 2014 at 7:02 pm

You know what can happen when Washington draws a line in the sand?

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Jeff Brown July 16, 2014 at 7:11 pm

Not much. :)

Gloria D. Wilson September 10, 2014 at 5:52 am

This is amazing – because it put so much of what was rolling in the back of my mind front and center. I’m very concerned about results – and didn’t know how to codify it until now. I’m nervous that my first foray won’t have the results I’ve conjured up in my imagination – and that I’ve tried to work out on paper. I don’t want to get bogged down in the paralysis of analysis, because that leads to procrastination – but I’m aware that there are so many caveats that could derail the beginning, middle and end of an investment. Thanks for this – I’m going to redraw my plans – the results I’m looking for are clash flow in a quality property in a good neighborhood.

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