I understand the attraction to the myriad formulas attached to both real estate and discounted note investing.
I learned the hard way with many of ‘em that most formulas don’t have an infinite shelf life. In fact, some are downright misleading. Take the 2% rule — please.
I’d love for somebody to show me a market in which that formula wouldn’t include the advice to make close friends of Smith ‘n Wesson. Or how ’bout the compromise made on location quality?
It’s almost always worth a chuckle when somebody describes a neighborhood they wouldn’t advise a stranger to live in, as a ‘blue collar’ area. Yeah, right, and the double digit interest rates of the late 70s and early 80s were merely, um, ‘challenging’.
The problem with formulas is that by definition they’re inflexible in an atmosphere demanding flexibility above all else.
The formula for success in my own market worked form about 30 years, give or take. Then it struck like a starving wolf in winter. That formula became something to tell the grandkids about almost as fast as you could watch it happen in real time. I invoked the rule of flexibility, and hauled buns outa California as fast as I could book a flight on Southwest. That one move, recognizing what my own lyin’ eyes kept tellin’ me, is likely why I’m not hundreds of thousands of dollars poorer right now, maybe more.
Here’s a formula for ya. 25% down on a typical duplex in a decent San Diego neighborhood at a 5% fixed rate loan, will get ya around $400/mo negative cash flow. In better, more welcoming markets around the country, and there are several, it’ll net you around 5-10% cash on cash. This is why SoCal investors haven’t been braggin’ much lately. Again, flexibility to the rescue.
The art of the possible. What can the typical ‘regular folk’ investor hope to accomplish over the long haul? We’ll talk about that next week. Today let’s talk principles.
Let’s Begin with a Broad Brush:
1. If you have more than 10-15 years to retirement, with precious few exceptions, go for capital growth ahead of cash flow. Your goal is cash flow at retirement, not cash flow now. For Heaven’s sake you have so much cash flow now you have untold thousands of dollars to invest. Keep your eye on the ball, and that ball is capital growth first, then ultimately maximum retirement income. It’s all about timing.
2. To the extent possible, create multiple, independent sources of retirement cash flow. When I say independent I mean that you’d like to enter retirement such that if one ‘domino’ falls, it doesn’t cause a chain reaction.
3. When possible, and it almost always is, make use of Strategic Synergism. That is, combine multiple strategies to either speed up the process or end up with more net worth/cash flow at retirement — or both. Surveys show ‘both’ is preferred by a landslide.
4. We must understand that different schools of thought aren’t always diametrically opposed to each other. Sometimes it’s about timing. Sometimes it’s about what’s even possible in a given scenario. Schools of thought can be your best friend or the worst of treacherous enemies. Often they can be used in concert. Again, did you get flexibility from that?
5. This one’s a twofer. Sometimes doin’ nothing is far and away your best ‘strategy’. The other side of that coin is that you must ensure that every relatively major move you make on the way to retirement, is a slam dunk no-brainer. Major moves shouldn’t be executed when the analysis concludes it’s a close call.
Now let’s Get into the Weeds Just a Bit.
#1 Speaks for Itself.
Here’s a post on the subject that really gets into the whys and wherefores.
#2 is a Real Keeper.
If you’re mid 40s or younger, I’d include an EIUL as a stand alone and completely independent source of retirement income. Real estate income property, and discounted notes are a couple more obvious sources.
Also, having notes both in your own portfolio and that of some sort of Roth ‘envelope’ is the best of all worlds. Why? Cuz the ones you own can have their after tax income diverted for the purpose of increasing the velocity of debt elimination re: your real estate.
The Roth portfolio(s) will grow tax free, also generating tax free income at retirement. Furthermore, BOTH note portfolios will continue growing in retirement, providing random monthly raises in income ’til ya go to your final reward. Also, inside the Roth, the untaxed accumulation of payments will buy more notes by themselves.
#3 is Almost Always THE Difference Between a Nice Retirement
and one that’s magnificently abundant. The Purposeful combining of multiple strategies can and does yield remarkable, and yet empirically measurable superior results. Real synergy is rare, but when effectively harnessed it tends to magnify positive outcomes. The key is to do it on purpose with a detailed Plan. Rarely are positive results generated by ‘accidental’ synergy.
#4 Schools of Thought
are not found on the third tablet Moses lost comin’ down from the mountain.
By far the most common mistake made by long term investors is treating a particular school of thought as if it transcends all other principles. Buy ‘n hold isn’t the be all end all, any more than constantly using Sec. 1031 of the IRC (tax deferred exchanges) is always the best option. What’d Grandma tell us? Avoid using always and never? That goes double for schools of thought.
#5 Doing Nothing is Often the Best Option on Your Menu
If I’d of stood pat a few more times in my life, there’d be more moola on accounts bearing my name.
We get caught up in the thinkin’ that we must be doing something or bad things will happen. There are more times, at least in my experience, when doing nothin’ would’ve avoided a whole buncha financial grief. Sometimes no more than hunkerin’ down produces the most preferred consequence.
Ensuring that major move you’re contemplating is worth the time, money, and effort is easier than most folks make it. Simply ask yourself if what you’re about to do is a Captain Obvious slam dunk. It should also be wonderfully unambiguous.
Pulling the trigger on a multi-property, multi-state tax deferred exchange is no small move. Though I’ve executed dozens of that flavor exchange, it was ALWAYS (Yeah, I said always.) analyzed within an inch of its life first in order to eliminate all other available options. Words mean things. Captain Obvious slam dunk should be literally interpreted.
Next time we’ll talk of a more specific level of details. What vehicles to acquire. Why? When, and with what strategies in mind to combine.
Be sure to leave your comments below!