Real Estate Investing Basics

Retirement Is About Creating Stable/Abundant Cash Flow and Net Worth

Expertise: Personal Development, Personal Finance, Mortgages & Creative Financing, Real Estate News & Commentary, Business Management, Real Estate Investing Basics, Flipping Houses
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If you don't agree with the title, this post ain't for you. You're makin' that ‘Huh? What?' face, but given the actions of so many around the country, you'd think they don’t agree. In last week’s post in which I talked about combining two or more strategies synergistically to turbo charge both retirement income and end game net worth, a commenter asked this excellent question:

Could you please elaborate on your comment about the Michigan investor; “highly successful Michigan investor who understands the difference — that price isn’t the be all end all. Ironically, even though he’s doing well, his results are pedestrian compared to what he could do elsewhere. When presented with the facts, he immediately saw his new options.”

I am also a Michigan investor and have long wondered if it would make more sense to be investing in another market. Is that what you mean? Also what do you mean “…saw his new options”?

The Short Answer — Options He Saw

  • Markets with dynamic, growing economies.
  • Properties located in regions with growing, not falling population.
  • Significantly increased end game — read: retirement income.
  • Net worth at retirement larger by a factor of 1.5-4.

The Long Answer

With apologies to my many friends in Michigan, and markets like it, I applaud those doing well — you’re exceptional. I know you don’t like me sayin’ it, but guys I could name here (but won’t), are doing well only relative to others in the region. Sure, they’re also pounding some who’re investing in superior markets, but that’s due almost completely to their own superior savvy. It’s my contention they’d do 50-300% better if they applied their impressive experience and skills elsewhere. But enough of that.

Let’s use the typical numbers of a young (under 30) Michigan investor who’s been kickin’ major bootie for awhile now. He’s wicked smart, and frankly, one of those guys who have far more, um, intestinal fortitude than is safe at times. 🙂

His typical investment is a $35-45,000 cash purchase, no rehab required, with rents of roughly $1,000. Not long after acquisition they sport market values of about $60,000 or so. He suspects they might be worth $80-100,000 in 10 years, but he knows that’s crystal balling at best, and agrees they’re purely a cash flow play. He owns about 12 of these puppies, I don’t remember the exact number.

What would happen if he . . .

  • Exchanged, tax deferred, all of the equities into a far better market/property(s)?
  • Applied The BawldGuy Domino Strategy.
  • Did a couple flips quarterly with just a $15,000 after tax profit each.
  • Used flip profits to increase the velocity of falling dominoes.

Let’s not just talk about it, let’s do it and compare results.

If our studly Michigan investor, we’ll call him Mike, did what I suggest, the numbers would work out thusly. For comparison, I’m assuming more operating expenses for his out of state properties than his local stuff. Also, there will be no assumption of increases in Net Operating Income (NOI) or value.

For those who will rant and rave about the cash flow of the Michigan props during the period of almost 14.5 years, I say your welcome to it. A dozen (12) properties cash flowing at about $600/mo each, is $86,000 yearly. Impressive for sure. Before finishing this thought though, let’s take a look-see at the numbers.

The Results

This assumes Mike traded into eight (8) outa state properties. He used moderate leverage, 30% down. His loans were 30 year fixed at 5.25%. He went from a total asset value of approximately $720,000 to over $2 Million. His cash flow, at first, went from $7,200 monthly down to just over $4,400 a month. This was rectified in less than six (6) years, when his cash flow outa state eclipsed his previous Michigan cash flow by $3,000 a year. After almost eight (8) years his cash flow is over $1,000/mo higher and quickly leaving what woulda been his Michigan cash flow in the dust.

But I digress — more on that later.

After just a mite less than 14.5 years the cash flow from the outa state properties, now completely debt free, are a steak dinner or two under $147,000 annually. That’s about $12,200 monthly.

NOTE: If Mike, as I've already advised, limits his local investment activities to flipping, he would easily free ‘n clear his outa state properties in far less than 14.5 years. Experience shows it would more likely be in 5-10 years. Just so ya know.

The Michigan rentals are still generating their pedestrian $86,400 yearly$7,200 a month. Ho, hum.

Meanwhile, at least for those keepin’ score, the net worth of each are as follows:

Michigan — $1 Million or so IF you allow for a 39% overall increase in value.

Outa State — Over $2 Million with NO appreciation whatsoever.

Let’s address the ‘Yeah buts’ shall we?

Yeah but, what about my cash flow in the first half of the case study?

I could write an entire post on just this one, but let’s be quick here. The cash flow for both approaches over the 14.5 years is just over $1.2 Million. I’ll give you that the Michigan cash flow is much more at the front end. So what? Over time the outa state strategy results in literally twice the net worth.

Yeah but, I’d use my cash flow to buy new rentals each year.

Really? In other words, Michigan is gonna suck like a Dyson forever? If it doesn’t, the prices will go up due to supply/demand. Pick one guys, cuz ya can’t have it both ways. Let’s assume they do rise in value beginning in say 2016. For Heaven’s sake, if Michigan goes up appreciably, what the heck do ya think places like Texas, Boise, and much of the South will do? Surveys says . . . 🙂

Yeah but, I can’t watch over my stuff when it’s maybe 1-3 hours away by jet.

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San Diego is on the other side of the economic coin, as compared to Michigan. Their housing market is trending down, but it’s not a complete disaster as is Michigan. Still, those who’ve stubbornly clung to Grandpa’s ‘Gotta be able to drive by it’ philosophy, have lived to regret it BigTime.

Of course, then there’s the age thing. Most of the props Mike has are roughly 25-35 years old. They’ll be 40-50 years old in 15 years. Yeah boy, that’s what every investor wants at retirement, a buncha rentals a hop, skip, and a jump from their own Social Security checks. 🙂

I’m pilin’ on now so I’ll stop. Well, maybe one last jab, alright? Mike's annual tax shelter, i.e. depreciation, will increase $30-40,000 a year over what he’s now ‘enjoying’ in Michigan. If he retires in 14.5 years he’ll still have that for the first 13 years of leisure. It’s not the reason to do it, but I’d wager Mike won’t complain. 🙂

Twice the net worth — 70% more cash flow (arguably more stable) — 3-4 times the tax shelter.

I dunno, works for me. Probably for Mike too.

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.
    Replied about 9 years ago
    Dear Jeff – where do I sign up for this? “Did a couple flips monthly with just a $15,000 after tax profit each.” Typo? -Drew
    Jeff Brown
    Replied about 9 years ago
    Hey Drew — Who wouldn’t?! A typo indeed. That bullet point shoulda read, ‘quarterly’, not monthly — though I do know more than a few flippers doin’ that volume or more. My mistake, and it’s already been corrected. Thanks so much for pointing it out.
    Replied about 9 years ago
    Hi Jeff – I am sure it can be done, but that is very hard work with scheduling work crews down to the minute. As you can tell (reading every word) I am a big fan and appreciate you taking the time to write all this down, though you may be somewhat preaching to the choir in my case. Thanks, -Drew
    Jeff Brown
    Replied about 9 years ago
    Figured as much. 🙂
    Mike Z
    Replied about 9 years ago
    I like it!!! Live where you want but invest where the numbers make sense.