Planning VS Executing — Execution Requires Knowledge, Expertise, and Experience

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I talk with serious investors just about daily. Some have never invested in real estate before, some have. Most of ’em have one thing in common, though — they wanna get it right. Nothin’ like the last decade or so to generate sober thinkin’. Who knew? 🙂 The conversations I’ve been having recently have underlined the value of knowledge, expertise, and experience.

The lessons to be learned from the last few decades are often . . . not the lessons that shoulda been learned. Again, this is where the Firestones hit the pavement. The troika of Knowledge, Expertise, and Experience (KEE), are the engine driving lessons well learned.

We must learn the correct lessons — or we’ll find ourselves in the same hot water, just a different pot.

A minor example — with major consequences.

Many have decided, when financing or refinancing their homes or their investment properties, to opt for short amortization periods. Most have selected 15 year fully amortized loans. In this economy, choosing that ammo period could seriously exacerbate future downturns your family’s job income.

Sure, the shorter payoff period also brings with it a lower interest rate. But the payments are significantly higher. And set in stone. For a $200,000 loan, the difference in payments at the current available rates would be around $480 monthly. Doesn’t it make sense for most people to pay the slightly higher rate, but significantly lower monthly payment? Think about it.

If current financial reality allows you to double up on loan payments, good for you. You can still pay your loan off as quickly as you’d prefer. ‘Course, Murphy doesn’t ask permission when he decides it’s your turn in the barrel. When temporary bad times descend upon your family, having the option to ‘revert’ to the normal, 30 year payment can literally make the difference. Think that’s important for your home loan?

Imagine the impact the wrong loan might have on your income property. I’ve seen it before and the havoc it generated wasn’t pretty. The lesson to be learned from previous bad times, at least when it comes to loan terms, is to keep more, not less options on your menu.

Learning the wrong lesson is often more disastrous than the original learning process.

The takeaway is that going through rough times usually leaves us the silver lining of valuable lessons learned. However, without the minimum knowledge, expertise, and experience at your command, they may not be ‘lessons’ at all. Instead, they may be the seed for your next disaster — this time self-inflicted.

The lesson we have or will learn?

Without ‘KEE’ we often never know what we’ve really learned, if anything — and worse? We may use that new ‘knowledge’ down the road, to wreak havoc on ourselves. Knowing exactly what we’ve learned isn’t as easily accomplished as we’d like to think. Words mean things.

Knowledge — Expertise — Experience.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Jeff,

    Great points on having the flexibility of a 30 year mortgage and not over correcting. How many current problems are caused by people over correcting from previous mistakes. The results can be like edging slightly of the interstate and then jerking the wheel the other way. The results are never good.

    Slightly off topic question for you. Do you consider inflation when looking at long term notes and plans for your clients? If you control a property for a $100k note in 1985, that $100k is worth far less now then it was then.


  2. Jeff Brown

    Hey Jason — If you’re talking about a purchase money note, I do take inflation into consideration. I’m of the school saying we’re in for inflation, and probably just around the corner. Imagine, a decade from now, having a portfolio with a median interest rate of 5%. You and I both know what a huge advantage that gives to the investor. Prices and rents would be rising. Vacancy rates would be falling. Meanwhile, your cost of money is fixed ’til paid off. This is another reason to invest no later than yesterday afternoon at 4:30. 🙂

    That note for $100k generated in 1985 is indeed worth less in the future’s inflated dollars.

    Let’s talk about your $100k note now. Few, if any bought a note in 1985 that hasn’t already been paid in full. However, think about buyin’ a note today for that amount. If inflation hits, as I believe is almost inevitable, what might be the consequences of owning that note for a decade?

    If you acquired that note for a discount resulting in a 15% yield, and the rate of inflation is less, you’ve at least preserved your dollars’ value. Many of us went beyond that in the recession following the first price run-up, which was 1976-79.

    It’s worthy post material. Thanks for the inspiration, Jason.

  3. That’s a great post Jeff. We cannot predict the future. I have always been a fan of keeping the 30 year mortgage and paying it off sooner if possible. It’s so much better to do this rather than putting yourself under the gun and taking out a 15 year, much higher payment loan.

  4. I do understand the logic of taking a 30 for the flexability and purchased my first properties in that fashion. I know go exclusily for 15 year fixed rate in my traditional financing properties. statistics show and I can easily see my 30 year mortgage properties easily taking 25 plus years because I won’t put extra cash in. I have used this 15 year financing strategy to be able to set a firm date of 15 years out to be able to do real estate full time. I also only purchase properties that I can make 15+% cash on cash with 15 year financing. A lot of this does have to do with area and other practices I use to make a couple extra points.

    As you say though Jeff, the point is to study and work on improving all the time. No one strategy should be used exclusively at all times. I believe the best investors are always looking to change and improve their investment strategies. Something that might be horrible now might be the best path 5 years out… great post.

  5. Jeff Brown

    Hey Kyle — Different schools of thought for sure.

    Many of those who opted for your strategy in the 1980s were slaughtered in the early-mid 1990s.

    They were stuck with short ammo periods when rents dropped 20-25% while vacancies rose to roughly 15-20%, sometimes more. Add significant rent rate decreases to simultaneously increasing vacancies and the formula for disaster follows as night does day.

    It takes a bit more discipline to use the 30 year approach, agreed. But if, I mean when bad times show up, how many investors will simply be able to shrug their shoulders, saying to themselves, “Oh well”? Not many.

    A case study example was a client who decided the 15 year ammo was the best strategy. Couldn’t talk him and his wife out of it. It was the late 1980s, and he’d acquired a couple fourplexes two years earlier. In 1989 or thereabouts his wife insisted on revamping their kitchen from top to bottom, wall to wall. They then financed this with a home equity loan. Enter the S&L crisis and the aforementioned consequences. His cash flow properties went negative when his NOI dropped like an anvil.

    They ended up losing the properties, when the income from his business fell. I begged them to delay the kitchen remodel, as strongly as I lobbied for a 30 year ammo. The difference in the two loans approached $900 monthly.

    Down economy lowers his company’s revenues. Rents fall, vacancies soar. Kitchen remodel adds to the party. Would they have lost the properties but for the remodel? I don’t know, as my crystal ball never came back from the shop. 🙂 I do know this, losing out on more than $10,000 a year in cash flow as a direct result of loan terms didn’t help a bit.

    Nobody sees the perfect negative storm before it hits the horizon.

  6. Jeff– I think this is one of your most important posts yet. Excellent follow up comments as well. Maintaining financial flexibility– and a 30-year term vice 15-year term is a prime example– is the key to weathering a multitude of financial storms. You never know how or when it may hit, just that it inevitiably will. Thanks for sharing the insight.

  7. In my approach, the rules are different for my personal home and for investments. If you are responsible with your finances, a 15 yr on your personal residence at a 1% lower rate seems wise . But that same note in an investment would limit your liquidity in finding other investments. It all boils down to whether or not you view your home as just another investment or not. Folks will differ on that spectrum. The problem many face is that they are living in homes that stretch their limits so much that when adversity hits they are quickly strapped. I don’t get the impression that most of the readers here are in that boat. Every home I’ve ever owned has been an easy payment to make, even with a 15 yr note. This is not because I’m wealthy, but because I live well below my means. A job loss or disability would not be preferable, but I could navigate those waters without distress, even with a 15 yr note. I think most BP readers are wise enough with their finances that they’ve put themselves in similar responsible circumstances as to avoid those ‘tough times’ altogether. Now this argument is completely different at times when a 15 and 30 are only .125% apart. Then I would concur that one should just take the 30 and make extra principal payments if he desires.

  8. Good question from Jason there – I think it’s vital, in this economic environment, to structure all investments for minimum term of return – which basically means foregoing all (or most) capital gains calculations and sticking to cashflow.

    This is, certainly, what we recommend to our clients. If your investment is paid back in 6-8 years and becomes a clean cashcow from then on, you can effortlessly get rid of it if necessary, once it’s doubled itself up or even less – particularly if you spread your risk over several, affordable, high return cashflow properties.

  9. Jeff Brown

    Hey Ziv — You make a good point. That’s why I refuse to infuse an serious cash flow analysis with the assumption of value appreciation OR increases in NOI. We differ, but in degree only, on how much cash flow with which to begin. It’s definitely silly, no doubt injurious sometimes to assume future cap gains via appreciation. I often ask folks who do that routinely how much the charge for others to use their crystal ball. 🙂

  10. jeffrey gordon on

    Hey Jeff! Having closed a few mortgage loans in my short 58 years I would like to weigh in on my last turn in the barrel between 2002-2007 helping folks refinance their mortgages (in many cases technically it could have been described as federal banking fraud, but I digress). Being a lot younger than you, but a lot older than most LO’s at 48 yo in 2002 a lot of my clients were 50+ and well to do and wanting to refi into a 15 year mortgage so they could pay it off soon!

    Who was I to argue with them? the bean counter side of my brain said that made sense with lower coupon interest rate. They were experienced, had equity and were well established in their income patterns.

    What stunned me was that in the next 4 years almost every one of those loans was paid off early as my clients moved, split up, died, lost their job!

    Never again will I ever recommend someone take out a 15 year amortization mortgage!

    It is too easy to increase the annual payments on the higher coupon 30 year term loan to actually lower the effective interest rate below the 15yr rate without locking a client into a rate that likely will become burdensome at some point in the future.

    My rule is only fixed rate mortgages, with minimum upfront points/costs to allow maximum flexibility in the difficult times of owning income producing real estate.

    thanks for your wisdom Jeff Brown, you are a giant amongst midgets!


    • Jeff Brown

      Not sure if I’m a giant, Jeff, but doin’ what I do for so long has surely taught me some priceless lessons. That’s why I love writing on BiggerPockets, cuz the contributors Joshua Dorkin attracts are all the real deal. This entire site is a giant.

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