Long Term Real Estate Investing is like Pitching: Timing and Location Quality Rule
The list of all that’s crucial to arriving at retirement with more than enough income is far longer than I knew, back when I was much younger and knew… pretty much everything. 🙂
So many factors must be infused into the ‘recipe’ that timing almost always becomes one of the most pivotal factors of all. Strategies executed late, or before their time, which is sometimes more injurious, can render the investor’s retirement results relatively disappointing. I’ve heard far too many times how ‘our retirement is not anywhere near what we thought it should be, and we have no idea where we went into the ditch’. When it comes to timing, the strategy most often mistimed is cash flow, when capital growth would be the preferred approach.
The debate over location quality not only pits those coveting higher cash flow against tenant quality, etc., but experienced against inexperienced investors. Not to say there aren’t those who’ve done exceptionally well in grossly subpar locations, cuz I know a few of ’em. But it’s solid use of British understatement to say they’re a tiny minority of investors. Those who’ve tried that approach over the long haul have generally arrived at retirement wondering where they went wrong. Their cash on cash numbers were always higher than their buddies, yet when it counted most — in retirement — their buddies’ strategy of insisting on blue chip locations resulted in larger, far superior incomes when the retirement party’s last toast was uttered.
Remember: We can only spend after tax income. And even the pre-tax income is less, due to higher operating costs for poorly located, older property. Yeah, I know, Captain Obvious. Yet not so for far too many.
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At the beginning of the year a caller asked me about their current portfolio. It consisted of four homes bought in a solid market. They were located, however, in what she termed a ‘blue collar’ neighborhood. They averaged 20-30 years old, with one being older. Now, I was raised in blue collar areas most of my childhood, and they were fine. However, when compared to areas with superior median household incomes, demonstrably better schools, and higher tenant/owner occupant demand, the long term results are virtually always much, much worse. But you’re interested in bottom line retirement income, right? You bet you are.
She’s now 43 years old, expecting to retire at 67 or so. That’s 24 years for those rentals to become pretty dang old. Over 40 at the youngest and over half a century at the oldest. Gee, wonder if that has any affect on the cost of management, repairs, maintenance, or, gulp, the quality of tenant it might attract by then? And what about functional obsolescence?
Floor plans from a couple generations ago are literally laughed at by tenants these days. In my local market, San Diego, a 1-4 unit property worth buying for a rental (what a joke that thought is) that’s under 30 years old is considered nice and broken in. 🙂 If they’re 2-4 units, the youngest ones were built in the 1980s for Heaven’s sake, over 30 years old now. Kitchens with no dishwashers, wall heaters, and little or no off street parking, almost always with no garage, is simply not gonna cut it 2-3 decades from now, when she’s retired.
She’ll also be faced with much higher turnover and the costs that come with that. She’ll experience more evictions, an easy prediction to make. If she’d spent a bit more on the front end, which she could’ve easily afforded, her ultimate income woulda been roughly 30-35% higher at retirement. Not only that, but the age of her rentals woulda been 24 years old, as they were new at purchase.
Now, there’s nothin’ magical about new, don’t get me wrong. But new compared to 30 years old at purchase? She’s beggin’ for a lower NOI at retirement when the properties are debt free. Why would she opt for less than $24,000 a year when she just as easily coulda created just over $32,000? Oh, and to pile on, let’s be always reminded of the higher costs of owning rentals twice as old, with much functional obsolescence and in inferior neighborhoods. Yeah, that’s what she wants to put up with in her golden years. What many don’t realize is that their choice of management firms dwindles, and the price management charges rises as the location quality falls.
To revisit understatement, the above barely represents the tip of the iceberg when it comes to investment strategies and timing. Experienced investors know how and when to combine two or more strategies to enhance either ultimate retirement income or retiring sooner, rather than later, or both. They realize that the successful implementation of those combined approaches often crumble under the pressure of old and or poorly located investment properties.
The concepts of both ‘strategy’ and ‘synergy’ have been both overworked and very misused when it comes to investing in real estate and notes for retirement.
“My strategy is to buy and hold.” What the heck does that even mean? My mentors told me a gazillion times that buy and hold is good, given all the factors involved are appropriately executed. ‘Course, that implies the investors knows exactly what to buy and hold, right? Also, when to invest. Where — how — with what financing — and also in what ‘flavor’ of income property. Industrial? Office? Retail? Residential? Small? Large? Is it buy ‘n hold ’til the end of days? 🙂 Or, is it buy and hold ’til it’s better to stop holding? It all depends on with whom you’re talkin’.
In baseball pitching is the foundation for virtually all championship teams. We all love the pitcher who can throw balls through brick walls at 98-100 mph. Yet, Sandy Koufax, one of the best pitchers ever to toe a major league rubber, had to shave a few miles an hour off his fastball before he even began to succeed. Why? Cuz there is no correlation between high velocity pitchers and success. None whatsoever, period.
There is, however, a tremendous link between those who throw 98+ mph for strikes, and winning big. Turns out 100 mph outa the strike zone is just as worthless as 87 mph outa the strike zone. Pitching is all about location and timing. The more successful a pitcher is in messin’ up hitters’ timing, the more games they’ll win. If the hitter expects Koufax’s legendary fastball, but instead gets his impossibly cartoonish 12 to 6 curveball, he’s doomed.
Again, timing and location turns out to be crucial.
Who knew? There are pitchers who can’t break glass with their fastball, yet win more games than fireballers. In the long run, history, and to be honest, wisdom shows us that much like baseball, gettin’ timing and location right is over half the battle. Screw up the timing of your strategies and location in either pitching or real estate, and I promise you won’t hafta worry too much about other things. You won’t get that far. 🙂
By the way, ya know what kinda hitters don’t last in the big leagues? The ones who never learn the strike zone, and swing at anything that looks good to ’em. Pitchers love those guys to death. 🙂
Photo Credit: artolog