2013 Thoughts & Confessions

It’s been awhile since my last post. If you’ve been following along you know I’m all about investing in income producing property (IncP.) I believe it's the fastest way to retire early, live the lifestyle you desire in retirement and leave a financial legacy for your heirs. And, unlike stock investing, it's easy to learn the basics and take control of your financial future. Some folks have asked if the 26% increase in the DOW last year changed my opinions about the benefits of investing in IncP vs. the stock market. I'll answer the question but first want to review some lessons learned in 2013 and ironically, some are about investing in stocks.

Sleepless Nights

Late in 2012 we moved our retirement funds out of a managed account (paying about 2% in fees) to Fidelity. We had a close personal relationship with our broker but I felt compelled to "walk the walk" and follow my own advice, see Why I Moved Our Retirement Funds Out of the Stock Market. Our plan was to invest in either a low-cost DOW indexed fund or use the monies to purchase real estate, single family homes or another mobile home park.

We placed the funds in a cash account and I stared investigating the options. I didn't see any need to rush as housing prices were in the dumper and there was a good chance the economy would slip into another recession.

Then, boom, the recession threat ebbed and the DOW had a couple of back to back to back weekly gains. The calls from brokers about rental homes stopped, abruptly. Bottom line, I missed the window on the cheap rentals and the DOW jumped 3,500 points. I hate losing “easy money” and hence, the tossing, turning and sleeplessness. So, what have I learned?

Market Timing

I don't have a system or process to time day-to-day or month to month changes in the market. Although I was right about the DOW going down short-term when we moved the funds out, I didn't know when to get back in! And, in hindsight, a more incremental vs. an "all or nothing" approach would have been a better strategy. There probably are folks who can time the market but not a novice investor like me. Having said all this, successful stock investors must time the long-term market and give due consideration to the macro tend line, see Still Waiting For 10% Returns in The Stock Market.

Stay Invested

I should not have pulled the funds out until I had a definite plan to reinvest. These are long-term funds as we have no short-term need for liquidity. Sitting in cash is expensive for a couple of reasons:

• After taxes and inflation, at current interest rates, most cash investors earn a negative rate of return and lose money
• The DOW averages 2% + inflation return per year, long-term, which is better than cash, see Fred's Intelligent Bear.

Sliding the money into an indexed fund would have taken a whole 2 minutes and it was a big mistake to leave it sitting in cash.

IRA Funds & Real Estate

I wanted to invest the IRA funds in real estate. I'd read a couple of books and thought I understood how it worked. When I contacted an intermediary (someone who manages self-directed IRA accounts) their answers drained some of my enthusiasm for the following reasons:

• "Sweat equity" is prohibited and considered an additional contribution to the IRA. I was hoping to buy a fixer, do some of the work myself and either flip or hold as a rental for a couple of years.
• Active property management is prohibited and also considered an additional contribution. The intermediary was insistent we identify a property management company, sign a contact and pay the fees.
• Personal loan guarantees are prohibited, making it difficult or impossible to obtain bank financing. This effectively means the investments must be all cash and eliminates an important advantage of real estate over stocks: leverage.
• My accountants recommend against using IRA funds for MHPs. They said an investment that leveraged the tax-free benefits of the retirement account would be better (MHPs kick off significant depreciation so the income is sheltered from taxes.)

In retrospect, I should have “pulled the trigger” and purchased two, 3-2, 1500 square foot rentals 50 miles from my house. At the time they were priced at $350K and have since appreciated up to $475K. I should have adjusted my plan , "baked" in the costs and moved forward vs. looking for ways to circumvent some or all of the issues listed above. The IRS could potentially invalidate an IRA (creating a huge tax liability) but the laws are ambiguous and the reward would have been worth the risk for these personal funds.

Sleeping Again

I've learned a few things, I’m sleeping again and "ankle-deep" in 2014. So, back to the question, did the stock market gains of 2013 change my opinion about the benefits of investing in income producing property over stocks? Not in the slightest and "stay tuned" for my next blog entry to understand exactly why!

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