The saying, cash is king is on my A-List of most used and abused phrases in real estate investing. Knowledge is king, and will trump the use of cash pretty much every time out, given time. Yet, in today’s market, one we’ve dealt with several years now, the phrase is repeated as if merely saying it gives the speaker magic power. A bad investment is bad whether you paid cash or not. A winning strategy used in the wrong set of circumstances will only be exacerbated if it was executed using all cash.
Getting a great price with cash is no great feat. Almost anyone can get that done. Chasing price will almost always cancel out solid strategy, as price alone, contrary to the mob’s insistence, isn’t what gets the job done. The sad thing is, most won’t realize what they’ve done to sabotage their own retirements till it’s too late.
An example would be back in 2007 when I did everything but get down on my knees begging to dissuade folks from buying San Diego property ‘at the market’s bottom’. A couple of ’em did so with the combination of cash and gusto. They’re still not back to ground zero. But even then, it’s the simply crippling results of mistimed strategy that is multiplied negatively when using the cash ‘as king’ approach.
Every month I speak personally with at least a couple investors who are still relatively young, say 50ish, who have wheelbarrows of cash. They can’t wait to buy as much real estate as possible. For some that would be a superb way to go. For them? It’s like wearing running shoes purposefully two sizes to small for a marathon.
Why do people do that to their own retirements?
I can see the furrowed brows as some read that last question. But think about it in terms of your personal end game — the most retirement income possible. Then think of your available capital as finite. Once that capital is out there workin’ for ya, it’s up to the quality, the execution, and the timing of your chosen strategy to make things happen. If you put $500,000 dollars into that much real estate without debt, what you have today, will be pretty much what you’ll have at retirement. The value and income will, of course, fluctuate with the ebb and flow of the market. However, it won’t change much in say 15 years, when you plan to retire. If you’re still smilin’, good for you.
On the other hand . . .
If that same investor, 15 years from retirement, put an average of 25% down on $2 million of income property, the difference at retirement would be literally lifestyle changing. Instead of $3-4,000 a month and half a million in free and clear equity, he’d be livin’ on $12-16,000 monthly. Ironically, his cash flow, Day 1 — 15 years before retirement would be about the same as his Cash is King buddy’s at retirement. Oh, and his net worth the day he retired? Assuming no appreciation for 15 years, it would be $2 million vs $500,000.
Again, I ask the question: Why would you buy for all cash that long before retirement? The investors who use leverage prudently and with a plan, will enjoy 2-5 times more income at retirement than those who worship at the alter of King Cash.
Put more succinctly — do you wanna be king now, or when you retire?
Go ahead, take your time, no rush.