Man Plans — God Laughs — It’s About Options

4

BawldGuy Axiom:  The investor with the most options, wins.

So often we spend quality time planning our futures via real estate investing. The underlying assumption being that somehow, some way, the plan will survive years, usually decades of the ebb ‘n flow of local, national, and global economic events. My experience shows we’ll say we don’t have crystal balls, but our plans seem to say otherwise. How else do we explain five, 10, even 20 year plans? I plead guilty myself, but with an explanation. 🙂

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Flexibility

The experienced among us talk incessantly about flexibility and it’s a crucial part in our long term plans to retire. Wise reliance upon the ability to flex when outside forces leave us little wiggle room is how we escape the charge of ‘knowing’ the future. However, merely being able to adjust to unforeseen circumstances shouldn’t be the only defense in our arsenal. Defense is one thing, but being able to conduct a viable offense offers the potential for more attractive results. Don’t get me wrong, a great defense — the ability to adjust to reality — is often the difference between preserving invested capital and losing it altogether.

Capital Preservation

Capital preservation is always the primary concern of the experienced investor. Again, somewhat of a defensive mindset. Once strategies to preserve your capital are entrenched as integral parts of your long term investment plan, the next task on the agenda should be proactive strategies designed to increase your future options. There’s no magic formula I know to get this done. What worked two cycles ago may or may not get the job done now. In fact, they might prove disastrous. But using known tactics to execute intelligently formed strategies for the purpose of increasing the number of options on your future menu, should be of paramount importance. Here are a couple concrete examples.

Debt Free Properties

I see some of you are smirking. Sure, it’s clearly a Captain Obvious observation. However, when analyzed in the light of the options it adds to your menu when it’s achieved, the chuckling tends to die down. Once free of a loan, the property can now be the catalyst for several different agendas. For instance, what if you’ve paid the loan off and the current interest rate for buyers has reached 7%? Experience tells us the slice of the BuyerPie will be a lot smaller. Prices might even take a minor hit. But as long as buyers exist in numbers big enough to matter, your option to sell or trade into better circumstances is significantly enhanced by your newly acquired debt free status. In fact, it could literally mean the difference between movin’ from that piece of property to two to five times the value. This is especially true if, as noted in last week’s post, the free ‘n clear property will be sold at a loss. One of the options you created by payin’ off the loan was the increased amount of property you’ll now be able to comfortably and prudently be able to afford. This is the answer, by the way, to the question routinely asked of me — “Why would I put good money after bad on a failed investment?!” 

Surely you’d need the wisdom to pick and choose which ‘losers’ to pay off — another Captain Obvious moment. But with that wisdom comes the benefit of having created the option to potentially reverse your bad fortune. Those who’ve already made this happen, whether by design or otherwise, are about to reap the benefits if they’re able to discern the opportunities — options if you will — on their menus.

Understanding the Timing of Cash Flow and Capital Growth

Sugar and salt are excellent things to keep in our kitchens. Yet as valuable as they both are, we don’t salt our apple pie ala mode, and we don’t pour sugar onto our Reuben sandwiches, do we? We use them appropriately and at the times and on the foods that make sense. Cash flow and capital growth are like sugar and salt. They’re both great as stand alone values. However, when mistimed/misused they can literally be ruinous to a real estate related retirement plan. In short, you already make so much income that after living expenses and taxes you’ve had enough left over to invest in real estate. Cash flow ain’t your problem. You need to grow your capital in the time you’ve allotted yourself before retirement. There’s no need to go into detail here, as I wrote extensively on the subject in this post. Let’s circle back to generating more options. 🙂

By truly understanding how to time capital growth and cash flow, you can then integrate that knowledge into strategies that result in more options in the future than you currently enjoy. In a post published on these pages a while back, I talk about the ability for those earning $150,000/yr or more to create the future option of selling a property(s) for a sizable gain, but without having to pay taxes — and without resorting to a tax deferred exchange. The creation of these otherwise elusive options must be done on Purpose, with a Plan. These are but a couple examples of how real estate investors can ‘bank’ future options for themselves which are currently unavailable. If those future options are able to be exercised in times of unexpected turmoil, so much the better.

Never forget that the investor with the most options wins. After ensuring the preservation of your capital, your most important job is the creation of those options.

Photo: Canon in 2D

About Author

Jeff Brown

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

4 Comments

  1. Got greedy and bought TIC’s in 1031X 5 yrs ago, and now will loss 1 or 2 of total 3. Cycle has changed, and investor and lenders both lost equally, value is now 1/3rd of sale price. hard lesson learned.

  2. Jeff,

    As always a very thoughtful compilation of thoughts – thank you.

    You’ve neat me to the punch relative to the issue of debt-free “losers”. You know that I am all about leverage, but not on losers. Those are the only properties that should ideally be free and clear because, as you rightly suggest, this provides for more exit strategies. I was going to right a post on this, but I guess it would be redundant now 🙂

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