Let’s Talk About The Art Of The Possible In Real Estate

by | BiggerPockets.com

I understand the attraction to the myriad formulas attached to both real estate and discounted note investing.

I learned the hard way with many of ’em that most formulas don’t have an infinite shelf life. In fact, some are downright misleading. Take the 2% rule — please. 😉

I’d love for somebody to show me a market in which that formula wouldn’t include the advice to make close friends of Smith  ‘n Wesson. Or how ’bout the compromise made on location quality?

It’s almost always worth a chuckle when somebody describes a neighborhood they wouldn’t advise a stranger to live in, as a ‘blue collar’ area. Yeah, right, and the double digit interest rates of the late 70s and early 80s were merely, um, ‘challenging’.

The problem with formulas is that by definition they’re inflexible in an atmosphere demanding flexibility above all else.

The formula for success in my own market worked form about 30 years, give or take. Then it struck like a starving wolf in winter. That formula became something to tell the grandkids about almost as fast as you could watch it happen in real time. I invoked the rule of flexibility, and hauled buns outa California as fast as I could book a flight on Southwest. That one move, recognizing what my own lyin’ eyes kept tellin’ me, is likely why I’m not hundreds of thousands of dollars poorer right now, maybe more.

Here’s a formula for ya. 25% down on a typical duplex in a decent San Diego neighborhood at a 5% fixed rate loan, will get ya around $400/mo negative cash flow. In better, more welcoming markets around the country, and there are several, it’ll net you around 5-10% cash on cash. This is why SoCal investors haven’t been braggin’ much lately. Again, flexibility to the rescue.

The art of the possible. What can the typical ‘regular folk’ investor hope to accomplish over the long haul? We’ll talk about that next week. Today let’s talk principles.

Related: A Slow, Boring, Incredibly Awesome Strategy for Building Wealth Through Passive Real Estate Investing

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Let’s Begin with a Broad Brush:

1. If you have more than 10-15 years to retirement, with precious few exceptions, go for capital growth ahead of cash flow. Your goal is cash flow at retirement, not cash flow now. For Heaven’s sake you have so much cash flow now you have untold thousands of dollars to invest. 🙂 Keep your eye on the ball, and that ball is capital growth first, then ultimately maximum retirement income. It’s all about timing.

2. To the extent possible, create multiple, independent sources of retirement cash flow. When I say independent I mean that you’d like to enter retirement such that if one ‘domino’ falls, it doesn’t cause a chain reaction.

3.  When possible, and it almost always is, make use of Strategic Synergism. That is, combine multiple strategies to either speed up the process or end up with more net worth/cash flow at retirement — or both. Surveys show ‘both’ is preferred by a landslide.

4. We must understand that different schools of thought aren’t always diametrically opposed to each other. Sometimes it’s about timing. Sometimes it’s about what’s even possible in a given scenario. Schools of thought can be your best friend or the worst of treacherous enemies. Often they can be used in concert. Again, did you get flexibility from that? 😉

5. This one’s a twofer. Sometimes doin’ nothing is far and away your best ‘strategy’. The other side of that coin is that you must ensure that every relatively major move you make on the way to retirement, is a slam dunk no-brainer. Major moves shouldn’t be executed when the analysis concludes it’s a close call.

Now let’s Get into the Weeds Just a Bit.

#1 Speaks for Itself.

Here’s a post on the subject that really gets into the whys and wherefores.

#2 is a Real Keeper.

If you’re mid 40s or younger, I’d include an EIUL as a stand alone and completely independent source of retirement income. Real estate income property, and discounted notes are a couple more obvious sources.

Also, having notes both in your own portfolio and that of some sort of Roth ‘envelope’ is the best of all worlds. Why? Cuz the ones you own can have their after tax income diverted for the purpose of increasing the velocity of debt elimination re: your real estate.

The Roth portfolio(s) will grow tax free, also generating tax free income at retirement. Furthermore, BOTH note portfolios will continue growing in retirement, providing random monthly raises in income ’til ya go to your final reward. Also, inside the Roth, the untaxed accumulation of payments will buy more notes by themselves.

#3 is Almost Always THE Difference Between a Nice Retirement

and one that’s magnificently abundant. The Purposeful combining of multiple strategies can and does yield remarkable, and yet empirically measurable superior results. Real synergy is rare, but when effectively harnessed it tends to magnify positive outcomes. The key is to do it on purpose with a detailed Plan. Rarely are positive results generated by ‘accidental’ synergy. 😉

#4 Schools of Thought

are not found on the third tablet Moses lost comin’ down from the mountain.

By far the most common mistake made by long term investors is treating a particular school of thought as if it transcends all other principles. Buy ‘n hold isn’t the be all end all, any more than constantly using Sec. 1031 of the IRC (tax deferred exchanges) is always the best option. What’d Grandma tell us? Avoid using always and never? That goes double for schools of thought.

#5 Doing Nothing is Often the Best Option on Your Menu

If I’d of stood pat a few more times in my life, there’d be more moola on accounts bearing my name.

We get caught up in the thinkin’ that we must be doing something or bad things will happen. There are more times, at least in my experience, when doing nothin’ would’ve avoided a whole buncha financial grief. Sometimes no more than hunkerin’ down produces the most preferred consequence.

Related: Are You Caught in Startup Minutiae? How to Finally Overcome Analysis Paralysis!

Ensuring that major move you’re contemplating is worth the time, money, and effort is easier than most folks make it. Simply ask yourself if what you’re about to do is a Captain Obvious slam dunk. It should also be wonderfully unambiguous.

Pulling the trigger on a multi-property, multi-state tax deferred exchange is no small move. Though I’ve executed dozens of that flavor exchange, it was ALWAYS (Yeah, I said always.) analyzed within an inch of its life first in order to eliminate all other available options. Words mean things. Captain Obvious slam dunk should be literally interpreted.

Next time we’ll talk of a more specific level of details. What vehicles to acquire. Why? When, and with what strategies in mind to combine.

Be sure to leave your comments below!

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, I love your focus throughout your writing on:
    1. Principles/Fundamentals
    2. Flexibility

    You show that the two go hand-in-hand. If we can just internalize those fundamentals and then pay attention to the current weather in the market, we can be flexible and make money no matter what is going on. You’ve explained that very well.

    One small point of contention.

    I’d agree that by and large 2% rule deals are in non-ideal locations. But I just signed up a 12-plex in a solid college town, 1.5 miles from campus, in a thriving area of the Upstate of South Carolina, in a location I’d be happy to sit in a lawn-chair with my 3-yr old daughter on a weekday at 5:30pm, and it’ll fit the 2% rule.

    I’m a deal-hunter, it was a distressed sale, and I moved quickly, so maybe not every-investor could do the deal. But it’s not impossible, either.

    • Jeff Brown

      Hey Chad — Your kind words are appreciated. Finding a residential income property fitting the 2% ‘rule’ in a decent area, is akin, at least in my experience, of finding a needle in a needle stack. 😉 They do exist, but like albino pythons, I’ve only heard of ’em, never seen on up close. What a great buy you found.

      One wonders why such a well located, 2% property was available by way of a distress sale? Do you know why?

      • Jeff,
        The distress resulted from a poor financial decision by the owners. They had good credit and capital, and bought a property out of town for a “friend” who was supposed to buy it back at an increased price. Can’t lose, right?

        The friend skipped out, they weren’t good managers of managers or capital, and the building is currently half empty. This and other things led to a personal BK, and we negotiated with their lender for a discounted price.

        We will spend about 20-30k to get it spiffy and fully rented. Main point, area is not distressed, just owner.

  2. James Evertson on

    Great post as usual.

    I am still a bit of a newbie so I need a few things clarified:

    1. The term “capital growth” in this article refers primarily to selling properties that have appreciated and buying properties that have a depressed value but potential for appreciation? If that is the case one would probably need to look at two unrelated markets to transact right?

    2. What does the acronym EIUL stand for?

    3. Is this post intended for 1-4 door residential properties? Cash flow dictates the value of 5+ or other commercial which is the driver of “capital growth”, no?

    Oh and I love the comment “Major moves shouldn’t be executed when the analysis concludes it’s a close call.” That should be one of Brandon’s “tweetable topics” 🙂

    Thanks again

    • Jeff Brown

      Hey James — 1. Appreciation is just one way to look at how capital growth is generated. Since I virtually always omit any baked in appreciation in my analyses, no capital growth is projected to happen from that source. However, the elimination of debt will certainly, over time, increase the equity position of the investor. I don’t advise long term investors to count on any capital growth whatsoever from appreciation.

      2. EIUL stands for equity indexed universal life, which is an income oriented (tax free) insurance policy.

      3. The relative cash flow, whether expressed in terms of NOI, cap rate, or any of the other methods, is exactly what dictates value. However, a property sporting significantly superior location property will, most of the time sell for more than it’s more poorly located cousin, even if that cousin has a higher cap rate etc. Capital growth can happen big time with no increases at all in NOI and/or market value.

      What part of the country are you in, James?

      • James Evertson on

        San Antonio, TX. I am trying my hand at building a spec to see if I enjoy it as a possible avenue to raise capital for down payments on rental properties. If so I project to be about 18 months away from being positioned to finance my first property.

        1. So when you suggest capital growth over cash flow you mean reinvesting cash flow into the mortgage to increase your equity position instead of pocketing the cash flow?

        2. I have read a little about EIULs but am still unfamiliar with it. Is it like an overfunded UL?

        Thanks again for your response.

        • Jeff Brown

          1. It’s more than that, but the principle remains. None of the capital growth about which I write/talk has to do in any way with appreciation.

          2. I’d talk directly to the best expert I know in regards to EIULs. Dave Shafer can be found at shaferfinancial.com. It’ll be an enlightening conversation.

          Best of luck with your new plan!

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