I know a guy who bought his first property in 1975 for $57,500.
If he’d held onto it all these years, it’d be free ‘n clear — and worth around $400,000, maybe a tad less. ‘Course, if he still owned it by utilizing the buy ‘n hold strategy many worship, he woulda lost well over an additional million bucks.
Why? Cuz the strategy seen by many as pure gold is silly. In almost 40 years, the original nominal FHA down payment he laid out woulda grown to at least a couple million, especially in San Diego, for Heaven’s sake.
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Buy ‘n hold is a great strategy ’til the day it’s not.
At some point, and the exception merely proves the rule, it makes Captain Obvious sense to sell and/or exchange the equity in any given property. Wanna know who buys and holds forever? One of the largest groups doing this are the ones investing in locations akin to capital growth quagmires.
In other words, they never had a chance or a choice from Day One.
An offshoot of the buy ‘n hold approach is to refi and buy more as the market dictates and/or allows. Sometimes that’s the best thing to do. In fact, there are strategies I employ that allow for refinancing debt-free property for the expressed purpose of acquiring something(s) other than more real estate. However, the refi and buy crowd is virtually always doin’ so due to their almost religious adherence to buy ‘n hold.
How the heck else are they gonna add to their portfolio, right? Right.
See, real estate is pretty much the only thing that works long term. (sarc) Sorry, but that ain’t a strategy, it’s a belief. It’s a belief I’ve proven false for a very long time. In fact, since 1975, when I acquired my first discounted note, that belief disappeared in a puff of smoke. But we’re gettin’ ahead of ourselves here.
The Problems With the “Exchange ‘Til Ya Die” Strategy
Refinance to buy more and more properties to be held forever: another strategy that will succeed in a vacuum, but be destroyed in terms of retirement income results when compared with other, more reasoned methods and techniques.
One of my all-time favs is the offshoot of buy and never sell, which is to exchange ’til ya die. NEVER EVER pay taxes!!! Shall we cut to the chase on this one? Let’s view the “benefits” of invoking the blessed Section 1031 tax deferred exchange into oblivion.
3 Results of Using the Section 1031 Tax Deferred Exchange Repeatedly
1. Upon retirement, the average adjusted cost basis of properties in your portfolio will be roughly $1.98.
2. Due to #1, any outright sale of a property, whether based upon positive or negative reasons, will cost the taxpayer/investor more money in various taxes than they ever dreamed. Imagine having the “baggage” of several exchanges come back to haunt you 30 years later. I’ve seen it a few times, and it’s butt ugly at best.
3. Most investors adhering to this “strategy” end up with a boatload of older properties with ever-increasing operating expenses, while “enjoying” an equally ever-decreasing slice of the tenant pie.
What’s even worse is that they did it to themselves with a plan — and on purpose. The really sad part is that at some point around midway, they realize the straightjacket into which they’ve put themselves. Not a happy day and relatively difficult from which to escape.
The so-called strategy of “Exchange ‘Til Ya Die” is based upon the shortsighted belief that payin’ taxes of any kind is against all that’s holy. Simply not true. It’s always about relative benefit. ALWAYS.
What’s the Biggest Strategic Mistake Real Estate Investors Make?
(You mean besides thinkin’ they can find all the answers online? 🙂 DIY types sabotage more potentially superb retirements than any group of folks I’ve ever observed. It’s almost painful to watch in real time. But that’s another post I’m reticent to publish.)
The answer from where I sit is twofold, and they tend to be connected at the hip.
First off, they think real estate is THE end all, be all. I love, love, love real estate, but seriously, people, it’s not all things to all investors, all the time. There are other investment vehicles that will lead to incredible retirement incomes. Discounted notes and EIULs come to mind, for sure. But there are more than those two. They’re the ones I’ve settled on after 45 years of seeing the results of how Time tests their relative results. I’ve seen those tests and their results in real time — and with my own lyin’ eyes. 🙂
Yet we display as part of our human nature fear of what we don’t know and/or understand.
Isn’t that why we go to the dentist? Isn’t that why we don’t rebuild our own transmissions? Why, oh why do so many not treat their retirement, arguably one of the very most important things in their lives, the same way? Why do they fumble around in the dark like the blind? I’ve never understood it. But there it is.
Secondly, it almost never occurs to investors to employ the principle of synergy when designing their plan for retirement income. Combining various strategies is something foreign to most. If there is anything even remotely close to a “magic button” when the goal is to generate a magnificently abundant retirement income, it’s the employment of synergy.
The Importance of Strategic Synergism
Strategic Synergism is what makes the empirically measurable difference between the results of one investor and another. The difference is almost universally laughable. But, you say, isn’t that phrase nothin’ more or less than a marketing device? A great point, and in my experience, almost always true when it comes to actual results. But when it’s actually executed well over time, you’ll know it’s real by these two empirical factors:
1. You’ll end up retiring sooner than you thought possible, sometimes much sooner.
2. You’ll end up with more actual after tax retirement income than you thought possible.
Bonus: Often, you’re able to experience both. 🙂
Let’s boil this down to something with which we all identify, so as to have a universally understood metric.
The mantra we’ve all heard since becoming working adults has been that we’re gonna retire with a comfortable income if we just work hard, save and invest wisely and keep our heads, right? The next thing they tell us is not to worry about income taxes in retirement cuz we’ll be in a lower tax bracket.
Ever ask yourself why that is?
I’ll tell ya why. It’s a direct result of listening to and acting on that advice most of your life. Allow me to offer you an alternative to that approach.
Given at least 15 years, the vast majority of serious people have the ability to create a retirement income that will be in the range of 80-200% of the best year ever on their job. Many will end up with after tax income greater than the best pre-tax salary they ever earned working.
The best part of that? They’ll do it in ways so boring that a bowl of plain vanilla ice cream will seem exciting.
It’s ALWAYS been about strategy. Combining multiple strategies synergistically becomes the turbo charger. Retiring with more than you ever made on the job should be the freakin’ rule, not the exception.
What’s your retirement strategy? To what extent are you relying on real estate investments?
Let us know your views in the comments section below!