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They’re called fundamentals for a reason – retirement or life sentence?

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Time to talk about timing

One of the first lessons I was ever taught while making the transition from traditional house guy to specializing in real estate investment, was correct timing. I’m not talkin’ about timing markets, as that’s reserved for epic fools. No, I’m talkin’ about when to choose one strategy or even a synergistic group of strategies in executing your Purposeful Plan. A great strategy poorly timed is often not only ineffective, but can and does derail an investor’s retirement agenda.

How so?

In real estate, as in 99% of investing universally, there are only two columns on your menu: Cash Flow and Capital Growth. To the extent your plan calls for one, the other suffers by definition. There’s no way around that truism. Want more cash flow? Put more money down, and borrow less. If there is appreciation in value, your capital growth rate will be much less having put 40% down vs 20-25% down. Duh. On the other hand, the investor opting for a bit more leverage, will benefit more from upticks in value than his buddy who put much more down.

It’s not rocket science, is it? Let’s talk timing now.

If you’re in you’re 50 or younger, with some exceptions, and expect to work another 15-30 years, why oh why would you even think about goin’ all out for cash flow? Think about it. You’re probably makin’ more money at work than you ever have. The older you get the more you’ll generally make. In fact, it’s directly due to your high earnings that you have the capital to invest in the first dang place, right? Right. So why go for cash flow during the 15-30 years of your life it’s completely unnecessary? Don’t answer, it’s a rhetorical question.

Yeah, I know this flies in the face of Grandpa’s sage advice. I work with many of those Grandpas, and let me tell ya somethin’. If they could go back in time and radically alter their real estate investment strategies, most of ’em would in a heartbeat. I’m OldSchool through and through. But there’s a huge difference between OldSchool prudence and conservatism, and simply being wrongheaded.

See, cash flow is made much too complicated a concept by many — and often on purpose.

What is cash flow, really?

It’s merely a return on a lump of capital. If the going rate of return is 6%, than you and I would both rather have $2 Million gettin’ 6% than $500,000. There’s nothin’ sophisticated about it. If we’ve mastered fourth grade math and can deal with percentages, we can figure out that X% on a humongous pile of cash is better than on a puny pile. So…

When you’re under 50 — again, with some exceptions — the idea is to eschew large cash flow and check the box next to capital growth on your investment menu. Grow your available capital as quickly, but as prudently/safely as you can. Rinse and repeat as often as the market allows. Then and only then, when you’re just about to retire, turn of the capital growth spigot, and open the cash flow spigot all the way.

Makin’ it happen

I cringe when so-called experts make these things seem easy as pie. Though the principles are indeed so simple even a Realtor can understand them (ht: Russell Shaw), the use of combined strategies synergistically is not to be tried at home by most. However, when executed correctly and in a timely manner, takin’ whatever the current market(s) are givin’ us, it almost always produces the desired result: A magnificently abundant retirement.

The difference in retirement income when comparing Grandpa’s approach to what I’m recommending, is almost always jarring. I’ve run numerous case studies, many of them on my own clients’ histories. What usually comes out in the wash, is that starting with cap growth then converting to cash flow in anticipation of retirement usually results in roughly 2-5 times the retirement income than Grandpa’s approach does.

The sad part? I’ve seen far too many real estate investors who’ve reached retirement, having worshipped at cash flow’s altar from Day 1. So many of ’em discover, sadly, and too late, that they aren’t living the retirement they’d planned. Instead, they’re living out a self imposed life sentence. Harsh? Maybe. But true, just the same.

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29 Comments

29 Comments

  1. Andrew Mckay

    September 12, 2011 at 4:16 pm

    Thanks Jeff for putting it so simply. Hitting 50 next year and my thoughts are turning to cash flow. Having said that I'm pleased that a few years ago we put as little down as we could on some properties to buy more rather than less with more down and can now use the equity growth or sell them to finance more cash flow orientated properties.
    I will point my clients to this article so they can see the basic maths from someone apart from myself.

  2. BawldGuy

    September 12, 2011 at 4:47 pm

    Funny how so often it has more clout when the 'other guy' says the same thing. 🙂

  3. Andrew McKay

    September 13, 2011 at 3:54 pm

    True

  4. Karen Nelson

    September 15, 2011 at 10:50 am

    Excellent artical

  5. Manhattan Beach Realtor

    September 18, 2011 at 1:57 pm

    The general concept here of age appropriate investment strategies is right on. Still, investors need to always weigh risk and reward in ROI considerations. Asset appreciation is the riskier of the two RE cash flows compared to operating income. Investors buying SFR's at the peak of the 2007/8 bubble will spend the next decade just trying to break even, not to mention the opportunity cost had they allocated their capital elsewhere. Nonetheless, as you said, younger investors should have higher exposure to risk, but it should be done on a measured risk/reward basis.

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Economic News

Boomers retirement may be the true reason behind the labor shortage

(ECONOMY) Millennials and Gen Z were quick to be blamed for the labor shortage, citing lazy work ethic- the cause could actually be Boomers retirement.

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Older man pictured in cafe with laptop nearby representing boomers retirement.

In July, we reported on the Great Resignation. With record numbers of resignations, there’s a huge labor shortage in the United States. Although there were many speculations about the reasons why, from “lazy” millennials to the number of deaths from Covid. Just recently, CNN reported that in November another 3.6 million Americans left the labor force. It’s been suggested that the younger generations don’t want to work but retiring Boomers might be the bigger culprit.

Why Boomers are leaving the labor force

CNN Business reports that 90% of the Americans who left the workplace were over 55 years old. It’s now being suggested that many of the people who have left the labor force since the beginning of the pandemic were older Americans, not Millennials or Gen Z, as we originally thought. Here are the reasons why:

  • Boomers are more concerned about catching COVID-19 than their younger counterparts, so they aren’t returning to work. Boomers are less willing to risk their health.
  • The robust real estate market has benefitted Boomers, who have more equity in their homes. Boomers have more options on the table than just returning to work.
  • Employers aren’t creating or posting jobs that lure people out of retirement or those near retirement age.

As Boomers retire, how does this impact the overall labor economy?

According to CNN Business, there are signs that the labor shortage is abating. Employers are starting to see record number of applicants to most posted jobs. FedEx, for example, just got 111,000 applications in one week, the highest it has ever recorded. The U.S. Bureau of Labor Statistics projects that the pandemic-induced increase in retirement is only temporary. People who retired due to the risk of the pandemic will return to work as new strategies emerge to reduce the risk to their health. With new varients popping up, we will have to keep an eye on how the trend ultimately plays out.

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…<<<<<

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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young executives

job openings

Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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