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

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.

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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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Written By

Jeff Brown specializes in real estate investment for retirement, has practiced real estate for over 40 years and is a veteran of over 200 tax deferred exchanges, many multi-state. Brown is a second generation broker and works daily with the third generation. With CCIM training and decades of hands on experience, Brown's expertise is highly sought after, some of which he shares on his real estate investing blog.

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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