The American Genius | October 9, 2011 | Jeff Brown
Real estate investment strategy
The cornerstone of any real estate investor’s strategy must always be — having a Plan and executing it on Purpose. Clearly, there are plans, and there are plans. Also, it’s almost axiomatic that this or that strategy works best for this or that set of circumstances.
Don’t you believe it.
With notably rare exceptions, employing multiple strategies synergistically is what works best for the majority of people. It’s easy to say your strategy is cash flow, or capital growth — but those who execute 2-4 strategies, seamlessly interwoven, almost always enjoy superior results. In fact, I’ll go a step further. Cash flow or capital growth are, in my view, more accurately described as goals, not strategies.
What happens when things change?
Ironically, the changes that happen more often, requiring the most thought are very positive in nature. A long term hold can turn into three year hold, morphing into a tax deferred exchange. I’ve seen it happen dozens of times, and it’s almost always completely from left field.
But no matter — when circumstances change, you as the investor must respond in real time, and with solid, effective action. Here’s an example from my one of own clients.
Back in 1977 when I’d just transitioned into investments from traditional home sales, a couple was referred to me. They owned a local fourplex acquired in the early 70’s. For those who don’t know, ’69 was a recession year, and the years following weren’t exactly stellar. Then another recession hit, ending around the last quarter or so of ’75. But from then on, our market caught fire! Prices rose like a runaway balloon at a kid’s birthday party. Their fourplex went from roughly $38,000 in early ’75, to sportin’ a net equity of a few bucks more than their original purchase price.
A surprise change of circumstances.
In what was to be one of my first few tax deferred exchanges, they traded into just under $140,000 of income property. But wait — there’s more! In two short years those properties had appreciated to approximately $185,000. For those keepin’ score, that’s just short of a 1/3 increase in 24 months. Who predicts that? Not me, that’s for sure.
I was all set to execute yet another trade when Dad stepped in and counseled patience. Though their net equity had almost doubled in those 24 months, Dad’s experience told him the wind’s direction was changing, and it wasn’t gonna be one of San Diego’s patented ocean breezes. At 28, I tended to listen to the old fart.
Good thing, ‘cuz a few neck wrenching months later, the correction of late ’79 hit like a ton of bricks. Correction? Try double digit inflation, 21% prime rate, and an FHA interest rate of over 16%. THAT kind of correction. My clients were surprised. As a matter of fact they were a bit chagrined at our advice to stand pat. ‘Course, when the aforementioned (bleep) hit the whirling blades shortly thereafter, we were heroes.
Yeah, I know, it really was Dad and the mouse in his pocket, but I stood close enough to bask in the reflected glow. Gimme a break.
Think about it. Their original Plan was to buy the fourplex and hold, hold, hold. But then the first ever cycle of cartoonish appreciation hit San Diego, and holding woulda had them retiring years later than possible. Even that isn’t the factor with the most impact on their retirement, from where they sat at the time. By doing the first exchange, and eschewing the second, their income potential at retirement increased tremendously.
They moved back to their Midwest roots just before retiring in the mid-1990’s. They’d executed two more tax deferred exchanges — one in the last part of 1986, the last in 1988. They spent all their spare job income and cash flow paying down their loans. They retired in 1998. Between his modest pension, Social Security, and their cash flow, they were very comfortable. But none of that would’ve been possible if they’d not adjusted to what turned out to be constant whipsaw changes in the San Diego real estate market.
The history of changes during their investment ‘Plan’.
1973 — Bought first income property, a local fourplex.
1977 — Took advantage of huge change in economy by exchanging large capital gain into several small income properties.
1979 — Another massive change — high inflation, higher interest rates, dead market. No moves . . . thanks to Dad’s experience.
1981-83 — Recession, continued high rates, etc.
1985-89 — Another big time run-up in values. Two more very propitious exchanges.
1990’s — Not only the abrupt end to double digit appreciation, but the emergence of the infamous S & L Crisis.
Adjusting quickly, prudently, and correctly to significant and/or radical changes in the real estate investment landscape is what separates the mediocre to disappointed retirement from the magnificently abundant retirement.
Having a seriously thought out Plan, and executing it with relentless Purpose is, as I said initially, the cornerstone of any successful real estate investment strategy. But like any foundation, when big changes begin to shake things up, that cornerstone better be able to flex with what comes its way, or what you’ve built could come tumbling down.
Grandma was right — Man plans, God laughs.
Always be ready to adjust in real time.