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Rickety Cash Flow – Stay Away | International Residential Real Estate Investors Association
Monday January 22nd 2018

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Rickety Cash Flow – Stay Away

While there are different views on this the Bawld Guy makes some very good points that I’ve learned the hard way.  Read on for more:

Real Estate Investors – Don’t Be

Seduced By Rickety Cash Flow

Posted @ 8:01 am – Filed under 1031 Exchanges, Cash Flow, Physics of Economics, RE investment strategies, Retirement, San Diego Property Owners, Tax Shelter

Cash flow is sooooo sexy, isn’t it? Even the phrase itself flows through our minds generating rivers of soothing endorphins. All cash flow ain’t equal of course, as many real estate investors will readily attest. A client once told me, fire almost pouring like lava from her eyes, that she felt she was making half of minimum wage just to get the so-called ‘crazy good’ cash flow her properties were ‘generously’ disgorging every month. She always did have a way with words. Oh, how she resented those units. I made the mistake of laughing — just once though — as she finished one of her rants. Her husband told me later it was OK to laugh, as he too thought it was Grade A standup material.

San Diego income property owners are acutely aware of what I’m talkin’ about here. Many of ‘em aren’t laughin’. It’s past time most of them shift into forward gear and begin the process of moving their equities to better performing regions. The same could be said for areas like Palo Alto, CA.

Resent cash flow? Really? Are you thinkin’, ‘I’d love a chance to resent some ‘crazy good’ cash flow. Please, gimme the chance.’

I talk all the time with folks from all corners, who’re tired of relatively high equity, good to seductive cash flow income property. They come in all age groups too. Their complaints run the gamut, but almost always include at least two of the following.

  • The units are pretty old, sometimes Moses old.
  • Tenants are chronically below average if not downright low quality.
  • Functional obsolescence abounds — a big cause of frequent maintenance, not to mention already mentioned subpar tenants and lower rents.
  • The neighborhood is rundown, maybe a tad seedy, little if any pride.
  • They’re located just far enough away to make frequent trips irritating on an almost epic scale.
  • Take a step back. Look at any property you own that appears like it may fit this model. You may have allowed yourself to become seduced by the Benjamins, only to find out they’re not worth the trouble, they’re also driving your Plan into the ground. ‘Wait just a doggone minute, I know I complain, but hey, the cash flow, dude. And, um, the equity is pretty high too, over 50% I think. Not bad for a man not even middle-aged yet, right?’

    Maybe, but probably not. Why? Let’s count the ways.

    1. You probably paid a pretty impressively low price, which is why you have the cash flow you love to brag about so much. I get it. Been there, bragged that.

    2. As the years passed, even though you sensed they were too old to get you to retirement, much less through it, you’ve ignored that little voice who’s been tellin’ you to make a change.

    3. Demand by tenants to rent and investors to own in the neighborhood has been in a downward trend for quite awhile.

    4. Rehabbing/remodeling simply isn’t worth the trouble. Lipstick on a pig, etc.

    5. As fewer and fewer folks wanna live there, the quality of tenant descends into what you now have come to call, TenantHell.

    What we have with this scenario much of the time, is a no-brainer alternative — a change must be made. The goal is to upgrade location, functionality, tenant quality, and age of property(s).

    Here’s a recent real life case in a nutshell.

    Real estate investor in his 30’s invests in local properties in the midwest. They’re from 35-100 years old, in neighborhoods where, according to him, most folks don’t have the credit needed to buy. Mild to moderate basement flooding is almost predictable in winter. Even with an approximate equity position overall of 50% or better, the cash flow, though nice in terms of dollars, isn’t what better located props would yield with less than half the equity position.

    In fact, a quick check with ‘Old Reliable’, my 12C, shows that a tax deferred exchange (1031) would allow him to nearly double what he owns in property value, triple his annual tax shelter, while increasing both his before and after tax cash flow. That doesn’t address the most obvious result, which is the relative potential of appreciation provided by hugely superior location and property quality.

    What this example clearly demonstrates, is that what I refer to as ‘rickety income’, is in fact a retirement-sabotaging time bomb, hiding in plain sight.

    Cash flow from these kinds of properties/locations can be seductive to say the least. They have the insidious ability though, to suck the life out of your retirement Plan. As almost always true in life, it’s better to cure a small problem now rather than try to slay the fire-breathing dragon just before you’re set to retire.

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