In my last post, I discussed one of the most important advantages of our Blueprint real estate investing strategy: Built in performance benchmarks. Well, today I want to tell you about another unique advantage that’s just as important. Unlike other strategies that by their very nature are rigid and resistant to change, our Blueprint strategy allows real estate investors the flexibility to make adjustments midstream to account for potential changes in goals, personal finances, portfolio performance and the overall economic environment.
Why does flexibility matter? Well, because real estate investing doesn’t happen in the vacuum assumed by cash flow analyses and multi year projections. The circumstances surrounding the portfolio and the investor herself don’t remain static – they are always changing. And unless your investing plan can change with them, it might be “providing answers to old questions” and leading you down the wrong path.
So let’s take a look at some specific case studies where flexibility in your real estate investing strategy can make the difference.
First, a case where a change in investor goals can require a course correction. Suppose that when you started investing, you were aiming for a second source of income to subsidize your job income or to allow your spouse to stay home with the kids. You thought all you wanted was an extra $35k a year. Until you saw the plan in action and realized its true potential. Until you realized that you don’t really like your job after all and if you could replace that income you’d quit without batting an eye. So now the goal has changed substantially: Now we need $100k a year and we need it in 10 years. This change of pace would throw most other strategies in a tailspin of confusion. With our Blueprint real estate investing strategy, we can figure out how many additional assets you need to acquire and figure out a plan to get you to that income in a decade.
Next, let’s say that Murphy moves into your guest bedroom as you’re executing your capital growth phase. Your company downsizes and you’re unemployed for some time. You were working the plan and making measurable progress – in fact you were aggressively attacking your mortgages at a rate of $2800 per month – when it all came to an abrupt stop. We can press pause on the capital growth phase so you can draw cashflow as income during this period until you steady the ship and find other employment with similar salary. Then resume your flexible Blueprint plan.
Or say that you’ve completed your acquisition phase and are now in the fifth year of the capital growth phase. All your properties are doing great except for one – what once was a good neighborhood has now taken a bad turn and the location no longer meets your high quality standards. It’s even become more difficult to find good tenants and you find yourself tempted to lower your standards to keep vacancy rates low. To be honest, if given the chance for a do-over today, your wouldn’t purchase the property again (litmus test). No problem. Our Blueprint strategy calls for a recurring re-assessment of your holdings every so often to identify situations like this and it offers the flexibility of a course correction. We exit the problematic property and acquire a replacement asset in a location that does meet our high standards. If the market at the time won’t allow for an advantageous exit, we bide our time and wait till the conditions are in our favor.
Further, if you are a regular Investing Architect reader, you know that (with rare exceptions) a well executed Blueprint strategy works best when the properties within your portfolio are recently built (new or less than 6-7 years old). The primary reason for this is that, over time, older assets consume a higher percentage of incoming rent as operating expenses (due to major repairs required) resulting in lower cash flow and return on investment. In addition, you probably also know that the road to retirement can sometimes take 10-15 years. If you purchase a 5 year old home today, it will be 15-20 years old by the time you reach retirement. So how do we reconcile the fact that right around the time you need to draw maximum income is when the property will need capital expenditures? Our Blueprint strategy provides the investor with the flexibility to trade into newer assets. This process of “freshening up” your portfolio can be accomplished by either exiting your current investments and acquiring newer properties or by doing a like kind 1031 exchange to defer taxes. Or depending on asset performance during the holding period, it may make more sense to incur one time capital expenditures and keep holding on to some properties as you trade others. For instance, if you’ve got a great property that’s been well maintained by long term tenants in a location that seems to get better every day, it make make more sense to make the capital expenditures (i.e. change the roof or A/C system) so you can keep holding it hassle free for another decade or two. If instead we’re talking about a property that’s progressively requiring more and more repairs each year, that might not be the best way to go. Again, flexibility rules.
Last, suppose that due to changes in the economic environment, investments that were once not feasible are now attractive. For instance, commercial real estate might offer some opportunities to consolidate your capital base into larger properties with established business tenants at a good capitalization rate. Or changes to income and capital gain tax rates might offer a window to take a gain under more favorable terms. Or a high interest rate environment may offer opportunities in profitable deals where you finance the property for a Buyer and collect note payments at a good rate of return. Regardless of the scenario that life might throw at you, our Blueprint strategy can adapt to it and get you back on track to your ultimate investment goals.
There is no universal strategy that works the same for every investor because every investors’ goals and situations are different. It’s a sure bet that things will change – Change is indeed the only constant. But it pays to have a real estate investing strategy that provides flexibility to allow you to ride out the wrinkles and resume your path to retirement.