Every wise real estate investor’s journey begins with a clear, overarching investment strategy. This strategy is the roadmap to get you from where you are to where you are trying to go. So needless to say, to come up with a worthwhile strategy, you must know your destination and be able to distill it into specific, time limited and written goals. If you can provide your goals, our Blueprint real estate investing strategy can provide you with a path to get there. More specifically it will show you what type of assets to buy, how many, as well as where and how to buy them. Setting out on an investment path without such a plan all but guarantees you a long journey into the wilderness of investing confusion – jumping from one fad strategy to the next.
But as crucial as it is to have an overarching strategy, the really hard part starts now. It’s what makes or breaks the plan and separates the best from the rest: Execution.
Four Stages to execute our Blueprint real estate investing strategy:
- Asset Accumulation
- Capital Base Growth
- Maximum Cash Flow
- Exchange or Exit
The first stage of executing your Blueprint investing strategy is Asset Accumulation. At this point you have the exact number of assets you must acquire in order to achieve your goal so we must begin the acquisition of these assets. This phase should be completed as fast as your income and assets will allow because it is a prerequisite of all other stages. If the necessary liquid capital and financing prowess is readily available from the start, you have nothing standing in your way but your own fears and doubts. It’s okay to tread lightly on the first deal or two just to get some assurances that the properties will be rented in a reasonable amount of time and for the same amount as the cashflow projections. But once you’ve exhausted that bit of skepticism, execute and complete the acquisition of the necessary assets right away. If instead you are facing liquid asset limitations at this stage, it helps to sit down and put together a plan of saving the necessary additional capital within the fastest amount of time your income will allow. Complete the acquisition of the assets you can acquire with your existing capital and figure out a way to save the remainder as soon as possible. Think about it this way: The amount of time it takes you to start the engine will be added to the trip time towards your destination. Yet another reason for speed at this stage is to lock in fixed low interest rates on your debt before they rise.
Capital Base Growth
Now that you’ve acquired the necessary assets and they’re stabilized with good long term tenants in place, you have positive cashflow coming in every month. At this moment you have a very important decision to make. You could opt to take the cashflow now and enjoy your returns while you accumulate wealth at the 30 year schedule set by your Lender. Or choose to use that cashflow to grow your capital base and build wealth now. The chosen path we advise our clients to take is to focus on building wealth first so later the cashflow from your real estate portfolio can reach critical mass and allow you to retire on it. To illustrate this concept, let’s say you put together a portfolio of five properties worth about $120k each which produces $4800 in positive cashflow per property per year and you hold these assets for 10-12 years. If you opt for income now while building wealth at a 30 year pace, you would earn $24k per year and you would build approximately $95k in equity during that period through debt paydown. Instead, if you follow our advice and grow your capital base first, in that same time frame you would have a free and clear portfolio worth $600k without a penny in appreciation during that period and that portfolio would produce $60k in annual income thereafter. Don’t get me wrong – $24k per year is nothing to sneeze at and it certainly would be very nice to have. The problem is that small money has a tendency to dissipate over time leaving investors wondering what happened to all that cashflow ten years later. I call this “Starbucks money syndrome” – when you don’t focus the power of your money to achieve a larger scale goal, it tends to turn into minutia.
Now that your real estate investment portfolio is free and clear, it’s time to enjoy your maximum cashflow stage. Since none of your incoming rent is going to service the debt, your portfolio is now free to produce income at it’s maximum potential at the very time when you need it most. You have arrived at your destination after a long journey of disciplined execution and now it’s time to enjoy the fruits of your wise decisions and your commitment to stick to them. So quit that job you no longer want to do, take that long trip you always dreamed of taking or fund that college for your grandsons and daughters. Whatever you imagined and hoped that your investment portfolio would do for you when you first started – Do. That. Thing.
Exchange or Exit
But wait, we’re not quite done yet. Just because you are rightfully enjoying the results, it does not mean that we let our guard down. With debt service out of the picture, all that’s left on the expense side of the ledger are operating costs. Since now is the time we need the income most, we need to be watchful and make sure that capital expenditures (major component replacements: roof, HVAC system etc) don’t eat up our precious income stream. So that may call for the investor to replace older assets with newer ones, or to exit an investment and cash in on the value appreciation it has incurred during the holding period. This can be done two different ways: A 1031 like kind exchange to defer property taxes on any capital gains/reclaimed depreciation or through a straight sale/exit of the investment. The road we will advise you to take will depend on several factors. The investor’s exposure to income taxes and any available tax shelters certainly come into play. Also, the investor’s plan may call for a shift of some of their capital base to a different type of investment.
One more concept to think about here: What do you have most Time or Money? If you have plenty of time (15+ years) you can let the positive cashflow alone do all the work. If time is scarce (you need to retire last Thursday around 1:15pm), you have to employ your income to feed the wealth building fire so it burns quicker. Let’s take that one further: If you find yourself completing the plan and still have got time on your side, it’s not illegal to start again and pursue even bigger goals. 🙂 In my experience, I’ve found that one major limitation for investors is that their goals usually go as far as their current “horizon”. However, a beautiful thing happens when they reach a higher level: Their horizon changes. And so do their goals. So it’s okay to be limited by what you think is your current capacity to achieve as long as you allow yourself to reassess that capacity once you reach higher plains.