Ya see, even if the flipper does well, he’s paying ordinary income tax rates on his profits. And if not? He’ll get caught soon enough. Seen it too many times. Most flippers though, earn their profits fairly, pay their taxes, then move on to the next one.

‘Course they gotta take out money for themselves before the movin’ on part actually, you know, moves on. After ’bout the third or fourth one, it becomes fairly clear exactly what’s what.

Here’s the dirty little secret flippers won’t bring up while chowin’ down on the BBQ this weekend.

They very rarely retire well at all. They hit 50 or so, then realize the sun is setting quickly their chances for a stellar retirement. It’s not a good feeling. I’ve consulted with several 50-something flippers in the last couple years. It ain’t been pretty.

They’ve discovered all flippin’s got ‘em is a bigger paycheck, higher taxes, harder work, and more liabilities. And they can’t stop, or it’s back to whatever job they hated before they started flippin’ real estate. They’ve built themselves a prison with no doors.

Please don’t misunderstand me — I think flippin’ properties is a great way to get a real estate investor started — given the right skill set and a solid Purposeful Plan. What happens though, is they get hooked on the relatively easy money. Before you know it, they have more and better cars, toys, houses, house payments, boat payments, etc. Now they’re flippin’ ‘cuz they have to — just to underwrite the lifestyle. Then this silly little market correction comes along and Boom! they’re upside down or fightin’ for their financial lives. Nobody told ‘em about corrections. Ah, that’s when the chart’s arrows are pointing down, and not eternally up.

We’ve seen this in San Diego and every other town we’ve been to. You think the market’s location matters? Not to flippers. Why? ‘Cuz it’s all about buyin’ low, sellin’ high, then getting the next one up and going before the cash runs out. No steady paycheck now. Nope, Uncle Murphy took care of that pipe dream. I’ve seen folks work six months from start to finish, end up with enough to take their family to Sizzler’s, then get up early the next morning to find the next one — all in the hope that next one will turn out better. Note: I speak with empathy, ‘cuz I’ve been there lived that. Could only afford In ‘n Out Burgers though, not Sizzler’s.

It has to.

Meanwhile their slow thinkin’ long term investment type friends, have been muddlin’ along, taking their gains slowly but surely. Exchanging up when appropriate, sheltering their day job income — or in the alternative their capital gains taxes — all the while watching their capital growth rate move their net worth into the thin air category.

Is there a strategy for the flipper to get off his deadly treadmill? Can he find a way to escape the cage he’s built for himself? Will Wally finish mowing the lawn before Dad gets home from work? Can the Beaver fix Mom’s favorite coffee cup — the one he broke gettin’ away from Lumpy?

The answers to all those questions and more this weekend.

To all the military veterans out there, and those presently serving our country — please accept my heartfelt thanks. I realize my freedom has been, is, and always will be preserved because of your efforts and sacrifice — sometimes the ultimate sacrifice. This weekend we think of you with pride, thanks, and our prayers for your continued safety.

Happy Independence Day.

Estoppel is a silly sounding legal word sometimes used in purchase contracts when tenants are involved. Of course there are many time an attorney might use the concept of estoppel, but since it doesn’t say lawyer on my expansive forehead, I’ll stick to the purchase of real estate investment property.

I’ve taught the concept, been taught the concept, partnered with a real estate attorney for a decade and listened to him pontificate endlessly on the concept. It’s a giant pain in the patute. Yet, I’m still gonna give it a shot here. If you really insist on confusing yourself you can click the above link, but I recommend you take two aspirin first.

Here Goes

You’re lookin’ to make an offer on some income property. You’ve gone over the offer to purchase three times, and are finally satisfied yer covered. Due diligence period — check. Subject to your inspection and approval of interiors/exteriors — check. Seller’s gotta turn over income/expenses last 2-3 years — check. 23 other things — check, check, and check. Eyes begin to blur, and the thought of watching a soccer game between East Toilet Seat, Wisconsin and Rubber Chicken, Kentucky is soundin’ pretty dang good about now.

Got it covered, right? Not so fast estoppel breath.

Estoppel is merely a legal concept (Dirt Lawyer welcome at any time.) (es)stopping someone from saying ‘blue’ when they clearly said ‘red’ before. It also helps if the other person in the contract believed them when the at first said ‘blue’ — and acted on it.

Let’s just cut to the chase here, OK?

Do not, I repeat, Do not, under any circumstances, buy income property without either an estoppel clause in the contract or its equivalent — whatever that might be. I’ll let the attorneys figure that one out.

Don’t believe the seller’s agent or the seller, or the lease agreements they turn over, or, and this one’s my all time favorite, their Schedule E form from their income tax return. What you want for your files is much more reliable, though not foolproof. You want copies of the rental/lease agreements for each unit. You then want estoppel agreement forms for them. You knock on each tenant’s door, and have them inspect the agreement their landlord is tellin’ you is the one the tenant signed and in force. If the tenant agrees it’s the correct lease and it’s their signature affixed to said lease, yer almost good to go.

You have them sign the estoppel agreement which generally takes a whole buncha words to say:

The lease attached to this form is the one I signed AND there are no special deals between me and the landlord not mentioned in the attached agreement. Now yer good to go. Caveat: Can the tenant be in league with the landlord to sell you down the river? You betcha. Only seen it once in all my years though. It’s fraud, and district attorneys kinda sorta frown on such shenanigans.

It’s not just so you can substantiate the numbers. How ’bout special deals with tenants? Countless times over the years we’ve come across buildings housing tenants claiming all sorts of rent discounts ‘cuz of some service they render. It may or may not be true, but if it’s not in the rental/lease contract it doesn’t exist. You should ask each tenant if there’s a special deal not in their agreement. If so, now you know to bring it up with the seller. Oops. Those conversations are always uh, entertaining.

Just make sure you make the purchase subject to and contingent upon obtaining signed estoppel agreements from all tenants — no exceptions.

See? Another answer to a question you most probably didn’t know to ask. How many more answers won’t you get ’till it’s too late?

Something to ponder.

Here’s something else to ponder. Why haven’t we talked yet? Come on now, get with the program. Let’s figure out where you are and where you wanna go — then let’s lay out a Purposeful Plan just for you. OK — this is where you click Contact BawldGuy.

Try not to primarily think in terms of retirement income. Think lifestyle. How much of a traveler do ya wanna be? Wanna be a globe trotter, or are you more a see the grandkids type? What about how you’ll be traveling? Gonna be an ocean goer? Maybe you’ll be staying in the contiguous 48 and takin’ long trips in the cool RV — maybe a $400,000 RV? Hey, it’s your retirement, what do you want? You and I will make it happen. Our #1 weapons? Your vision and my Purposeful Plan.

See what I mean? It’s one thing to randomly think or even talk about your retirement, but try to answer the question concretely and it becomes a different tale altogether.

I bring this up to kinda sorta jump start your thought process. When constructing Purposeful Plans for our clients, we tell them not to sweat it if they change their minds a dozen times as the years come and go. You’d think it’s such a huge part of our financial lives that we’d know exactly what it should look like. Then we realize it’s not the money, though surely the money supports it. No, it’s the what, how, and when that makes us crazy.

Here’s your homework.

Take a notebook or legal pad and across the top write, “My (Our?) Retirement Will…”

Now paint the picture with your own brushstrokes, using your own colors, your own texture. Use the blank sheets of paper as an analogy to your blank retirement plans. The paper begins to taunt you. Pretty soon though, your mind will begin to get in touch with ‘Retirement You’ and off to the races you’ll be. I’ve had clients come back to me after completing this task, accusing me of costing them several sleepless nights. The results were well worth it though. Many have surprised even themselves with what they really wished to accomplish.

The real payoff for doing this homework well? There’s not a better engine to drive your own Purposeful Plan than the picture you’re able to keep in your mind — You — Retired — Doing exactly what you envisioned.

It doesn’t get any better than that.

BawldGuy Axiom: A great retirement starts not with a single step, but with filling in the first blank sheet of paper.

When you’re done, call or email me and we’ll get started. Oh, already know how it looks? How cool is that for you? You may call or write me immediately then.

OK — either get started with your blanks sheets of paper, or get ahold of me so there’s not a day’s more time wasted.

‘Course that’s not why I’m talkin’ about her today. It’s ‘cuz the 4th of July is on Friday, and Roberta has done a ton of homework so she’d be able to tell you and me where all the excitement’s gonna be. If someone’s settin’ off a cherry bomb somewhere in the county, she’s got the lowdown on where and when.

So if yer wondering about our choices for fireworks in San Diego Friday night, here’s where ya go.

Thanks Roberta!

It’s all about expectations, isn’t it? I’ve spoken to investment clubs, and the experience generally falls into three categories.

• Newish club so mostly newbie investors — great questions, solid response
• More mature club, a few ‘leaders’, one of which I inadvertently cross while talking
• The ‘1 in 10′ club, interested only in real info, in depth detail, real expertise and advice

After a conversation yesterday with a long time client, I’ve decided what the heck, it might be time to revisit clubs. She recounted a recent trip outa state to her see her brother. They’re both seasoned investors, and he took her a meeting of the local club. She’d told them during a break about how we do things at Brown and Brown, and that we used to speak to clubs like theirs.

Locally of course, I’ll speak for a free lunch. I’ve not spoken to a local club in some time. (At least 15 years.) If you run a club or are a member of one, and you think they’d like to hear me speak, contact me through the blog here. If I can drive there in less than a couple hours, lunch is fine — or dinner as the case may be. Wherever I’ve spoken, the only thing asked is for them to pick up the flight and hotel. I’m a cheap date.

It’s my heartfelt contention real estate investment clubs have been prayed upon by vendors, or real estate agents/brokers who, though they mean well, are not qualified to advise folks on the investment side of real estate. Then there are worst cases. Those clubs where it’s the blind leading the blind. This isn’t universal of course, as I’ve been the guest of many clubs with both excellent leadership, and stellar speakers. It’s not been the rule though, at least in my experience. Heck, I remember a speaker at a club, who, when finished explaining tax deferred exchanges, had me scared, and I’ve done hundreds.

Folks wanna hear how to retire well. They know it takes time, Planning, and commitment.

Bottom line? I’m wantin’ to speak to some clubs. I miss it. There’s nothin’ like a room full of regular folk, hungry to hear something besides how to get rich by next Thursday. Everywhere we go, people tell us we’re the first pros to tell them it takes time, Planning, and work. Nobody’s taken them behind the curtain, so to speak. I love doing that, and do when speaking at seminars. They love the concept of Purposeful Planning. So do we. I’m Jonesin’ here — and in need of a fix.

So if you’d like me to speak at your club, just ask. I’m a pushover.

Go ahead, make my day.

Not a difficult decision, is it? ‘Course not. It’s obvious on it’s face. Why? ‘Cuz in baseball the winner is decided by how who has the most runs at the end of the game — not the team sporting the pitcher with the most strikeouts.

Appreciation = Strikeout Pitcher whereas Capital Growth = Very low Earned Run Average

In real estate investment terms, here’s how it shakes out in real life.

Let’s say you’re in the Bay Area of NoCal, and poppin’ your vest buttons ‘cuz properties are selling via multiple offers, with some appreciation. Let’s inflate ’some appreciation’ to 10%. Income properties there require 40-50% down payments to break even on a month to month operational basis. Let’s use 40%.

Invest $100,000 at 40% down buys you a $250,000 property. Those in SF or Palo Alto can stop laughting — it’s just an example. If the first year’s appreciation rate is 10%, your capital grew by $25,000. On the other hand, if you’d have bought properties in one of the regions we currently recommend, you’d have acquired $1 Million of new property. If the first year’s appreciation was just 5%, your capital grew by $50,000.

I dunno, you make the call.

Over time, the only hope for places like California and places like it, are to resume double digit appreciation year after year. Don’t wanna burst yer bubble, but the odds on that happenin’ aren’t, uh, in your favor, know what I mean, Verne?

Even with all things being equal, which they aren’t and won’t be, what’d'ya think the increased flexibility multiple props gives you? Oh, did I forget to mention triple to quadruple the tax shelter? Oops, my bad.

BawldGuy Axiom: Appreciation is for show, while capital growth is for dough.

Purposeful Planning understands this truth. There are now thousands of real estate investors who are learning the differences the hard way. Their retirement income will be the victim, if they don’t modify their outlook. That’s a nice way of sayin’ you’re sabotaging your own retirement if you’re buying appreciation instead of capital growth.

For those anxious to start growin’ their capital, your first step would be to click right here, and start a conversation — one I’m lookin’ forward to having.

Now for our Sunday musical interlude. (Always wanted to say that.)

Anyway, I went through the whole day gleefully anticipating the family deal — and never once, not even a hint of a thought about writing something semi-intelligent. Oh well. Life goes on, and something tells me your lives didn’t change ‘cuz I forgot to put on my real estate investment dude hat on. The family party? The best ever. Everyone had their sharpest double edged swords out. Haven’t laughed like that in a long time. I was cut to pieces, but got my share in too. The Glenlivet was smooth as always, and The Boss was lookin’ hot hot hot.

On an absolutely unrelated note, if you’ve heard of twitter.com you can follow me. I’ll be, ah, @bawldguy — duh. If you haven’t heard of twitter, check it out.

I’ll be back in spades tomorrow though, and that’s a promise.

Here’s some music designed to put a cool twist on the weekend, and smooth everything over. Blasts from the past. Even Lani’s gotta like these two.

The Problem?

If your real estate investment world begins and ends at San Diego’s borders, you have a big problem. If they don’t, takin’ your equities Outa Dodge will easily mean $1 Million in additional capital growth for most of you in the next decade. And that figure’s a relatively safe one. Talk about the tortoise and the hare. And for the record? It’s only in the fable that the tortoise wins. Where we’ll take you, the hares don’t stop and lollygag. All things being equal, those leaving San Diego with their real estate investment equity/capital will race past those who stay in town.

It’s a no-brainer. Those who leave now, will be working towards another $5,000 a month retirement income in the next 10 years or so, give or take. This isn’t a game. This is your retirement, and I’m serious as a heart attack about this subject. It’s what I do.

Do not invest in San Diego income property now, or keep what you have longer than it takes to sell/tax defer (1031 exchange) your way out. I’ve been tellin’ folks to buy SD property since Carter was in office. I don’t say these things lightly, as I understand the gravity of decisions based upon one’s future retirement income. But it’s the right thing to do. That makes it an easy call.

I’ll be in town this weekend, available by phone and email. I’m pretty good about gettin’ back to folks quickly. So Contact the Hairless One and let’s see what it’s gonna take to get your retirement back in high gear. Oh, and by the way, for clients doing tax deferred exchanges with Brown and Brown, the selling costs will be reduced by $10,000 or more 90% of the time.

Really — wouldn’t kid ya ’bout that.

Now for some kinda sorta on-topic weekend music. (Just go with it, OK?) Have a good one.

BawldGuy Axiom: No wildly successful action ever came from anything but a thought. Thought — thinking, always comes first. Poor thinking = equals poor doing.

A superb retirement comes from Purposeful Planning, doing things on purpose. It doesn’t come from a mental attitude equivalent to rollin’ dice on the Craps table at the casino.

David just published There Is None So Blind As Those Who Will Not See and I’m convinced if you read it, one of three reactions will ensue.

1. Amen! Yer preachin’ to the choir Big Guy.

2. You’ll see yourself in all your security driven splendor, then race down the hallway to the door marked ‘DENIAL’.

3. You’ll see yourself, recognize the need for a sea change in your thinking, and begin your new and abundant life.

David and I want everyone to enter retirement with a sense of excited anticipation. If the thought of your retirement makes your palms sweaty, and sleep hard to come by, click the link and read the post. If it changes your thinking it’ll change your life.

Without the right mindset, your retirement might very well end up as a life sentence. When you finish reading David’s stellar post, come back here and take a short listen to the Grandpa Economics podcast. You won’t be sorry.

If you now think you’d like some help with your retirement, Contact Me. I love this stuff. It’s the only reason I keep doin’ it. Let’s figure a Plan just for you.

BawldGuy Axiom: Those who set out to try are doomed to learn from those who set out to do. Doing is what results are all about. Trying is how we begin explanations for failure.

The latest bump in the road for ‘Jim’ is figuring out how to reliably value properties in which he has some interest. Though I’m still not positive about what he was looking at during his research, I can say it did bring up a common misconception.

Going to the local tax assessor and viewing property tax appraisals in order to value is maybe one of the fastest ways to find yourself in the black abyss of ‘What happened?’

In California for example, the only kinda sorta reliable assessor valuation is found the day after a new sale is recorded — if that sale was recorded at full value. Back in ‘78 we amended the state constitution as it relates to real estate taxes. (Proposition 13) Very much oversimplified, it limits taxes to 1% of the purchase price, which of course has been perverted somewhat over time to include various exceptions. In San Diego homes and small investment props generally land in the range of 1.25-1.6%. Also, and this is best part, annual tax raises cannot exceed 2%. Pretty cool, eh?

So, if you’re appraising a small income property, say a duplex, and look at a few others close by, here’s what you’ll most likely see. Tax appraisals all over the place based on the price they paid long ago, plus 2% a year. This assumes they didn’t hoodwink the assessor concerning purchase price. Happens more than you think, Grasshopper.

This has been our experience everywhere we’ve been, regardless. Their methods may vary from state to state, but the results remain uniformly worthless to the pro. The values shown by tax assessors are ridiculous on a good day, and beyond stoopid most days. That duplex isn’t worth what you think it is. Don’t impute any credibility into an assessor’s valuation of property, especially if you’re trying to figure out how much you should pay for it. That approach will either get you nowhere fast or somewhere you never meant to be at a price too silly, or worse, embarrassing to mention in public.

And no, I haven’t spoken yet about how to assign reliably credible value to property you’re lookin’ to buy. We’ll do that real soon. We have talked about how not to appraise real estate investment property, or any real estate for that matter.

Think folks haven’t invested in property they ‘researched’ only to find out too late they paid way too much? ‘Course there’s the other side of that same coin. How’d you like to find out you left thousands on the table ‘cuz you sold your property way under value — based on the local tax assessor’s valuation? I wonder which guy would feel worse?

Don’t answer, it’s a trick question.

Call or email me and learn an answer or six to questions you didn’t know to ask. Come on, I need a fix.
Click here and miraculously my Contact BawldGuy page will appear. I’m confident you’ll know what to do next.