Formulating a plan
March 14th, 2007 by KenricLooking back to 2004, I had a clear path of what I wanted. When I moved to Arizona, I knew that I was looking for buy & hold properties that had positive cashflow. I wanted at least 10% cash on cash return. I knew exactly want I wanted. And that’s what I got.
Every property I purchased in 2004 fit those parameters. I remember passing up many opportunities of barely negative cashflow. In hindsight, if I had picked up any of those I’d be a much richer person. But I stayed true to the course. Even my Salt Lake City properties bought in 2005 made the cut. They are 100% financed and breakeven or slightly positive.
So what happened? Well, the lots in St. George did not fit my plan. I didn’t have any lot flipping parameters in my plan. I didn’t recognize that I was deviating from my plan when I bought them. They ended up being a poor investment. In fact, even if they had paid off, they were a deviation from my plan and therefore a poor choice.
Another thing that I wasn’t prepared for was the massive appreciation in 2005. My strategy was always to buy & hold, collect the cashflow. However with many properties hitting over $100k in equity within a year, I was faced with some choices.
- My cash on equity return was horrible. I had $100k giving me $200/mo cashflow. That’s 2.4% return
- Should I sell? The market might tank. Should I preserve what I’ve made.
- Should I cashout refinance or HELOC to pull money out? What do I do with the money?
- Should I just continue to hold and collect cashflow?
If I would have had a 10 year plan, I would have had answers to all of these questions. But I only had a plan for 2004, to buy & hold. If my 10 year plan was to have $5,000/mo in cashflow and to buy 4 properties a year, my choice would have been clearly #3. Can you see how easy our exit strategy choices would be then?
In June 2007 I will hit my 2 year mark at my primary residence. My friend asked me today. “Are you going to sell it or rent it out?” I don’t know. How scary is that?
That is my problem. I am going in circles with no direction. I’m sure you readers could tell by my blog postings. I had stuff about the burger place, poker, flipping a house, stock market, etc… No direction.
So in the next coming months I am going to formulate a plan for a 7 year timeframe.
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Formulating a plan is a good idea. Many corporations have a five year plan. Crazy corporatons even have 20 year plans. Usually the plans fall apart well before they are executed because they don’t achieve the ultimate goals of the corporation.
What do you ultimately hope to achieve? Do you want to have a bunch of rentals that are all feeding you income? This is a great plan but you want to have some of those rentals totally paid off so that every dime in rent collected is income. You can’t pay them off if you borrow against the equity over and over again.
You seem like a very nice “kid” (I’ll try to use that term sparingly). You are in a pretty good position since most of your property has some cashflow. You need to be aware that real estate is NOT a sure fire deal. There have been times in history where real estate has fallen on it’s ass. People don’t imagine it happening (now) but real estate can lose 50% of it’s value or more. You need to be prepared for that. The recent problems with subprime are going to spill over to the Alt-A and A markets because lending requirements were grossly loosened in the last 5 years. It’s starting in subprime but it’s going to spread like a virus. There are a lot of people out there who own many many homes who shouldn’t own many many homes.
I would try to refinance into 30 year fixed on those properties that you can do this with. If you have properties you want to sell, you should have been selling them yesterday.
The mortgage market is going back to the old fashioned thing of “can you afford to own this?” That doesn’t mean “Can you afford to pay the interest on the loan” or “Can you afford to pay 1% of the interest on the loan” — it means “Will your salary buy this?” The people who ultimately own these loans don’t want to own the properties behind them. They want YOU to own them. You need to be able to pay for them. This is what is really going to hurt the real estate market since most people can’t afford to own a $400,000 house!
Anyway…. If I were in your shoes, I would sell the properties you can now. I would hold onto the ones with good cashflow (though I don’t think you have a lot of good cashflow — I think you have SOME cashflow, but I think you need to be getting over $500 a unit to be doing well). I’d prepare to hunker down. Everytime something seems too easy and too good to be true — it is.
By ubu50 on Mar 15, 2007
Every time I eat at Chipotle, I wonder if it’s still in the back of your head.
Make sure you “own” your plan. After that, everything will fall into place.
By Clifford on Mar 15, 2007
Kenric, how are you going to create your plan? Do yo have a coach? who is going to review it with you to see if it makes sense? Luckily for you, after this weekend I think it is easy to have a couple of friends from the get together giving you a hand with this.
I am working exactly on the same. The weekend really help me open my eyes to things that I knew but I was jut taking for granted and not really doing them.
By Andres on Mar 15, 2007
UBU,
What you are saying is exactly why I have realized I need a plan. My current portfolio of properties are fine. They are all cashflowing to some extent and can support themselves.
Your question on what I hope to achieve is what I need to determine. If I ultimately want free&clear properties feeding cashflow, then I have a clear direction. I wouldn’t even worry about a market downturn if this were my goal. I’d refinance to 30yr fixed and begin paying down principal.
However, if I decide it’s to own a strip mall, then I would proceed differently.
By Kenric on Mar 15, 2007
A wise man once said…
“Everybody’s got a plan until they get hit.”
-Mike Tyson
By knuckleheaded on Mar 15, 2007
I am with Knuckle.
I do, however, have a plan. Gig is, shit happens. My ten year plan was fucked because a kid happened. My next ten year plan just got hit 2 weeks ago because of other issues.
Truth is, I–or you–might not make it to ten years. Then what?
What if you were living your life for ten years and then ten years turns to sixteen months?
There has to be some algo formula there. I have been looking. How do you live now and plan for then and do both well?
My question, which is not the same as yours, is, “How can I live now and plan for a ‘might not be’ then’”
Ah, well. Live and learn and die and forget it all, right?
By Jscott on Mar 17, 2007
I would also suggest having a 1 year plan, 5 year plan, as well as a 10 year plan, and review it every year.
The 10 year plan will not change much from year to year, but the 1 year, and 5 year may need to be adjusted more often. By seeing the 1, 5, and 10 year plans, you can see how the 1 and 5 year plans may change but still support your 10 year goals.
This will help you keep focused on the “big picture”, and not panic when short term circumstances change, as they will always do.
By Allen Young on Mar 19, 2007
Well, when you say you look for properties that Cashflowing positive, that basically depends how much down did you put. A 10% - 20% down will most likely get you positive cashflow at many places. So how much down did you have for St.George one?
Another question: do you have property managers or do u manage these properties remotely?
By Sri on May 16, 2007
Sri,
My St. George properties were just land. Therefore, there was no income coming in.
I have PMs in SLC, I manage the rest of them myself.
By Kenric on May 17, 2007