A popular diner in Denver called Tom’s Diner has been serving breakfast for around 20 years. Recently developers offered to pay Tom around $5 million for his location.
As Tom is now 60 and thinking about retirement, he was looking to sell and have a nice retirement with the money he was going to earn from his decades of hard work. Fortunately for him, Denver’s real estate has appreciated dramatically over that time period and he had a nice retirement saving in the value of his land.
A small group of people (I believe 5 in total) petitioned the city to make Tom’s Diner a historical landmark as it had been in operating for roughly 50 years (Tom only bought it 20 years ago). Unfortunately for Tom, the city sided with those 5 petitioners and overnight the entire value of his land was wiped away.
As a historical landmark, no one could come and build nice condos or multifamily development. Tom’s entire life’s work and savings were gone.
Fortunately for Tom, this received a lot of media attention and the city eventually rescinded its ruling and Tom will no longer have to retire in poverty. But, what can we learn from Tom?
You may own the land, but your not the only one who controls it.
You may have received notices from your city or town about proposed developments or construction projects happening near property you own. In essence, if enough people in the neighborhood get together and make enough noise, you can effectively veto someone else’s use over their private property.
While this could be good if an industrial plant or landfill is going in near a residential neighborhood, for example, it may not be good for someone who wants to make a positive development for the city or area.
As an investor, you’ll more likely be on the receiving end of these decisions, not the beneficiary.
Additionally, even if you own the land, the government (city, state, and federal) all have the right to eminent domain and the right to taxation. In essence, you own the land but the government can take it or they can simply reassess the value and double your taxes (which has happened to me more than once).
While both of these scenarios are very unlikely, it IS possible. That’s why having only one or two properties is so risky.
That’s exactly why I run training events and workshops – to help you scale and lower that risk. To see the latest workshop, go to www.10xmyportfolio.com
Also, if you haven’t yet, download a step by step guide to growing and scaling your real estate portfolio so you don’t have to leave your retirement in the hands of the mob rule.
You need to scale and diversify
Tom’s biggest mistake was that he owned only one asset of any worth. All of his net worth was in one place which opens it up to a lot of risk. When something put that asset at risk, Tom had no backup plan.
I don’t care if you own one duplex or a 200 unit complex, you need to start putting more assets into your portfolio to avoid these risks. While you may not be at risk for overzealous historical commissions, you are at risk of a tornado, flood, earthquake, fire, or hurricane wiping out your entire portfolio and income stream.
Use your equity to grow and scale
If you have an asset, it may seem appealing to have it entirely paid off and just live on the cash flow. But, Tom could have leveraged some of the equity in his asset (before it was deemed worthless) to buy more cash flowing and appreciating assets such as real estate in other parts of his city or state, or even invested across the country to limit the risks specific to his area.
Just like stocks, you don’t actually earn anything until you sell the property. That is unless you refinance against its value.
Refinancing is a very effective way to use the equity without losing the asset in a sale. As long as you purchase another asset that pays for the debt service on the first (plus a healthy profit) then you’re doing well.
Don’t build your life around a job or business that requires you to work in it
Tom was looking to retire but has no source of income other than his business. If he stops working (or managing the business) the income dries up. Even though he had achieved the dream of having a very successful business, he had effectively trapped himself into a different sort of JOB.
There is nothing wrong with having a job or running a business, but you need to build other streams of income because it’s just a fact – you can not work forever.