For today’s post I’d like to share with you a tool that has really helped me grasp the concept of saving for retirement.

Compartmentalization

Separate Accounts

- Don’t keep your retirement money in the same account that holds your emergency funds
- Keep everything you’re saving for in separate accounts
- INGdirect.com allows you to create multiple accounts online
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Equity Goose

- Keep an “Equity Goose” (read “The Equity Goose and the Cash Flow Golden Egg” for more information) that you never take money from
- Only use this money to invest in assets that will cash flow

Emergency Funds

Most people have one savings account that they use for their retirement as well as for their emergency fund. But what ends up happening is they’ll save and save and save until an emergency happens and they have to draw the account down.

Then they try again- saving, and saving, and saving, until they decide to go on vacation. After this next dip, they continue to save until another emergency occurs, like they lose their job. So because their retirement account doubles as their emergency fund, it never builds and never benefits from compound growth.

Equity Goose

The solution is to make sure you have at least two savings accounts. One will be untouchable- what I like to call the “Equity Goose” (see below for a link to another article describing the Equity Goose). The Equity Goose is basically cash that you never access. The only function of that cash is to produce more cash for you either in an interest bearing checking account or through real estate or another investment.

So now you have your long term equity goose which just continues to grow exponentially and your short term accounts for all other things. You should have a separate emergency account that will naturally rise and fall as emergencies happen, and separate accounts for everything else you’re saving for like vacations, a new car, or college educations for your children.

This is what’s called compartmentalization. Remember that the key is having one account that you can never touch. The only purpose of that account should be to buy assets that produce cash flow for you.

Separate Accounts

A really good resource I use is a bank called INGdirect.com. I don’t make any money from advertising with them, but what I like about them is that they have a higher interest rate (right now about 1.5% which is really high compared to most money market accounts). The other thing I like about them is that they let you open up several accounts online just by clicking a few buttons. This is a lot more convenient than having to sit down with a banker and getting funny looks when you want to open 6 accounts.

So that’s what I do- I’ve got my Equity Goose account, an account for vacations, and separate accounts for asset type goals or things that I want to buy.

I hope you’ve learned from this tip. If you can learn how to compartmentalize your accounts, it will make you a lot more money in the long run and set you apart from 90% of Americans.

Personal Branding

Today I’ve got a book review for you. I just finished Gary Vaynerchuk’s book “Crush It.” It’s a fantastic book- I wish I’d had this book when I started blogging four years ago. There’s a couple of great things about this book that I really like.

Number one is one of the central themes of the book- that blogs have begun to place a greater emphasis on personal branding. Every single person needs to brand themselves for their career. You’re no longer just part of some faceless corporation. Most people don’t stay in corporations very long anyway so you need to brand yourself.

I like this concept because I wrote an article about it in 2007 called “Your Personal Brand,” and I’ve got a link to it below so you can check it out. Gary and I are definitely on the same page with this.

If I had this book when I started blogging in 2006 I think my acceleration would have been a lot faster because he really lays it out. I think that anyone who wants to start in blogging should start with this book because he really goes over the best practices for starting a blog.

Content

Besides the emphasis on personal branding, I also liked the idea of “content over quality.” That’s a huge one and something that took me a long time to learn. Bloggers tend to obsess over things like how their site looks- always tweaking and making sure they have the right plugins and apps. But Gary really emphasizes the importance of just getting content out there. Just film yourself- even if it’s on a flip cam, and even if the quality’s horrible. It doesn’t matter- it’s the fact that you’re getting out there. It’s your personality and your content that people care about. They don’t care about the quality- I think people get way too hung up on that.

Community

Another thing that I took from the book is the importance of social media. This is something that can take a long time to figure out. There’s two major points of blogging- one is the content we just talked about and the other is the community. Establishing and creating that community and reaching out to other people through social media is a very important concept within blogging.

As a blogger you tend to get wrapped up in your own work and your own site and the way it looks. You don’t think about other people’s blogs. But it’s the people who are unselfish and who truly do care about other peoples blogs, twitter accounts, and facebooks, and who reach out to the community who really become successful.

He suggests that you spend the majority of your time on social media, reaching out to other people. So once you get your content created spend the rest of your time networking.

Video Blogging

Another important thing is video blogging. Video and speaking is a more natural communication device for me. I can write and do it well but it takes more energy from me and a larger commitment. If I want to write an article like “5 ways to create passive income” that’s going to be big on the internet it’s going to take a few days of planning and intense writing and some tea or coffee to keep me going. It takes a big commitment from me and that’s why it’s harder for me to come out with those on a consistent basis. And consistency in blogging is everything. People start to expect a rhythm and that’s something that I’ve fallen short on with Genius Types over the years.

The video blog is something you can knock out. You can get your ideas out there and people can see your personality. Through writing they don’t necessarily get as much of your personality, but with video blogging they can get the inflection in your voice and the emphasis on what your talking about. For me it’s a more powerful medium. And now that bandwidths a lot higher people are watching more videos.

It’s certainly going to hit a different audience than article readers. There are certain people who just read articles but then there are people who won’t touch an article because they’re not readers, they are more of a video or interactive person. The same person who will watch this video may not turn around and read a long article that I wrote. So video blogging is huge.

Medium

Gary suggests you find what your medium is. If you’re not comfortable in front of a camera maybe writing is your medium. If writing isn’t your medium or you’re not good in front of a camera, maybe it’s an audio podcast. Whatever it is find what you’re comfortable with and you can express your passion through it. I’m probably most comfortable in front of a camera, and probably second most comfortable writing, but you may be the exact opposite.

Passive Income

So these are great suggestions if you’re a beginning blogger, or any blogger. The theme of this blog is creative life and passive income. Which means we’re looking to create assets that kick off passive income which gives us time to enjoy life. However Gary is a workoholic as he expresses in his book and he says your going to be working your tail off and will have to keep working your tail off. I agree with that to some extent- in the beginning of a blog you are going to have to spend a lot of time on it, but I’d like you to eventually work to make it more and more passive. But that’s the only difference I have with the book and I would recommend it to anyone who’s interested in blogging. In fact, everyone should be blogging anyway so I’m going to recommend it to everyone.

Here’s a link to an article I wrote in 2007 about building a “personal brand.” I guess Gary and I were on the same page!

Warren Buffett

Many stock market investors look up to Warren Buffet as their “guru”, but if you listen to him closely, he’s basically telling you not to invest in stocks.

Warren Buffett’s rule #1 of investing is “Don’t Lose Money.”

Rule #2 is “Don’t forget rule #1.”

Retail Stocks Don’t Qualify

What he means by that is: don’t invest in anything that can go down in value.

By that definition, almost all stocks are ruled out. By contrast, Warren Buffett wants you to buy assets at wholesale, not at retail prices. That means picking up property or companies at 50 cents on the dollar.

When you buy stocks online, you are, by definition, paying market value for the stocks. The only way to get a company at wholesale is to buy the whole thing like Warren Buffett.

Wholesale Real Estate

Since most people can’t afford an entire company, the next best thing is a piece of real estate.

We buy $100k properties for $50k and fix them up. We are never in to a property for more than 70% of the after repair value. That way, we are protected against a downturn in the market.

Don’t Lose Money!

The hardest thing in investing is recovering from a loss. It takes a 100% gain to recover from a 50% loss. So don’t lose money!

Pay Yourself First

The concept of “Pay Yourself First” was made popular in the book “The Richest Man in Babylon ~affiliate link” by George Clason. The idea is that you
“pay yourself” the first 10% of your income each month.

This idea resonates with a lot of people, but many get it wrong. For example, “pay yourself first” does not mean to treat yourself to a nice dinner or vacation with the 1st 10% of your income. That would be paying the restaurant first, not yourself.

The True Meaning

Pay yourself first means to put away money in an account that you never touch that will grow over time. This could be a money market or savings account that grows until you have enough to buy a protected asset such as real estate that will make you even more money.

Not Just Money

This concept is not limited to money. Pay yourself first also applies to fitness, recreation, and time with loved ones. Think of all of the human needs that you have. It is important to block out time to service these needs “first.”

If you are spending time doing favors for your boss to get “extra points” instead of working out; you are paying your boss first.

Last week I did something that I never before imagined was possible. I made more money with a few phone calls than I did in my entire first year as a blogger.

$7,500 Just Like That

My real estate partner, Shauwn, and I started an investment company called Passive Equity, LLC. Last week, we were given a $7,500 check for assigning a contract on a house from one investor to another.

The crazy thing is that we didn’t spend time looking for the house, we didn’t need to look at the house (I drove by just to prove to myself it was real)… We didn’t do anything except make a few phone calls.

Entrepreneur 3.0

Ever since I found a whole new gear of making money, It amazes me how much easier and faster it has become than in my early days as an entrepreneur. I used to work my tail off for what ended up being a minimal result. Now it’s just the opposite. At each step along the way, I learned something revolutionary that made my life easier.

E 1.0 was back in the 90′s when I was in high school and college. I started a lawn mowing businesses, a t-shirt design company, an online poster website, and on and on…

I thought that working for myself was the way to go, no matter how hard I worked. It turned out that owning your own job was harder, more stress, and sometimes less profitable than working for someone else!

E 2.0 started when I read Rich Dad, Poor Dad. I got smart about passive income and learned how to create businesses that didn’t require me to be there. I got into bulk candy vending, blogging, an automated eBay business, etc.

That was pretty cool, but it soon dawned on me that passive income was great, but only after my bills were taken care of. I was trying to live on passive income alone and it wasn’t enough.

The problem was speed. I wasn’t building it fast enough.

E 3.0 Over the last year, I started seeking out people who had made lots of money at the rate that I wanted to make it for myself. I let go of trying to reinvent the wheel and just listened to the guys who knew how to do it.

The $7,500

As I was networking, I ran into a guy who assigned contracts for a living. Commonly known as a wholesaler, he specialized in finding property a deep discounts and assigning the contracts to investors for an assignment fee.

He was expanding his business to include Central Texas, so he asked if I could help him find buyers for his contracts in exchange for half of the assignment fee.

No problem, I said, but it really seemed to good to be true.

The Call

A week later, he called me with a property that he had under contract. It was a large home with a pool on the outskirts of San Antonio.

Comparable homes in the neighborhood had been selling for $220k – $250k. He had it under contract for $105k.

I first thought about buying the house to flip. I talked it over with Shauwn and we agreed that it was a little bit too “outside the box” for our comfort because it was out of town in a slow-moving real estate market.

But, at that price, I was sure someone would want it!

The Plan

My plan was to get an estimate on the repairs and then start working my real estate investor contacts. I sent over my rehab guy and he discovered that it was pretty clean except for some plumbing issues and a little updating. His estimate was around $20k, mainly because it was a big house in an upper-end neighborhood.

To my surprise, he told me that he wanted to buy it!

Sweet, I thought. That meant I didn’t even have to touch my contact list!

We went into price negotiations and settled on $120k.

That’s $15k more than we had it under contract for.

An Amazing Way to Make Money

The closing date was set for a few weeks after the deal was signed… and to be honest, I wasn’t going to believe it until we got a check.

Would you know… We got the check!

At closing, the investor bought the property for $120k with a $7,500 assignment fee for us and a $7,500 assignment fee for my wholesaling friend.

Unbelievable…

It was truly a win-win deal. The investor got a great deal that he will rehab and make a ton of money on. We made some quick cash for showing him a deal that he couldn’t find elsewhere. The owner got rid of a plumbing headache and moved on with her life.

When I look back on how hard I’ve worked over the years for varying degrees of pay, making money like this simply blows my mind. All I did, literally, was make a few phone calls. I drove by the thing just so I could see that it was real, but I didn’t have to. My wholesaling friend never even saw the thing.

Well, you better believe that Shauwn and I will be doing a lot more of this kind of thing in the future. I’ll be sure to keep you updated.

Six Ways to Make Money is Better Than One

I’ve made several comments over the years recommending real estate investing as the most powerful form of passive income.

The reason it’s so powerful compared to other passive income sources such as stocks, blogging, or bulk candy vending is: there are six ways it makes you money.

Stocks, by contrast, only share one of these sources (two if you’re getting dividends).

Income Sources of Different Passive Income-Producing Assets

Once you understand how all six of these income sources work, you will begin to see the tremendous wealth-building power of real estate bought and managed correctly.

I Said Correctly

Quick Disclaimer: These six income sources only apply to real estate bought and managed the way my mentors taught me:

A) with equity,
B) with cash flow,
C) in “bread and butter” neighborhoods,
and D) managed with best practices.

If your knee-jerk reaction is that real estate investing is too risky, you have not yet been taught how to minimize the risk. The way I was taught to invest in real estate is not the same way that many of the “gurus” teach. Most of those programs are far to risky for my taste.

Multiple Streams of Income

One neat thing about having so many different income streams is that real estate can be forgiving. Many people I know (including myself) screwed up on their first deal, but still made money. That’s because one income stream can make up for a lack of another.

Now, I don’t recommend screwing it up. You might as well do it right as long as you’re getting in the business. That way you won’t ruin your taste for the most powerful wealth-building tool available to the average person.

Let’s run down the list of the six ways:

1. Cash Flow

Cashflow is the reason we seek passive income-producing assets. Without cash flow, you don’t have income… meaning: you can’t quit your job without cash flow.

All of the assets on my comparison chart have cash flow (I’m assuming your stocks have dividends). If it doesn’t cash flow, I don’t consider it.

We don’t buy a piece of real estate unless the rental income is greater than the monthly expenses by a decent margin. For example: when your tenant pays you $1,000 a month and your monthly expenses including principal, interest, taxes, insurance, and maintenance/occupancy reserve are $800 a month. The $200 difference is now income in your pocket.

2. Equity Capture

Equity capture is when you buy an asset for less than it’s worth. In real estate, it’s when you buy a house in a $100k neighborhood for $50k, fix it up for $20k and you’re “all in” for $70k.

You just captured $30k in equity which goes directly towards your net worth. Few other investment vehicles can create wealth so quickly

In fact, of the six assets on my comparison chart, real estate investing is the only one that allows you to capture equity. Stocks are sold to the average person “at market” which, by definition, means there is no captured equity.

Without equity, you are exposing yourself to the risk of a falling market. We always buy assets with equity so that we are never hurt by a down market.

Online businesses, network marketing, and vending can be good sources of cash flow; but they don’t offer an opportunity to buy an asset for less than it’s worth.

3. Forced Appreciation

The ability to change the value of an asset by your own efforts is a very attractive reason for choosing an asset for self-determinists like me. Most of the businesses that I have ever started relied heavily on my creativity and work ethic to gain in value.

In real estate, you have the opportunity to physically change the value of an asset. In single-family investing, we take a distressed asset and raise the value back up to where it supposed to be with a proper rehab.

Multi-family investing lets us take this concept to a new level. While the value of a single-family house is constrained by the comparable sales in the neighborhood, the value of an apartment complex is based on the profits. That means you are only limited by your ability to increase the income and decrease the expenses.

The value of a vending or online business is also based on the profit margin that you can personally control.

Unfortunately, stocks do not allow you to control the value (that’s in the hands of the execs), and network marketing businesses typically can not be sold (so they don’t have a market value).

4. Market Appreciation

Real estate doubles in value every twenty years. It might fluctuate in the short term, but it is forced to rise over the long term with inflation of building materials, labor, and scarcity of land.

The main reason most people buy stocks today is for market appreciation while it’s only the 4th most important reason we buy real estate. Do you see the difference?

While stock investors live and die by market appreciation, real estate investors see it as a nice bonus to pile on top of the other five ways we make money.

5. Principal Pay Down

Here’s a neat way we make money in real estate that most people don’t even think of. We naturally accumulate equity in our houses as the notes get paid down.

Even if you weren’t making money any other way, your tenants would be paying down your mortgage a little bit each month. It starts out small, like fifty or a hundred dollars a month, but it grows over time and adds to your equity in the house.

The other asset classes typically don’t have mortgages, so this wouldn’t apply.

6. Tax Advantage

Real estate investors pay the lowest takes of any for-profit group in the United States. The IRS allows us to reduce our earned income tax on cash flow by taking a depreciation deduction against the house. We can avoid capital gains tax when we sell by using a 1031 tax exchange.

How long can you avoid taxes with a 1031? If you pass the property to your children, they will take over at the new cost basis, which wipes out all of the capital gains over the life of that asset.

None of the other assets can claim such a huge tax advantage.

Does it Make Sense?

Are you starting to understand why I talk up real estate investing so much? It’s the only asset class that I know of that can create rapid wealth. All the others make money in one or two ways, but not six.

I find it interesting that wisdom is often clearly laid out before everyone in a book or a lecture, and few truly understand it. It’s just as Napoleon Hill wrote in “Think and Grow Rich” when he hinted that one needs to re-read the book several times; and even then, the wisdom can only be captured when a person is ready to hear it.

The wisdom that I have in mind as I write this article is the treasure that can be found in the children’s fable “The Goose and The Golden Egg.”

The idea was further developed in popular wealth literature such as George Clason’s “The Richest Man in Babylon,” which was echoed in Kiyosaki’s “Rich Dad, Poor Dad” and also supported by Warren Buffet’s 1st and 2nd rules of investing.

Pay Yourself First

The simple, but powerful concept is generally known as “pay yourself first”.

Most of you that read this article will be familiar with the principle, but my guess is that few truly understand it; and fewer still practice the concept.

The concept is so simple, yet possibly the most powerful wealth building principle available to the average person.

What Does “Pay Yourself First Mean?”

In “The Richest Man in Babylon,” Clason describes a technique that includes putting aside 10% of your income to “pay yourself first.” The idea is simple, yet profound in it’s implications.

I find that there is widespread misunderstanding about what “pay yourself first” means. The definition is subtle, but important to understand if you plan on using it to create wealth.

Let’s start out with what it’s not.

Luxuries

Some people think that “pay yourself first” means to treat yourself to something nice when you get your paycheck. For example: someone might get their paycheck on Friday and decide to go out to eat with the first dollars of the check before they pay their bills.

It’s important to realize that this scenario does not pay you first, but instead, pays the restaurant first. Do you see the subtle difference? If you were paying yourself first, you would still have the money.

Buying a House to Live In

Many people think that they are “paying themselves first” by putting aside money to purchase a home. While this isn’t the worst thing you could do with your money, a home doesn’t qualify as a cashflowing asset. Robert Kiyosaki describes in “Rich Dad, Poor Dad” that your home is actually a liability because it takes money out of your pocket each month.

Automatic Distributions to a 401k

Many people arrange for their employer to automatically deposit 10% of their paycheck into a 401k. While this is in line with the spirit of pay yourself first, it doesn’t completely qualify under Warren Buffet’s rules of investing.

The problem with a 401k is that people tend to invested it in stocks or assets that might lose value. To make matters worse, people tend to tap into their 401k early by borrowing against it or taking a premature distribution.

Worst of all, the majority of retirees have to draw down their 401k principle, which is effectively “killing the goose.”

The Real Definition

Based on my understanding of the works of Warren Buffet, Napoleon Hill, George Clason, and Robert Kiyosaki; I have have come up with a definition of what “pay yourself first” really means.

The simplest comparison I can make is the goose from “The Goose and the Golden Egg.”

Wealth is created by consistently feeding the goose that provides you with golden eggs. In order to continue to grow in wealth, it is important to always feed the goose and never destroy it.

The Equity Goose

I like to call it the Equity Goose: an asset or group of assets you own and contribute to on a regular basis that rewards you with passive cashflow.

Your equity goose is not your net worth. The two concepts are loosely related, but not the same thing. Many of the assets you might own that contribute to your net worth will not qualify as your equity goose.

In order to qualify as an equity goose, your asset has to meet 3 requirements:

1. It Can Not Be Tapped Into

It is of the utmost importance that your equity goose always grows and never gets smaller. This automatically disqualifies your “rainy day fund” because you might potentially tap into it (when it rains).

It disqualifies your checking account, because you use it to pay your bills. Remember, the equity goose can never get smaller.

It disqualifies the equity in your home if you ever take out a home equity line of credit.

Basically, your equity goose needs to have a firewall around it. It needs to be hard as possible to tap into.

For example: the simplest form of an equity goose is a money market account. Money market accounts limit your ability to access the asset for this exact reason. I even suggest getting a money market account at a different bank than the one you use to pay your bills. The temptation to make an online transfer from one account to another might kill the goose.

Don’t trust in your own will power to protect the goose. Humans have weak moments. The smart thing to do is to keep it away from yourself.

2. It Can Not Lose Value

Warren Buffet’s 1st and 2nd rules of investing are: 1) Don’t lose money, and 2) Don’t forget rule #1.

I’ve known these rules for many years, but only recently did I understand what he was trying to tell us.

Warren Buffet is telling us not to invest in anything that has the possibility of going down in value. This immediately eliminates stocks. Ironic as it may seem, Buffet is telling you not to invest in stocks because they have the possibility of losing value.

The only way to protect your asset from losing value is to buy it at wholesale. Warren Buffet buys $1 Million companies for $500k. 50 cents on the dollar.

To keep your goose healthy, you need to buy assets at 50-70 cents on the dollar. The most practical asset class to accomplish this rule is real estate investing.

By either buying a house at 70 cents on the dollar or becoming a private lender who loans no more than 70% loan-to-value; you are protecting yourself from losses.

3. It Must Cashflow

The masters have been trying to tell us for hundreds of years to buy assets that produce realized cash on a monthly or quarterly basis. So why do people buy stocks with no dividends? Somewhere along the way, we have been sold on the concept that we don’t need cashflow; but we do.

Sources of cashflow include: interest on savings and money market accounts, dividends on stocks (not capital appreciation), and cashflow from real estate.

A money market account is the most secure form of cashflow, because it is guaranteed by the FDIC. These accounts only yield 1-2%, but they fit all the requirements of the equity goose.

Rental real estate is my favorite form of cashflow, and provies a higher rate of return, anywhere from 10 – 20%. If you buy your rental real estate a at wholesale with cashflow, you are protected from downturns and it meets all the requirements of the equity goose.

The First Step

The first step is to figure out how big your equity goose is. Given the strict guidelines laid out above, many people will not have many assets that qualify.

It’s okay if your number is not impressive, the key is to know where you stand so that you can plot a course.

Everyone Has 2 Numbers

To really take advantage of the wisdom of “pay yourself first”; every person should know 2 numbers: 1) Their equity goose, and 2) the cashflow, or “golden egg” that their goose provides.

It’s kind of like knowing your weight, or your GPA in school. Each person should know where they stand; but few do.

If Your Number is Zero

If your equity goose is nil, your first action should be to scrounge up enough money (even if it’s just a few hundred bucks), to open a money market account that you will never allow yourself to tap into except to purchase cashflowing assets. Remember to choose a different bank from the one you already use for you monthly bills.

You will feel a tremendous amount of accomplishment by taking this simple step. The sum of your whole life up to that point was a zero equity goose, but now you have planted the seed that will soon make you wealthy!

Every month from this point on, it’s important to put something in the account. Even if you can’t afford the entire 10% of your salary, at least you are feeding something to your equity goose.

Your First Acquisition

Before long, you will have enough in your equity goose to purchase a cashflowing asset; but don’t rush it… your money market account fits all the requirements until you find another qualified asset to move it to.

It’s more important to keep your money in a low-performing asset that fits all the criteria than it is to risk your goose on a higher-performing asset that doesn’t fit.

When you find an asset selling at a wholesale price that cashflows, do your due diligence and if it qualifies, purchase the asset.

It might be a single-family home selling for less than it’s worth.

It might be a private loan that you make to a real estate investor at 70% loan to value.

Cashflow

As long as you follow the rules, you can take comfort in the fact that your goose will always get bigger and your cashflow will grow along with it.

Ultimately, your goal will be to live on the cashflow without ever touching your goose.

In real estate, you can reasonably expect to make 10% cashflow on your investment. That makes it easy to determine how big your goose needs to be to support you.

If you need $50,000 a year to live on, you need an equity goose of $500,000. If you need $100,000, you need $1 million.

Make a plan to grow your goose until it’s big enough for you to live on.

One of the greatest things about real estate investing is that anyone can do it. People think they need money or credit to become a real estate investor, but that is simply not the case.

No matter where you are financially: broke or bulging pocketbook, there is a place in the real estate investing world for you.

The Ladder

I like to think of it like a ladder. We are all want to make it out of the rat race, and each of us is on a rung on the ladder. Whether you have a lot of money and are near the top of the ladder, or are just taking your first step; it is as simple as a series of steps.

It’s obviously easier at the top of the ladder because you have the most options. Cash is king and buying real estate with cash will get you the best deals and terms.

Because you have the most options at the top, it’s logical to choose the highest returns with the least amount of work. The top rung should be on the passive side of the passive income continuum.

At the bottom of the ladder, your options are limited, but not as much as you might think. You will need to find ways to invest in real estate with little or no money. You will have to give up some long-term gains for some short-term money to get you on the next rung of the ladder.

Let’s start at the top of the ladder and work our way down to the bottom.

5th Rung: High Net Worth, Wants Low-Risk Cashflow

People on the 5th rung have enough money to retire and are looking for low-risk, cashflowing assets that will give them a steady stream of passive income in their retirement without digging into their principle.

At this level, you could theoretically just dump your money in Treasury Bonds and live off the 1-2% return, but you can do better than that in real estate while keeping your risk to a minimum.

Multi-Family Yield Play

As real estate investors, we are all heading in the direction of the multi-family yield play. That’s where you buy an apartment complex that is in good condition and already stabilized; and enjoy a steady 10-20% return on your investment through monthly cashflow.

If you have a high net worth and are close to or in retirement, you want an investment that will give you a high rate of return without much hassle. Those that want the least amount of hassle should look for an opportunity to be a passive investor in a multi-family deal put together by an experienced lead investor.

Many lead investors will accept passives with as little as $100,000 to bring to the table. Your commitment might be as little as the optional quarterly meeting to vote on distributions. If you have placed your money with a solid lead, all you have to do is go to the mailbox and deposit your check.

Before entering in any deal with a lead investor, make sure they have a solid track record of safe, steady returns.

If you are willing to put more time and energy into a deal, and have the skill-sets to manage large projects, you might consider learning to be a multi-family lead investor. As a lead, you would earn extra compensation for putting the deal together and managing the asset.

Private Lending

Finding a great multi-family value play might take a little time, so in the mean time you can make a steady 6-10% return by lending money to real estate investors to buy property. Your investment would be secured by the piece of real estate at no higher than a 70% loan to value (LTV).

If you hold a 1st lean position on a piece of real estate at 70% LTV, the worst thing that could happen is you would have to foreclose on the borrower and take over a property with a 30% equity position.

You could sell the property and probably walk away with more money than you would have made if you had not foreclosed. Some people consider this the BEST case scenario.

(For more information on private lending, please visit PassiveEquity.com)

4th Rung: Medium-High Net Worth, Wants Big Gains

People on the 4th rung are either still building their nest egg, or are wanting to get more aggressive with their investments. They are looking for opportunities to make a 50-100% gain on a deal in a 1-5 year period.

Multi-Family Value Play

A Multi-Family value play is where you buy an apartment complex that is beat up with low occupancy, and rehab the asset until it is in good condition and performing at a high level.

There is more risk involved with such an undertaking, but the rewards can be massive. Think about it: If you by a apartment complex that was selling for $30k a door five years ago for $10k a door in foreclosure; imagine the possibilities if you could run that asset properly.

Before you embark on such an undertaking, get as much information from experts in this sort of deal. Find a local investor group with multi-family investors to learn from. Go to NationalREIA.com to find a local investor group.

3rd Rung: Medium Net Worth, Wants to Move Up

People on the 3rd rung have a good foundation, but not enough to get into multi-family investing. Their main concern is building their nest egg as quickly as possible while adding to their passive monthly cashflow.

Single-Family Buy & Refi

If you have $20-$100k to invest, you should be mainly concerned with preserving your liquidity. The object is to buy as much real estate with as little out of pocket as possible.

One way to do that is to buy rental real estate and then refinance your money back out in order to buy the next piece.

The first step is to buy the property with either cash or a hard money loan. In order to make this work, you will need to find a property that you can buy and rehab for 75% or less of it’s after repair value (ARV).

Once you have rehabbed the property, most commercial lenders will give you up to 75% of the value of the house in a refinance mortgage. Take your money back out of the property and do it again.

Rinse and repeat.

When you have built up enough equity to move into multi-family, sell your properties to liquidate your equity and move up.

2nd Rung: Low Net Worth, Good Credit

If you have somewhere between $5k and $20k with good credit, you are still in good shape! Your real estate investing plan should be to buy as many properties as you can with hard money loans.

Hard money lenders are non-traditional banks that will usually lend up to 70% of the after repair value of a property. This differs from traditional lenders who lend based on the current value.

If you can find a house that will be worth $100k when it is fixed up for $50k with $10k in rehab and $10k in closing costs, you will be all in at the end of the day for $70k. Since 70% of the ARV is $70k, the hard money lender will lend you everything you need to buy and rehab the property. In this case, you will have nothing in the deal.

If you are all in for $75k, you would only need to come out of pocket $5k.

Hard money allows you to stretch your minimal capital as far as possible.

1st Rung: No Net Worth, No Credit

If you have no money and no credit, you can still be in the game. Since you won’t be able to qualify for a loan, your strategy will be to find deals for other investors and make a short-term gain.

Wholesaling

Wholesalers are sometimes known as “bird-doggers” because they spend their time hitting the pavement to find deals for other investors. If you don’t have money or credit, you will have to bring value to the deal with sweat-equity.

You will set up a marketing campaign to find motivated sellers by putting up signs, sending out mailers, walking the streets, plastering your car with ads, networking, etc. If you can find a $100k for $45k that needs $10k in rehab, you could easily sell it to an investor for $50k, giving you a quick windfall of $5k.

(Remember that most investors are looking to be “All-in” for around 70% of ARV.)

Conclusion

I know people who make a living at every one of these rungs of the ladder. The reality is that it can be done no matter where you are financially.

After hanging out with a bunch of millionaire real estate investors for the last few years, it’s amazing to me how much most people DONT know about creating wealth. The average reaction to this article will probably be skepticism because most people have never even imagined creating wealth this quickly.

The investors who run in my circle are doing this every day.

Is $200 a month a lot of money?

How you answer this question speaks to your level of financial sophistication.

How Far Would You Go for $200?

Most people would not go very far out of their way to make an extra $200 a month. When compared to a monthly salary of $3,000 or $4,000; $200 sounds pretty insignificant.

A person might pick up an extra shift on a Saturday for a little vacation money; but the uncomfort from losing a weekend day keeps them from making a habit of it. Someone might sell an outdated computer or game system for a few hundred bucks, but that money’s usually gone by the end of the weekend.

As a way to create wealth, $200 doesn’t even cross most people’s minds. The average person spends more time buying lottery tickets and gambling in casinos than looking for ways to add another $200 to their monthly cashflow.

Successful Real Estate Investors

I happen to have the best job in the world. I get to produce videos about real estate investors, which allows me to meet many successful people and pick their brains in the process.

I’ve found that all the successful real estate investors I meet are excited about $200 a month in cashflow from one of their rental properties.

In most cases, that $200 a month is the main reason they pursued the property.

The Definition of Wealth

How you feel about $200 a month has a lot to do with how you define wealth. Most people associate wealth with a large dollar amount: Alex Rodriguez signed a $80 million dollar contract, or Bill Gates is worth $80 billion.

Throughout most of my childhood and early adult years, my definition of wealth was 1 million dollars. The day I opened up my bank statement and it said “$1,000,000″ was the day I was going to be wealthy.

Rich Dad, Poor Dad

My definition of wealth changed the day I read the book “Rich Dad, Poor Dad,” by Robert Kiyosaki. If you have never read the book before, your next click should be Amazon.com to order yourself a copy. This book changed the way the world looked at investing.

One of the most important concepts in “Rich Dad, Poor Dad” is the definition of wealth. While most people look at wealth in terms of a large, one-time amounts of money; Kiyosaki says that this has nothing to do with wealth.

Wealth is determined by this simple test:

Quit your job today; and without touching the principle on any of your investments, how long can you live on your passive income?

Passive Income

A few forms of qualified passive income are:

• Interest from Checking and Savings accounts
• Dividends on Stocks (not capital appreciation)
• Cashflow from Real Estate

All of these things A) give you cash on a consistent basis, and B) once set up, are relatively easy to maintain.

How Long Can You Live on Your Passive Income?

To figure out how long you can live on your passive income, you first need to know how much your personal bills are each month. Add up all of your expenses: everything from the house note and car note, to toothpaste and tuna. If you’re married, just do it for your half of the bills.

Let’s say that the average American needs $3,000 a month (after taxes). Since a month is about 30 days, that’s $100 a day.

So how long can you live on your passive income?

I would suggest that most Americans can only live a few hours… maybe a few minutes on their passive income. Most people don’t have anywhere near $100 a month in qualified passive income. They might be getting a few cents in interest from their savings account, but that would only cover a few seconds.

One Single-Family Rent House

Let’s say, in the next three months, you go out and buy one single-family rent house that cashflows $200 a month. Can you see how you may have done more to retire yourself in 3 months than you had in your entire working career?

That one house, and it’s $200 a month cashflow, pays for 2 days out of your month. If you don’t have more than $200 a month right now in passive income, this one house did more to retire you than you had done for yourself in your entire working career.

Now, go buy another one… that pays for 2 more days…

Buy another and you’ve now paid for 6…

By the time you have 15 rent houses, you’ve now paid for all 30 days in the month… and the month starts over again.

Theoretically, you can now live forever on your passive income.

Side Note on Kiyosaki

After seeing Kiyosaki live, buying his board game, and reading many of his books; I’ve come to realize that he is BIG on ideas, but small on details. When you finish reading his books, you’ll be so jazzed on creating wealth that you won’t know where to start… (that’s because he didn’t give you any details.)

Make sure you are part of a local investor group to fill in all the little details that Kiyosaki doesn’t tell you. My favorite is Lifestyles Unlimited Real Estate Investing, Education, and Mentoring where I am both a member and mentor; but you should shop around until you find a group or groups that you are comfortable with. Go to NationalREIA.com for a list of investor groups in your area.

$1,000,000 401k

Now, let’s compare our 15 rent houses to a million dollar 401k. Let’s assume you were the worlds greatest at-home stock trader in the early 2000′s.

You listened to Jim Cramer every day and managed to act on his good advice and avoid the bad advice that lost everyone else 40% of their portfolio in 2008. You sold everything before the market crashed and now you’re ready to retire.

The challenge you now face is how much money to take out of your 401k in your retirement so that it lasts the rest of your life

Or.. as Real Estate Investor Del Walmsley likes to put it: so you can hurry up and die before you run out of money.

The Conventional Wisdom Plan

You seek the advice of a financial planner and they give you the conventional wisdom on retirement:

1. Conservative Investments

You’re told to put your money in conservative investments that will only yield 2-4%, but at least you can have some peace of mind in retirement. Sounds reasonable.

2. 4% Drawdown

You’re allowed to draw down your 401k at the rate of 4% per year to live on: $40,000 per year.

Before the crash of ’08, 4% was generally accepted to be the right amount to draw down in retirement. The book “The Number” lays out research from William Bengen showing that those who drawdown at 5% have a 30% chance of running out of money.

3. A Little Interest

Won’t I be getting some interest, too?

Yes, but it will be at a very low interest rate and getting smaller each year as you eat into your principle. Let’s say, another $10,000 per year.

$50,000 a year doesn’t sound as great as you had always imagined, but at least you don’t have as many expenses as you used to (you did pay off your house, didn’t you?).

4. Pay Taxes

Wait, I thought we were done!

Sorry, here comes the worst part… Now you have to pay taxes. You were sold on the 401k as a way to defer taxes, but you didn’t realize that defer was not the same as avoid. You pay roughly $14,000 in taxes which leaves you with $36,000.

$36,000 a year just happens to be $3,000 a month or $100 a day.

15 Rent Houses Did the Same Thing Faster

15 rent houses did the same thing as your million dollar 401k, but did it take you your whole working career and a huge chunk of your paycheck to build?

No. You can buy 15 rent houses in 5 years or less.

The Five Year Plan

Here’s how to buy 15 rent houses in 5 years:

Year 1: Save $5k from employment to buy 1 house with a hard money loan. (1)
Year 2: Save $5k and refinance $5k out of the 1st house to buy 2 houses. (3)
Year 3: Save $5k, refinance $10k out of last year’s 2 houses, to buy 3. (6)
Year 4: Save $5k, refinance $15k out of last year’s 3 houses, to buy 4. (10)
Year 5: Save $5k, refinance $20k out of last year’s 4 houses, to buy 5. (15)

This example only took $25,000 out of pocket over a 5 year period… much less than a million dollar 401k …and much faster.

But Wait… There’s More

The story doesn’t stop there, with 15 rent houses and $3,000 a month in cashflow. The beauty of real estate is that there are so many different ways it makes you money.

While a 401k gets smaller and smaller in your retirement, rent houses continue to increase in value and cashflow year after year.

1. Equity Capture

If you bought those houses correctly, you should have captured equity in each house. Let’s say you captured $20k in each house. That’s $300,000 added to your net worth.

2. Market Appreciation

Real estate doubles in value every 20 years. That means: by the end of your retirement, your real estate holdings would have exploded in value.

If each house was worth $100,000 when you bought it, then all 15 were worth $1.5 million. You could potentially add another $1.5 million to your net worth over the next 20 years.

3. Cashflow

Rents rise over the long run, adding to your cashflow year after year.

4. Principle Paydown

Your tenants will be paying down the notes on all of your houses. If you had 20 year notes on each house, you would have them all paid off in 20 years, adding another $1.5 million to your net worth.

5. Tax Advantages

Real estate investors pay the lowest taxes of any for-profit group in the United States. The cashflow is virtually tax-free when you account for the depreciation deduction the IRS allows you to take.

If you decide to sell and capture your equity, you can roll the profits into a 1031 tax exchange to defer the capital gains tax. When you pass the properties down to your children, they take over the property at the new cost-basis, wiping out all the capital gains tax.

Conclusion

Now, do you see why I stopped playing around with small-ball investments and focused on real estate? Real estate is the most powerful wealth-building tool that is available to everyone in the United States.

Stop playing small-ball and start investing in real estate.

Reader Beware

Be careful when you read Kiyosaki, Robert Allen, or any of the army of gurus preaching that passive income will end all your troubles. The overall concept of “Rich Dad, Poor Dad” is profound, but it doesn’t tell the whole story. Don’t quit your day job yet.

When I first read Kiyosaki, I was immediately hooked on the concept. I read all the books and they blew my mind. I bought the game Cashflow 101 and hunted down every last friend and family member who was still brave enough to donate a few hours to reliving their financial failures in a board game.

Young Passive Income Warrior

I went out and started my portfolio. The economy was on still on a real estate bender, so I was able to buy a rental house with no money down, no proof of income, and no credit. I stuck in a tenant who paid me $100 more than I paid to the mortgage company and thought to myself: …damn I’m good.

My girlfriend had the brilliant idea to start a bulk candy business for passive income. We bought ten machines and placed them in ten restaurants in Austin. Just like that, we added $250 a month to our passive income.

When we were ready to move to LA to give the entertainment industry a shot, I started scanning the internet for bulk candy vending businesses in Southern California. I found a guy who was willing to let go of 40 machines in decent locations for next to nothing. I almost covered the acquisition cost on my first day in LA. Just like that, I added another $500 a month in passive income.

I thought… damn I’m good.

King of the Anthill

At this point, I pretty much decided that I had made it. All those suckers moving to LA, struggling to pay the massive cost of living increase had nothing on me. I had $850 a month in passive income. What did they have? …a crappy job? Kiyosaki taught me that jobs were for suckers.

Hero Fallen

I went to see Kiyosaki once at the Real Estate Wealth Expo in New York City. It was an event where hundreds of real estate gurus all got together to give speeches, sell books, CD’s, and boot camps. Robert was one of the headliners and I could hardly contain my excitement to see him.

With my girlfriend at my side, I proudly stood up to greet him along with hundreds of others in the auditorium as he entered the stage. My perma-grin turned to puzzlement as he put his right hand on his forehead in the shape of an “L”. “Losers!” he yelled and the crowd cheered.

“What is he talking about?” my girlfriend asked. I wasn’t sure, so I continued to listen as he explained to the crowd that working a 9 to 5 job was the mark of a loser. Over and over again, he stuck his hand to his forehead and repeated the chant: “Loser!, Loser!, Loser!”

Wait a minute, I thought. I bet 95% of this audience has a 9 to 5 job… and they’re cheering.

Steady Ahead

The experience had taken Kiyosaki down a notch in my eyes, but I still believed strongly in his concepts. To me, he was a brilliant “big picture” guy who left something to be desired in the category of tact, humanity, and details. I didn’t need him to be a good guy to know that passive income was for me.

I found sporadic work in Hollywood producing small-time pieces for TV and internet, but never pursued full-time work. Why would I? 9 to 5 was for suckers (but not losers).

Soon after, I started GeniusTypes and added another $750 a month to my cashflow. My passive income streams were over $1500 a month. I thought: …this just keeps getting better.

The First Sign of Trouble

Life should have been good. I had done everything the books had taught me. It was almost as if everything I touched turned to gold. I had money coming into my bank account even as I slept… Big pimpin’ …right?

As I explained all of this (with great pride) to my girlfriend, something weird started to happen. I was telling her how great everything was and somehow, she was ticked off!

I don’t remember the exact conversation, but it went something like this:

Her: Your stupid “passive income” isn’t helping us pay the ridiculously high cost of living here!

Me: What are you talking about? I make that money in my sleep!

Her: Who the hell can live on $1,500 a month in LA?

Me: But it’s passive!

Her: That’s the freakin’ problem: you need to get your butt into action!

Me: But it’s passive…..?

Her: (shut down)

Something had gone terribly wrong.

Starting Over

Now you have the long version of why I stopped posting on GeniusTypes. I went out and got a job… Actually, I got two. I worked 60 to 80 hours a week in order to make up for the long period of time that I was quote/unquote “self employed” (which really means unemployed). It was the antithesis of everything that Kiyosaki had taught me.

I also went looking for guidance. Instead of believing in authors and trying to do it on my own, I found people who had achieved the success that I wanted. I found some mentors.

The Right Map

The first thing they taught me was something I didn’t want to hear. I wouldn’t have bought their book if they were selling it like Kiyosaki because it kind of sucked…

They agreed that passive income was the ultimate, but everyone needs money to survive. If I couldn’t pay for my monthly expenses with passive income, then I must do the next best thing: get a job.

…But Kiyosaki says jobs are for Losers!

…Who’s more of a sucker: Someone who works full time and supports their family, or someone who quits their job and gives all of their remaining money to Kiyosaki fpr books, CD’s, and boot camps?

Wow. That was kind of harsh.

Leverage Your Time

I re-learned the concept of leveraging time. Kiyosaki had taught me that passive income was a way to leverage other people’s time in order to free up more of my own. He was accurate in that assessment, but he left out a crucial detail:

When you don’t have enough passive income to pay your bills, the best way to leverage your time is to get a job.

Think about it. If you have no money, is it better to spend your time chasing passive income or to get a job? The answer is to get a job… but the advanced correct answer is to get a job and use your nights and weekends to build passive income.

Large in the Margin

The ultimate goal is to get enough passive income to cover your bills; but in the meantime, it’s important to view passive income as a marginal profit center. This means that passive income should be above and beyond your regular operating income and expenses.

Everyone has a minimum cost of living. No matter where you live in the U.S., it costs several thousand dollars a month to stay afloat. If you have no money, your only option (if you want to remain independent) is to get a job. Passive income would only help you if you had enough to cover your basic expenses.

Believe it or not, a job is the best way for a broke person to leverage their time. Think about it: what activity will yield me the greatest number of dollars for forty hours of work a week? If you have no money to invest, the answer is to get a job.

After the hours you need to spend to pay for your basic cost of living, the next highest leverage activity is to gather passive income. Any passive income you make from now on will be in your profit margin. When I was making passive income without a job, I had no profit margin. I was taking a net loss every month on my basic expenses.

Passive income is most beneficial when it’s in your profit margin. $1,500 a month in passive income won’t pay your bills, what if it was extra? That’s $18,000 a year that you could use to invest in real estate. Do you see what a tremendous difference it makes when you take it from primary to marginal income?

Your Credit

Another great reason to get a job when you’re broke is your credit. If you want to accumulate passive income-generating assets, you’re going to need the help of a lender. The wealthiest people I know are in real estate. In order to purchase real estate, a bank wants to know that you have steady income. If you are quote/unquote “self-employed” with no real income, the bank isn’t going to budge.

Check Your Ego

It was a bit of a reality check when I realized I wasn’t above working for the man. In fact, working for the man was the only way that I stood a chance to succeed.

Creative types are highly intelligent (which comes with a little bit of ego). It’s hard for a really smart person who thinks they know it all to realize that he can’t break the laws of nature. You might have the greatest idea in the world, but great ideas alone don’t pay your rent.

Build a Foundation

You can’t fight for financial independence until you have a foundation. Even though there are many ways to create passive income with little money, everyone needs a minimum amount of money to survive.

Furthermore, the best ways to create wealth (real estate) require money. If you don’t have any to start with, the best way to get some is to work. Work enough to pay your expenses and put away some to invest. That’s what my mentors taught me. It’s boring, but it’s proven.