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Thinking like a Millionaire (Part Five): Non-Financial Offerings - Real Estate

4/21/2016

Many people fail to see that skills fade, but assets are forever.

They don’t know their entire financial education in their lives is completely WRONG!

Too many people believe that a good job, good skills, and a positive attitude will make them great wealth. The problem is that it just doesn't work that way. People who make an hourly wage and an annual salary cannot build wealth. This is because their money doesn't work for them, and instead they work for their money. This idea keeps them from understanding that the only way to build wealth is to invest in multiple sources of income that you don’t have to work for, but instead build yourself or purchase from someone else.

Another misconception of multiple sources of income and passive income is that people assume government and financial institutions offerings such as the stock market, CD’s, and many other financial instruments are passive income. Most of the time however, unless it is a note or bond that pays you regular interest. It is not actually passive income or a stream of income. As a stream of income or passive income is income that you make every day, every month, and every year continuously as cashflow. Stocks and the like only make you money on the sale and never anything in the meantime. Meaning they don’t ever actually cashflow. For example, it is the same as purchasing a piece of fine art and hoping that it appreciates the longer you hold onto it. Which is risky and locks your money up from better uses.

Real Estate as an Investment

Real Estate is the King when it comes to creating people wealth. No other offering has the traits and abilities like real estate does. It is constantly appreciating and gaining value. It is always in demand because people need a place to live. And most important of all, it is a real asset that isn’t going anywhere soon. Allowing you to borrow against it as collateral and even to write off all expenses and costs associated off on your taxes. Now let’s not wait a moment longer to get into Real Estate as an Investment.

Real Estate You Can Buy as Investments

There is so many ways to invest in real estate and the major differences comes to how much capital you will need to put down to purchase them. This could be as little as $40,000 -$50,000 to buy a condo outright, to only $10,000+ to purchase a $100,000 single family home, or to as much as $20,000-$30,000 to purchase a multifamily home (2-4 units). All of which are Residential and can be easily financed.

Once you get past 4 units, small office buildings, and industrial properties. You’re going into commercial territory and have a lot more hoops to jump through as well as have to start working with commercial lending which can require sizable amounts of capital before they will lend. In the rear, is my personal favorite of mobile homes and parks. Which are hard to sell, but can cashflow in all sorts of amazing ways from lending on the mobiles themselves to charging them for renting the use of the land. All of which is taxed as land which is the cheapest tax rate you can have on property.

·         Condos/Flats – Condos and flats are some of the best to buy for cashflow as they give the best cap rates. The only issue comes on the resale as many can be hard to finance as an investment property, preventing a large portion of the population from being able to purchase them.
·         Single-Family Homes – Single-family homes are easy to rent, easy to sell, and easy to finance.
·         Duplexes/Triplexes/Quads – Small multifamily properties (2-4 units). These property types combine the financing and easy purchasing benefits of a single-family home with the cashflow benefits and less competition found in larger investments.
·         Small Apartments - small apartment buildings are made up of between 5-50 units, they can make great cashflow, but can be very illiquid on the resale.
·         Small Commercial Office Space – Buying small commercial buildings and renting out office space to business professionals.
·         Industrial Properties- Manufacturing, warehouses, distribution centers, etc.
·         Mobile Homes - inexpensive way to enter the world of real estate investing and can also experience significant cashflow.
·         Mobile Home Parks - The entire park in which mobile homes are situated on can also be bought and sold. Rent the individual lots to mobile home owners, and as well as have corporately owned and leased ones.

Strategies in Finding Investment Properties

Just as there are a million ways to skin a cat, there is a million ways to find properties for investment. Of the many ways to find the properties for investment. The most common ways are to find the owner directly and give them a cash offer, to find properties that are owned by a lender or bank that they want to get rid of at a discount, or purchase a lien on the property so you can foreclose on the property yourself.

Lease Options – buying the property and “renting” it with the legal right to buy it later.
For Sale By Owners (FSBO) – private owners sell their property themselves with a sign or newspaper advertisement, they may want to sell their properties at a discount to avoid paying a realtor
REO’s – Foreclosed Property owned by banks can be bought under market if the demand isn’t too high
Auction at the Courthouse Steps – During the process of foreclosure, a home is brought to the courthouse steps to be sold to the highest bidder.
Buying in Pre-foreclosure - Sellers on the brink of losing their home can be very motivated to sell their home and save their credit and their lives
Short Sales - A bank will often take less than the loan amount on a property to save from the hassle and costs of foreclosing and reselling.
Tax Liens - When homeowner’s refuse to pay their taxes, the government can foreclose and resell the property.
HUD Foreclosures - When a US government ensured loan is foreclosed on, it often becomes the property of the department of Housing and Urban Development.
VA Foreclosures – Similar to the HUD foreclosures, the US Department of Veteran’s Affairs sells their homes as well after foreclosing on one of their insured properties

Strategies in Buying, Renting, and Selling Properties:

When you finally have the property in your grasp, there are many techniques you can use to maximize your return. Some properties are great for buy n’ holding. Meaning you buy them for cashflow, but are expecting to also make a sizable return on the resale due to appreciation. Next up is Fixing N’ Flip/Hold, which is finding properties undervalue and fixing them up to either hold onto for cashflow or to sell immediately for instant profit. Then there is Turn-key-Investing, this is where you find the property, turn it into a profitable cashflow and sell it as a source of income to a big fish investor. For Big Commercial, there is NNN leasing that entails having the company renting the property takes care of all the trimmings of the property and pays you for leasing the space. Another Buy N’ Hold strategy that can make decent money is to turn your Buy N’ Hold property into a Vacation Rental and charge 3x as much than a normal lease. Then there is hard money lending, where you finance others in their fix n’ flips, buy n’ holds, or primary residence.

Buy-N-Hold – Buy real estate, rent it, and hold it until the market is up and a great buyer comes along
Fix-N-Hold– Buy below market value, remodel to force appreciation, and held until the market improves and sell it
Fix-N-Flip – Buy well below market value, remodel to market prices, and sell it immediately to get your return.
Turn-Key-Investing – fix-and-flipper, but sells remodeled properties to out-of-town individuals seeking a good place to keep their money moving.
NNN Lease – Big Businesses rent the building and pay all costs associated with the building such as maintenance, taxes, insurance, and more. We can own these buildings for highly-passive income.
Vacation Rentals – Buying vacation property and renting it out off and on season (Snowbirds)
Cash Purchase, Sell on Contract - buy properties and immediately re-sell them to buyers who may not be able to conventionally qualify for a mortgage. Collect a large down payment when using this method.

How to Finance:

Financing is readily available to anyone who has a cash for a down payment. Below is the major ways you can finance your Real Estate Investments.

All Cash - property with no mortgage attached is very stable and a safe return.

May not be as great as when using leverage (like a mortgage)

Seller Financing - seller owns a property free-and-clear (no mortgage), and can be negotiated with to find a finance deal
Unconventional Lending – There are many lenders who will lend on any deal you have as long as the number make sense, this can be anything from landlord loans, had money, and much more
Self-Directed IRA – if you have a 401(k), throw it out, it’s time to put that money in a self-directed IRA and make that money finally work for you than expecting some money manager who is just trying not to lose your money than make you any. You can use your money in your SD-IRA to do all the strategies in buying, selling, and renting.
20%-25% Down Conventional Investment Mortgage – buy a real estate investment through a bank. Come up with 20-25% down payment and have the bank finance the rest
10% HomePath Investment Mortgage- These loan types are only available on Fannie-Mae backed bank REOs, but can allow an investor to purchase the home for just 10% down payment with other benefits.
Home Equity Line of Credit (HELOC) - with significant equity in real estate, M&T can borrow a line of credit off M&T Real Estate equity.
Small Business Loans - Banks often will finance a line of credit or loan for small businesses- to include a real estate investment company

Conclusion:

If you have the mind for real estate or want to hire someone who does (Click Here). Then you should forego a large portion of your portfolio to invest in real estate. It easily as one of the highest returns than any other investment in the world, the only caveat, like anything else, is that you need to do it right to be successful.

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Thinking like a Millionaire (Part Four): Corporate Offerings

4/9/2016

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Of the many offerings of the investment world from banks to governments, the sexiest and most publicized is corporate ones. Specifically Stocks, Mutual Funds, and ETFs. Each has their own flavors of the month, but they are all simply “equity in a company”. Most are publicly traded and on the largest stock exchanges. There are also private stocks from privately owned companies you can buy, but they have the issue of not having as liquid of a market as publicly traded stocks because the trading of the stock is private as well. Now you have to understand stocks (equity in the company) are the base for everything else in corporate offerings as stocks make up Mutual Funds and ETFs. Understanding this will allow you to understand our list today.

Corporate/Brokerage Offerings

Corporate Stocks

Corporate stocks represent ownership in a company, the stock’s price is a representation of how valuable it is according to public opinion. If a company is expected to not do as well as hoped, stock prices will go down as people sell off them off. If the company does a lot better than expected, then the stock price goes up as more people buy them. If there is bad news about the company, then the stock goes down. If there is good news about the company then the stock goes up. This is the way of stocks.

Therefore, it’s not a bad idea to think of the prices of stocks as the expectations of the company. Strong prices tell you people expect it to do well while weak prices mean the opposite. And if you disagree, you can buy the stock in expectations that the price will go up or you can short the stock in expectations it will go down. Shorting simply means you’re borrowing shares and selling them, expecting they will be cheaper to buy back in the future. Not only can you short stocks, you have a million other contracts you can have to make money such as options, which is a contract that sets a price that you can either buy or sell a certain stock for at a subsequent time.

Pros

·         Higher Returns - Stocks typically have the potential for higher returns compared to other types of investments over the long term

·         Pay Dividends - Some stocks pay dividends, which provide extra income or used to buy more shares

Cons

·         Volatile - Stock prices can swing dramatically from high to low meaning your gains today may be gone tomorrow based

·         Uninsured – stocks are the unsafest of all investments as they can become worthless quickly based on investor opinion and if the company goes bankrupt

Corporate Bonds

Next up is corporate bonds. Corporate Bonds is debt issued by a company, and are very similar to government bonds except they aren’t as safe. But because they aren’t as safe, they usually pay out more interest than government bonds. Because when investing, the interest on a debt represents the risk of the investor, called a risk premium. Therefore an investor should be paid more for taking on more risk. Thus, the more creditworthy the company, the less interest it will pay because of the lesser risk. This is not only how corporate bonds work, but all loans from mortgages, auto-loans, and personal loans such as payday loans and even pawn shops. All loans’ interest is calculated based off of how risky the borrower is. The more likely you expect someone not to pay you back, the more interest you will charge to compensate you for taking on the risk.

Pros

·         Pay Higher Interest - Corporate bonds usually pay more than government securities, money markets, and CDs, especially if they are risky bonds

Cons

·         More Risk - The Company that issued the bond could suspend interest payments, or even go out of business

·         Commissions - You may have to pay a commission to purchase corporate bonds and affecting your ROI

·         Penalty for Cashing in Before Maturity – cash out before the bond matures, and you may not get back all of your original investment.

Brokerage Offerings

Money Market Funds

Money market funds combine a checking account with a mutual fund. When you put money in a Money Market fund, you have all the benefits of a checking account such as high liquidity and the ability to write checks. But while your money is in the account the fund invests it in highly liquid, safe securities such as certificates of deposit, government securities, and commercial money. Meaning you’re making with your money, but because its invested in highly liquid assets that if you want to use your money, you can.

Pros

Liquid – gives you access to your money through both ATMs and checks

Higher Interest – although they are safe, they have more inherent risk which is why they pay out more interest than other accounts.

Safe – legally required to keep the price per share near $1, making it safer than other mutual funds, but not normal accounts

Cons

Not FDIC Insured – because they are purchased through brokers and mutual funds, they are not insured

Negative Interest - No guarantee that the price per share will remain at $1. Meaning your money is losing value rather than gaining value in your account

Bond funds

Bond funds are mutual funds that invest exclusively in Bonds and purchase large swathes of different bonds to diversify and protect your portfolio.

Pros
·         Diversified – owns a little bit in every bond market to minimize risk from one or two bad bonds
·         Balanced Interest – Because the bonds are in many different markets that have varying interest rates, you can have a higher interest rates than just buying only one bond in one market

Cons
·         Fluctuating Yield – being a mutual fund, the yield will change depending on interest rates, buy/sell costs, and other factors that are outside your control. So you never know how much you are going make until you cash out
·         Management Fees - You will pay ongoing management fees, which is fine as long as they make more money than they charge you, as some of the best managers will take all your profits for themselves
·         Commissions – the bane of the financial industry, paying someone to sell you a certain fund. Whether or not the fund is any good for your goals

Mutual Funds

Mutual Funds come in a variety of flavors and each have their own risks and returns. But essentially, you just have to think of them as a basket that holds multiple investments. This basket could have individual stocks and bonds in it or can even have other mutual funds or ETFs. The idea behind them is that you pay someone a management fee to fill the basket for you so you don’t have to do it yourself. And of the many flavors, here are the major six you will see on the market.

1.    Fixed income funds - These funds fill their basket with investments that pay a fixed rate of return. Usually, government bonds, investment-grade corporate bonds, and high-yield corporate bonds. The purpose of these funds for most people is that they want a guaranteed return on their money so they can sleep well at night.

2.    Equity funds – Equity funds fill their basket with stocks. Unlike fixed income funds, these funds aim to make more money over time by taking on higher risk. These could be growth stock funds that make their money on investing in companies they are expecting to grow quickly over the next few years to sell for a hefty profit at the end. Income funds that pay large dividends and are for people who want cashflow while they own the fund.

3.    Balanced funds – These funds fill their basket with both fixed-income and growth stocks to try to capitalize on the benefits of both.

4.    Index funds – To understand an index, you have to think of it as a very, very large mutual fund that covers a lot of companies in an industry. Although the index is made up, their purpose is to show how well a specific industry is doing within the economy. This could be blue-chip stocks that represent the largest and most established companies, the tech industry that is populated with many tech companies, and any other index of companies that can make up an industry.

Therefore, the mutual fund that follows an index, fills its basket with stocks that best replicate the return you’d get if you had purchased all the stocks in the index. (Usually cheaper because management doesn’t have to work as hard)

5.    Specialty funds – these funds could also be called “Niche Funds” as they focus on their basket with specialized investments such as real estate, commodities, or any other niche they specialize in.

6.    Fund-of-funds – These mutual funds could be called “Meta-Funds” as they invest only in other funds. Essentially, they fill their basket with funds they believe know what they are doing and getting great returns. Piggybacking off their success.

Pros
·         Don’t Need Plugged In – if you have ever traded stocks, you know at times you have to be plugged in 24/7 to make sure your investment is doing well. This includes reading quarterly and annual financial reports. Deciphering what the company is really saying and making a decision to hold or sell. Putting your money in a mutual fund makes all that the manager’s job, leaving you to enjoy your free time.
·         Different Flavors to Choose from – Mutual funds have an option available for nearly anyone’s investment goals. If you want fixed-income, there is a mutual fund for that. You want to take on higher risk for a higher return, there is a mutual fund for that. If you want a combination of the two, there is a mutual fund for that.

Diversified – can own a little bit in every market to minimize risk from one or two bad investments

Cons

Higher Risk – depending on the mutual fund you
Management Fees - You will pay ongoing management fees, which is fine as long as they make more money than they charge you, as some of the best managers will take all your profits for themselves.
Hidden Fees - Also be wary of the addition of hidden fees they like to sneak in. Mutual Funds are notorious for getting you in the fund and sneaking additional fees afterwards. Although they are legally required to tell you about these fees, they sneak them in the reports they mail to you, expecting you won’t read it anyway.
Commissions – the bane of the financial industry, paying someone to sell you a certain fund. Whether or not the fund is any good for your goals. Be careful on who is advising you and what their true motives are.

ETFs

ETFs (Exchange Traded Funds) are exactly like a mutual fund in that they are a basket of investments such as stocks and bonds and are managed by a manager who decides what those investments will be. The only major difference is that an ETF is treated like a stock in the way it is bought and sold compared to a mutual fund. As a mutual fund cannot be bought and sold, it can only be invested in or out. This means that an ETF can be bought and sold on the stock market, can be shorted and optioned, and anything else you can do with a stock.

Pros
·         More Readily Traded - Traditional mutual fund shares are traded only once per day after the markets close meaning you can’t speculate on the fund to go up or down in price for a profit. While ETFs are traded all day like a stock.

·         Cheaper than Mutual Funds - streamlined compared to mutual funds as the costs are put on the brokerage instead of the investor. Making less overhead that equates to more investor returns as they don’t have the legal requirements of having a call center for questions or the need to send out monthly reports.

·         Tax Benefits – mutual funds have more capital gains taxes than ETFs because mutual funds have to pass on the costs of every trade before a year to the investor, while ETFs are only taxed when they are sold.

·         Quickness of Buy/Sell – because it’s sold as a stock, this makes it easier to buy and sell to gain exposure to certain industries. You could get the same result by having a mutual fund, but because mutual funds are designed mostly for long-term investors, it can be a process to get in and out of them.

Cons
·         More Expensive than Anticipated – because the costs are baked into the stock, it can be hard to tell if you’re really getting a deal or not.
·         May not make sense for the Long-Term Investor – due to the nature of how it is traded, it may not make sense for a long term investor who wants to hold onto his investment for years to come. The benefits of being a stock are not utilized for some long-term investors

ADRs

The last offering from the brokerage and corporate world is ADRs (American Depository Receipt). This were introduced as an easier way for U.S. Investors to invest in foreign companies. As the bank would purchase a large lot of shares from the company, bundle them into groups, and reissue them in US currency. Although you don’t have to invest in ADRs and you can invest in foreign companies yourself, you’d have to set up a brokerage account and watch the exchange rate as you move in and out of currencies. Making things complicated quickly.

Pros
·         Don’t Need Foreign Brokerage Account – the biggest pro of ADRs is having the ability to buy stocks in foreign countries with your normal brokerage account. This takes the hassle of having to set one up in the country you want to invest
·         Automatically Calculated Exchange Rates – because the bank calculates the exchange rate for you, you can follow the prices of the stock based on your currency and not the foreign companies

·         Diversify your Portfolio – allows you to expose your portfolio to other countries and companies that can increase your return.

Cons
·         Political Risk – with the purchase of an ADR, you now have vested interest in the politics of that country because the government could decide to expropriate the company or your investment.
·         Exchange Rate Risk – may have to be mindful of the foreign companies’ currency, although your ADR is calculated in your currency, strengthening and weakening of the foreign currency and affect the returns you receive.
·         Inflationary Risk – if the government is very poor with their finances, they may print more money and cause inflation. High inflation can make the company becomes less and less valuable each day and your investment worth less and less.

Conclusion

There you have it. Here are the most common offerings from the corporate/brokerage world. Being they are backed by private organizations and individuals, they are the riskiest of all investment as they are not protected from scandal, bankruptcy, or bad business practices. Meaning you need to be careful and understand that with the higher return your expecting, carries with it a higher risk of losing your investment. With that said, INVEST WELL and with DUE DILIGENCE. As they can only get it past you, if you let them.

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Thinking like a Millionaire (Part Five): Non-Financial Offerings - Real Estate

Thinking like a Millionaire (Part Four): Corporate Offerings

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