In a previous edition of “The Lund Letters”, I promised a coming attraction… “Common Reasons I See People Fail at Buy and Hold Real Estate, and How to Avoid Them So You Can Become Financially Free!!! Yes, it works, even in this real estate market, if you just do it correctly!” Well, when I make a promise, I make every attempt to deliver, so here is that article.
My experience has been in single family home, buy and hold real estate, so all of this applies to that particular arena; some of it may or may not apply to areas such as multifamily real estate, commercial real estate, etc. Also, I am giving reasons that I have seen and can recall, and this is in no way intended to be a list that includes every possible reason for failure – this list should help someone succeed in buy and hold real estate, but please don’t think that it is an exhaustive list. Above all, use common sense and recognize that you are 100% responsible for your own success or failure in real estate investing. In no particular order, here are common reasons I see people fail at buy and hold real estate, and how to avoid them so you can become financially free…
#1 – People chase the illusion of making a fast million or two, and give up too easily when they find out buy and hold real estate is a long term, work hard, get ahead slowly plan. It happens in years, not days. The solution is to have really big reasons why you want to succeed, to be willing to work hard and do whatever it takes to succeed (within moral, legal, and ethical limits is always a given with me), and to continually learn, improve, and motivate yourself (and it is my intention that ‘The Lund Letters’ be a great tool towards these ends!).
#2 – People start out too fast, and get in over their heads. I have seen many new investors come out of the gate with a ton of excitement, rush in, and start buying anything and everything they are able to buy, just because they can. Often “newbies” learn some great technique for buying houses, and figure that means anything and everything they can buy that way must be a good deal. “It is nothing down, so it must be a good deal.” Not true. “The bank discounted the mortgage, so it must be a good deal.” Not true. The solution is, again, to recognize that building wealth is a long term plan. You must buy properties that make sense, and fit in with a well thought out plan. Properties must have positive cash flow, so you can carry them as long as necessary before selling – that is what gives you the ability to ride out downturns, no matter how long it takes. This leads to several other common reasons…
#3 – People buy properties with no specific plan of how they will make money on them. My solution is that, when I buy a property, I know when I buy it that I will make money on it, and often how much and approximately when. To quote one of Stephen Covey’s ‘7 Habits of Highly Effective People’, begin with the end in mind. More on this in common reason #4. In real estate investing, you make your money when you buy. If you can’t see the profitable exit strategy from the beginning, don’t buy. Look for a better deal.
#4 – People often buy properties that are not flexible in what can be done with them. One example is buying large, expensive single family homes that do not cash flow, so they must be sold to make a profit, or they become alligators (the payments eat you alive). Large, expensive houses are for experienced investors who know the ins and outs of investing in big expensive properties (such as optioning properties, rather than buying)! Another example is buying war zone or dysfunctional properties that may cash flow well, but are nearly impossible to get good tenants for, are management intensive, and do not lend themselves well to selling if and when it makes sense. I always have multiple plans in place when I buy a property. On any new property, my criteria are that I buy well below value, that the property has positive cash flow from day one if I keep it, and that there is a substantial target market for the property (occasionally, when I can really get a great deal, I may step outside of one of my criteria, but I am extremely careful when doing so). Combined, these criteria remove most of the risk of long term buy and hold real estate investing. When I buy, I am hunting for a needle in a haystack… an undiscovered gem… a diamond in the rough. Too many investors get in trouble because they ‘settle’ when they buy. I like to buy properties that lend themselves to a flexible approach, and here is a recent example. I bought a 3 BR concrete block house in a decent North Lakeland neighborhood, for $80K. It comped around $129K (in a declining market), and needed no repairs, though it could stand about $5K in improvements to ‘make it really sparkle’. First, with the sellers approval, I began advertising it for sale “as is” before I even closed (I often do this with fixer uppers, too – sometimes the property “as is” is just what some individual or investor is looking for, and you can make a nice profit without ever having to do a rehab – no reason to avoid easy money!). You might consider this wholesaling instead of long term buy and hold – and I would agree – but I also consider it flexibility and good business sense. I did one property in the Kathleen area of Lakeland in 2006/2007, where a partner and I intended to have about $25K in total profit doing a major rehab, best case scenario, and we made that without touching it because it was exactly the fixer upper some other investor wanted at the time. ‘Nuff said. Back to my 3 BR, which didn’t sell “as is”. Next, I spent the $5K and ‘made it really sparkle’. Then I advertised it FSBO, owner financing possible, rent to own available, and for rent, all simultaneously. At this point I would prefer a cash buyer (now a flip instead of long term buy and hold, but I still make a nice profit, fast, and I can reinvest it back into my long term buy and hold real estate). That didn’t happen. With owner financing, I don’t care about credit, because I get enough cash down to protect myself (if a caller inquires about owner financing, my first question is how much do they have to put down - the more down the better; with this house $10K would be my minimum). That didn’t happen either. What did happen was rent to own (called lease/option to most investors, but I find my target market understands the rent to own terminology easily, and lease/option scares them a little). This is about my fourth choice (after sell before any fix up, sell cash after fix up, sell owner financing with a bunch of cash down), but in a tough market I knew going into this house I was likely to end up at rent to own or, fifth option, straight rental, and I had no intention of waiting around for an empty house to sell for cash. That was fine. I got $3K down, $850/month, with a sell price of $109K, and a great tenant/buyer. The tenant buyer is a nice middle-aged couple that got in over their heads buying too much home at the top of the market, and lost their home to foreclosure, but otherwise their credit is really good; both husband and wife have stable jobs with good income, and their residence looked better than my personal residence – you could eat off their floors. This one won’t make me rich, but I aimed a little low (notice my sell price $20K below comps – a huge selling feature, especially when most lease/option investors want full market value or above) because in a tough market I wanted to sell or fill the house fast – which I did; it was filled before we finished putting the $5K into it to ‘make it really sparkle’. If I fell to my last choice, renting, I was asking the same $850/month, with first, last, and a security deposit, which would have gave me almost as much money down as my rent to own deal did. FYI, when I take a house and ‘really make it sparkle’, I am extremely careful about who I put in it, and how much cash I get before letting them move in – keep in mind, the better the condition of the property, the more exposed you are, so CYA (cover your assets). FYI, I paid cash for this particular property, so the cash flow is solid; I may eventually borrow some money out of it for other deals, but I would still keep it positive cash flow if I did.
#5 – (if you have digested #4 yet – it was a biggie!) – People buy properties that don’t cash flow, and then wonder why they get in trouble. Often, they are completely unrealistic about things such as vacancy and repairs – in fact, nine times out of ten when someone tells me about their cash flow on a property, they don’t factor in vacancy and repairs at all – are they living in la la land? The solution is to figure out a realistic formula for cash flow that works for the type of property you are evaluating, and then stick with it. Here is the formula that I have found well suited to my Lakeland, Florida, buy and hold, single family homes… First, if it passes the sniff test (does it smell like a deal?), here is how I evaluate cash flow. Start with estimated rent (if you don’t KNOW what it will rent for, do some research!). I count 25% of rents as my estimated vacancy and repairs (with this formula, keep in mind that I manage my own properties, and tenants are responsible for yard, utilities, etc.). I adjust my formula as needed – for instance, a brand new block house would require fewer repairs and an older frame house or mobile home would require more; a unique or very small house might have higher vacancy because it is harder to fill and has higher turnover; and a war zone property, which I recommend against for anyone but the experienced war zone investor, will likely have higher vacancy, repairs, and management expense. Many new(er) investors tell me 25% seems high, until I ask them a few questions… Did you factor in that you need a $5K roof every 15 years? Response – No; it won’t need a roof for five years. Right, and then how will it be paid for? Ummmm… Did you factor in new carpet every few years? No, it’s already new. Right, and based on experience how often do you need new carpet in your rental units? Ummmmm… How about changing locks whenever the unit becomes vacant? Did you factor in that a certain percentage of tenants, no matter how good you are at managing property, will fool you, and be slime, and do big damage to your property before you get them out, or never pay another month’s rent after move in, or move out in the night without notifying you? Ummmmmmmm… Does that really happen? All of that and much, much more happens, but those things don’t have to stop you (more on that in common reason #6). Back to our formula; rent, minus 25% of rent for vacancy and repairs (adjusted to suit the property and specific situations), minus PITI (payment, interest, taxes, and insurance), leaves us with cash flow. Especially in a down real estate market, I do not buy property that doesn’t cash flow. It is a recipe for disaster. You want to be able to hold your properties as long as necessary to be able to sell for a price that makes sense/cents, and you want to make good money every month doing it. Trust me on this one – doing all of the work involved with buy and hold real estate for a property that costs you money every month gets old really, really fast, and even more so if you can’t afford it!
#6 – People have a good buy and hold property, with positive cash flow, and everything is going great, but they spend the profits every month. They never build themselves a cushion for problems, and something unexpected comes up (ala a few examples in common reason #5), and they don’t have money for it. Then they throw up their arms and tell the world that buy and hold real estate sucks and it makes you broke and it doesn’t work. The problem here was not the unexpected thing that came up – that happens. The problem was the lack of preparation for it – which is shortsightedness. When, not if, the unexpected big expenses come up, I welcome the opportunity to overcome yet another challenge (as much as that is possible), remind myself that I have a dozen other properties that are doing just fine to ‘average it out’, and thank God that I have funds available to right my ship, because I think long term!
#7 – People don’t properly screen their tenant applicants before putting them in a property. Big mistake! This could end up being way worse than the property being vacant a little longer. My solution is twofold. First, I don’t ‘settle’ on the up front money (meaning first month’s rent plus deposit, rent to own down payment, or whatever). Over and over again I hear about investors that got burned because they put somebody in a property with almost nothing down, and then they either didn’t pay, or did significant damage to the property, or both. The up front money protects you in two ways. It screens out the people that will have a hard time making the payments every month – if they can’t save up initial move in money, they will likely struggle with monthly payments, too – a headache you don’t need or want – and move in money gives you a cushion to cover if they don’t pay, or if they cause damage. Second, after checking applications thoroughly, including references, jobs and sources of income, etc., if everything else looks good, I take the final step, that most investors aren’t willing to take. I go by the place they live now, unannounced, and I find out how they live. Whatever their house looks like now, that is what my house will look like in 1-2 years. This is, IMHO, the ultimate best way to screen applicants.
#8 – People consistently underestimate the carrying cost and/or repairs on properties. I see over and over again people that get into trouble before they even get out of the gates because they either can’t get a property sold or filled quickly, or they underestimated expenses, and the carrying costs eat them up alive. This may apply to rehabbing and flipping, or to long term buy and hold. Are you counting payment, interest, taxes, and insurance for enough months (be realistic)? Are you adding in enough for repairs (and contingencies)? What about the utilities, advertising, upkeep for yard and other while it is empty? How about trips to the property and related expenses? Closing costs and realtor fees if applicable, etc.? Costs of staging the property? I have a few solutions to these problems, some of which we already covered in some detail. First, I have found that even as an experienced investor, I estimate my rehab based on everything I see, and then I add 50% to my estimate for the things I can’t see. Second, my flexible approach to selling/filling a property, mentioned in detail in #4, effectively triples or quadruples my target market. Compared to someone limiting themselves to just one approach, I target people wanting to buy fixer uppers, people that want to buy retail, people that want to rent, and people that want to buy and have cash but damaged credit. I can also find creative ways to help people get financing if they have good credit but little or no money, and sell them a house when someone else might not be able to put that type of deal together. These tools help me to sell or fill houses quickly, thereby reducing my carrying costs to a fraction of what many investors experience. The more you learn, the more you earn. Third, if the house justifies it, I ‘make it sparkle’. I rehab it nice, then I do the little extras that don’t cost much, but make people fall in love with a house. Fancy house numbers are a great example. A nice looking mailbox pays off in spades compared to the cost. Anything that adds curb appeal without adding a lot of expense is good, including keeping the landscaping well groomed and the yard mowed, edged, and weed-eated. I am always amazed at the number of nice houses for sale/rent that have overgrown yards and lawns killing the curb appeal. I almost always do all new outlets/switches and covers throughout. They are cheap, but make a big difference compared to old ones. Get new doorknobs and deadbolts if the old ones show any wear at all. I always put in nice new shower curtains and those toilet decoration rug set things (you can see that top notch terminology is important to me – LOL!). Often I put new blinds in the windows. Most people know to spend a little more in kitchens and bathrooms – they sell houses, and they also rent houses. When you have a choice, always lean towards neutral colors – I have seen many investors and/or homeowners that struggled to sell or fill houses because their colors, ummmm, didn’t appeal to the majority of their target market. For finishing touches, just before show-time, I make sure the house smells right throughout, is as clean as a whistle, the temperature is right, etc. One of the ways I used to know I had it right was, when I finished a house and started showing it, I would bring my wife by to check it out. If she didn’t want to move out of our lived in house and into my showroom special, I wasn’t done, or I didn’t do it right. It always fascinated me that, when we bought, she never liked the houses, but when we sold she usually loved them. See, to me it was the same house, because I knew before I bought what I would do to it, and I could see a mental picture of the finished house (begin with the end in mind). I expected the transition, but she was always amazed by it, even though we did it again and again and again. How do you sell or rent a house fast? Make it the nicest one, with the same price/rent as lesser houses. Alternatively, you could make it the same as the competition, but with price/rent lower than equal houses. If you can, be flexible. Fastest of all – make it the nicest house in the area, with slightly lower price/rent than the others, and be flexible, and it will be filled or sold fast, and a lousy real estate market won’t make a bit of difference. I let someone else be a casualty of carrying costs – not me. If you can’t afford to do the things I just talked about – then evaluate whether or not you are a) managing your money right, and b) buying your properties right (back to an earlier theme – you make your money when you buy)!
#9 – I touched on this briefly in common reason #4; people buy houses that are not aimed at a large enough target market. Roger Salam spoke at our REIA recently, and he said that a buyer’s list is more valuable than a bargain property in this real estate market. I have heard of the buyer’s list approach before, and while I thought Roger did a great job overall, I will have to respectfully disagree with Roger on this point. Just because real estate overall is beat down, doesn’t mean great deals are suddenly a dime a dozen. People that need help are a dime a dozen, but great deals are still like hunting for a needle in a haystack. I make a buyer’s list every time I work on selling/filling a property, and let me tell you my experience. First, buyers are very fickle. When someone buys a house retail, to live in, it has to ‘feel’ right, and what creates that feeling is different for everyone. When I create a buyer’s list, I can find exactly what 30 people say they want, and only two weeks later, 20 of them are no longer looking or interested, and 5 suddenly want something different than what they said they wanted, and 5 say they will go by to check it out, and 3 actually do, and all 3 have reasons it isn’t right for them. A buyer’s list grows old and cold very, very fast. What I have found to be effective, instead of a buyer’s list, is to aim at a large and definite target market. If 30 people all want the same thing, don’t worry about finding those 30 people what they want. Just know that there is a target market for what they want, find a great deal on what they want, follow methods from #8 on selling/filling houses fast, and voila – you have the makings of a great investment. In my early days I heard several investors say they only want 3/2 block houses in decent neighborhoods, and I thought that sounded kind of limiting – but there was a method to their madness. They knew there was a huge target market for that type of house, to rent it or buy it. If you can find a 3/2 block house, and you buy it right, your work is half done for you already. On the other hand, even with a good deal, small 2 bedroom houses can be tough investments, because they are too small for the majority of the population. Personally, I won’t even consider a 1 bedroom house, or a multi-unit property that has many 1 bedroom units. Very few people want a 1 bedroom, and the ones that do are very transient (they move often). One bedroom houses/units are hard to fill, and harder still to keep filled.
#10 – People don’t have enough tools in their tool box. This is similar to #4, where the property lends itself to just one exit strategy, and when it doesn’t work, the investor gets in trouble. However, now instead of the property being the issue, the issue is the investor’s lack of knowledge or creativity. One solution is learning a variety of techniques for selling or filling houses, instead of just one. Another solution is, when you have a problem you can’t figure out alone, get together with a group of investors and brainstorm a bunch of possible solutions.
#11 – Going in the opposite direction, people have too many tools in their tool box, and not enough mastery over each one of them. Each of the tools I mentioned for selling/filling houses has certain specific advantages and disadvantages. Also, there are specific things you want to do, or avoid doing, to limit your risk as much as possible. If you try to use methods you don’t fully understand, it can be like playing with fire - sometimes you get burned.
#12 – People manage their own properties when they don’t have the temperament for it. Managing property is a form of running a business, and you must treat it as a business. You must stay professional at all times. I have seen several situations where investors got into heated arguments or screaming matches with tenants, up to and including vulgar language, and it came back to bite them. They often thought at the time that they “sure did straighten that tenant out”, but not long after they found out what they really did. They brought out the wrath of a tenant without paying attention to the fact that tenants yield a certain amount of power by virtue of the fact that they live in your property. This kind of thing doesn’t happen often, but have you heard about tenants that… Poured concrete into the drains? Smashed up the walls/floors/ceilings? Poured motor oil all over the carpets? Broke all the windows in a house? Sold or stole your appliances, light fixtures, etc., when they left? Ripped all of the wiring out of your house? Helped you avoid vacancies (by moving homeless people into your house when they left)? Personally, I have managed as many as 15-20 properties simultaneously, for about 10 years, and I have never experienced any of those problems. The reason is because I always, always, always treat my tenants with respect (even when they disrespect me). When I have to evict for nonpayment, I notify the tenant that I would like things to work out for them, but I am running a business and I have to get paid. I have to pay the mortgage and support my family (I know many investors present themselves as only being the property manager, and not the owner, and thereby have the ability to make the owner out to be the bad guy when needed). I notify them of what they need to do to remedy the situation, and I try to be understanding. I notify them of what will happen when in the eviction process, so they can take measures to find alternate housing if applicable. When they need to vent, I quietly listen, and calmly and quietly say what I need to say. If something they say or do surprises me, sometimes I notify them that I will have to take some time to get back to them (rather than saying something in the heat of the moment that I might later regret). If possible, when an eviction is apparent, I try to work out the tenant leaving on their own. I have only had to do a handful of evictions in ten years, and most of those tenants, when it was done, actually thanked me for how professional and courteous I was throughout the process. Getting ugly is never the right answer, and if you can’t keep a level head, by all means, get someone to manage your properties for you.
Well, that doesn’t cover everything, but it covers what comes to mind now, and it should give you some ideas to think about. Now, since I gave you a list of all of the things I see people do wrong, let me close by sharing with you some of the advantages of buy and hold real estate, when it is done correctly. First, you should have positive cash flow on your investments. Second, your tenants are essentially buying the properties for you, since your mortgages get paid down a little more every month, and the rents cover the mortgage payments. Third, in the long run, you get appreciation (although I know right now, in this down market, it may not feel that way). Fourth, you get tax advantages such as depreciation, 1031 exchanges, and possibly, if done correctly, the ability to legally write off some of your normal living expenses. Fifth, it is easier than most investments to use leverage to your advantage. Sixth, investing in single family homes is easy to get into compared to many investments such as starting a business. And seventh, compared to having a JOB, it is a relatively passive income (once your properties are up and running, you shouldn’t have to do a lot of work relative to the long term returns you should receive), and that is a beautiful thing! Get enough properties, done correctly, and you will be well on your way to financial freedom!!!
P.S. - I didn't hold anything back - I shared all of the secrets I could think of that I am using to be successful in real estate at a time when many are struggling - hopefully all of you can find something useful in it!
P.P.S. - Further, and I apologize for the sales pitch, but I finally set up an affiliate account with Amazon.com, which is where I buy almost all of my books, CDs, etc., and figured out how to add recommendations to my blog. I have recommended three of the best success/wealth books I have ever read, and I may add more over time. I will never recommend books/products 'just to make money', but only because they are books/products that I have used, that I have got a lot out of personally, and that I believe whole-heartedly can help my readers!
Monday, March 31, 2008
Sunday, March 23, 2008
Financial Freedom for the Rest of Your Life – Part II
In my last blog, I asked “Is it possible that just 3 simple rules will give you financial freedom for the rest of your life?” I continued, “You better believe it. It worked for me, it worked for millions and millions of others, and it will work for you. If you follow my three simple rules, you will have financial freedom, probably sooner than you ever thought possible…”
If you haven’t read that blog, please check it out now, as this is a follow up, intended to break down the three rules in more detail, and to get more personal.
Here, again, are my 3 rules:
Rule #1 – Live below your means.
Rule #2 – Save and invest the difference.
Rule #3 – Continuously improve on rules #1 and #2.
Now, the breakdown…
Rule #1 – Live below your means. This point is the beginning of building wealth, and eventually financial freedom. The 2-5% of Americans that become self-made millionaires do a few things differently than the rest of the population. They manage their money better, they take 100% responsibility for their financial success or failure (no blaming, no excuses), and they take a long term view of things. Rather than spend every penny of income or more today, they live below their means, so that, rather than working for their money, eventually their money can go to work for them, and then they can do… whatever they want!
Rule #2 – Save and invest the difference. The obvious second step, is to save the difference between their income and their spending, and then to methodically begin investing it. Don’t invest it haphazardly, willy nilly. Once you get on track with living below your means, start studying investments. Figure out which avenue suits you. Learn, try some things, improve, and keep improving. What kind of investing will you enjoy enough to get extremely good at? Some possibilities include real estate and/or real estate related, stocks and bonds, owning your own business(es), marketing, and internet based income streams. One of my primary recommendations to someone who wants financial freedom is always to try to find something you are passionate about, and figure out how to make money doing it. Gaining financial freedom, or becoming a self-made millionaire, is not a stroll in the park – you might remember ‘it is simple, but it isn’t easy’. If you don’t have a burning desire (strong reasons why you want it), and have passion for the avenue you are using to achieve it, chances of you doing what it takes to make it are not real good.
When I first started trying to live below my means, I had an extremely hard time with the adjustment (from living paycheck to paycheck). I failed several times. What makes a champion isn’t making sure you never get knocked down – it is making sure that you get up one time more than you get knocked down. Brian Tracy calls it becoming “unstoppable”, and asks the question, “How do you become unstoppable?” The simple answer is you… refuse… to ever… STOP!!! How simple is this?
Here is what finally worked for me, and hopefully it will help others. I made the habit of saving automatic, so I didn’t ever have to think about it. I stopped trying to save what was left over at the end of the month, and started to ‘pay myself first’. I set up an untouchable savings account, and I set up part of my paycheck to go into it automatically. A very important thing to remember here is the amount doesn’t matter! T. Harv Eker says, “It’s not the amount, it’s the habit!” My untouchable account had to be hard to get to, so I opened it at a different bank than my normal bank. I wrote up a full year of deposits into my savings passbook, put it in an envelope that I wrote my goals and dreams and reasons I wanted to succeed all over, taped it all over completely with scotch tape so it was impossible to open without destroying, locked it up in a small home safety deposit box, and buried that at the back of my closet. Then I hid the key separately. Then, to make it interesting, I set some savings goals, and made simple bar charts to follow my progress, and taped them to my refrigerator. I used the same scotch tape that I used to tape up the envelope with the passbook savings in it – that’s important (LOL). Every payday I marked the next bar on my charts, a little higher than the last. One chart was for a $1K goal, to open a checking account that had no fees, and paid interest on the balance. The second goal was saving for a down payment to buy a house (I was renting a dumpy efficiency apartment in a bad neighborhood when I started this, and delivering pizzas for a living). The third goal was to buy a hot tub (I think it helps to have at least one goal that is fun and glamorous and indicative of the good life that your future holds). Then, and don’t skip this step, I started visualizing my dreams, already having come true, and began looking back from that place to figure out how I did it. I learned this from one of the many books I read, and, while I didn’t get all of the answers all at once, things started improving, and my finances started changing, and over time the answers came. I still visualize today. In fact, I quit my JOB, in part, because I felt that I needed more time for dreaming and visualizing, and I figured that would benefit me more in the long run than my JOB salary and benefits.
I was able to save such a small amount at the beginning that it was almost laughable, but I will tell you what happened. I started, and my ‘journey of a thousand miles began with a single step’. I started to see progress, and I got encouraged. I started saving my spare change, so it could be added to my funds. Then I got a pay raise, and I didn’t need the extra money to live on, so I increased my automatic savings, and redid my passbook higher. My charts grew faster, and I got more encouraged. Watching my charts grow became more enjoyable to me than a lot of the stupid stuff I had been wasting all of my money on. Then I got a better job, and didn’t need the extra money for living, so I redid the passbook again, even higher. Then I called around for quotes on my auto insurance, and got a better rate, and started saving the difference. Somewhere in there I worked two jobs for a short period of time so I could save more, faster. Then I got one unexpected break or another, like an income tax refund, and I didn’t need it for living, so I saved it all. To make a long story short, God seemed to help me at every turn, once I finally helped myself by taking the first step, and goals that appeared insurmountable at the start rapidly began being reached, and increased to bigger goals. Success begets success. If memory serves me, I was initially saving $10/month or less, and in less than one year I opened that $1K no fee checking account that paid interest. I had been talking to my landlord, and getting some information, and when I opened that checking account, I think I replaced that goal with a new goal of saving money to invest in real estate (even though I didn’t even own my own home yet at the time). Anyhow, it wasn’t long after that when I bought myself a house to live in (a starter home, to be sure, but I hunted down a bargain, and within three years of buying my home, I bought my first rental property, just two blocks away, and started my passion and my path to financial freedom - real estate investing).
Finally, Rule #3 – Continuously improve on rules #1 and #2. I guess I already led into this with my personal story, but you need to get better and better at living below your means, and saving and investing the difference. You also need to become a lifelong learner. I forget where I got this quote from, but, “The learners inherit the earth, while the learned are beautifully equipped for a world that no longer exists”. Only one thing in your finances is constant – change. So don’t fight the change, but become a continuous learner, and be one of those who benefits from it. Looking at history, the times when the most people built the most wealth the fastest, were in the times of greatest change. The Great Depression hurt many, but also made those brave enough to forge ahead very wealthy, like J. Paul Getty. The automobile industry killed the horse and buggy, but it made people with the vision of Henry Ford and Harvey Firestone very wealthy. The internet created countless millionaires of those who got in early, and hurt those companies that moved slower than their competition. Don’t fight change; become a continuous learner, and embrace it.
Let me give a quick point on why it is so important that you continuously improve on living below your means, and saving and investing the difference. If I offered you a choice, would you rather have $1 million today, or one cent today, which would double every day through day thirty? If you haven’t seen this before, this will astound you. I have seen it before, and I still have to do the math from time to time, because it seems so unbelievable. The one cent today, doubled every day through day thirty, becomes $2,736,509.12 (almost three million dollars!). Good thing I taught you this, because now if you ever get this offer, you won’t make a mistake – LOL! If you still don’t believe it, it only takes about five minutes to work through the math. Start with one cent on day one, and double it twenty-nine times to day thirty. Presto - $2,736,509.12! So what is my point?
Have you heard of the rule of 72? If you have money invested, divide the percentage rate of return on your money into 72, and that is how many years it will take until your money doubles. For instance, if you have a nice, safe, CD in the bank, earning 3% interest, it will take you 24 years to double your money (72/3 = 24). Hike that up to 6% and you double your money in 12 years. Figure out how to earn 12% and you are talking about 6 years, and earn 24% on your money, and you double it every 3 years. I have made 24% and more on my real estate investments, by learning the business, learning the right way to do it, and having the discipline to stick with it. I did a nothing down deal on a single family house that earned me over $40K in less than three years (with nothing down, the return is infinite). Then, when I sold that house, I learned how to do a 1031 exchange, rolling the profit into a bigger, better house, and allowing me to defer the taxes on my $40K profit until I eventually sell without doing a 1031 exchange (if I ever do). What a great country we live in! Anything is possible! Anyhow, looking at the rates of return on investment, and how many years it takes to double your investment, how good do you think you should become at investing? ‘The more you learn, the more you earn’. I have been studying real estate, investing, finance, motivation, and success since before I bought my first rental property back in 1998, and I study them still. I read books, listen to CD’s, attend seminars, etc., on an almost daily basis. I am reading two books, plus my Bible, and listening to two CD sets (one in my truck, and one in my office) simultaneously, and I am confident I will continue to do this type of learning for many, many years to come.
This is adapted from Brian Tracy… Why do you think wealthy people have libraries in their homes? Is it because they had all of this money, and decided, hey, why not a library? Or do you suppose that they started in a small house, with a few books, and as they got more and more books, and improved themselves, and moved to progressively bigger and nicer houses, they eventually decided that, when they got their next house, they absolutely had to make sure there was a place to put all of those books?
Anyhow, I guess this is as good a point as any to start wrapping up this session. Please, if you aren’t already, start following my three rules. Make it automatic if it will help. Figure out your dreams, set some financial goals (and whatever other goals suit you), and start to chart (it is much easier when you can see your progress). Peter Drucker said, “What gets measured gets improved”. Watch and see if, over time, God doesn’t speed you on your way. ‘Whatever you can do, or dream you can do, begin it; boldness has genius, power, and magic in it.’ Best wishes!
If you haven’t read that blog, please check it out now, as this is a follow up, intended to break down the three rules in more detail, and to get more personal.
Here, again, are my 3 rules:
Rule #1 – Live below your means.
Rule #2 – Save and invest the difference.
Rule #3 – Continuously improve on rules #1 and #2.
Now, the breakdown…
Rule #1 – Live below your means. This point is the beginning of building wealth, and eventually financial freedom. The 2-5% of Americans that become self-made millionaires do a few things differently than the rest of the population. They manage their money better, they take 100% responsibility for their financial success or failure (no blaming, no excuses), and they take a long term view of things. Rather than spend every penny of income or more today, they live below their means, so that, rather than working for their money, eventually their money can go to work for them, and then they can do… whatever they want!
Rule #2 – Save and invest the difference. The obvious second step, is to save the difference between their income and their spending, and then to methodically begin investing it. Don’t invest it haphazardly, willy nilly. Once you get on track with living below your means, start studying investments. Figure out which avenue suits you. Learn, try some things, improve, and keep improving. What kind of investing will you enjoy enough to get extremely good at? Some possibilities include real estate and/or real estate related, stocks and bonds, owning your own business(es), marketing, and internet based income streams. One of my primary recommendations to someone who wants financial freedom is always to try to find something you are passionate about, and figure out how to make money doing it. Gaining financial freedom, or becoming a self-made millionaire, is not a stroll in the park – you might remember ‘it is simple, but it isn’t easy’. If you don’t have a burning desire (strong reasons why you want it), and have passion for the avenue you are using to achieve it, chances of you doing what it takes to make it are not real good.
When I first started trying to live below my means, I had an extremely hard time with the adjustment (from living paycheck to paycheck). I failed several times. What makes a champion isn’t making sure you never get knocked down – it is making sure that you get up one time more than you get knocked down. Brian Tracy calls it becoming “unstoppable”, and asks the question, “How do you become unstoppable?” The simple answer is you… refuse… to ever… STOP!!! How simple is this?
Here is what finally worked for me, and hopefully it will help others. I made the habit of saving automatic, so I didn’t ever have to think about it. I stopped trying to save what was left over at the end of the month, and started to ‘pay myself first’. I set up an untouchable savings account, and I set up part of my paycheck to go into it automatically. A very important thing to remember here is the amount doesn’t matter! T. Harv Eker says, “It’s not the amount, it’s the habit!” My untouchable account had to be hard to get to, so I opened it at a different bank than my normal bank. I wrote up a full year of deposits into my savings passbook, put it in an envelope that I wrote my goals and dreams and reasons I wanted to succeed all over, taped it all over completely with scotch tape so it was impossible to open without destroying, locked it up in a small home safety deposit box, and buried that at the back of my closet. Then I hid the key separately. Then, to make it interesting, I set some savings goals, and made simple bar charts to follow my progress, and taped them to my refrigerator. I used the same scotch tape that I used to tape up the envelope with the passbook savings in it – that’s important (LOL). Every payday I marked the next bar on my charts, a little higher than the last. One chart was for a $1K goal, to open a checking account that had no fees, and paid interest on the balance. The second goal was saving for a down payment to buy a house (I was renting a dumpy efficiency apartment in a bad neighborhood when I started this, and delivering pizzas for a living). The third goal was to buy a hot tub (I think it helps to have at least one goal that is fun and glamorous and indicative of the good life that your future holds). Then, and don’t skip this step, I started visualizing my dreams, already having come true, and began looking back from that place to figure out how I did it. I learned this from one of the many books I read, and, while I didn’t get all of the answers all at once, things started improving, and my finances started changing, and over time the answers came. I still visualize today. In fact, I quit my JOB, in part, because I felt that I needed more time for dreaming and visualizing, and I figured that would benefit me more in the long run than my JOB salary and benefits.
I was able to save such a small amount at the beginning that it was almost laughable, but I will tell you what happened. I started, and my ‘journey of a thousand miles began with a single step’. I started to see progress, and I got encouraged. I started saving my spare change, so it could be added to my funds. Then I got a pay raise, and I didn’t need the extra money to live on, so I increased my automatic savings, and redid my passbook higher. My charts grew faster, and I got more encouraged. Watching my charts grow became more enjoyable to me than a lot of the stupid stuff I had been wasting all of my money on. Then I got a better job, and didn’t need the extra money for living, so I redid the passbook again, even higher. Then I called around for quotes on my auto insurance, and got a better rate, and started saving the difference. Somewhere in there I worked two jobs for a short period of time so I could save more, faster. Then I got one unexpected break or another, like an income tax refund, and I didn’t need it for living, so I saved it all. To make a long story short, God seemed to help me at every turn, once I finally helped myself by taking the first step, and goals that appeared insurmountable at the start rapidly began being reached, and increased to bigger goals. Success begets success. If memory serves me, I was initially saving $10/month or less, and in less than one year I opened that $1K no fee checking account that paid interest. I had been talking to my landlord, and getting some information, and when I opened that checking account, I think I replaced that goal with a new goal of saving money to invest in real estate (even though I didn’t even own my own home yet at the time). Anyhow, it wasn’t long after that when I bought myself a house to live in (a starter home, to be sure, but I hunted down a bargain, and within three years of buying my home, I bought my first rental property, just two blocks away, and started my passion and my path to financial freedom - real estate investing).
Finally, Rule #3 – Continuously improve on rules #1 and #2. I guess I already led into this with my personal story, but you need to get better and better at living below your means, and saving and investing the difference. You also need to become a lifelong learner. I forget where I got this quote from, but, “The learners inherit the earth, while the learned are beautifully equipped for a world that no longer exists”. Only one thing in your finances is constant – change. So don’t fight the change, but become a continuous learner, and be one of those who benefits from it. Looking at history, the times when the most people built the most wealth the fastest, were in the times of greatest change. The Great Depression hurt many, but also made those brave enough to forge ahead very wealthy, like J. Paul Getty. The automobile industry killed the horse and buggy, but it made people with the vision of Henry Ford and Harvey Firestone very wealthy. The internet created countless millionaires of those who got in early, and hurt those companies that moved slower than their competition. Don’t fight change; become a continuous learner, and embrace it.
Let me give a quick point on why it is so important that you continuously improve on living below your means, and saving and investing the difference. If I offered you a choice, would you rather have $1 million today, or one cent today, which would double every day through day thirty? If you haven’t seen this before, this will astound you. I have seen it before, and I still have to do the math from time to time, because it seems so unbelievable. The one cent today, doubled every day through day thirty, becomes $2,736,509.12 (almost three million dollars!). Good thing I taught you this, because now if you ever get this offer, you won’t make a mistake – LOL! If you still don’t believe it, it only takes about five minutes to work through the math. Start with one cent on day one, and double it twenty-nine times to day thirty. Presto - $2,736,509.12! So what is my point?
Have you heard of the rule of 72? If you have money invested, divide the percentage rate of return on your money into 72, and that is how many years it will take until your money doubles. For instance, if you have a nice, safe, CD in the bank, earning 3% interest, it will take you 24 years to double your money (72/3 = 24). Hike that up to 6% and you double your money in 12 years. Figure out how to earn 12% and you are talking about 6 years, and earn 24% on your money, and you double it every 3 years. I have made 24% and more on my real estate investments, by learning the business, learning the right way to do it, and having the discipline to stick with it. I did a nothing down deal on a single family house that earned me over $40K in less than three years (with nothing down, the return is infinite). Then, when I sold that house, I learned how to do a 1031 exchange, rolling the profit into a bigger, better house, and allowing me to defer the taxes on my $40K profit until I eventually sell without doing a 1031 exchange (if I ever do). What a great country we live in! Anything is possible! Anyhow, looking at the rates of return on investment, and how many years it takes to double your investment, how good do you think you should become at investing? ‘The more you learn, the more you earn’. I have been studying real estate, investing, finance, motivation, and success since before I bought my first rental property back in 1998, and I study them still. I read books, listen to CD’s, attend seminars, etc., on an almost daily basis. I am reading two books, plus my Bible, and listening to two CD sets (one in my truck, and one in my office) simultaneously, and I am confident I will continue to do this type of learning for many, many years to come.
This is adapted from Brian Tracy… Why do you think wealthy people have libraries in their homes? Is it because they had all of this money, and decided, hey, why not a library? Or do you suppose that they started in a small house, with a few books, and as they got more and more books, and improved themselves, and moved to progressively bigger and nicer houses, they eventually decided that, when they got their next house, they absolutely had to make sure there was a place to put all of those books?
Anyhow, I guess this is as good a point as any to start wrapping up this session. Please, if you aren’t already, start following my three rules. Make it automatic if it will help. Figure out your dreams, set some financial goals (and whatever other goals suit you), and start to chart (it is much easier when you can see your progress). Peter Drucker said, “What gets measured gets improved”. Watch and see if, over time, God doesn’t speed you on your way. ‘Whatever you can do, or dream you can do, begin it; boldness has genius, power, and magic in it.’ Best wishes!
Friday, March 7, 2008
Financial Freedom for the Rest of Your Life If You Follow 3 Simple Rules
Is it possible that just 3 simple rules will give you financial freedom for the rest of your life? You better believe it. It worked for me, it worked for millions and millions of others, and it will work for you. If you follow these three simple rules, you will have financial freedom, probably sooner than you ever thought possible, and the only thing that can screw it up is… You.
I know this because I screwed it up for a long time before I finally got it right. However, once I finally got it right, my success sky-rocketed. I spent the first 29 years of my life spinning my wheels, financially, and then I started following my 3 simple rules, and I became financially free in the next ten years. Many have done it faster than that. Some take a little longer. Here they are:
Rule #1 – Live below your means.
Rule #2 – Save and invest the difference.
Rule #3 – Continuously improve on rules #1 and #2.
A friend recently reminded me of a saying I have heard many times before – financial freedom and/or getting rich is simple, but it isn’t easy!
It can be started on a shoestring, but it will never happen if you don’t start. Reality is not “when I have more money, I will start to manage it”. Reality is, “when I start to manage my money, I will have more… money to manage!” So many people complain that they don’t have enough to make ends meet, much less to get ahead. That is not a money problem; that is a philosophy problem. No matter how little or how much money someone with that mindset makes, they will never be financially free. Back when I was building financial freedom on about $20-30K/year, I knew a guy that was making over $100K/year. When he lost his executive job, he started working two weeks later as a salesman, not because he wanted to, but because he had to. He had to support his lifestyle (the corvette, the dinners out, the huge house payments, electric bills, and the rest of the doodads). He was living paycheck to paycheck. You see, he just never quite made enough money to get ahead. Probably the next pay raise would have put him over the top (not!).
Jim Rohn said “Shortly after I met my mentor, he asked me ‘Mr. Rohn, how much money have you saved and invested in the past six years?’ Jim answered, ‘none’. His mentor then asked, “Who sold you on that plan?” Let me take it a little further. How many books have you read in the past 90 days that might help improve your financial future? How many courses have you taken? How many financially successful people have you reached out to and asked, “Can I buy you dinner and pick your brain a little while we eat?” T. Harv Eker says you have your own financial plan in place right now. His question is, “how’s that working for you so far?” If you don’t have the financial success you want in life, are you doing the things that need to be done to change that? I am sure you have heard that the definition of insanity is doing the same things over and over again, always expecting different results. If you don’t change something, nothing much will change!
My path to financial freedom started when I finally figured out that I didn’t know everything, and that I could get help. I started reading material that improved my financial IQ. I asked questions of co-workers that were successfully investing in real estate. I stopped using my plan, which had zero success in 29 years, and I started learning from people that showed me how to become financially free in 10 years. I attribute most of my success to my three simple rules, and I challenge anyone to follow those rules, and prove to me that you can follow them and not succeed financially.
It is simple, but it isn’t easy. It requires discipline. It requires finding people that have the success you want, and learning from them. In my first 29 years, I learned financial success from dozens of people, none of whom had any financial success themselves. I needed to stop and ask directions from somebody that knew the way. When I started to learn from people who already had what I wanted, everything changed. It is simple, but it isn’t easy. You might have to get up earlier and go to bed later. I did. You might have to work harder and smarter. I did. You might have to figure out ways to add value to other people’s lives. I did. You might have to recognize that you are 100% responsible for your success, or lack thereof. That is what, after 29 years, finally, I did. You have heard me say again and again, 'you can have your excuses, or you can have your dreams, but you can’t have both'. Ten years ago, in August 1998, I stopped making excuses, and I started working on my dreams. I hope you have done the same, and if you haven’t yet, I hope I can motivate you to do it now. If you haven’t already started, when will today be the right time?
I will tell you what I see in 90% of the people that talk to me about wanting financial success, and it is easy to recognize because I had it for 29 years. I see people that want financial freedom, but they don’t want to have to learn more, work harder, do more, or become more than they are right now. Oh yeah, and they want it by next Thursday. Furthermore, if they can’t have it on their terms, then they just know it isn’t possible - anyone that has financial success must have been lucky, or took advantage of other people (just ask 'em).
Personally, I spent ten years busting my butt doing a full time job to the best of my ability, plus gave my evenings to my family, then worked until 1-2am doing real estate, paperwork, reading, goal-setting, visualizing, etc. I got up and 5am and was back at it again. I gave up 'me' time and did repairs, managed property, hunted for needle-in-a-haystack great deals. Then, occassionally someone learns how successful I have been, and tells me, "You sure were lucky!" If I feel up to it I enlighten them as to the luck I had, but usually I just smile and nod in agreement.
Let me tell you, millions of people have become self-made millionaires, and many have overcome hurdles bigger than you or I ever dreamed of. Some have overcome physical handicaps. Many came to this country without a penny to their names, and couldn’t even speak our language. In one way, shape, form, or another, whether they realized it or not, almost without fail they followed my three simple rules:
Rule #1 – Live below your means.
Rule #2 – Save and invest the difference.
Rule #3 – Continuously improve on rules #1 and #2.
It is simple, but it isn’t easy!
If my blog inspires you in some way, please refer your friends and family members to check it out, and, as my friend Tim Harris is fond of saying, “keep on keeping on”! May your parents have rich children, and your children have rich parents!
In closing this blog, anyone who wants to be notified whenever I post a new blog can get on my e-mail list. E-mail reinvestorsfl@aol.com and ask to be added to “The Lund Letters”. It is free, you can be removed from my list at any time, and I will never sell or trade your e-mail address or any other information.
A coming attraction… 'Common Reasons I See People Fail at Buy and Hold Real Estate, and How to Avoid Them So You Can Become Financially Free!!! Yes, it works, even in this real estate market, if you just do it correctly!'
I know this because I screwed it up for a long time before I finally got it right. However, once I finally got it right, my success sky-rocketed. I spent the first 29 years of my life spinning my wheels, financially, and then I started following my 3 simple rules, and I became financially free in the next ten years. Many have done it faster than that. Some take a little longer. Here they are:
Rule #1 – Live below your means.
Rule #2 – Save and invest the difference.
Rule #3 – Continuously improve on rules #1 and #2.
A friend recently reminded me of a saying I have heard many times before – financial freedom and/or getting rich is simple, but it isn’t easy!
It can be started on a shoestring, but it will never happen if you don’t start. Reality is not “when I have more money, I will start to manage it”. Reality is, “when I start to manage my money, I will have more… money to manage!” So many people complain that they don’t have enough to make ends meet, much less to get ahead. That is not a money problem; that is a philosophy problem. No matter how little or how much money someone with that mindset makes, they will never be financially free. Back when I was building financial freedom on about $20-30K/year, I knew a guy that was making over $100K/year. When he lost his executive job, he started working two weeks later as a salesman, not because he wanted to, but because he had to. He had to support his lifestyle (the corvette, the dinners out, the huge house payments, electric bills, and the rest of the doodads). He was living paycheck to paycheck. You see, he just never quite made enough money to get ahead. Probably the next pay raise would have put him over the top (not!).
Jim Rohn said “Shortly after I met my mentor, he asked me ‘Mr. Rohn, how much money have you saved and invested in the past six years?’ Jim answered, ‘none’. His mentor then asked, “Who sold you on that plan?” Let me take it a little further. How many books have you read in the past 90 days that might help improve your financial future? How many courses have you taken? How many financially successful people have you reached out to and asked, “Can I buy you dinner and pick your brain a little while we eat?” T. Harv Eker says you have your own financial plan in place right now. His question is, “how’s that working for you so far?” If you don’t have the financial success you want in life, are you doing the things that need to be done to change that? I am sure you have heard that the definition of insanity is doing the same things over and over again, always expecting different results. If you don’t change something, nothing much will change!
My path to financial freedom started when I finally figured out that I didn’t know everything, and that I could get help. I started reading material that improved my financial IQ. I asked questions of co-workers that were successfully investing in real estate. I stopped using my plan, which had zero success in 29 years, and I started learning from people that showed me how to become financially free in 10 years. I attribute most of my success to my three simple rules, and I challenge anyone to follow those rules, and prove to me that you can follow them and not succeed financially.
It is simple, but it isn’t easy. It requires discipline. It requires finding people that have the success you want, and learning from them. In my first 29 years, I learned financial success from dozens of people, none of whom had any financial success themselves. I needed to stop and ask directions from somebody that knew the way. When I started to learn from people who already had what I wanted, everything changed. It is simple, but it isn’t easy. You might have to get up earlier and go to bed later. I did. You might have to work harder and smarter. I did. You might have to figure out ways to add value to other people’s lives. I did. You might have to recognize that you are 100% responsible for your success, or lack thereof. That is what, after 29 years, finally, I did. You have heard me say again and again, 'you can have your excuses, or you can have your dreams, but you can’t have both'. Ten years ago, in August 1998, I stopped making excuses, and I started working on my dreams. I hope you have done the same, and if you haven’t yet, I hope I can motivate you to do it now. If you haven’t already started, when will today be the right time?
I will tell you what I see in 90% of the people that talk to me about wanting financial success, and it is easy to recognize because I had it for 29 years. I see people that want financial freedom, but they don’t want to have to learn more, work harder, do more, or become more than they are right now. Oh yeah, and they want it by next Thursday. Furthermore, if they can’t have it on their terms, then they just know it isn’t possible - anyone that has financial success must have been lucky, or took advantage of other people (just ask 'em).
Personally, I spent ten years busting my butt doing a full time job to the best of my ability, plus gave my evenings to my family, then worked until 1-2am doing real estate, paperwork, reading, goal-setting, visualizing, etc. I got up and 5am and was back at it again. I gave up 'me' time and did repairs, managed property, hunted for needle-in-a-haystack great deals. Then, occassionally someone learns how successful I have been, and tells me, "You sure were lucky!" If I feel up to it I enlighten them as to the luck I had, but usually I just smile and nod in agreement.
Let me tell you, millions of people have become self-made millionaires, and many have overcome hurdles bigger than you or I ever dreamed of. Some have overcome physical handicaps. Many came to this country without a penny to their names, and couldn’t even speak our language. In one way, shape, form, or another, whether they realized it or not, almost without fail they followed my three simple rules:
Rule #1 – Live below your means.
Rule #2 – Save and invest the difference.
Rule #3 – Continuously improve on rules #1 and #2.
It is simple, but it isn’t easy!
If my blog inspires you in some way, please refer your friends and family members to check it out, and, as my friend Tim Harris is fond of saying, “keep on keeping on”! May your parents have rich children, and your children have rich parents!
In closing this blog, anyone who wants to be notified whenever I post a new blog can get on my e-mail list. E-mail reinvestorsfl@aol.com and ask to be added to “The Lund Letters”. It is free, you can be removed from my list at any time, and I will never sell or trade your e-mail address or any other information.
A coming attraction… 'Common Reasons I See People Fail at Buy and Hold Real Estate, and How to Avoid Them So You Can Become Financially Free!!! Yes, it works, even in this real estate market, if you just do it correctly!'
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