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The 100% Return Goal

January 18, 2019 by  
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As we begin a new year it’s a very good time to remember the basics, specifically the basics of financial independence through which you make and keep your own fortune.  It’s so easy to forget the basics, especially when we are all caught up in the details of our daily lives, even those details that are involved with building our wealth. For example, if you have a big problem with the plumbing at a rental property or the property taxes just got bumped up, it’s easy to focus on just that, but that can get you frustrated or make you kind of space out on your overall plan.

What you should not forget is that you have to continue to look at the big picture, looking for ways to take advantage of leverage whereby you could earn as much as 100% of your money due to compounding. I’ve certainly been there and done that. Even on the very property that is giving me fits, I many times have failed to step back and realize that my equity on that very property has already exceeded a 100% return on my money and I should be motivated and reminded to keep doing that.

There is a simple example that I used in my fist book, How to Wake Up the Financial Genius Inside You, where I showed how 1 single penny a day compounded at 100% a day turns into just over $339 million on the 35th day alone. Now I know there is no way you can compound your money at 100% per day, but it is possible to compound your money at 100% per year, especially in the first few years. The key to those huge numbers is using other people’s money (your leverage). So, maybe only 10, 20 or 30% of the price you pay is with your own money and then the rest is in a loan from the bank or the seller for the balance. It’s not only possible but many people are doing just that, every day, including myself and many people that I know and have helped.

I do know that finding beat up properties these days can be a bit more difficult, depending on where your market is, but things change and prices go up and down and you and I need to always be looking for those bargains, especially those properties that need fixing up, the ones I like to call “dirt bag properties”. Then, always remember that good ole leverage formula:
If your down payment is only 10%, and you improve the property enough to increase the value by 10% you have made a 100% return on your money. That formula is a little simplistic since it doesn’t take into account your expenses, but you can keep those pretty darn low if you do most of the work yourself. Just don’t let the goal of a 100% return on your investment scare you away because it seems too difficult. If you can get even part way there, say just a 30% return on your money per year on only $10,000, that fraction of the big goal will still add up to over $1,124,000 in just 18 years.

My big point here is that we must keep the big picture in mind and remember that those potential returns are there. If you do, it becomes easier to not be deterred or discouraged by those plumbing issues, property tax increases, or other relatively minor problems.  Keep your eye and your dreams focused on the big prize, because it is all together very possible to achieve that big goal.

A Darling Little House

July 15, 2017 by  
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Many years ago, I wrote a book called The Courage to be Rich. This week, I re-read some of that book and, in particular, a chapter entitled “How Yuks Can Create Big Bucks”. It reminded me again that making money by acquiring beat up, old, dirt bag properties and adding your own sweat equity can make a person rich today in the exact same way it did 30 and 40 years ago. In fact, right now, with many properties selling for top dollar, it makes even more sense to lower your financial risk by investing in these kinds of properties. Here is an excerpt from that section of the book.

Changing a Tacky Dump into a Swiss Chalet

I really couldn’t believe what I saw. A few years ago, while driving down a street in Salt Lake City, I glanced over at a little white house, maybe a thousand square feet at the most, and I just about drove off the road. The formerly grungy house had been completely transformed. Instead of a tacky little house complete with cluttered yard, worn grass, and garbage cans by the porch, I saw a cute, Swiss chalet cottage. The change was so stunning that I pulled over to stop and stare.

At first glance, it seemed that someone had spent a ton of dough making the property shine. Upon closer inspection, I found that the changes made on the outside of the property were quite inexpensive. The dirty sides of the house had been covered up by a fresh coat of paint, and Swiss style shutters with decorative patterns had been placed on either side of the windows. The garbage cans had been moved from the front yard to the back. For extra frosting, a white picket fence had been put along the front of the yard. One other conspicuous difference was a FOR SALE sign prominently displayed.

I was totally amazed at the change, but even more amazed at my reaction to the changes! I had, for years, been in the business of buying properties that needed fixing up and, after some work, would resell or refinance them at substantial profits.

Prior to stopping at this house, I considered myself very smart and successful at what I did. But here is the huge shocking part of this experience. My first reaction was: “What a cute little house! It’s absolutely darling. I should buy it!”

Talk about dumb–really dumb. Here I am in the business of buying dirt bag properties, fixing them up and making big money selling them and this little house almost fooled me into buying it. But now as I think about it, that experience is teaching me a big lesson.

Almost everybody would rather buy a property that looks nice and new and pretty. That’s just normal in us human beings. That’s why people are making money by fixing and fancying up beat up houses and apartments. And now in today’s market where a lot of properties are at top prices, these types of properties are the safer investment. You can greatly increase your chance of making money by doing the simple fixes that stand out and grab people’s attention!

That darling Swiss looking house certainly did it for me and needs to be duplicated. Or should I say, “Hey, here is another way showing how you can make big bucks from yuks.”

Sweet Sweat Equity

May 2, 2015 by  
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When I first learned, from my mentor and friend Larry Rosenberg, how I could actually make a 50%, 60%, 70% and even 100% return on my money, I was blown away because I knew exactly what those kind of returns could do to a small amount of money over time. And believe me back then, a small amount of money was all I had.

I remember vividly the first dirt bag property I bought.  It was a little house that was ugly on the outside and a mess on the inside. But this little ugly and messy house didn’t really need anything more than a major clean up, new carpet and a fresh coat of paint inside and out. The problem was I used almost all of my cash for the down payment.  So, I knew I couldn’t afford what contractors wanted to charge for the work and the materials that were needed to turn this dirt bag property into a beautiful cottage.

So what did that leave me? Sure, I probably could have borrowed enough to cover the contractor’s bids from relatives, friends or a bank but that would cut into my overall profits on the deal. So what did I do?  I just rolled up my sleeves and went to work.  Yes, it was some dirty, hard work but wow did it ever pay off!

I’m not a professional painter and I really didn’t have experience laying carpet but I quickly figured it out.  I can’t say that it was fun but when the project was done and I looked at that dolled up house it gave me quite a bit of satisfaction and a huge a sense of accomplishment.  But I also must say that my satisfaction soared to new heights when I sold the doll house for a big fat return on my investment and that, my friends, is what your own sweat efforts, or ‘sweat equity’, is all about. Wow. Can it ever pay some very handsome returns! And don’t ever forget how those returns of 50, 60 and even 100% can turn a small amount of money into millions over time.

I will admit that a bit later in my investing career, as things were speeding up, I finally got to the point when I figured that my time spent doing all that physical work was robbing me of time that could be much better spent with much larger rewards.  What I mean is that I realized at that point I could make more money by spending more time finding good deals and getting others to do the physical work, than doing the work myself. I could put in more time to make more offers, negotiate more deals and do the paper work needed to figure out what deals to buy and how to finance them. I traded sweat effort for brain effort.

This mental part really is also sweat equity. It’s actually the brain sweat that will give you the biggest returns on your money.  Both physical and mental sweat equity are critical and necessary and you can do both. You need to get to the right point in your growth so you can delegate the physical jobs to speed up your efforts and really grow those returns!

 

 

 

 

 

Leverage to Lift Your Profits

November 7, 2014 by  
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Today I’m going to continue talking about making those huge returns that I touched on last week. Remember, with only a $30k salary and saving just 10% for only 5 years, you can bring in as much as $21 million dollars by age 70! How is it done?  It’s done by using two different types of leverage.

No. 1: Financial leverage. This is Other People’s Money (OPM) as in mortgage loans, personal loans, signature loans, loans from family or friends, or even through having family and friends as partners.

No. 2: Labor Leverage. This is Other People’s Efforts (OPE). You bring on other people, including employees, part time contract labor, day laborers, contractors and the like, to do the fix up work that will create added value in an asset.

Basically what these two types of leverage can do for you is help lift something that is bigger than you can take on yourself. To paraphrase what Archimedes said, give me a long enough lever and a place to stand and I could by myself lift the earth.

Using these two levers is exactly how it is very possible to receive a return of 15% or 20% or even more, turning a meager income of $30,000 into $21 million! The math is pretty simple. As I said in my July 25th blog, if you go out and buy a $500,000 dirt bag type property, one that needs some fixing up, and do this with a $100,000 down payment (a down payment that itself may be borrowed) and then go out and use some OPE and improve the value by $50,000, that gives you a 50% return on your money,

But of course it will have cost you something to fix it up. Let’s say it cost $30,000 in material and labor to fix it up. That puts you at a 20% return. Now keep doing that on additional properties and you’re looking at a cool 21 million by the time you hit 70 years old. Let me emphasis that you can only do this if you control your own money and do the work or have others do the heavy physical work.

Anytime someone comes along and offers you a 20% or 30% return on your money without you doing a thing, grab your wallet and check book and run away as fast as you can.  These very high returns are possible but, for the most part, only with your efforts or the efforts of other people that you control.

Think of it this way … if you are making 30% or more on most every deal you do, why would you go tell others about it? Wouldn’t you just borrow more money at 5% or 6% and take home the difference? You certainly wouldn’t give someone else a big fat return of 20% or 30% in passive income for not doing a thing to help.

I’m not saying these returns are easy and take no effort and there are other details such as income tax that will eat into that profit (although there is a way–see the IRS 1031 section of the tax code to help delay some taxes) so these numbers aren’t exact. But what I am saying is that it doesn’t take as much savings capital as most people think.  In fact it takes relatively little savings to reach some very big financial levels.

By the way, I’ve had more than a few deals that have topped the 100% return level. Compound that for a few years and your eyes will pop out! That’s the potential. Now, doesn’t that get you motivated?