Real Estate Investing: The Advantages Never Change

Yesterday I was going through a bunch of old files and I came across a large envelope that my good friend Joe Sugarman sent me. Joe is the founder of the company that introduced the Blueblocker sunglasses that sold millions, making Joe a very, very rich man. In the package was a few of my old ads that Joe had kept.  On the old yellowed paper I re-read one of my first half page ads printed in the Wall Street Journal on January 25, 1977. The headline read “How to Achieve Total Financial Freedom”.  I am totally convinced that the reason the ad sold so many copies of my first book, How to Wake Up the Financial Genius Inside You, had less to do with the semi-catchy headline than the sub-header that read, “Millionaires Are Not 100 Times Smarter Than You, They Just Know The Wealth Formula”. I’m sure that most people read that and it rang true to them. Because it is true.

In the body of the ad I went on to say, “Millionaires are not 100 or even 10 times smarter than you , but it is a fact that millionaires are making 10 to 50 or even 100 times more than you.” Additionally, I should consider that millionaires are not working 100 or even 20 times harder or longer than you either. There are not enough hours in the day to work 20 times longer than your average worker! And now, 38 years later, I can clearly see that the formula to making big money and accumulating great wealth is basically the same today as it was way back then.

I can tell you for sure that if I were just starting out now as a young man without any money to speak of, just like I was years ago, I would pursue the same path as I did back then.  The only difference would be that I might be a little more aggressive today than I was then. Today’s market is ripe for the picking!  For the most part the only push back that I have had in recent years from readers of the Financial Genius book is that buying properties at the prices given in the book are just not possible in today’s market.  And those critics are absolutely correct, but the ratios are still pretty much the same.  In other words today you can’t find “dirt bag” properties for prices like $40,000 or $50,000 in most markets. And that’s correct.  But the ratios for what you can make on your investment are still the same.

In many cases, you can gain a 33% value increase on a dirt bag property you fix up. On a $50,000 property, that would be a little more than $66,000. But today, you may have to pay $120,000 or $200,000 dollars for a beat up property but after fixing it up, you could sell the $120,000 purchase for at least $159,000 and the $200,000 investment for $266,000 or more. Yes, these numbers don’t take into account the money you spent on fixing it up, but if you leveraged the deal with a mortgage–using someone else’s money to make money–you will find that the return on your investment goes up a ton and will usually more than make up for your fix up expenses.  So bottom line here is don’t get hung up on the lower price examples in the book, invest and pay attention to the percentages you can gain.

To help with that, I have recently updated my Financial Genius book. It will be going to the printer before too long and I will let you know here when it’s ready for ordering.

The Failing of Stock Market Investments: Human Nature

In last week’s blog I talked about the wild stock market moves and the huge sell off, which was followed quickly by a rebound of prices. Since then we’ve had another pull back of prices once again erasing some of the gains. Some people would point to the big spring back of prices and make the argument against my conclusion that for most people investing in ‘real estate’ is a much better place for their money.

It is true that, in most cases, the market does rebound and in the long run you can make some money there as long as you buy good growing companies. The key here, as Warren Buffett has preached for years, is to buy the right stocks and hold them for the very long term. The big problem, however, is most people don’t do that. Why? It seems to be connected to our human nature. You see, when many, if not most, people buy a stock and they see it gain, say 50%, they sell it because, as I heard hundreds of times when I was a stock broker, “Hey, you can’t go broke taking a profit!” But the thing is, that stock may end up being the next Microsoft or Apple Computer company, subsequently moving up another 50% or 100% or 1000% or more over time.

On the other side, there’s the typical part time stock investor who buys a stock at $20 only to watch it drop to $10 a share, says to themselves, “I am not going to take a loss on this so I won’t sell it now.” So they hold on and wait. Over time I think you can guess what will happen. Yep, those kind of investors end up with a portfolio full of crummy, terrible, loser stocks. They kept the ones that went down and sold the ones that went up.

A big part of the problem with stocks is anyone can quickly and easily buy or sell with very little effort and that can lead to impulsive decisions. Greed and fear can cause that quick buying and selling of stock reaction–usually not a good idea. However with income producing real estate, impulse buying or selling doesn’t usually happen since it all takes more time and, of course, more effort.

But because of that ‘time and effort’ factor, most people that buy income producing properties buy and hold for the long term and if they’ve done it even half right they are collecting enough income in rents to more than cover their expenses which gives them the great benefit of being able to wait–sometimes for a very long time–until they can sell the property for a sizable gain! That’s why I love real estate.  It is also what primarily got me to leave the stock business and move into the real estate investing business. I do hope if you are not already investing in real estate, you’ll start very soon.

Sweet Sweat Equity

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!

 

 

 

 

 

The Discipline Hurdle

If you truly want to be wealthy then it’s virtually a must for us average humans to do it through wise investing. But you might say, “Hey, what about the person who doesn’t have any money to invest, even in the smallest property?”  So the question becomes, how can you begin without a dime to your name?  Well, you build a nest egg. Of course, that begs the question, how do you get that beginning nest egg to start your investment program?

Most of us know that the traditional way to build a nest egg is through savings.  For many people that’s a big fat “ouch!” When you take a close look at the average American family, you see that the rate of savings has been in a steady downtrend the last few years.  When someone is asked why they don’t have any savings they usually respond with something like “I can’t afford to put any money aside. I barely break even. By the end of the month, nothing is left over.”

The people that say this are usually the same ones that, even after they get a raise, nothing changes. They are forever stuck at breaking even at the end of the month or, worse, going into debt.

So what’s the real problem here?  In a word it’s usually discipline, or more accurately, the lack of discipline.  When you are saying to yourself, “I just had to buy that new coat (or dress, suit, latest and greatest cell phone, computer, new car, etc.)”, or “We’ve been scrimping so long we deserve to treat ourselves to a very nice night out on the town or a vacation,” you are also saying that you’ll never be wealthy and are likely to be a ‘wage slave’ your entire life.

In order to be able to start an investment program, you must be tough on yourself and fully realize there is a huge difference in what you ‘need’ verses what you ‘want’. Once you have arrived at the point of understanding that, then you may well be on your way to great riches and maybe even wealth beyond your wildest dreams. That is what happened to me.  Unfortunately I can’t remember who or what book taught me the big difference between need and want, but once I learned that lesson and applied the needed discipline, I was able to save thousands of dollars in one year and that launched my investment program.

Of course, once you’ve built up that “nest egg” you must be wise and put it to work with great care.  When I began my investments, I was in a big hurry so I used a lot of OPM (Other People’s Money) as well as sweat equity which propelled my return on investment by leaps and bounds. I’ll talk more about just what worked for me in next week’s blog but in the meantime, consider the fact that your biggest hurdle to the wealth and financial security you are craving is one less vacation a year, one less shopping spree a month, one less night eating out each week and one less fancy coffee each day. When you think about it, that really isn’t too much to ask of yourself. Not for the chance to make a fortune.

After 37 years the same FINANCIAL FORMULA STILL WORKS

I was going through a bunch of old documents, notes, and papers the other day and came across the very first article ever written about me in the local newspaper.  The headline read “So Here’s How to Go About Making that First Million”. That was in the Salt Lake Tribune clear back on January 18, 1978

They quoted me as saying “…the best way to get rich with someone else’s money is through loans–mortgage and real estate loans.”

Now we fast forward 37 years and guess what?, That old method of getting rich, for most people, is still the best and most reliable way to make your first or second or fifth million. I did however get a big kick out of reading my example and some of the numbers of how you make a 100% return on a simple investment, such as a small house.  It was the small numbers that made me smile.  I had been quoted as saying:

“If you have $5,000 to put down on a $50,000 house and you borrow the other $45,000 to purchase the house, you can compound your investment by 100% if that house increases in value by $5,000 over one year”.

Most casual readers would quickly say or think, “Wait a minute, where can you find a house that you can buy for 50k?  They don’t exist anymore.” If you say that, of course you are right about finding a 50k house but that doesn’t mean the same formula used back then won’t work today.

That financial formula for great wealth is still the same today, but you do need to add something–simply a zero to each of the dollar numbers.  It’s the ratios that give you the 100% return on your money.  You are right if you are thinking that 10% increase in value won’t just happen by itself though. That is unless you are really lucky and we have 10% inflation in one year. But don’t count on that. However, you might be able to buy a house at a real bargain price then make cosmetic improvements which costs money and or your time and efforts but that may well increase the value by 10%.  Of course with the additional money you put to fix it, it may reduce your overall return to 50% or 75%.  But still, those kinds of returns will almost certainly make you a million or multi-millions over time.

Go ahead and google “compound table calculator” and see how quickly 50% or 75% returns increases $5,000 dollars into a million dollars! You may be shocked; especially what it turns into in 15 or 20 years.

 

 

 

 

It’s About Controllable Assets

I have a few more insights to share with you, hatched from Jeff’s “book report” on my book. On Addendum B–“When a Billionaire Speaks, I Listen” he commented on Curt Carlson’s advice. Jeff said, “Interesting that Fortune Magazine would say over 30 years ago that we’ve seen the last of the billionaires. But, that may be the typical thought of someone with limited thinking or a small world view.  While the oft-quoted statement by the commissioner of the US Patent Office in 1899 said ‘everything that can be invented has been invented’ may not be correctly attributed to him, it tells the same story. Carlson’s advice to get good people, then delegate is certainly right. The big wealth comes from spreading yourself around or at least by using ‘Other People’s Money’.  I always remember Aristotle Onassis, the Greek shipping magnate who married Jackie Kennedy, saying ‘borrow as much money as you can and always pay it back on time.’”

Hey Jeff, that’s some good stuff from your book report!  I think I will have to give you an A+.  I would add to Onassis’s comment about borrowing money with a very critical qualifier.  Yes, borrow as much money as you can but borrow it to purchase the “right kind of stuff” and by the right stuff I mean use it to purchase assets that appreciate in value and ideally assets that also provide you with cash flow returns as you watch and wait for their value to increase.

Yes, many stocks fit those parameters but for my money the assets that have worked by far the best for me have been income producing real estate (and that’s coming from a former successful stock broker.)  Why real estate rather than stocks?  The biggest reason is because with stocks you cannot control the company or the ups and downs and whims of the stock market. With the right kind of real estate you can at least have some degree of control over the property plus all that money you borrowed will, in the long run, be paid back by your tenants and if you have done it right, you will be collecting cash flow along the way.

So the take away here is that Onassis was partially right when he said borrow all the bucks that you can and always pay it back. But I say borrow all the money you can to buy appreciating assets that you have at least some control over, collect cash flow along the way and let your tenants pay off the money that you borrowed! I bet you can see just how smart that is!

 

 

The Story of a Millionaire Goal

Last week I posted the front page story that was written about me and my plight when I was a poor 21 year old and how that wonderful couple Phil and Addie DiBenedetto took me into their house and let me sleep in their basement even though they had just met me.  This all happened when I was working construction in Rockford Illinois back in 1965.  I was very lucky to meet the DiBenedettos not only because they gave me a place to stay and feed me for free as well but maybe even more importantly, they seemed to really believe in me.
Re-reading that article reminded me that even as a very young man I had set my sights on becoming a millionaire.  I must admit that I had a tough time staying focused on that huge million dollar number when I was physically working myself to the bone at a measly $4.50 an hour. I do remember that I tried very hard to make every single day count by continuing to search, in what little spare time I had, for the “million dollar secret”.

I don’t think the DiBenedettos, even though they believed in me, ever really thought I could reach the “millionaire status or level”.  In fact years later as quoted in the newspaper story when they visited me in Denver, Phil and Addie said they “still remember Haroldsen and his wife lived in a broken down house. Finally, the young man ended up in Salt Lake City, where he was eventually fired from his job and on his way to making his first million.”

I loved the next part of the newspaper story. “When Addie and Phil visited Haroldsen for the first time in Salt Lake City, they had no idea he had fulfilled his dream of becoming a wealthy man.” In fact they were even worried that I couldn’t afford the long distance calls that I had been making to them prior to their arrival.  The best part was how blown away they both were when I drove them through the gate and into the long driveway of my home. It wasn’t a huge mansion but it was close, with over three tree-lined acres surrounding it.  They were so very proud of me and I had always been so very grateful to them for their willingness to reach out and help a young man who needed a place to stay but even more so for their very kind, loving and friendly support of his dream.

Those 5,840 days (16 years) between my meeting the DiBenedettos and the publishing of that article, were used to search out and discover the financial formula that can lift an ordinary person from being a meager wage earner to being a millionaire and, yes, even a multi-millionaire.  What is the secret?

Well, first it’s setting your mind firmly on your goal and never giving up on your objective and then working your tail off–or I should say, working your brain off since physical work and an hourly wage will never get you to the big numbers.  Hitting millions and multi millions is done by using financial leverage and people leverage. If you are not sure what that is, you should go back and read some of my earlier blogs that address that specifically and in detail. The secrets are all here:

http://ignitemylifenow.com/2013/01/11/the-power-of-leverage-and-compounding/

http://ignitemylifenow.com/2014/06/14/the-final-step-to-wealth/

http://ignitemylifenow.com/2014/07/25/the-simple-wealth-formula/

http://ignitemylifenow.com/2014/11/07/leverage-to-lift-your-profits/

 

Leverage to Lift Your Profits

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?

 

The Magic 10%

Last week I wrote about the basic and beginning key to great wealth for those of us who start out with nothing, like I did. That key is ‘savings’. A couple days after I posted last week’s blog I saw a great summary on ways to save money in the USA Weekend Publication. Its suggestions included things like buying a used car rather than a new car, always shop for better bargains, set spending goals and budgets, refinance your house at today’s lower interest rates and more. These are things I’ve always preached. It comes down to buying only what you need vs. what you want and mistake for things you need.

It might be easier to put away that savings if you take a look at the huge potential in that 10% you are putting aside. I know it seems simple to put aside 10% but for most people it’s not that easy. In my book The Next Step to Waking Up the Financial Genius Inside You I talk about how to save that 10%. Many years ago when I was making a starvation wage of $600 dollars a month, I was faithfully saving $60 dollars each and every month and then when I got a $40 dollar raise I decided to add the entire raise to the $60 dollars–so I was saving $100 dollars out of $640 or 15.6% of my monthly income. Yes it hurt sometimes because I had to go without things I wanted, but was it ever worth it in the long run.

You would do all of this if you truly wanted to be very wealthy rather than just being like everyone else who lives paycheck to paycheck. But now let me reveal to you a little fact that may entice you, shock you, and motivate you to do the ‘savings thing’.

Back when I wrote the third chapter entitled “Action Two, Saving the Magic 10 Percent” I had a friend who was paying a 10% tithing to his church and when I pointed out to him what he was really giving up he was shocked to the core. Please don’t get me wrong. I am not against charity but the thing is, if you want to be independently wealthy, you must pay yourself first. What I told him was that If you start at age 25 saving 10% of your wage, and assuming you only make $30,000 dollars a year and (get this … you stop saving at age 30) you will have over 7 million dollars when you hit age 70! And believe me, that big 70 comes much faster than you think!

Granted those numbers all depend on you investing your savings with an annual compounded return of 15% but wait before you jump to conclusions and think 15% is unrealistic and can’t be done, because it can. If you work harder and find the right deals you could even push that rate of return up to 20% which would be an astounding 47 million dollars by age 70. Amazing, isn’t it? Next week I will show you exactly how to do that. I’ve gone over this before but its well worth repeating.

Live and Leave a Legacy

The great Arthur Ashe left a wonderful legacy, not so much as you might think from his champion tennis days but more for his amazing kindness, sharing and selfless giving and his gentle warm personality that moved people to accept that every human being is equal. Believe me, back in his early tennis days, black people were not thought of or treated anywhere near equal. In fact, in some areas it was against the law for a white person to play tennis with a black person.

When you read about Arthur Ashe or watch the documentary on his life, you keep seeing these same words over and over to describe him–thoughtful, kind hearted , great role model, warm, gentle, friendly, fair minded and so very concerned about other people. He made a huge difference in the world and is a great example and role model for the rest of us. But you know what? Anyone of us can do similar things if we set our mind to it.  That, believe it or not, brings me to the subject of money.  Arthur Ashe used tennis and the fame he received from that as a lever to do good in the world.  The same thing can be done with money!

Money is neither good nor bad.  I know many people think that money is “the root of all evil” and they claim that this is what the Bible says, but this is not what the bible actually says. It says “the LOVE of money is the root of all evil.”  The real key, of course, is what you do with that money.  If you let money become your god or the end goal in and of itself rather than a means to the end you might well be in big trouble.  I’ve seen this happen many times. Someone will make tons of money and then spend and lavish it all on themselves with high end toys, jewelry, food, drink and drugs and then you see that love of money really does become the root of evil that arises in these people’s lives.

If you want to help humanity for many years to come, way past your own lifetime, then you need to devise a plan that does exactly that.  I’m not saying that you have to have huge amounts of money to leave a great legacy fro mankind but it sure helps. I don’t know about you but working hard to make a lot of money–especially past the point of making enough to just live on–is much easier, seems like less work and is more rewarding when I know that the extra cash and net worth can, and will, be directed to others in need. And not just for the here and now but long after I have checked out of this life. Call it extra motivation, extra energy or whatever you want to call it. It’s real and it can help keep you going.  That ‘legacy’ can also spill over into the future for many, many years after you are gone and may even get bigger as time rolls on.

Try to pretend that this is the only world there will ever be–as in there is no after or next life.  If that were the case–and it might be–and you still really want to live forever, then maybe the only way to do it is through what you do for other people.  First your kids and grandkids, then maybe your friends and associates but why not go way beyond that and try to help total strangers and anyone on the planet that you can reach, especially those that are in desperate need.  If you can motivate them to make their lives and their kids’ lives and their kids’ kids’ lives a little better, encouraging them to pass it on or ‘pay if forward’ forever into eternity, then I think you may see that you are living forever. Just one person has the potential to make the world a better place for numerous other people and that is one terrific legacy that you can leave as well as live.

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