[Click on the graphic to view video]
He’s perhaps the poet of our (well your) generation … a guy who beat all the odds to live his dream: who would have imagined a white rapper (insipid Ice-T – only nice on a hot day – aside)?
So, would YOU capture it, or just let it slip??!!
Money Monk asks:
“A question about your commercial property: How do you collect rent? Do you use paypal or another source? Do you have a Post Office Box that they send checks to or do you have a property management team do it for you? I only plan to have one properly so a mgmt team may not be necessary.”
I currently have a smaller portfolio of investment property than previously [AJC: unfortunately, I also have a larger portfolio of for-my-own-use residential property than planned or ideal], having sold the ‘jewel in my investing crown’ due to market conditions (then, favorable) upon careful deliberation and finally deciding NOT to be my own developer (the existing property was not the ‘highest and best use of the land’ so somebody needed to develop the land) …
… however, I still use a variety of Property Management teams (paid by ~6% commission on rents collected) for all of my remaining properties; they pay directly into my account (monthly) and send me statements electronically (also monthly).
I recommend that you use property managers once your portfolio gets to a certain size … unfortunately, I have no rules of thumb on this other than that I took this route from the very beginning NEVER managing even my first apartment myself.
However, if – like Money Monk – you only plan to have one or two properties – and, they will be conveniently located (and, you don’t mind calls from the tenant/s) – then managing them yourself can:
(a) save 6% – 10% in Mgt Fees, which may make the difference between a cashflow positive property or one that loses you money, and
(b) provide needed experience to help you oversee the property managers better, if and when your portfolio grows.
Just remember, if you do decide to manage the properties yourself, to STILL build in the property manager’s fee (say 6% to 10%) when doing your acquisition budget, as you are really paying yourself to manage the property.
Also, be aware of burnout … it only takes a few late night phone calls to unclog a blocked toilet before you decide that this “property thing” really isn’t for you, and put your property/s up on the market at a loss … when what you really mean is that this PROPERTY MANAGEMENT thing isn’t for you, so you should just outsource it …
… lucky you built that extra 6% to 10% into your budget ‘just in case’. huh? 😉
Five Cent Nickel (after inflation, it’s only worth a penny) uses these wise words of Warren Buffett’s teacher/mentor – and the ‘father’ of Value Investing (the art of buying a stock for less than its ‘real’ or ‘intrinsic’ value) to teach us about the value of index funds:
The recommendation to track an index rather than pick stocks may sound somewhat surprising coming from the man who wrote one of the most well-respected books ever written about picking stocks. However, as more and more investors are learning every year, index funds make a lot of sense compared to the alternatives.
5c’s heart is in the right place, but it’s not what Benjamin Graham was suggesting at all; he simply suggested that analysts and untrained investors should invest via Index Funds …
… then dedicated his life to teaching others (and, practising what he preached) how to select common stocks that will give better than average results.
The trick is that you need to become a trained investor to do so … it’s a business and like any other business, it requires training, dedication and a certain degree of risk-taking (although, I fail to see how suffering a 15% loss – as I did – while the indexes all lost 50+% is more risky?!).
Phil Town reportedly turned $1,000 into $1,000,000 using Grahamesque ‘value investing/trading’ techniques, and Warren Buffett created a $40+ Billion monolith using similar techniques … and Graham himself made millions. And, studies have shown that this is due to skill, not luck (as is the case for most successful ‘businesses’).
By all means, realize that you don’t have the skills and stick to Index Funds … because, if you DO want to invest in stocks, these experts are telling you that you MUST first acquire the skills.
I love those articles that the mainstream financial press likes to trot out from time to time, such as this Wall Street Journal piece that offers Seven Questions to Ask When Picking a Financial Adviser; you will have to read the article for the full story (literally!) but here is their list:
1. What’s in the adviser’s background?
2. What do the adviser’s clients say?
3. How does the adviser get paid?
4. Where are the adviser’s checks and balances?
5. What’s the adviser’s track record?
6. Can the adviser put it in writing?
7. What do other pros think?
Personally I could care less how an adviser gets paid (as long as I know up front) and whether they can write or not … and, I certainly don’t care what the their clients or peers think, because I am always looking for above-the-herd results. And, track records and supposed checks and balances mean nothing when there is a long line of Madoff-wannabes in this world (so, I ain’t handing over the keys to my check account to anybody!) …
… I only want to know three (actually, four) things:
1. How much is the ‘adviser’ worth today?
I only want to take advice [AJC: commercial, money-making advice … not ‘technical’ advice such as tax codes, appropriate legal entities, contract wording, etc.] from people who are already well ahead of me. When I start to catch up to my adviser’s net worth, it’s time to find a new adviser!
2. What does the adviser invest in?
I only want to take advice [AJC: yadda yadda, yadda … as above] from somebody who has made the bulk of their current net worth in exactly what they are advising me to invest in.
3. Will her advice get me to my Number?
Can the adviser then show me – in a way that I can understand (no smokes and mirrors) – exactly how what she invested in to get to her current net worth will get me to my Number by my Date [AJC: apply this reasonableness test to the investment mix that she is recommending]?
Then there’s a fourth question, but it’s for me to answer, not her:
4. Is it something that I love, understand, and feel comfortable doing?
Because, once the adviser has finished dispensing her advice, and you have handed over your money for her fees/commissions, despite what anybody may tell you to the contrary, it’s all up to you!
[click here to view]
She wants to be a world class professional singer …
Now, what do you want to be … and, what’s your “I can’t possibly do it because …” excuse, again?
’nuff said 🙂
For those who are new to this blog, 7 Million 7 Years is not about saving money, retiring on 75% of your salary in 30 years, stock or real-estate investing, frugal living, ‘getting rich quick’ or anything else that you are likely to find around the blogosphere …
… this blog is simply aimed at those who want to get rich(er) quick(er) more so than any of these other things – on their own – can possibly accomplish. That’s why, from time to time, you will read things here that (a) you won’t see anywhere else, and (b) will fly in the face of conventional wisdom.
You can choose to follow these suggestions or to ignore them; either way, this is unique opinion offered by somebody who has already made their millions and is doing one thing and one thing only: giving back to the best of their ability. Enjoy!
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Ramit Sethi, the personal finance blogging phenom – and, champion of Gen Y (18 to 30 y.o.) has finally published his book.
Naturally, it is being reviewed all over the blogosphere, including a review by my good blogging friend JD Roth of Get Rich Slowly, who ventures close to giving the book his highest possible endorsement (JD’s Caveat: for the right audience):
I’m often asked to recommend personal-finance books for young adults. I’ve read a few (and have more in my to-read stack), but there are only two that I promote … however, my friend and colleague Ramit Sethi has written a money book aimed squarely at those in their twenties. If you’re under 25 and single, and if you make a decent living, this book is perfect.
I have to confess that I have not (yet) read the book, but if JD recommends it, then it is probably worth a read.
However, I did find a ‘sneak peak’ of one of the pillars of the book, “The Ladder of Personal Finance“; Ramit says:
These are the five systematic steps you should take to invest. Each step builds on the previous one. So when you finish the first. go on to the second. If you can‘t get to number 5, don‘t worry. You can still feel great, since most people never even get to the first step.
Rung 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get too percent of the match. This is free money and there is, quite simply, no better deal.
Rung 2: Pay off your credit card and any other debt. The average credit card APR is 14 percent. and many APRs are higher. Whatever your card company charges, paying off your debt will give you a significant instant return.
Rung 3: Open up a Roth IRA and contribute as much money as possible to it.
Rung 4: If you have money left oven go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match).
Rung 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there. Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it’s starting a company or getting an additional degree, there’s often no better investment than your own career.
It appears that Ramith Sethi has outlined a simple plan to financial success that is aimed at removing debt and ensuring that you have a great retirement, IF you are prepared to work until retirement age.
My major issue with it is that the book is called I Will Teach You To Be Rich and I will need to read it to see what Ramit thinks ‘rich’ is, because inflation will erode a good chunk of the benefit of any time-based ‘retirement saving plan’ …
… but, if you’re reading this blog, you probably want to become rich(er) quick(er) [AJC: After all, this blog IS called How to Make 7 Million in 7 Years 😉 ], in which case I have a simple solution for you:
Turn Ramit’s ladder upside down!
The 7 Million 7 Year Patented Upside Down Ladder of Personal Finance might look something like this:
Step 1: Start investing in yourself: start a side-company or get an additional job
Step 2: Put at least 50% of the extra money into a regular nonretirement account
Step 3: Pay off your credit card and any other non-mortgage, non-investment debt
Step 4: Start investing in real-estate, stocks, and/or your own business
Step 5: Since you will have money left over (i.e. at least 10% of your original – pre-Step 1 income) feel free to feather your 401(k) nest with it (grab the employer match if you do)
A simple solution with a powerful result … and, if you don’t get past Step 4 then I won’t be terribly upset. 🙂
I’m not posting this video just because of the historical interest (to that end, Phil Town – of Rule #1 Investing fame, and supporting actor in a recent post – does advise to “get the heck out of the market”) as it aired on August 17, 2007 … but because of the explanation that Phil Town gives about how Rule # 1 is NOT about buying and holding … equally, it’s NOT about trying to time the market, but it IS about:
1. Finding a quality stock that is ‘on sale’ (as MANY stocks are right now), and
2. Moving in / out when the ‘Big Guys’ do (i.e. when the major mutual funds buy or sell huge quantities of your favorite stock/s).
The major mutual funds control the short term price of stocks as they decide to move in/out of positions; the Rule # 1 investor takes advantage of this by buying into – or selling out of – a stock that they would otherwise be willing to buy/hold …
… but, the Rule # 1 investor has one advantage: they can buy into / sell out of a stock in the time it takes them to log into their online trading system (eg E*Trade, Scottrade, etc.) and press the BUY/SELL button.
The mutual funds, on the other hand, can take weeks to buy into / sell out of a major position for fear of causing a major price correction if they move their huge volume of stocks too quickly.
Warren Buffett has commented on this advantage of the small investor:
During a shareholders meeting in 1999, Warren Buffett lamented that he could generate 50% returns if only he had less money to invest.
I’d even accept a paltry 25% return … how about you? 😉
PS If you’re interested in learning more about Rule #1 – but, are not yet ready to buy the book – then listen to these podcasts: http://www.philtown.com/podcast/
Motley Fool are masters of the sensational headline; case in point: their blog shouts Avoid the Mistake That Cost Buffett 8 Years of Better Returns, which turns out to be a reasonable discussion of technical analysis v fundamental investing a la Warren Buffett:
Technical analysis is the practice of predicting where stocks will trade based on charts of historical pricing and volume information. There’s a certain logic to it. Stocks trade based on supply and demand, which is greatly influenced by investors’ attitudes about the stocks. The charts should reflect those attitudes and might predict where the individual stocks will go.
But Buffett discovered one small problem. Technical analysis didn’t work. He explained, “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” After eight years of trying, he concluded that it was the wrong way to invest.
So, what does Warren say is the right way to invest?
Well it would be unfair of me to steal Motley Fool’s Thunder [ AJC: see I, too, can write clever headlines 😛 ] …
… instead, I want to point you to an even better strategy for small-time investors who can hop in/out of positions far more nimbly than Warren Buffett:
Combining value investing with basic technical analysis as touted by Phil Town of Rule # 1 Investing ‘fame’. Phil reportedly turned $1,000 into $1,000,000 over 5 years using these strategies, so maybe you can, too?
I didn’t have this same kind of success (with stocks!), but I did only start to use these strategies as the market crashed 50+%, yet my loss (including doubling my risk by using margin lending) was a 15% loss in the US (on approx. $1,000,000 invested) v a 60% loss in Australia (on approx. $750,000 invested) and a 80% loss in the UK (on approx. $3,000,000 invested) where these techniques were NOT used.
Before you say “what a dope”, my UK ‘investment’ was actually part of my buyout, so I had no choice … but, Australia and US were my [stupid!] decisions to invest at the peak 🙂
So, a 15% US loss should actually be read as a 35% ‘gain’ over the market, thanks to these tools …
Here’s what Phil Town has to say about sticking to his technical analysis-based buy/sell signals:
For all you arrows users (Investools or Success): I buy with three greens and it’s amazing how many times I regret it when i jump the gun and buy with two. So three green.
And I get out when the stock stops going up and I get two reds down below.
And, here’s how to combine the two:
– Select a stock based upon sound fundamentals: i.e. is it trading below its long term value?
– Buy when the ‘technicals’ tell you that the major fund are beginning to buy in and sell when they are beginning to sell out.
IF this works for you (and, it has worked pretty well for me), it allows you to rid the short-term ‘waves’ in a stock’s price …
… but, you sell out for good, once your ‘value analysis’ tells you that the stock is no longer cheap.
This is my third ever Guest Post: Andee Sellman agreed to it, after I had come across his blog and linked to one of his videos on this site.
Andee soon contacted me and we realized that we both live in the same city (Melbourne, Australia … well I split my time between Melbourne and Chicago) and share similar philosophies on personal finance.
This ‘video post’ explains the ultimate goal of Andee’s unique Personal Finance game (called Where’s The Money Gone). Andee’s video can be accessed by clicking on the image below; I really think that you enjoy it …
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Many people have been fooled by the financiers over the last 15 years of boom into looking at the wrong ratios. As a result they don’t know whether they’re being fiscally responsible.
Have you heard of the ratio 80% LVR. This stands for 80% loan to value ratio. Another way of expressing ratio is this :- 400% Debt to Equity!!!
If people continually focus on looking at the lower ratio they will be lured into buying overvalued assets, funding them with too much debt and then wondering why they’re struggling with their cash flow when they’re supposed to be feeling wealthy.
In this video I explore a better ratio to focus on. This means wealth creation is built more sustainably and with less risk.
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Thanks for the video, Andee!
It really helps to explain why people go broke in buying too much property (home and investment) and/or other investments on finance, even though we’ve always been told to borrow more to invest more. In upcoming posts, we will explore the link between Andee’s ‘twin equations’ and our own Equity and Income Rules …
BTW: Andee filmed this video in the lovely (if a bit dry due to the extended drought) Stephens Reserve – a section of parkland near his office in Vermont (an outer suburb of Melbourne); Andee plans to do a ‘video tour’ of Australia, filming a number of videos at scenic locations around the country … or, perhaps the world!? If you want to keep an eye out for these videos – which are sure to be instructive and entertaining – I suggest that you check in at Andee’s blog from time to time.
OK, it may be me who may carry the disease … I may be jaundiced by my experiences with partnerships, but frankly I don’t see the need.
Unless your partner brings a unique skill-set that you can’t hire in, contract out, or simply acquire for yourself – or, provides a lot of capital then is willing to sit back and let you work your magic – I think that you would be well-advised to rethink your need for partners.
I was having coffee this morning with my insurance broker / friend who expressed a desire to acquire some residential property.
To digress, I would normally suggest commercial property for its superior income-generation ability (assuming that you buy / manage right … but, that’s another story), but in his case: he has a 50% share of a small broking practice that turns over $2.5 million a year and puts around 30% on the bottom-line.
If you set aside one client that provides about 25% of this revenue, that’s about $300k per year that he can pretty much safely ‘bank on’ as income year-in-year-out … with upside as he grows the practice.
So, income isn’t his ‘problem’ … for him it’s equity and taxes:
1. Equity: broking practices (as do many professional practices of other types and in other markets) tend to sell for a multiple of earnings (i.e. profits) or simply a smaller multiple of revenue; for insurance brokers in his market, right now, it’s bout $2 for every $1 of revenue. Since he has a 50% partner, he’s currently ‘worth’ about $1.8 – $2.5 million (depending upon what happens with that one big client) plus whatever equity he has in his house.
Again, not a lot of risk in that equity figure, and it will grow with the practice, but not a lot … his practice would need to double in size before he’s worth $5 Mill. (and, if that takes 20 years, then he’s really gone nowhere, slowly).
2. Taxes: How does a professional in a professional practice protect against taxes? The answer is that they don’t: these are the soft targets for the tax systems of most countries!
So, if he doesn’t need the income, then it may very well be that residential real-estate provides a suitable solution to his tax/equity ‘problems’ … one that fits into his investment ‘comfort zone’ (assuming that his Number is circa $5 Mill.):
If he buys Tax Cashflow (or better) residential property, he may have enough income/purchasing power to acquire enough property that he can afford to wait 20 years to supplement his ‘retirement’ when he eventually sells his practice.
So, what does this have to do with partnerships?
Not much, other than he asked if I wanted to go 50/50 with him on a small block of apartments … I said ‘no’.
The reason is that our interests may diverge: and if one wants to sell and the other doesn’t, what happens?
And, what’s so special about a block of apartments that we couldn’t each buy one on our own for about half the size/price of one that we could buy together (eg a duplex each instead of a quadraplex).
And, if you’re the type of person who needs a bit of motivation/hand-holding, you can always do what a friend and I did (in fact, this was my first-ever property acquisition):
We researched and found together two apartments in a new construction.
We negotiated a reasonable price from the bank-in-possession (it was a foreclosure) since we were buying two, and a reasonable loan … then we simply executed two sets of loan and purchase documents, one set in each of our names.
Sure enough, he ended up selling way before I did … but, it had absolutely no impact on me 🙂