Monthly Archives: August 2009

Paralysis by Analysis!

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flipping-housesI have been asked, by way of two comments to this post, to talk a bit about my web 2.0 businesses (how I intend to make money with them) and the ‘distressed business’ that I am looking to buy … both of which I will post about, shortly 🙂

But, today I want to talk a little about residential real-estate:

I was having coffee with my builder-friend who is helping me renovate my house (hopefully, bringing a $2 million + renovation cost ‘blowout’ to a mere $1.5+ million) and his nephew-in-law happened to drop by.

He is 30, single, and wants to do his first development: he wants to purchase a block of land; subdivide it; and, put two town-houses (i.e. houses … just a little smaller than usual) on the block; then sell them.

When asked: “So? When are you building?”, he says that he has a lot of questions, and has been reading a lot of books telling him different things. He is getting confused … he is making the simple difficult … he is suffering from paralysis by analysis!

Look, this type of development is really the simplest thing in the world … even a 14 year old can do it:

My son has restarted his eBay business in Australia; he sells high-end headphones that he sources from China and sells on eBay in Australia. He buys 5 or 6 at a time (total cost = $500+) and sells each for circa $180, making around $40 profit on each. He’s 14 … he’s happy … and, as far as 14 year old standards go, he’s rich (at least, getting there).

And, it’s simple:

A. He finds a product that he wants to sell (headsets)

B. He researches the market for them (who’s selling them on eBay; for how much; and how many are being sold?)

C. He finds out how much it will cost him to buy them

D. He calculates his shipping and packaging costs (from China to Aus; from Aus to his customer)

E. He adds C. and D., subtracts the total from B. and goes ahead if the answer looks attractive (to a 14 y.o $40 a pop profit is huge)

Simple!

So it is with this type of real-estate deal (i.e. buy-to-sell, rather than buy-and-hold):

1. Find out how much your end product will sell for (drive around and look at similar brand-new town-houses for sale)?

2. Find out how much the land will cost to buy (drive around and look at blocks of land and/or tear-down houses for sale)?

3. Find out approx. how much it will cost to build (drive around and look for similar buildings going up and ask the general contractors / builders for a ball-park estimate to build similar on your land)?

4. Add 2. and 3., subtract the total from 1. and go ahead if the answer looks attractive (to a single 30 y.o. $50k – $150k profit for the whole project is huge)

If there’s any ‘secret sauce’ to this, it’s to become the expert in your end product … spend a month (max.) driving around and looking at every similar home currently for sale; get a feeling for how they look; how they are built and fitted out; see which ones sell quickly and why; and – most importantly – learn to set the right price.

The other parts will take far less time, because your goal isn’t to build at the cheapest price, or to buy the land at the cheapest price, or even to milk every drop out of the deal … it’s simply to sell for more than it cost you to buy i.e. to make a modest profit and learn from the process.

Buying real-estate – in a flat-to-rising market – to add value (by building, rezoning, rehabbing) then ‘flip’ is the easiest thing in the world … but, if you get caught up in the irrational exhuberance that always precedes a market crash, then it’s the hardest thing in the world; so buy now, or soon, when the market has only one direction to go: up!

A hierarchy of one?

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Org Chart

One of the ‘growth engines’ that I used to make my $7 million in 7 years was Business [AJC: actually, I used it to fuel a real-estate investment strategy much like that described in my Perpetual Money Machine series], as I suspect it will be for many readers so, from time to time we will cover business topics.

Therefore, I was interested to read this comment on A Closet Entrepreneur from a reader who runs their own interesting site:

I have a section [in my business plan] defining the roles and responsibilities for all jobs within the new company, even though initially all the jobs will be filled by me.

This is interesting because this is what Michael Gerber suggested that I do when I read his classic: The E-Myth Revisited …

Think about it: you are busy doing everything in your business either as a sole operator or because you still have few staff, yet you are going to take precious time out for some seemingly esoteric exercise?!

Let me tell you how important this ‘useless waste of time’ task was for me:

When were only a handful of employees (perhaps 4 or 5; I can’t recall exactly how many there were) I promoted my first ever employee, who was still with me (and still is today!) to supervisor of the other 2 or 3 staff – by default, 2IC to me …

… then, when we won a major new contract and moved – as we had suddenly outgrown our old office – our new location was mostly open-plan but outfitted with four ‘closed-door’ offices, as well.

Naturally, I took one office for myself, and put the new supervisor in another since he was still the only manager and it didn’t make sense to leave the offices empty. Then my accountant moved in, taking another office (a great move for both of us!) and the final office was taken up with office equipment: servers, copier, faxes, etc.

The problem was the company kept growing [AJC: a GREAT ‘problem’ to have 🙂 ]; soon, to 14+ staff while still in that location, and I had to hire a more experienced manager, as well … now, who gets the office? I could hardly kick my most loyal employee out, could I?

Then I came across The E-Myth Revisited and realized that I needed an organization chart NOT for now, but for when we were ‘done’ … so, I drew up an organization chart for 60 people.

Much like the reader who commented above, many of the roles were triple- and quadruple-teamed, even though we had 14 employees by then … how many times does 14 employees go into 60?! 🙂

Now, here’s the thing:

1. When we moved into our next office, I outfitted it for 50 people immediately (even though we were only 20-strong by then), with room for 10 more.

2. I also outfitted this office mainly as ‘open-plan’ but with 4 ‘closed door’ offices … this time I had no problem leaving them empty. They were reserved for Senior VP-level management of which, at that time, I had none!

3. Over time, we grew to 30+ staff and knew exactly what roles needed to be filled and when, because the Organization Chart that I drawn up NEVER CHANGED.

4. When we opened in the USA, with up to 100 staff, that same Organization Chart, with only minor modifications, became the US Organization Chart, making our HR issues that much easier to resolve.

So, if you have a business of any size … it’s time to draw up your own Org. Chart 🙂

Hint: Keep the chart simple and hierarchical: the old-fashioned structure of CEO/President => Sales/Marketing + Operations + Finance/Admin as the three positions underneath the CEO (President) still works just fine.

Nothing is impossible!

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[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=mKOEQVgONh0[/pro-player]

If you ever needed inspiration to take immediate, massive action to get off the ‘rat race’, just check out this video …

… but, before you wave it off as just another thing to laugh at the Japanese about, think about all the things that YOU do in your day to earn a meagre crust: flip the bird to another driver; have one flipped to you; kiss up to the boss; rush to meet a stupid, meaningless deadline; steam/iron/fold another shirt; and the list goes on … and on … and on … and …. [groan]

Of course, there’s another message: I bet you never thought it possible to get all those people ON the train? How about your Number … does it seem possible? 😉

Adrian

Acknowledgment: Thanks to Brandon for the video http://www.brandonlaughridge.com/all-aboard/

New Rule # 1 Group on Share Your Number

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Rule 1The KC-inspired discussion on Rule # 1 Investing (thanks, KC!) has prompted me to create a new group on Share Your Number, the home of people who want to help others (and themselves) to reach their Number ,,, and, now also the only web-Community [webmunity?] partially devoted to all-things-Phil-Town – well, at least to his book: Rule # 1 Investing.

To kick things off, I am sharing some resources (including my very own Rule # 1 spreadsheet!) … so, why don’t you join today?!

Join here:

http://shareyournumber.ning.com/group/rule1investing

Will a million dollars be enough when I retire?

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1MillionDollarBill01

It seems like we have visited this question a lot … on the other hand, we have new readers every day, so it’s important to revisit the basics – and, I hope, it never hurts us to refresh our point of view either.

So, I couldn’t resist jumping in when Peter of Bible Money Matters posed the question: “Will a million dollars be enough when I retire?”

I told Peter that I love this question because it’s such a loaded one …

… we’d love to BELIEVE that it will be enough, but for most, it won’t.

Why?

Simple mathematics:

If you have $1 million (by the time that you retire in, say, 20 years) and inflation is averaging 4%, then the first 4% of your return goes just to keeping up with inflation. So, now just keeping your money in the bank isn’t enough.

So, let’s say that you can earn 9% on your money (in the stock market … crashes – and, ridiculously high mutual fund fees – aside? Hopefully!), then that’s ‘just’ $50,000 a year after inflation.

But, if you’re retiring in 20 years, $50k is (again, ‘just’) like $25k today [AJC: remember, 4% inflation roughly halves your buying power every 20 years] … so the real question becomes:

Will $25k a year be enough when I retire?

Now, that’s up to you to decide …

… all I can say is that, in my own retirement years, I’m ‘struggling’ to live off $250k a year ;)

The Myth of Passive Income …

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money-sign-tapFlexo at Consumerism Commentary says that the Wikipedia entry on “passive income” is WRONG.

Flexo is right!

Wikipedia says:

Passive income is a rent received on a regular basis, with little effort required to maintain it.

OK, that’s pretty obviously incorrect, so let’s adjust this slightly to say: “Passive income is any income received on a regular basis, with little effort required to maintain it”.

Better?

Yep! It does sound a little better – aside from the repetitive tautology 😉 – so, let’s see a little more of the Wikipedia entry:

Some examples of passive income are:

  • Earnings from a business that does not require direct involvement from the owner or merchant;
  • Rental from property;
  • Royalties from publishing a book or from licensing a patent or other form of intellectual property;
  • Earnings from internet advertisements on websites;
  • Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;
  • Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;
  • Pensions.[dubious – discuss]

I love the little [dubious – discuss] attached to the last one …

… it should be attached to all of them!

You see, whilst I have also been guilty of (mis)using the term “passive income”, at least I know fantasy from reality; let’s start by reexamining the Wikipedia list:

  1. Earnings from a business that does not require direct involvement from the owner or merchant;

    2. Q: If you put the owner of such a business in one corner of a room with Santa Claus, The Easter Bunny, and the Tooth Fairy sitting in the other three corners, and you put a bucket of gold in the middle, who would be the first to get to the gold?

    A: No one, because there is NO SUCH THING as Santa Claus, The Easter Bunny, the Tooth Fairy … or, a business that does not require direct involvement from the owner!

  2. Rental from property;

    3. This is great, especially if you have (i) a flawless property manager, and (ii) NO taxes, vacancies, repairs, maintenance, mortgage payments, refinancings, etc., etc.

  3. Royalties from publishing a book or from licensing a patent or other form of intellectual property;

    4. Agree; totally ‘passive’ … that is, AFTER the book writing, editing, deadlines, interviews, and book signings … and, BEFORE the next book writing, editing, deadlines, interviews, and book signings.

  4. Earnings from internet advertisements on websites;

    5. Please! Exactly HOW do you ‘passively attract’ readers to your site to get the ‘earnings from internet advertisements on websites’?!

  5. Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;

    6. Asked: “Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service”
    And, Answered: “that must be renewed on a regular basis in order to continue receiving its benefits” … we addressed this exact issue for (another) Scott, not so long ago!

  6. Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;

    7. Now, this is interesting – if it is indeed true that in “the United States, portfolio income is considered a different type of income than passive income” – because (at least, to me), dividend and interest income is one of the MOST PASSIVE of all of the items on this list … interest rate changes, market crashes, poor earnings reports, and other reasons that a Board may reduce or eliminate the dividend, aside.

  7. Pensions.

    8. Strange that whomever reviewed this entry felt this one to be ‘dubious’ … ‘old style’ pensions (like government ‘lifetime pensions’, and the ones that are sending the car companies broke) seem to be the most passive of all of these!

If you disagree, please drop me a comment (below) then try and go on an extended vacation and NOT: (a) answer your cell phone, or (b) check your e-mails, or (c) worry about your [insert “passive income” source of choice] 😉

A sample business plan template …

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Because I have asked our Millionaires … In Training! to take a “dry-run” at the financial section of a business plan – to see if the ‘growth engine’ that they have selected to reach their Number – is “an opportunity worth pursuing”*, now seems like a great time to tell you how I go about business planning …

… also, it’s an excuse to share a business planning model that I built – keeping in mind that finances and numbers are actually NOT my strong point.

NOTE: Since I can’t work out how to attach spreadsheets to my posts here, you will need to go to this forum thread and scroll down in the comments until you find a reply with the same heading as this post, the spreadsheet IS linked as an attachment there: http://shareyournumber.ning.com/group/7millionairesintraining/forum/topics/will-your-craigs-list-ad-take or try this link: http://shareyournumber.ning.com/group/7millionairesintraining/forum/attachment/download?id=2494516%3AUploadedFi38%3A4669

Once you download it (hopefully, it works with most versions of excel?), you use it like this:

[Hint: double-click on various cells to see which ones are data and which ones are formulas]

1. Start with the Pricing Tab, and set up your pricing model – if you are going to use this sheet, which is designed for an online subscription-based business (like SurveyMonkey.com, but with the usual 7m7y Patented ‘Twist’) please try and keep the data in the same places unless you are comfortable fiddling formulas … each sheet is tied to data in the other sheets! But, it shouldn’t be hard to create your own, either …

2. The go to Business Volumes and try and work out what your potential market it, and how many you will get for each product type that you are offering … we are offering survey services to all businesses but feel; that out ‘sweet spot’ will be in businesses with 10 to, say, 100 employees.

3. Then go to the Subscriptions tab, which is simply where I summarize the info that I came up with in 2. … it’s not hard to think ahead, here, and see that my SALES REVENUE will be be based on this info multiplied by what’s in the Pricing tab (1., above), which is why we work in this order.

4. Your major cost will PROBABLY BE PEOPLE -and, the space to occupy them – so let’s move on to the HR tab; since this is an IT-based business you may need to modify the categories to fit your job titles, and the salaries and numbers of such staff. You can see that I am paying commercial rates, even though I will do this and ‘frank’ will do that … we want to see if our business can ‘stand alone’ if it needs to. You can then rerun a ‘bootstrap’ version of this plan where you eliminate as many startup costs as possible by having your relatives do all the work 😉

[HINT: in the startup phase, though, $85k is plenty to pay a CEO who is getting some ‘sweat equity’ as well]

You will see that I have built in models of occupancy costs (which includes an allowance for rent, desks, and chairs) based upon some USA industry chamber of commerce-type estimates that I found online.

5. Now, the P&L should VIRTUALLY produce itself!

[HINT: Again click on cells to see which ones are formulas and which ones are numbers; IN GENERAL: leave the formulas alone, but check the numbers in case you need to put in ones that you prefer]

Voila! … 7Million7Years Instant Business Plan 🙂

* Thanks to Michael Gerber for teaching me that you need to find out UP FRONT if your business is “an opportunity worth pursuing”.

Fundamentals Will Out!

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[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=HiW2-hygtzU[/pro-player]

I’m not being rude when I say this guy is one-eyed about stock … apparently, his Canadian ‘friends’ call him “The Pirate” 🙂

He gives a nice explanation that stocks follow interest rates, more so than the general economy (as measured by GDP growth) … but, in his next video he gives 5 rules, the only one of which really makes practical sense to me: FWO

Fundamentals Will Out

This means, that no matter what crazy gyrations the market may undertake in the short-term, over the long-term the fundamentals will ultimately decide which way stock prices go: buy on value!