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Readrer Poll

Thanks to all of you who voted, especially those who backed up their vote with an opinion (via the comments section of my post)!

Jason asked whether he should continue renting the commercial condo that his business is in for $1,800 per month OR buy it for $160,000? When he asked his friends earlier he didn’t get much help:

I have asked a lot of people and get about half giving me one suggestion while half give me the opposite!

Unfortunately, as is often the case with these difficult decisions, our vote is split 3:2 …  but, in favor of buying the building.

For example, Zach is emphatically FOR buying the building:

More information would be helpful, but that seems like a good price for $1,800/mo rent. Business or no business, I would take that deal every time.

Whilst, Victor is equally AGAINST:

Don’t invest in something you don’t know much about, you know your business, invest in that, pass on what you don’t know.

So, Jason is right back where he started 🙁

My general advice in these situations, without having nearly enough enough info to give specific/personal advice, is to …

do both. Every single time.

You see, it comes from the advice that my Grandpa once gave me: I remember him recounting an argument that he had with Grandma when they were just starting out. Grandma wanted to buy a modest home, instead of renting what amounted to little more than dumps, being all they could afford as poor immigrants, but my grandfather had other ideas; he said:

From a business, you will always be able to buy a house. But, from a house you will never buy a business.

Sound advice (it certainly guided me), but how does it help in this situation?

Well, it applies in reverse: when you have a business that’s generating cashflow, you have to start thinking about external investments, and buying your own premises is often the best place to start. Of course, you still have to keep the reinvestment needs of the business in mind … after all, that’s what’s generating the cash!

But, what happens when it seems you don’t have enough capital to do both?

That was the situation that I found myself in when we outgrew our last rental office:

I found a building that we could rehab for our purposes, but that I felt had good future capital appreciation value: in other words, a building that I thought – first and foremost – would be a good investment.

It was way over budget (e.g. when comparing old rent v new mortgage), but it seemed too good an investment opportunity to simply pass up.

I had no idea how to value it properly, and it was going for auction, but I found out that the only other serious bidder was a property developer. I knew that he would only pay land value, not much more.

This was a trick that I had employed successfully once before: find a property that developers are interested in, but that you want to own/occupy and pay $1 more than they are willing to bid.

And, that’s roughly what happened (cost me $1k over his losing bid of $1.36m) …

Then the worry started: how was I going to pay for this monolith? How was I going to find the deposit?

I dealt with the second issue (finding the deposit) by employing a tried-and-tested short-term funding method: shorten the time to receive payments from clients and lengthen the time to pay suppliers.

This (temporarily) reduces the amount of working capital tied up in the business at the (hopefully, manageable & short-term) expense of happy customers and suppliers.

I dealt with the first problem (plus, the new problem of quickly replenishing the working capital situation) by not eating for 6 months 😉

This means, maximizing the profits of the business to help cover mortgage costs and rehab costs, whilst quickly rebuilding the working capital of the business.

Tough – very tough for a while – but, manageable.

And, that’s how I made my first real $1 million: I sold the building just a few years later for nearly $2.5m. It remains one of the best real-estate investments that I have ever made.

The only catch, if Jason were to employ this strategy, is that his building doesn’t look like it has much upside potential – with “32 units, of whitch 24 are currently vacant shells” in the complex.

Perhaps, Jason is better off using the month-by-month lease time, when his lease expires, to give him time to find something with a little more upside potential?

 

 

Make more money with the watermelon plan …

20130522-123549.jpgIf you want to make money, you need a plan …

… a simple plan.

And, nothing could be simpler – or make more sense – than The Watermelon Plan.

Simple?

It has to be; you see, this ‘plan’ was created by an 8 year old!

Here’s the plan, as told by the boy’s uncle, Jack:

I will never forget my little 9 year old cousin who lives in the UK, who shared a pretty simple money making plan with me. He told me he is planning on:

1. Buying a watermelon for $5
2. Cutting it up into 10 pieces and selling each piece for a dollar.
3. Go back to the store and buy 2 watermelons.
4. Etc.

I love this simple and basic business-building thought process.

There’s nothing difficult about making money if 8 year olds can do it.

And, they can. Here’s proof … a little closer to home … It’s my son’s story, as told on Quora:

At 10, my son wanted to start a cake shop outside his grandmother’s house (naturally, she would bake, he would sell).

But, at 12 y.o. he came to me and asked for $50 to start his new business on eBay. He offered me 49%. I accepted, just to see what would happen.

And, something did happen: a week later a package from China arrived at our front door, and over the next week a few smaller packages left the same way.

Two weeks later, my son came to me and said “here’s your $50 back” … he bought me back out!

[I didn’t have the heart to tell him that it doesn’t work like that. That’s probably the only non-commercial assistance that I’ve given his business in the last 6 years].

Since then, after growing his eBay store for 3 or 4 years, my son ‘graduated’ to an online service-based business that nets him in excess of $60k p.a. (turning over $100k++ p.a.) and has bought him a car whilst still in high school.

He contracts programmers in India and has 2 full-time customer service contractors in Manila. One of them just sent him a Christmas present and a card thanking him, saying that – because of my son – he can now fulfil his life ambition of opening up his own coffee shop.

Not only is my son setting up his own life, he’s changing other people’s lives already … and, he’s just finished high school.

With luck, you – or your children – may be able to embark on a similar journey.

A quick real-estate buck!

RE - 1Beware those who love stocks. Beware those who love bonds. Beware those who love gold, oil, futures, and so on.

Most of all, beware those who love real-estate!

OK, so I invest in real-estate …

… but, I’m not in love with it.

Take a look at the above infographic [click to enlarge]; a picture (with numbers) tells a thousand words:

This person claims that they (or a client) bought a single-family home for only $35,000 and now clear (fees, insurance, and property taxes) $680 a month in rent.

Since they put in $7k in closing costs and rehab when they bought it, they are really returning $8k a year, which is 19% a year.

The key to real-estate is that you can add value.

To see what I mean, check out the highlighted items in the enlargement, below:

RE - 2

By spending just $5k in rehab, the purchaser immediately increased the value of the property by $18k, from $42k to $60k. Presumably, this similarly increased the rents.

The problem with this type of example is that it is unrealistic: this example assumes that you paid cash for the property.

Instead, I’ve made a ‘more normal’ example from this one, to show you how cash-on-cash returns really work, and why RE really is such a good investment:

RE - 3

[you can download the full spreadsheet here:  https://www.dropbox.com/s/ujuqaptgrr8hssv/Simple%20RE%20Analyzer.xls]

This analysis confirms that it is possible to get a 19% Cash-on-Cash Return, but:

1. You need to have a 15 year outlook; the first year produces a loss,

2. The assumed rent is VERY high.

The reality is that most residential real-estate tends to produce negative returns in the early years, and capital gains over the longer term. Whereas commercial real-estate tends to produce higher earlier returns but lower capital growth.

Still, by purchasing well, adding value (e.g. through a clever & economic rehab) it is possible to produce fairly reliable (when compared to the up’s and down’s of the stock market) cash-on-cash returns that blow away most other consumer-grade investments.

Help a reader out …

Should this reader buy his building or reinvest in his business?

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What should this reader do?

Read his story, make a selection, and leave a comment:

We are renting the commercial condo that our business is in for $1,800 per month, we can buy it for $160,000 should we?

We like the building, the location is a bit hard to find, and with a 20% down it will really cut down on the monthly expense but I will eat up $32,000 that we could use to expand the business. I don’t have $32k but I have a friend who offered to lend me half of it, I do have half.

We currently average $15k a month in sales, other than rent we have about $1000 in fixed expenses, I pay myself $2500, and we average about 25% for costs of goods sold. We currently have staff that costs about $2000 per month. This gives us about $4,000 of extra money at the end of each month….so far with this extra money we have bought lots of extra inventory to the point that we have enough, we have bought a commercial truck, the business is 100% debt free and has about $5,000 in liquid assets saved up (And we personally have over $10k), along with 30k in inventory and 10k in tools and equipment. Personally we are debt free other than the house, student loans and car….but with the house at 2% interest and the car at 2.9% and the student loans at 3.25% I don’t see any reason to send any of them more then the minimum because we make 4 times on most inventory that we buy.

So is now a good time to get the building? Or should we keep our cash free to keep buying things that are our core business? We are not in the business of real estate so should we own or rent?

Now, I’m not yet sure exactly what advice to give him, yet, so leave a comment and help us BOTH out 🙂

The ideal portfolio for successful investors …

Portfolio - 1I came across this excellent infographic that talks about real-estate and its place in your investment portfolio:

It (rightly) questions the typical “Wall Street” view that (a) asset allocation is important, and (b) that a 60/35/5 stocks/bonds/cash mix is the only way to secure your financial future.

Of course, a ride through 2008 fixed that view for a lot of folk …

So, I was quite impressed that a site that provides financial / portfolio allocation advice actually considers real-estate to be a viable investment option, and an equally important part of your portfolio.

The suggestion is to use real-estate to provide the real diversification that you need.

And, it may even be the right for successful investors (although, I prefer a portfolio that is more like 90/5/5 real-estate/stocks/cash) …

… but, it is not the right approach for investors who want to become successful.

Let me explain.

The balanced portfolio may help you retain your wealth if you already have it (i.e. if you are already a successful investor), but is unlikely to make you rich on your own.

You see, in order to:

– Become wealthy, and

– Maintain your wealth along the way

… you need two things:

1. An Income Driver: i.e. something to provide an ever-source of cashflow, and

2. A place to invest that cashflow that compounds.

The good news is that you can achieve this simply by modifying the second, larger section of the pie-chart, somewhat:

Portfolio - 2

Your own business is the best way to provide a rich vein of income that you can then tap to fund an ever-growing investment empire in real-estate.

Now, you can certainly grow income in other ways besides having your own business: you could look for a sales job that pays very high commissions (hundreds of thousands per year; or, a management job (preferably, c-level: ceo/cfo/cmo/cto) that pays the same, or better; or, take on a second job or a part-time job; and, so on.

But, nothing has the earnings-growth potential of your own business (although, the ceo’s of certain Fortune 500 companies might – quite rightly – argue that point).

But, why real-estate?

Because both the capital value of the asset (i.e. the amount that you paid for it) and the income stream grow at least in line with inflation, given a long-enough investment horizon … so, you get a double-whammy of increase in your net-worth (i.e. the building grows in value) and the ever-growing rental income stream – if you save it rather than spend it – will eventually help you buy another, and another, and so on.

Keep this up for long enough, say 7 years, and my experience says you can become rich 🙂