Tag Archives: money

Safe as houses?

Posted on by
11

Picture 2Well, I did ask for it, and the first cab off the rank for the ‘diss Adrian party’ is Dan who thinks that one of my favorite posts – Contrary to Popular Opinion, Paying Off Your Mortgage Is The Dumbest Move You Can Make – is ‘ridiculous’. Seriously, thanks for opening up an important new discussion with this comment, Dan:

This is ridiculous. The author apparently believes he is untouchable and will never lose his job, get sick, or die.

You can do all the complex math you want, but the simple fact of the matter is that Risk is the biggest variable, and I don’t see it show up in your equation once.

Don’t be stupid America, and dont prescribe to a system that encourages you to continue owing people money long after you need to.

Pay off your house, free up some income, then pay off your credit cards, pay off your car, and be a happier, less stressed individual.

Hmmm …. paying off your mortgage as a ‘risk management tool’?

Before we even consider why anybody in their right mind would pay off a (say) 8% mortgage before paying off a (say) 19% credit card or car loan, let’s review the substance of my “don’t pay down your mortgage early” argument:

Look at everything that you own as a business: if it’s your own home, separate the ownership of the property in your mind from it’s use …

… for example, even if it’s your own home, treat yourself as your own tenant and figure the rent that you would otherwise had to pay when doing the sums.

Then evaluate the investment against any other investment or ‘business’ …

… but, if you’re still trying to get rich(er) quick(er)?

If you own a home, don’t pay it off … use the upside to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …

If you have other sources of income (businesses, investments) don’t spend it or reinvest all of it … use some of the spare cash to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …

That’s my advice to you, but only take it if you want to be rich!

But, Dan says that the ‘math’ matters not, you should consider what happens if you “lose [your] job, get sick, or die”. Well, what happens?

If you have paid out your mortgage, your money is locked in the safest bank vault imaginable … all you have to do it sell the home to access the cash. Just pray that the market is an up market and not a down market, when these events outside of your control force you to sell. Or, would YOU prefer to choose the timing? Hmmm …

Of course, you could just borrow some money against the house; but then, aren’t you now putting yourself in EXACTLY the financial situation that Dan wants you to avoid: i.e. “owing people money long after you need to”?

And, even if you still do want to use your Zero Mortgage Bank, what are the chances of the bank actually lending you (or your survivors) any money when you are jobless, sick, or dead?

Oh, and let’s say that you do happen to be unfortunate enough to “lose [your] job, get sick, or die” while you are still in the 10-15 year period when you are well ahead of the 30-year payment curve, but haven’t paid off the mortgage in full, yet? How easy will it be to refinance, or even convince your bank to hold payments for you? Even if you THINK they will, you had better be certain 😉

What do you reckon? Dan’s on the right track? C’mon, be honest … would you feel safer paying off your mortgage early, or letting it ride?

The end of capitalism?

Posted on by
5

I love Michael Moore, he can make shotguns in the hands of teenagers seem like a bad thing …

… and, now he’s on to big, bad, ol’ Capitalism.

I wonder how much of the proceeds of this film he’s donating to equalize wealth across the American population? And, I wonder what he’s proposing to replace capitalism with?

If you’ve seen the movie, or have any for/against ideas of your own, let us know by dropping a comment …

An ad free blog!

Posted on by
3

Picture 4

Adrian J Cartwood Esq. [AJC: Euphamism for ‘Nobody Important’]

I use a tool called ad-blocker to do exactly what the name suggests: block ads from appearing in my browser. There’s no real reason for this, other than I wanted to see how it works …

… but, it’s (hopefully) well known  by now that I don’t accept advertising, promotions, or cross-links for any products or services on this blog.

I do, of course, mention books, products and services from time to time … but, only those that I genuinely use and like, and I NEVER accept payment or join affiliate programs.

The reason is simple and two-fold:

1. A multi-millionaire can hardly be credible if he writes to earn a few extra bucks per week from advertising revenue,

[AJC: Although, this reminds me of a joke that was a huge hit at Blogger Con 2007: A blogger gets on The Apprentice, and says to The Don “You know, Mr Trump, if I were you I would be richer than you”. To which Trump raised an eyebrow and responded “How so?”. The blogger, with a totally deadpan face, said: “Well, Sir … if I were you, I would still do a little blogging on the side!”. Oh, those blogger’s conventions are such a riot! 🙁 ]

2. Even if I donated that extra few bucks to charity (I give plenty, already) YOU wouldn’t know or believe me, even if I said that’s what I was doing.

So, no solid good reasons, just the way I feel … and, others are entitled to feel totally differently … which is why I present the little owl-logo, above, just in this post, and  probably won’t promote their site by placing it in my sidebar 😉

However, what I would like to see is a ‘community service’ advertising program, where a trusted third-party places ads on your site, collects the revenue (or, maybe the spots are free community service announcements), which goes directly to a panel of trusted and worthwhile charities and/or non-profit organizations.

Anybody up to the challenge? Give me an exec. summary of your business plan!

Oops! I didn’t answer the question …

Posted on by
Reply

Last week, I posted the second installment on my series about real-estate development under the ‘teaser’ headline: how much money can you make developing real-estate?

But, of course, I didn’t actually answer the question!

And, that’s simply because I don’t know …

… it depends on the project, and what you are trying to achieve.

But, I DO know two things:

1. Typically, real-estate developers work on:

– a 20% to 25% profit margin on residential real-estate projects,

– a 35% profit margin on commercial real-estate developments,

– upwards of 50% profit margin on land subdivisions.

2. I also know the EXPECTED profit margin on the two projects that I’m working on.

What that expected margin on my projects will translate into is anybody’s guess, because it depends on so many RISK FACTORS – which is why real-estate development is (in my opinion) a Making Money 201 income acceleration activity, not to be taken lightly.

But, I can share Tab 3 of my spreadsheet, which shows:

– That there’s about $2,000,000 (Australia … approx. $1.8 million US dollars) of land related costs: I estimated this as $1.5 mill for the actual purchase price of the property, plus $500k allowance for taxes, closing costs, and the necessary project permits. Obviously, I will put in better estimates for some of these costs, as they come to hand.

– I’ve assumed that the bank will lend me 60% of the total project development cost of $17.9 mill. (which includes, the land component, all the costs of consultants, permits, etc., and the building costs). I’ve since spoken to the bank and they will lend closer to 80% of the total build costs, PROVIDED that I sell enough condo’s ‘off the plan’ to cover their total debt.

– Based upon the 60% that I have used in the spreadsheet, I will either need to come up with $7,160 million of my own money (i.e. the $2 mill. that I will have already spent on the land and permits, etc. PLUS the $5.160 million ‘shortfall’ in bank funding) OR find a mezzanine lender who will lend me some of this (at inflated interest rates, naturally) OR find one or more equity partners, who will put up some of the $7+ mill. shortfall in return for a good chunk of the project profits.

– In this case, I’ve assumed that we sell the condo’s in year 3 (more likely – hopefully – to be a 2 year project) and pay back the bank and this spreadsheet assumes 10% interest rate (although, that can be easily changed), leaving $10.6 million to pay back my and/or the investors’ equity and (hopefully) leave some real profits.

– I’ve assumed that we’ve had to pay some interest at ‘preferred rates’ (read: higher interest rates) on my (and the investors’) equity, which leaves a ‘real profit’ of $892k … but, don’t forget that the preferred interest is also part of our (i.e. the investors’) profits … so, they need to be added together.

– Now, I have a management partner who is a builder (but, won’t be physically building this one), who is providing time and expertise in return for 30% of the profits of the venture. He has a sweet deal: not risk (he provides NO funding and only his payment is ‘at risk’) and 30% of the upside. In my next life, I want to come back as him 😉

– According to this spreadsheet, I make 32% on my money. Not a shabby return, and pretty much in line with the estimates that I provided above.

The good news is that the project has actually become much more profitable than the early version that I am providing here, but since it’s merely an estimate – as all budgets are – I’m not holding my breath 🙂

I should point out that one of my readers has kindly provided a more sophisticated analysis of the returns that you may wish to substitute in your version of the spreadsheet, if you are going to use it; Jonathan says:

On tab “Proforma”, shouldn’t the annual return equation in cell E34 be something like =(1+E31/E5)^(1/3)-1
It looks like you have =(+E31/E5)^1/3
This drops the return from 32% down to 25%, but I do believe 25% on 2mil over three years comes to 3.9mill (2mill + 1.9mill)

Thanks, Jonathan! This tab of the spreadsheet was actually created by a consultant friend of mine who specializes in this type of thing, so I didn’t really look that closely; still, I will be keen to hear what other readers think?

How did you answer?

Posted on by
5

Picture 2

Last week, I asked the question: “does more money give you more security or more confidence?”

The results, from a reasonably representative sample of readers, was overwhemingly in favor of the statement: “more money gives me more security”.

Interestingly, this apparently says something about you …

… you see, most entrepreneurs would say that more money gives them more confidence!

But, why?!

I’m not a psychologist, so I can’t tell you, but I do think it helps to explain why entrepreneurs tend to become ‘serial entrepreneurs’ …. one success emboldens them to go for another.

We all know (by now) that once you reach your Number, you should STOP. Yet, we don’t always do that, do we?

[AJC: if you’ve been reading my recent articles on property development, you’ll know exactly what I mean 😉 ]

Work on your business?

Posted on by
Reply

Picture 1Yesterday, I told you (yet again) about this book … the book that others claim to be “the most important business book” that they’ve ever read.

Well, I claim it to be so, too!

Let me revisit one of the key tenets of this book – indeed, a phrase that has been often (mis)used by all and sundry:

Work on your business, not in your business!

Why misused?

Because I think that most people use it, but don’t really understand what it means to really work on your business, rather than in it …

… to understand what this truly means, let me give you a personal example:

When I started my second business (the first having being ‘handed to me’ in a rather crumpled heap … but, that’s another story), I was not at all qualified to do the ‘work’ of the business, which was essentially technical in nature, yet I taught myself to handle the paralegal files that we were handling at that time because my attorney was too slow.

This became a blessing – because, it meant that I could reduce costs by insourcing a lot of the previously outsourced paralegal work which was the essential component of the business model – and a curse, because I was the person handling all files, initially.

Even when I started to hire staff, all ‘complicated’ files – or, all files over a certain $$$ value – would cross my desk, because I wanted to make sure they were “done right” … you see, I had started the business, so I wanted to believe that I was also the best technician.

But, of course, that wasn’t my job …. but, at the the time, I was blinded to the fact that every hour that I spent handling technical issues was an hour that I was NOT running my business!

Eventually, as happens in so many businesses (thank goodness!) my operations manager simply stopped his people referring those files – any files – to me; he didn’t ask, he just stopped sending them to me.

Guess what?

Our technical metrics didn’t fall in a heap … the uber-technician [AJC: obviously, only in my mind!] was not as essential as he thought he was …  and, I had more time to concentrate on my real job: CEO i.e. running the business.

The business grew!

Lesson One learned: I wasn’t essential to the technical operation of the business.

But, as CEO – now, totally focused on marketing, finance, and other high-falutin’ business matters – surely, I was key to the successful day-to-day operations of the business?

Seems logical, until I signed the contract for the USA branch of the business …

… since this would be about three times the size of the Australian operation, I decided that I needed to relocate to the USA to personally manage my ‘global operations’ (well, three countries: Australia, New Zealand, and now the USA) from there.

That left me a hole to fill: I needed to appoint a replacement CEO of my Australian operations.

After a long search, I found somebody, who I appointed and trained over a period of months …. and who promptly resigned for a “better opportunity” [read: more money] just 6 weeks before I was now contractually-bound to relocate to the USA to commence operations!

Think about it: I now had only 6 weeks to find and train a CEO who could replace me in a job where I – like every owner/CEO – believed that I was totally indispensable!

How would this be possible [AJC: queue to apocalyptic visions of imminent business failure]?!

Yet, somehow, I found the ‘new guy’ and gave him all of two weeks training before I left, leaving him with:

– some last minute instructions (which he subsequently, all but ignored),

– my direct phone line in the USA (which he NEVER used), and

– my silent prayers that he wouldn’t run my life’s work into the ground too quickly.

Here is where I learned my ‘second lesson of indispensabilty’: not only did he NOT run the business into the ground, he saved a client that I had all but lost, maintained excellent relationships with my largest existing clients, signed a major strategic new contract, etc., etc. …. he proceeded to double the business over the next couple of years.

In fact, to this day, he is still successfully running the Australian operations for the new owners!

Lesson Two learned: a good business runs well under the watchful eye of it’s owner/CEO … a GREAT business runs even better without him.

You see, anybody [AJC: clearly!] with suitable training and experience can do the technical and managerial work of pretty much any business …

[AJC: if not, you don’t have a business …. you have a JOB]

… it just needs good systems to be put in place so that the business can run on ‘auto pilot’ while you – as the entrepreneur behind the business – do the ONLY job that you NEED to do:

Develop and and promote the strategic vision of the business.

Any other work that you do decide to take on is just so that you can feel busy … if that’s what makes you happy, keep doing it.

Me?

I prefer to make money 😉

The BEST way to make money …

Posted on by
2

Recently, I’ve been talking about how to make money in property development, but that’s not the only way to make money … it’s not even the BEST way to make money.

So, what IS the best way to make money?

For that, we need to refer back to Michael Masterson’s table from his book, 7 years to 7 figures [AJC: That’s nowhere near $7 million in 7 years, but it’ll have to do 😉 ]:

Required Compound              Investments

Growth Rate                             Required

4%                                                  CD’s

8%                                           Index Funds

15%                                              Stocks

30%                            Real-Estate together with Stocks

45%              Real-Estate together with Stocks and Small Businesses

50%+                           Start Your Own Business

… from this, it’s clear that starting your business is the way to go IF it’s the Big Bucks that you are after.

But, you don’t have to start off big to end up making it big: I had no idea that I was going to end up with $7 million in 7 years when I started my business (in fact, it was only until a few years AFTER I started the business that I found my Life’s Purpose, hence my Number) … just take it from Pierre Omidyar, the billionaire-founder of eBay:

I started eBay as an experiment, as a side hobby basically, while I had my day job

– It’s what my son is doing with his eBay business (and, now with his New Online Venture … which I’ll share, once he gets it off the ground)

– It’s what my Web 2.0 partners did with our first venture (they’ve since left their full-time jobs to start their own software consulting/development company)

And, it’s what YOU should do, if you want to start a business with the least amount of risk!

How much money can you make developing real-estate?

Posted on by
10

riskyReal-estate development is a risky BUSINESS, but it can be very lucrative and – provided the market doesn’t turn on you, hence the risk – you can predetermine HOW MUCH money you are likely to make and WHEN you can expect to have it sitting in the bank. All in all, not a bad MM201 activity … one that scales from small projects to large ones.

Speaking of which, my projects happen to be large ones but the methodology to analyze them is pretty much independent of size … only the number of zeros will change 😉

So, whether you are building a single dwelling, a quadraplex, an office, or a 8 to 12 story apartment complex (or two, as I am doing), you will still need to collect a few key numbers – that I ran through with you in last week’s post – from a reputable Realtor and an equally reputable builder:

– The cost to buy the land

– The estimated cost per square foot to build the size /type/quality of building(s) that you are planning to erect

– The expected sale price for finished residential apartments/condos/houses

– The expected rental rates – and current capitalization rates – for any commercial space (e.g. office, retail, warehouse) that you are planning on building

Of course, you need to have a pretty clear idea of what you are building – and, their sizes – before you can really do this properly.

If you have all that, then it’s time to move to the second tab of the spreadsheet [AJC: I recommend that you spend a few minutes double-clicking on each cell to see which ones require you to insert a number, and which ones are formulas that should feel free to use or adapt for your purposes]:

– Your site may be a certain size, but you will need an architect, designer, draftsman, or town-planning consultant to tell you how many buildings / floors you can put on the site … it’s this buildable area that we are most interested in.

– I have allowed $500k for consultants’ costs (e.g. survey, plans, etc, etc.) for my large project, but it’s much better if you can call the various experts that you need and get an idea of their likely charges up front

– At this stage, I’m not building in interest cost … that will come in the next tab

– Most of this tab of the spreadsheet is self-explanatory [AJC: just drop a comment, below, with any questions!] and, completes itself, IF you have researched those numbers that I asked you to get.

Don’t get overly excited about the $7 million ‘paper profit’, as next week we’ll look at how to build in the interest component [AJC: don’t worry, the profits will still remain in ‘nose bleed’ territory IF everything goes according to plan] …