Business for Cash Flow and Real Estate For Wealth

I don’t know these guys, but I do like what they have to say: “our philosophy on creating and sustaining income without a job: Business for Cash Flow and Real Estate For Wealth” …

… it pretty much sums up how I achieved my $7 million in 7 years; maybe it’s how you’ll also make yours? 🙂

So, you want to invest in commercial real-estate …

… but, you don’t know where to begin?

At least, that’s the case for IJ who e-mailed me:

I’ve always wanted to find some sort of mentor.  It would be great that everyone had a mentor that can help with advice and bouncing ideas off of … [people who’ve] owned their own businesses, residential and commercial RE.  I want to get more involved in commercial RE and do not know of anyone who I could turn to on how to get started.

I’m a great fan of mentors; but, when you can’t find one then you have to make do with getting info. from a variety of sources: friends, accountants, attorney’s, investor’s clubs, and – of course – Realtors.

This takes time and energy, so in the meantime, you can refer to the resources on this site and others …

For example, you can start by checking out these posts;

If you are interested in property development:
And, these posts if you are interested in how to analyze a commercial property deal (offices):
And, you should follow up these resources if you are interested in multi-family-type ‘commercial’:
Dave Lindahl: (I bought and USED his ‘multi-family millions’ course to help me analyze 100’s of potential deal (but, in the interests of full-dsclosure, I didn’t end up buying any, although I already own millions of dollars of residential RE, but my largest is only a quadraplex)
Dolf de Roos: I have bought a number of his products, including his Commercial RE audio course and some s/w … more basic than Dave Lindahl’s course, but helpful nonetheless, especially for noob’s.
To be fair, a few others consider these guys to be ‘scammers’, but I don’t make any money from either – have bought their material at full price and found it useful, so what more can I say?
Oh, and here is a guy who is definitely NOT a scammer and has some useful stuff, too: John T Reed.

Of course, you could also try and do what IJ did:

E-mail me with your questions … I don’t mind, if you don’t mind if I [perhaps] choose your question for a future post 🙂

Free money at last!

Once my honeymooner guests agreed that purchasing a home would be a good investing goal, the question became how much equity to maintain?

I explained that if you have an empty glass, worth $100 (let’s say it’s a collectors’ item) representing your house then it makes no difference how much fine wine (also a collector’s item at $100 a glass) you have poured into it as to the future value of the glass …

… the glass can be full or empty, but if collectors’ glasses double in value every decade, it will still be worth $200 in 10 year’s time.

Of course, after consuming a few glasses of that fine wine, another question arises:

What happens if I put less money into the house (or other real-estate)?

Simple, you have to borrow the rest: less deposit, more borrowings/mortgage … more deposit, less borrowings/mortgage.

Then, in deciding exactly how much wine to pour into your glass, you think of the next logical question:

What’s the ideal amount (or %) to borrow against the property i.e. how much deposit should I put in?

Given the current ‘crisis’ in domestic RE values, it’s popular to imagine a high number: 20%? 50%? 100%?

But, it’s not so long ago (and, I wager it won’t be more than a decade before it comes around again) that it was popular to imagine a low number: 10%? 0%? Even negative 10% (as people borrowed 100% of the property PLUS closing costs)?

But, what’s the right number?!

Surprisingly, at least to me, there’s no magic ‘right’ number …

… once you realize that it matters not what equity you have in the house as to how your future wealth increases – based on the appreciation of such fine real-estate.

So, another question forms instead:

What does it cost/save me if I put in more/less money into the RE purchase?

Well, we know it does not cost you future capital appreciation, but it does cost/save you exactly what the bank would charge in you in mortgage interest and ancillary charges … circa 4% – 5% these days.

So, let me ask you two closing questions:

1. Do you think that you can do better than getting ‘free money’ by owning real-estate that appreciates, perhaps even doubling every 7 to 18 years (depending upon whom you believe), leaving you with virtually ALL the excess over the original purchase price?

2. Do you think that you can invest money that would otherwise cost/earn you only 4% – 5% for more than that [Hint: how about some more of that yummy real-estate? Failing that: stocks; business; P2P lending; etc; etc; etc? But, we covered this question last week ]?

… at least those are the questions that I put to our house guests 🙂

What do you think?

What should you invest in first?

My wife just got back (well, just before our Noosa trip) from a trip overseas to attend her nephew’s wedding; and, the young happily married couple decided to spend part of their honeymoon in Australia … so, they are staying with us right now!

This was an opportunity for me to interfere in their financial lives … naturally, I couldn’t resist 😉

It’s also an opportunity for me to share my financial plan for our younger readers, whether single or married.

The plan is simple:

Step 1: Start working!

Step 2: Use your pre-work spending and living standards as a guide to ensure that you save at least 10% of your gross salary; preferably more.

Step 3: No matter what your Step 2 Income and Expenditure, save at least 50% of any future salary increase

Step 4: That includes any ‘found money’ such as: change found on the street; tax refund checks; small handouts/inheritences from friends/family (naturally, you will ‘up this’ to saving 95% of any LARGE handout/inheritence); etc.

It won’t take too long to actually have some money (perhaps for the first time in your life) to think about actually INVESTING.

So, what to invest in? Stocks; car parks; italian art; … ?

It’s simple: your own home!

It will probably be a small house or condo to start with … possibly with some ‘fixer upper’ potential …

But, what about the 20% Equity Rule and the 25% Income Rule, which will ensure that you can only afford to buy a shoe-box (literally) at this early stage of your financial life?

You forget them for your first home …

… and, replace them with these guidelines:

– Put as much equity into your house (by way of making a deposit) as you have savings (you’ll want to keep a little buffer against immediate expenses)

– Borrow as much as the mortgage payment that you can afford, which will be the amount per month that you are currently saving (of course, you’ll want to keep a little buffer against extra expenses).

When you (eventually) get tempted to ‘trade up’ to a bigger house, that’s when you apply the 20% Rule and the 25% Income Rule!

But, shouldn’t you invest in something else first? Perhaps you’re not even married yet and can happily rent for a while?

This is true: but, buy the condo anyway … then you can evaluate if your rent is so cheap that you should rent out the condo for a while before moving into it. Same applies if you move to another location: rent out the house/condo and rent for yourself elsewhere until you are ready to trade up (or across).


Let’s decide whether, over the course of your life, real-estate will go up in price or down in price? The answer for all of history has been UP (over a sufficiently long period).

Decide whether you will ever want to own your own residence? Again, the answer is YES for the overwhelming portion of humanity (and, even if you think not, I guarantee that your eventual spouse will have a very hard go at convincing you otherwise).

So, unless you have an overwhelming reason to believe that RE won’t go up in price for the next X month/years, then you are compounding your money at RE’s typical growth rate (6% … depending upon who you believe and where you live) TIMES the leverage that the bank is giving you LESS (your mortgage payment/costs – rent you would have otherwise paid).

Run the numbers; it’s a VERY good/safe rate of return 🙂

Travel or invest?

Ryan from Planting Dollars asks:

Having been raised by self made real estate millionaires it’s not shocking that I agree with the vast majority of what you have to say.  The reason I’m emailing you is because I was wondering if I could get your advice.

As a 23 year old recent college graduate I understand the power of real estate investing and building businesses, but at the same point would like a nomadic lifestyle and be able to travel while living frugal at a young age.  In my experience real estate and most business ventures aren’t possible with this lifestyle.  So I’m simply wondering:

If you were in my situation, how would you perceive this challenge and what types of businesses would you pursue?

Simple: anything internet!

Specifically, anything internet that trades in downloadable products and services (information products are ideal), or of the ‘virtual infrastructure’ type (e.g. FaceBook) … of course, once you become successful, you will need staff and support of the financial kind, and these require phyical access more often than not [AJC: Venture Capitalists are soooo 90’s 🙂 ].

That’s the short answer; now for the long answer 😉

The first thing I would suggest that Ryan do is to ask the “self made real estate millionaires” who raised him for their advice … after all, they’ve been there / done that … know Ryan better than possibly anybody else … and, being a parent myself I have no doubt that they ABSOLUTELY have his best interests at heart!

As to the second part of Ryan’s question, which asked whether I would “place travel and new experiences in [my] twenties as more important or less important than investing and capturing the time value of money?” 

The easy answer is that (by some coincidence) I just addressed this in some small way in yesterday’s Video-on-Sunday post …

…. but, the harder answer is “it depends”:
– I would rank those Life Experiences very highly


– If the desire to be an entrepreneur burns bright, and you have a rip-snorter of an idea just bursting to get out … well THAT can be the “new experience” that Ryan mentions, and it may very well more than make up for itself by funding your future travels.
I would be willing to delay a boringly ‘normal’ savings plan a little for those one-of-a-kind of Life Experiences.
Let’s say that you do decide to compromise, by being that nomad, yet starting a business; what’s the ideal business for this sort of traveling, hands-off lifestyle?

As I said above, anything Web, however I suggest that you buy a copy of the 4-Hour Work Week first!
But, I would also say not to be so quick to discount real-estate …

… I maintained 5 condo’s and a small’ish office block in Australia whilst I was living in the USA.

Buy anything by Dolf De Roos and Dave Lindahl, both of whom claim to own real-estate in far flung places (Dolf across the world, and Dave across the USA) and learn all you can about ‘hands off’ real-estate ownership; it can be done.
Of course, Ryan still has direct access to Millionaire RE mentors … so, he should first ask his parents what they do with their RE investments when they wish to travel?

Call me … make it happen!

OK, so he wants you to buy five houses this year … and, he gives you the quick ‘hard sell’ at the end … but, the basic philosophy – to me – is sound:

– Houses are depressed in the USA, but so are interest rates,

– Unless the USA ‘double dips’ prices will begin to go up (when?)

– You can fix an incredibly low interest rate on your primary residence (can the bank rewrite the mortgage if you move?)

– You MAY be able to receive enough rent to cover most/all of the mortgage

– Who says you need to buy five houses (except for this Realtor!?) … just think about one for now

Do the numbers for your area/s of interest (price of house, monthly cost of mortgage, likely rental income, other expenses such as 6% – 9% property management etc.) … if you can even come close to breaking even, could you find a better return on your deposit plus the cumulative cost of any monthly shortfall (or gain of any monthly excess)?

Now, run the numbers again assuming that the US market stays flat for another 5 years before some sort of rebound … maybe it still makes sense?

Have you run the numbers? If so, what do you think?

A Vacation Question – Part II

But, what about the other financial question that my son asked while we were on vacation?

Well, we were walking along the beach and Bill, the shaved ice vendor, drove past with his little all terrain vehicle pulling his ‘shop’ behind only to stop a few yards up the beach to tempt my son – and, the many other children running along the sand and swimming in the warm surf.

Naturally, I  quickly became $3.50 poorer and my son had his paper cone filled with shaved ice with various color sweeteners poured over it (he chose ‘rainbow’ flavoring), which got us talking:

You see, it’s popular folk-lore that Bill, who has been selling his flavored shaved ice along the beach for 20 to 40 years, owns many of the apartments in the vacation rental buildings all around [AJC: check out the aerial shot in yesterday’s post] … if true, then Bill is the poster-child for the Wealth Alchemist i.e. turning temporary cashflow into long-term assets.

It’s not hard to see that Bill turns over thousands of dollars a day, most of it costing him nothing (little staff, few overheads, little-to-no-cost-of-goods-sold), after all, how much can ice cost to make?!

Instead of spending all of that money, it’s not a great leap to assume that Bill saves up enough for a deposit to buy a property every now and then; we figure $1 million worth of property each year (with 20% initial equity).

Here is my son’s question:

“Would he pay cash for the properties, or would he just save up enough for a deposit and borrow the rest?”

Now, this is a seemingly simple – yet terribly interesting – question; one that we could labor over for many posts … instead, we’ll look at this another way, by asking:

“Does Bill need the property for income now or for its future value (hence, future income)?”

The answer is clear: Bill has plenty of income now, but what does he do if his income stops?

Presuming that he can’t rely on being able to sell his business (for example, the council could decide that they no longer want people peddling ice on their beaches), then Bill will probably want his properties to generate a replacement income “one day”.

So, which would do that better? When Bill moves into MM301, it’s likely that owning the properties outright and living off the rental treams that they throw off will be best …

… until then, Bill has to (in my opinion) work on the strategy that will produce the most properties by the time he wants to retire.

So, I had to explain the concept of leverage to my son:

SCENARIO A: If you purchase a property for $100k CASH and it doubles in 10 years, then you have $200k of property. Well done!

SCENARIO B: But, if you purchase TWO $100k properties, putting $50k deposit into each and borrowing $50k for each from the bank, then in 10 years (assuming they both double), you now have $400k of properties, of which you owe the bank $100k (assuming that you haven’t paid down any of the loan in the meantime), leaving you with $300k of property … a $100k improvement over Scenario A.

At least, that’s what the property spruikers would have you believe …

… because, they have conveniently forgotten that in Scenario A, you also have some rental income (after, say 25% costs) coming in, whereas in Scenario B that income would be largely offset by interest owed to the bank.

The question is, is that differential in income ‘worth’ $100k over 10 years?

Let’s assume that we can get a 5% return from our Scenario A property (after costs), giving us $5k a year initially (when the property is worth $100k), increasing over time to $10k a year (when the property increases to $200k in value). It doesn’t take a genius to figure that this comes to less than the extra $100k that Scenario B gives us (if you assume an average $7,500 per year rent for the 10 years, we are comparing $75k in rent for Scenario A to $100k in additional capital gain for Scenario B).

Now, add the benefits of:

– 80% gearing (i.e. only making a $20k down payment in our example), which should buy you 5 properties instead of Scenario B’s 2 properties (cost = $500k; worth in 10 years $1 mill., less $80k loan on each = $600k v $300k for Scenario B and $200k for Scenario A. Get it?),

– Increasing rents offsetting fixed interest rates (possibly producing some positive cashflow from each of our 5 properties as time passes),

– Tax deductibility of any excess of interest over income in the early years (a.k.a. negative gearing),

– And, any additional tax and depreciation benefits of 5 properties v only 2

… and, it’s just possibly a ‘no brainer’, even if that does make some of those scummy spruikers right 😉

But, how does Bill pay his bills?

Well, that depends on how much excess of income the properties produce by the time Bill is ready (or has) to retire …

… if  insufficient to pay Bill’s bills, he can sell enough properties to pay off the bulk (or all) of the bank loans, thus forcing a positive cashflow situation (assuming the properties aren’t total dogs, which is highly unlikely in this well sought after tourist area, which boasts near 100% year-round occupancy) and that (after a reserve to cover costs of vacancy, property management, and repairs and maintenance) is his infltation-protected income for the rest of his life.

Then Bill can spend the rest of his days lazing on the beach … buying shaved ice from the next shmuck who chucked in his chance at earning a college degree for the life of a beach bum 🙂

Instant Real-Estate Valuation Tool!

fear1Today, I want to share one of my secret weapons for purchasing real-estate: it absolutely kills paralysis by analysis, and it works for all type of real-estate, including residential and commercial.

But, I warn you in advance, you won’t like it!

You’ll think it’s risky, you’ll think it’s stupid … then you’ll find out that I’ve actually used this method three times … well, four times … and, each time it’s made me more money than I could ever have dreamed of.

Let’s think about the biggest problem in real-estate: knowing how much to pay.

So, what are the solutions:

1. You ask a realtor – if you can trust them

2. You ask a friend – but, are they the experts

3. You ask (actually, pay) an appraiser

4. You put in the ‘hard yards’ (missing many potential bargains as you simply stand by taking notes) learning about real-estate until YOU are the expert.

Of all of these, 4. is the one that I would recommend …

… if I did it, but I’m way too lazy 😉

Instead, I use 7million7years Patented Real-Estate Valuation Tool

Here’s how it works:

I find a property that somebody else wants to buy … somebody who is already an expert in that specific property … somebody who has: measured the place, gone to council, hired an appraiser, looked at 1,000 identical houses in the same areas … in short, somebody who has made themselves an expert in this type of property, and has narrowed down his search to this one property that I also happen to be interested in …

… and, I make sure that I offer just a little bit more for the property than he does. Simple!

Does this work? Sure … I’ve done this on my own home, an investment condo, a quadraplex, and an office.

Is this the cheapest way to buy such properties? Of course not; by definition, I’m always paying (at least a little) more.

Can it make money? Absolutely … I’ve probably made at least $2 million profit doing exactly this.

… and, the best part is that I’d probably still be researching my first deal if I didn’t.

Here’s one example of how it worked:

I was driving around and saw a condo for sale … actually, it was up for auction that day. I noticed that the sign was from an ‘out of town’ agent – I love these properties because they usually attract the smallest pool of buyers because the agents don’t really know how to attract the buyers out of their own area.

I went home and grabbed my checkbook and rushed back because I wanted to look at the condo before the onsite auction started: I saw a young guy in coveralls walking around with a tape measure doing a final ‘once over’ … it was obvious that he had been though the place before and was planning to rehab and flip it.

This was perfect: I simply bid against him at the auction until everybody else dropped out and it was just him and me bidding … the difference between us?

He needed to buy at a low enough price to rehab and make a quick buck; since I was buying to hold and rent, I could afford to pay a little more … which is exactly what I did: every time he bid, I bid a little more … eventually, he could bid no more, and my $500 ‘overbid’ was enough to buy the property.

I was surprised that I bought it … but, not as surprised as my wife 😉

But, we still own it … it’s the smallest property in our portfolio, but is still cashflow positive and has appreciated by over $250k.

So, who are these ‘unofficial appraisers’ that you are looking for?

– Home buyers – we bought our first house by attending an auction for a house that we expected to sell for a lot more; we just kept bidding until the only other serious buyer dropped out and we bought it – much to our surprise – far cheaper than we ever expected. We knew it was a good deal, because we knew the other guy had been looking around the area for quite a while

– Developers – I bought my office for $1,000 more than a developer was prepared to pay to buy it for as a ‘tear down’ … so, I figured that I was buying the property at land value and getting a whole building for only $1,000 more. I used the property for my business then sold it (a year or two after I sold the business) for around $1 million profit.

– Owner / builders – as well as the condo, I also applied the same technique to a quadraplex that I eventually bought; this was rehabbed while we were in the USA (my accountant oversaw the project) and I have never even seen the finished product, yet it is cashflow positive and has already appreciated by around $1 million. Again, I only saw this building once: on the day that I paid over $1.25 million for it!

Now, I don’t recommend that you do quite as little ‘due diligence’ as I often do (or, don’t do … as the case may be), but you have to admit that it is the ultimate cure to paralysis by analysis!

Scary, and you won’t find this technique in any book, but it works 😉

Paralysis by Analysis!

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)


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!

Speculating on your own home?

Ryan, who is upside down on his own mortgage asks:

I agree that plenty of investments, if not most, will give you a better APR than your house, but what about leverage?

$500,000 House( $400,000 Bank’s money, $100,000 Your Down Payment) * .05(expected year 1 appreciation = $25,000

$100,000(Your would be down payment) * .15 (from a successful investment or business venture) = $15,000

This is POSSIBLY true IF you gain market appreciation; that’s called speculation.

On the other hand, if you put the same money into a cashflow positive rental, then you make money on the rents and any future appreciation is a bonus; that’s called business.

A case can possibly be made for using your own home as a ‘business’ investment IF you presume to (nominally) charge yourself market rent for the same type of accommodation …

… but, would you pay that same rent rent to somebody else?

The answer must be ‘yes’ for this to work.

If so, then compare how the property then stacks up as an investment if you were the owner and renter i.e. is the pseudo-rent greater than the mortgage?

But, there is still a catch: you also lose most of the great tax benefits of a true investment (e.g. depreciation), even though as home owners in the US you gain some (capped) tax-benefits – particularly in relation to your mortgage interest.

But, there is a solution: buy a house to rent out, and rent the identical one from somebody else!

Rent out the one that you own and rent the other one from the owner: this way, you ‘force’ yourself to treat the one that you own as a real cashflow investment and the other as a place that you live in.

What do you give up?

Probably that sense of ‘ownership’ (but, hey … you do own the identical one, right?) and security of tenure.

But, you must weigh this up against the benefits:

1. True investment ‘status’ … buy, sell, hold, refi as the numbers dictate

2. Gain depreciation benefits for anything that you add (works great if this is a new’ish house!)

3. Full, uncapped tax-deduction on mortgage interest, etc.

4. ???? [you tell me?]

In fact, if you have a friend, why don’t you each buy a house and rent it to the other? Now, that is a strategy worthy of a millionaire … in training! 🙂