A financial path well-trodden?

A short while ago, I received an e-mail from a reader who said:

I’m on the same path as you once walked.  I have a small business that is making good money and just started into real estate.  So far I have 7-9 houses and I’m looking for my first commercial building.

Michael told be that he started a consulting company with his partner about 7 years ago, and ventured into real-estate investment after he realized how much hard work it was and how little the consulting business returned (Michael’s business only had $80k in the bank after 5 years of hard work). I guess that situation has finally improved …

Michael and his business partner stumbled onto the idea of real-estate investing when Michael realized that the one rental property that he had owned for years had halved in value!

For most people this would be a sign to run away from real-estate, instead Michael took the Warren Buffet line (“be fearful when others are greedy, and greedy when others are fearful”) and ran towards it …

… but, he quickly realized that he could find other houses that had halved in value since the ‘crash’ and maybe pick up some real bargains.

This is the sign of a true investor – Michael had found his niche.

He began by making a ‘low-ball offer’ that was “too low to accept” on one property … yet, it did get accepted and Michael had made his first (actually, second, since he still owned that rental) real-estate purchase.

Except that Michael forgot to mention the deal to his business partner; so, his next phone call to his business partner that went something like this: “I got this great idea!”

Fortunately, his business partner shared Michael’s vision, so that first purchase followed with a flurry of other purchases and after just one year they now own 8 single family rental houses!

I asked Michael to share with you how he invests in real-estate:

The residential real estate market has been a boom to investors.  It seems that everyone now is cashing in on the housing downturn.  Here is a breakdown of the steps that I use to determine which houses to invest in that will turn a profit; here are my basic criteria for a good rental house:

  • At least 1000 sq ft
  • 3 to 4 bedrooms (3 bedrooms that can easily be converted into a 4 bedroom house)
  • Garage (no one likes to park outside in the winter)
  • Split level house (this configuration tends to be popular with rentals in my area)
  • Decent sized yard
  • Has sold or been valued for at least 100k or greater in the last 10 years based on Zillow.com
  • Property taxes around 2k

I use Zillow and Home path to find properties in my desired zip code.  I run the available houses through my criteria and start to narrow them down.  I then will call up my realtor and set up appointments to look at the houses.  It honestly takes me about 2-3 minutes to walk though a house and figure out what the house is worth (to me), how much it will cost to fix it up and what it will rent for.

The houses that I typically buy are about 45k.  Some more, some less.  My target is to have no more than 65k in each house total.  That allows me to rent them between $945 and $1095 depending on the property.  I try and average at least $1000 in rent per property.  Once the house has been renovated I usually create 20-40k in instant equity.  Here is a real world break down of two houses that I have.  One was paid for with cash the other was purchased with a mortgage.

Cash property

  • Asking price: 35k
  • Purchase Price: 25k
  • Approx renovation total: 30k
  • Total investment: 55k




Property Taxes



Property Insurance






This house rents for $995 per month and the tenants pay all of the utilities.  I manage this property myself so there is no management fee and they deposit the rent directly into a bank account setup for that property.

The net income that I receive from that property is $818 per month [$995-$177] or $9821 per year (not deducting personal income tax).  This represents about 18% cash-on-cash return per year [$9821/$55,000].

Mortgage property

  • Asking price: 65k
  • Purchase Price: 47k
  • Approx renovation total: 15k
  • Total property cost: 62k
  • Mortgage: $32,830
  • Cash down payment: $12,713
  • Interest: 4.773%



Property Taxes



Property Insurance



Mortgage Payment






This house rents for $1095 per month and the tenants pay all of the utilities.  I manage this property myself so there is no management fee and they deposit the rent directly into a bank account setup for that property.

The net income that I receive from that property is $752 per month [$1095-$343] or $9020 per year (not deducting personal income tax).  This represents about 71% cash-on-cash return per year [$9020/$12,713].

I’m already acquiring equity in these properties at a deep discount.  In 5 years the gross rents will average close to 60k.  Again some more, some less.  At that point my plan is to sell all of these houses for an average of 100k (I have 8 houses) and cash out with about 2.5x my money invested.  Ideally it looks like this:

60k rents over 5 years + 100k selling price – 65k total purchase price.

Now I don’t get caught up in all of the cost of my time, turnover allowances or maintenance of the property arguments.  If you are busy constantly crunching those figures you have lost focus on the big picture.  In the end a few thousand one way or the other doesn’t make ANY difference.  Remember focus on the BIG PICTURE.  Spend money up front on quality renovations and tenants and these will be insignificant expenses in the end.

Michael says that his average cash-on-cash returns, even in the current market, average 20-22% which is outstanding. And, if the real-estate market recovers in the near future, he should expect a tidy capital appreciation, as well.

But, not one to rest on his laurels, Michael is currently negotiating to buy not one, but two multi-million dollar commercial properties:

 Today was the first day that I made an offer on a commercial property.  It is a type “A” building with a 10% cap rate.  I’m pretty excited.  Our real estate company is small but growing rapidly.  We have the down payment for the property which is priced at 4.25 million … I understand that 4.25 million is a big jump but the property will be professionally managed and cash flows very well.  We are contacting about 8 different commercial banks.  This will be a big step for our company.  We just have to have a bank take a chance on us.

Michael actually ended up negotiating a ‘smaller’ $2.8m commercial property that he is purchasing with $250k down and the owner carrying $250k, which would leave them with sufficient cash in the bank (~$500k) allowing Michael and his business partner to pick up another property at about $2.5million.

A $5m + property portfolio puts Michael and his partner into the ‘big league’ …

Now, it’s not the value of the portfolio that you own, but the cash that you can realize if you sold it all off (or, the net income that it generates) that determines how well-off you really are, but I’m guessing that it won’t be much longer before Michael and his business parter can write their own “how I made $7 million in 7 years blog”.

I like reader stories like these … good or bad, rich or poor, heep ’em coming 🙂


How to retire in 7 years …

For our new readers, let me ask:

How would you like not one, but two ways to retire in just 7 years?

But, I warn you, retiring in 7 years is not easy … or, everybody would be doing it. However, I promise you that it can be done, either my way or Jacob’s way [AJC: Jacob is the author of the controversial book Early Retirement Extreme and the blog of the same name].

I would suggest that Jacob is an outlier in the Personal Finance community because of the aptly named ‘extreme’ portion of his book’s/blog’s title. On the other hand, my method to early retirement is just as extreme … just the other extreme.

In fact, I’ve said before that Jacob and I pretty much book-end the spectrum of personal finance advice.

So, let’s take a look the two methods and find out why each method, in its own unique way, is so extreme:

Method 1 – Early Retirement Extreme

In his excellent review of Jacob’s book, Invest It Wisely summarizes Jacob’s reasoning for retiring early: so that you can explore “renaissance man” aspects of your life.

That is, ‘retire early’ so that you can become less job-specialized and explore wider, more varied options than you would if you were still tied to earning an income full-time.

In order to do that, Jacob advises taking drastic cost-cutting measures e.g. downsizing your home; lowering the thermostat in the winter and raising it in the summer; taking cold showers; downscaling to 1 car or even no car at all, and so on.

Now, that’s extreme!

There has to be a reason and a benefit to this … and, there is:

The reason for the extreme (there’s that word again) austerity plan is so that you can … Save at least 75% of your income.

The benefit of saving that super-sized chunk of your pay packet is that you may be able to effectively retire in just 7 years if you do. Here’s how it works:

Let’s say that you currently earn $50,000 after tax and want to retire in 7 years. Jacob suggests that you should save 75% of your income, this means in the first year you live off just $12,500 and save the rest.

Now, if your salary increases with inflation (let’s say 3% p.a.), and you can invest the money that you save (starting with $37,500 in the first year and increasing each year with inflation) at an 8% after-tax return (by no means easy in the current market), then you should be able to replace your then-current salary after just 7 years with your passive income from your $300k nest-egg’s investments.

There are two catches:

1. Your salary in the 7th year (hence, your starting retirement salary) will be just $14,700 a year (representing a 5% withdrawal rate on your $300k of savings). Given that you started by living on just $12,500 and can retire in 7 years, you should be able to live like a king (or queen) on nearly $15,000 p.a. And, if you find that you can’t survive on $15k a year, well, you’re probably still young enough to enjoy your extended holiday, go back to work, and start again!

2. Our numbers are quite bullish: there’s no investment that you should put your money into for only 7 years that will return 8% after tax. In fact, you would be extremely lucky to return more than 2% after tax, and really should be just keeping your money in CD’s or bonds which currently return just ~1% before tax.

Also, a 5% withdrawal rate is hardly safe; you have to make this money last much longer than normal retirees, since you are retiring so early. A Monte Carlo analysis shows that withdrawing just 3% of your now-required $600,000 nest-egg is probably already stretching it. The good/bad news is that you can still retire in a still-not-too-shabby 11 years, on just under $20,000 per year …

… but (because of inflation), that’s only worth $14k a year in today’s dollars when you retire.

Method 2 – Early Retirement Super-Extreme

Super-extreme early retirement means, to me, retiring in 7 years with $7 million. This means retiring on $350k a year.

Why $350k?

Is it really needed, especially since Jacob has shown that it’s possible for a couple to live on $12,500 a year?!

Strictly speaking, no.

But, since you can retire with $350,000 a year to spend (because I did), I say … why not?!

With $350,000 a year, you can definitely live the relaxed, varied lifestyle that Jacob suggests we should aspire to … just at a slightly different level to his suggested $12,500 / year lifestyle.

Cars? Have 2 …. heck, have 3 and make them imported (with at least one exotic).

Vacations? Twice a year … travel business class and make at least one of them international 5-Star.

Upsize your home? Sure … and, pay off the mortgage with cash.

Raise the thermostat in the winter and lower it in the summer? Sure (as long as your ‘green conscience’ can stand it).

Take loooong hot showers? Absolutely [WARNING: see ‘green conscience’, above]!

… and, so on.

So, how does one do this?

Well, the key is this ‘specialization’ thing that Jacob says that we need to avoid long-term:

I agree, but for the next 7 years you absolutely must specialize in increasing your income, and increasing your savings appropriately. However, unlike the ‘extreme savers’, you never reduce your lifestyle … instead, you just don’t increase it as much as your income increases:

– Save 10% of your income starting right now (or, build up to it over the next few months, if you have started by saving less)

– Save 50% of all future salary increases; all additional income (from businesses, second jobs); and even more for unexpected windfalls (e.g. lottery winning, inheritances, tax refunds, etc.).

Instead of cutting costs – and, saving – which are inherently limited (even Jacob can’t save more than 75% of his income) – concentrate on increasing your income because the sky’s the limit: start a second job; start a part-time business; start an online, part-time business (call it Facebook and the rest is easy).

Most of all, start investing … actively, aggressively, wisely.

Simply follow my patented two-step wealth generation system (it used to be 4-steps, but I cut it in half … so, now you have no excuses) … voila!

$7 million in 7 years.

There you have it: two methods of retiring young.

Choose the one method that appeals to you the most and, from today forwards, read the creator’s writings carefully, and ignore anything that you read that contradicts their advice …

… because every other method will have you enslaved for the next 20 to 40 years, with absolutely no guarantee as to what your retirement years may bring.

And, don’t let anybody tell you otherwise 🙂

Stuffing the income genie back in the bottle …

As I said in my last post, I think it’s ironic that the time that you think about income the most is when you don’t have any.

And, that’s usually because:

– You’ve lost your job, or

– You’ve retired.

And, the second one only becomes an issue if – like most people – you haven’t really thought about how much income you DO need when you are retired. For example, this 2006 AARP survey (rather depressingly) showed:

One-third of workers (31%) have not yet saved any money for their retirement; 26% admit they are not confident they know how to determine how much money they will need to live comfortably in retirement.

… and, this is before the 2008 global meltdown!

Unfortunately, for most people, the retirement income decision is made in two entirely unrelated sets of decisions:

1. How much income will you have pre-retirement?

This one is not really a decision for most of us: most people receive an income that is simply based on opportunity.

For example, you are presented with a new career opportunity; it may come from an employment ad you happened to see in a newspaper, or somebody contacted you (a friend, a headhunter), or it may be forced on you by a down-sizing at one company that leads you to start looking seriously.

In any event, you think you are lucky, because you score a new job with a 20% pay increase over your previous job!

But, you are not really lucky, because of the second – almost totally unrelated – decision that you then need to make:

2. How much money will you have in your nest-egg when you retire?

This one is really a function of:

a) Time: i.e. how long do you have until your retire – or, are forced to retire (through job loss, injury, circumstance)?, and

b) Accumulation Rate: i.e. what % of your income are you willing – and, able – to save?

The two choices are not entirely unrelated, as I previously claimed, because most people save a fixed % of their income (e.g. 2% with an employer match of some sort) into their 401k; presumably, this increases as your income increases.

But, virtually nobody – and, I mean nobody – really works backwards and says: “if this is my income today, and it grows at least with inflation – or more, if I am really clever and opportunistic – what does that mean at retirement?”

You see, post-retirement income is usually a function of pre-retirement income, give or take 20% or 30% according to most experts.

If you want to scare yourself, try this little calculation:

1. Take today’s income and then scale it up to an income that you realistically aspire to; for example, what income would you realistically like to have in 20 years time?

2. Double that number, because in 20 years (due to the effects of inflation), you’ll actually need double that amount.

3. Now, multiply that new number by 20

That, according to the Rule of 20, is how much you will need to have in your nest egg if you want to retire in, say, 20 years time.

I’m guessing that this will be a Big Scary Number.

So, let me give you two choices:

A. Control your income NOW so that you don’t have to worry about it in retirement

This is the frugal [read: boring, yet sensible for most people] way and it has two major benefits:

– By controlling your income now (i.e. not increasing your income dramatically), your frugality allows you to lower your final pre-retirement income expectations as well. When you plug these nice, conservative, frugal numbers into the above calculation you, hopefully, come up with a Slightly Less Scary Number.

– But, this doesn’t mean forgetting about opportunity …. no, absolutely the opposite is true: you still chase all of those increased income opportunities, but instead of spending more when you are lucky (!) enough to land one, you save – a lot – more, which gives you even more chance of reaching that Slightly Less Scary Number.

B. Put your income earning capability into overdrive

But, what if you could reach that Big Scary Number

Why, then you would be able to earn and spend as your income grew, and you would be able to keep spending outrageous sums of money (at least, that’s how it would seem to lesser mortals) even in retirement.

But, how can you do that?

Well, rather than focussing on cutting costs, you focus on controlling costs. But, far more importantly, you focus on ways to increase your income …

… ways to increase it even more than you previously had your sights set on (i.e. in question 1., above).

Of course, you then don’t spend the extra income, instead you save it … saving at least half of all future salary increases.

Not only does this allow you to rapidly accelerate your savings (dramatically bumping up the size of your eventual retirement nest-egg), but it also provides a huge income cushion allowing you to deal with short-term income setbacks by temporarily slowing your rate of savings (say, from 50% of your accumulated salary increases to a more ‘normal’ 10%) rather than compromising your underlying lifestyle.

The real safe wealth building secret is to:

Accelerate your income rapidly, but your lifestyle slowly!

So, what could you do to increase your income, even more than you have previously dared to hope?

Any one of a thousand things!

For example, you could chase even bigger work/business opportunities (that’s why I moved to the USA from Australia), or you could start a business (that’s why I left my high-paying corporate job), or you could do something ‘on the side’, or you could invest actively, or ….

This blog is obviously aimed at those who want to choose Door B.

And, far more importantly than greed, the real reason is that once you let it out (i.e. accept an income increase) it’s almost impossible to stuff the income genie back into that bottle …

… in other words, rather than trying to live frugally by focussing your financial plan on cutting costs and saving the little that’s left, it’s far better to prepare a plan that allows you to rapidly increase income and spending in a controlled manner, so that you can build in the buffers that allow you to preserve your lifestyle should things go wrong.

But, which option would you choose?

And, what would you do do if dramatically increasing your own income actually became a financial imperative?



The problem with income …

I’ve been thinking a lot about income lately, which is ironic as I don’t have any right now (at least, not in the traditional ‘work for a paycheck sense’).

It’s also ironic because, when I did have an income, I didn’t worry about it at all:

Back in 1998, I had two businesses that, between them, managed to earn exactly $0 …

… what one business made (about +$5k a month), the other one managed to lose (about -$5k a month).

But, I wasn’t at all worried.

That’s because this break even scenario already took into account the cost of my (then) still-quite-basic basic lifestyle.

For example:

– I could deduct the cost of my cars as a business expense, so my business paid for those

– I could deduct the cost of my travel as a business expense, so my business (or the occasional consulting client) paid for those

– And, I could afford to pay myself a fairly basic (at least, for a guy with a family) $50k salary a year

So, with my combined businesses breaking even (after these expenses were taken into account), together with the fact that I could control my cost of living by delaying gratification (not to mention, my wife was still working and bringing in a decent income), I simply didn’t worry too much about earning an income.

But, all that changed when I started investing actively, and built up my first $7 million (in 7 years) fortune …

It changed for the worse!

Firstly, my cost of living increased. A lot.

Then, my wife stopped working. Of course.

And, my actively-generated income stopped. Because I sold my biggest business.

Now, I mostly have to rely on ‘passive income’ which is really just spending the money I have in the bank while I figure out how to make more money from investments than I spend on their expenses + the cost of my lifestyle.

And, that’s now a big number!

So, ironically, just when most people think that I have “f**k you” money, I have started to worry about income …

… simply because I have to create my own.

How about you? Do you worry about income? Why (or, why not)?

Help a reader pay off their credit card debt …

What should this reader do?

View Results

Loading ... Loading ...

Help a reader out by reading this, then answering the poll:

When I first spoke to you, I had just paid of my cc debts and was working 2 jobs and saving a little money.  4 years later, and I have since moved from NYC to Miami, got married, just had a baby, and right now I am in the process of buying our first home. (Not an investment, but our primary residence.)

With all of the life changes that have happened, my savings is gone (we had to pay for the move, marriage, and honeymoon ourselves) and over the past 2 years I have watched as my credit card debt has risen to over 13K. I  have a very well-paying job, making 130K in Miami as a computer programmer, but right now I am the only source of income, as my wife is not working.

Anyway that is a quick catch-up with my life to date. And I have question for you.

Once I close on my house, my next move is to get rid of cc debt. Here are the 3 choices I see available to me. (Perhaps there are other ways, I am just not aware)

A. Pay it down heavily and hope to pay it off over 2 years.
B. Move it over to a 0% card for 15/18 months.
C. Take a loan out against my 401K to pay it off credit card immediately

Chris also wanted me to know that the “loan against my 401k is special in that the 4% interest I pay back is added back into my 401K account. So every penny I pay goes back to my pocket. There is no hit to my credit, since I am borrowing against my own funds, and it allows me to pay back less aggressively.”

What would you do? Please help me help Chris by choosing one option from the poll …

Note: if you chose ‘other’ please leave a comment; if you didn’t choose ‘other’, please still leave a comment 😉

What’s a simple business to start?

Often, I’m asked about businesses to start.

Usually, the person asking has low-to-zero capital to invest; wants to start part-time; and, wants “a simple business to start”:

What is a business that I can start, so simple in nature, that virtually I (perhaps with the help of a friend) could start with less than $3000 and some hard work?

Well, there are lots of what I call ‘traditional’ businesses that you can start part-time, depending on your talents:

For example, if you are good at photography, you could do wedding photos at nights or on weekends. Same if you like baking (“cakes delivered to your door”).

But, these aren’t as easy to scale part-time, in my opinion,  as an online business …

… which is why I prefer online businesses, these days.

Even then, some online businesses are better than others:

For example, starting a blog (perhaps like this one), or selling information products (e.g. eBooks), or even starting an eBay business might be relatively easy, but they’re hard to scale into something that might one day take you full-time (so that you can quit your job and become your own boss) or even – eventually -become saleable.

So, let me share with you the little-known secret of the type of online business that I think is:

1. easiest to start, and

2. makes the most money, and

3. is still quite scaleable and saleable (the two magic words if you want to retire rich).

The secret is to create a 2-sided market place.

A two-sided market place is any kind of business that has buyers on one side and sellers on the other:

1. eBay is one example: it’s people and businesses selling to other people and businesses.

2. Amazon is NOT an example (it’s very hard to set up a warehouse and systems to become an online seller like Amazon) but the Amazon Marketplace is a example: it has buyers and sellers using Amazon’s payment platform to sell stuff to each other.

3. Etsy is another example: people make things (arts, crafts, jewellery, etc.) and list it on Etsy.com where people browse and buy things: Etsy doesn’t make anything, sell anything, or hold stock … it just makes a % of every sale for introducing both sides of the marketplace to each other.

4. The most famous recent example is Airbnb, started by 3 guys who simply came up with the idea of letting people share their couches for backpackers to stay (they weren’t even the first: couchsurfing.com got there first); it has since evolved into a real competitor to the Expedias and Pricelines of this world and is on track to become a $1bill.+ company.

That’s why, when people ask me what business to start, this type of business is usually where I then point them.

But, how to start?!

To start Airbnb (I suggest you don’t, this is just an example):

1. One of the startup’s founding team goes around their home city photographing and signing up a whole bunch of ‘bed and breakfast’-style accommodation (I know that Airbnb didn’t start with this; remember, this is just an example)

2. The other founder gets to kick back with a tiny budget to drive traffic to a ‘sign up to be notified when … ‘ landing page (LaunchRock is ideal for this).

[HINT: try $50 worth of Facebook ads and another $50 of Google Adwords and see if that drives any traffic. Spend $10 on each ad platform on 5 different keywords rather than $50 on one. Remember to target your ads specifically to your city (I know FB allows this; I’m not sure if Google does). Submit your landing page to sites like betali.st and startupli.st. Wait for a more significant story before you spam Techcrunch and Mashable]

3. Once you have 20 to 50 BnB’s signed up, and perhaps 200 – 600 names on the landing page, you put the two sides together and see if magic happens!

4. If so, you rinse and repeat in another city, and another (until you raise sufficient investment to allow you to hire ‘city managers’ to do the photographic/doorknocking for you).

5. If not, this marketplace idea sucks. Try another.

Now, stop asking and go do it … 🙂


Catch my latest interview herehttp://www.creditcardassist.com/blog/7-million-7-years-best-of-the-best-blogger-series-22702/ – thanks Bill (founder of Credit Card Assist).



Poor little rich doctor …

A couple of weeks ago, I responded to a reader request from a young doctor who is on what can only be described as an OMG level of income:

I am a young physician (early 30s) making approximately 800k per year. After expenses and taxes, I am left with ~300k to save/invest.

Never mind the fact that he is losing approximately $500k a year in “expenses and taxes”, a $300k take home is still pretty good in anybody’s language!

There was plenty of well-considered reader debate and advice for the young doctor, including this highly-reasoned argument from traineeinvestor:

I’d suggest he continue to focus most of his energy on maintaining or growing his professional income. Time spent on side ventures and investments should be limited so that it does not interfere with the $800K professional income.

In terms of investments, given his time constraints, I’d go with a Boglehead approach, possibly supplemented with some geared cash flow positive real estate (especially if he lives in the US and can take advantage of depressed prices and long term fixed borrowing costs).

I agree on both counts:

a) When you are earning a super-high level of salary, your primary goal should be to protect that source of income. It’s a river of money: you should do everything in your power to keep it flowing!

b) However, you shouldn’t just let the money flow into the taxman’s pocket, then into yours, and then out again by increasing your spending. Instead (and in keeping with our ‘river’ analogy) you should also build a downstream dam.

And, you should only open the sluice-gates to let off a much smaller amount than is going into the dam …


Because that’s the only way that the dam gets to fill up!

This way, when the river stops flowing (ideally, at a time of your choosing i.e. early retirement, but it could be forced upon you even earlier for a variety of reasons), you can keep the sluice gates open, knowing that there’s still enough water in the dam to keep the flow running for the rest of your life.

In other words: you don’t want the dam to run dry before you do 😉

But, this is much harder to achieve than you may think, so here’s where I differ – but, only slightly – starting by reversing the order of traineeinvestor’s otherwise excellent investment strategy:

I’d go with a geared cash flow positive real estate approach (especially if he lives in the US and can take advantage of depressed prices and long term fixed borrowing costs), possibly supplemented with some Boglehead-type investments.

The reasons are two-fold:

Firstly, I’m not accepting that 62.5% (i.e. $500k) of our doctor’s $800k earning capacity can simply be wiped off in “expenses and taxes” …

… professionals are just sitting ducks when it comes to taxes.

But, by implementing a nicely geared (and, maybe even cashflow negative after depreciation allowances) real-estate strategy, there may be deductions that can legitimately increase his super-high professional’s take-home income, without falling afoul of the tax man.

This is a clear-cut case of where a professional’s advice can add huge value [AJC: not in asking “is real-estate a good investment for me” but in asking “is real-estate a good tax-advantaged but highly legitimate investment vehicle for me?”], and our doctor should not take another step without seeking such professional advice.

Secondly, he should go through every single expense with his accountant and see what he can reduce or better manage. Nobody can afford to burn $500k worth of dollar bills …

… not even a super-high-income doctor.

Secondly, real-estate (especially when prices are depressed) is just a great long-term investment.

With his $300k (and, hopefully much more once he implements some of his accountant’s tax and cost-management advice) cashflow plus any income that he receives from his tenants, the doctor can afford to leverage quite a large portfolio of such high-quality, long-term, income-producing investments.

And, it is this large portfolio that becomes his growing ‘dam’ of cash, trickling out at perhaps a $100k – $150k sustainable annual spending rate … one that he should be able to index with inflation and maintain for his whole life, whether he (one day, perhaps quite soon) chooses to work full-time, part-time, or not at all.

And, isn’t that the whole (financial) point of it all?

How to start with next to nothing in cash and build up from there?

Ken H asks:

I am just starting my journey to the concept of making money when you buy. Can I get more examples of what can be bought to use this concept? Where do I learn a strategy that I can start with next to nothing in cash and build up?

Great question, Ken!

The short answer is that you need a source of cashflow.

The long answer:

A high-paying job is ideal (but, only if you invest 30% to 50% of it after tax) …

… if not a high-paying job, then a second source of income.

I like the idea of starting an online business ‘on the side’ and reinvesting 100% of the profits (a) back into the business to help it grow and, whatever’s left over, (b) in income-producing investments.

The ideal investments, of course, are ones where you can get a silent partner to put up 75% – 90% of the money required. That way you can get more investments quicker.

Also, when the bank puts in 80% of the funds required to fund a real-estate acquisition, and it goes up in price by 20%, you have just doubled your money (less the bank’s interest).

And, the best ‘silent partner’ that I know is The Bank. But, the investments that The Bank likes the most – hence, they will lend by far the most on these – is good old-fashioned real-estate.

So, I would reinvest as much of my savings as possible into real-estate, and then wait 10 to 20 years (unless my business grows really fast, in which case I might wait 5 to 10 years.

Sure beats ‘working for The Man‘ for 40+ years, doesn’t it?

Make money when you buy!

There’s an old saying that you may have heard. It’s used particularly in relation to real-estate, but it can be applied to many forms of investment. It’s:

You make money when you buy, not sell.

One of my new readers asked me to explain what it means:

Could you expend on this statement a little or maybe you have some related blogs about this on your site? “…buy at the right price you make money when you BUY not when you sell.”

I don’t think I’ve ever written explicitly about this age-old investment adage, because it’s almost a tautologogy …

… after all, an investment is something that you should never need to sell!

To me, a true investment is something that generates ongoing income. So why would you ever sell it?

Any ‘asset’ that you buy, specifically to sell to (hopefully!) generate a profit, is in reality a SPECULATION, not a true investment.

Business makes these kinds of speculations all the time: buying trading stock (or labor) with the expectation [read: hope] of selling it at a sufficient price to generate a healthy profit.

Businesses take a calculated risk in doing so, hoping that the potential profits justify the risk, but …

90% of business owners are wrong!

They say that 9 out of 10 businesses fail within their first 5 to 10 years. They fail for lots of reasons, but one of the main ones is that these simply cannot make enough money when they sell due to competitive pressures, new products, outdated manufacturing techniques, low volumes, etc., etc.

As investors, we cannot afford to make the same mistake, otherwise we are just gamblers – gambling that: red will hit more times than black; we will roll a natural 7; AAPL stock will go long this month; Las Vegas house prices will continue to climb.

On the other hand, as true investors, we have to buy well, then hold on for the long run.

It is the income from our investments that makes us rich (by funding our dream lifestyle), not the amount that we could sell the investment for.

How about you? Are you an investor or gambler? Do you see the difference?

Another reader question …

Eddy asks:

I am 21 years old living in Los Angeles CA. I dropped out of [college] after 2 years of studying because of lack of stimulation. I’ve had a job since I was 15 and have been in sales since I was 18. I currently work as an account manager at an IT outsourcing company. Oh, and I forgot to mention one small detail, I am also $40,000 in college debt.
My only plan right now is to gain enough experience and a set of skills in sales to make six-figures. After that I will begin investing. I know its to early to doubt myself, but I am constantly reminding myself where I am and where I am going to make sure I am on the right path.
My question is this, am I on the right path? A lot of my colleagues do a great job reminding me about the glass ceiling above me because I don’t have a college degree. Also, once I start making six-figures, how do I learn how to invest?

I told Eddy that I don’t/can’t give personal financial advice (laws aside, I simply don’t know enough about him … or any other reader).

BUT, I can make some general observations about the e-mailed question:

To succeed in life requires tenacity … and, to make any sort of large Number (e.g. $7 million) in any sort of soon Date (e.g. 7 years) requires super tenacity; if it didn’t, everybody would be rich!

More on this a little later …

Eddy’s second problem seems to be his unwillingness to even begin investing until his income reaches the “6 figures”.

But, it’s important that Eddy begins investing NOW.

[AJC: if you haven’t already done so, Eddy, please read this posthttp://7million7years.com/2011/05/26/the-pay-yourself-twice-wealth-strategy/]

If Eddy does, one day, it may not even matter that he didn’t complete college 😉

Back to Eddy’s first problem …

The first thing that I look for in anybody who tells me that they wish to succeed financially is “show me evidence of your ability to follow through”.

With this e-mail, I see a couple of red warning flags:

The first one is, what sort of return on investment is there in a $40k college loan for a college degree not completed?

I’m guessing none … after all, you don’t need two years of college to work from age 15, nor to get most typical 18 y.o.-level “sales” jobs. So, by not completing college, Eddy seems to be $40k worse off than anybody else entering the same sales job at the same age!