5 Easy Pieces
If you can play five easy pieces on the piano you are on the way to becoming a piano player. If you can take the five easy steps I suggest, you are on the way to wealth with real estate.
1. Decide it’s ok to be wealthy.
Sounds simple enough, but you would be surprised to the number of people that think down deep, they should not strive to be wealthy. Not a worthy goal. After all, the Bible says “It’s harder to go put a camel through an eye of a needle than to be rich and go to heaven”. I hear remarks like; “rich people are all jerks”, “rich people have more problems”; “I’m busy, I don’t have time to be rich”; “I’ve never really tried”.
Some people will go out of their way not to become wealthy, they will shoot themselves in their foot to prevent becoming rich. Maybe subconsciously they feel they don’t deserve to be wealthy.
Is it ok to be wealthy? Maybe, depends on how you define wealth, how you treat other people, and what you do with your wealth.
What’s the upside of wealth? It’s fun. More control over your time and life. You can help other people. You can create jobs and opportunities, you can make someone else’s life better, yours too.
2. Decide on a figure
First, let’s define wealth as financial independence. How much money do you need to make you independent so that you can spend your time as you wish, live a life style you are comfortable with, have enough reliable income, and enough resources to provide for emergencies? Is it $5,000 a month, or $50,000 a month? It’s up to you, give it considerable thought and then (very important) decide on a figure. Write it down. Justify the figure in your mind. Add up, again and again, the components for arriving at that figure. Get slightly obsessed with that figure. Tie a rope to it and drag it behind you wherever you go.
Maybe you decide on $1,000,000 a month. That’s a stretch, and it won’t happen unless you can justify it in your mind and totally believe it. The figure must have a concrete basis. You must feel you deserve it.
3. Have a plan
We’ve all heard “Life is what happens while you are busy making plans”. Do we have control of our lives? No. Can we make an impact on our lives? Yes! We can plan and strive, and sometimes it works.
The ship’s Captain does not tell his crew “let’s sail around for awhile and see where we end up”. The Captain has a destination and a detailed plan on how to get there. The Captain knows how to handle problems, emergencies, or even a change of destination.
You too, must have a plan and be prepared to make adjustments.
A wealth plan is tied into your life plan. For example, when you are young you may want to invest in your education and hold off on investing in real estate until you are firmly established in your career. After established and you have some discretionary income, that’s the time to start investing. Maybe you need some tax deductions. Single family homes are a great place to start. They don’t give you much income but they go up in value faster than most other real estate investments. No income, but you are building wealth. And….after the tax deductions for depreciation, interest, and expenses, you may break even on the cash flow. Remember, there is a difference between “cash flow” and wealth. Build wealth when you are young, get cash flow when you are older.
Start your wealth plan by creating your Balance Sheet. Add up all your assets, deduct your liabilities(how much you owe on your assets) the result is your “Net Worth”. Become good at tracking your net worth. Revise it regularly. The Balance Sheet is the starting point for your wealth plan. It tells you what you have got to start with.
You must develop the skills to avoid consumer debt, such as high credit card balances, etc. No, you can’t buy a new car every year. Start a savings account, become a “Scrooge” about money. Get control of your income and bills. You have to develop an attitude about money. “You gotta manage it”. You need a saving reserve to start the investment process. Money is a tool, not a master.
Speaking of debt, try to limit yourself to just asset debt. Not consumer debt. It’s ok to owe money on an asset that is paying it’s way and also going up in value. In fact, that is one of the most important concepts you must understand.
4. Get lucky
How do you get lucky? Luck is when preparation and opportunity meet. You gotta learn some stuff. You have to ready to act when the opportunity appears, and believe me it will, guaranteed! Will you recognize it? Will you be ready to act?
How do you get yourself prepared? Learn everything you can about real estate. Hang out with investors. Read. Attend seminars, take courses. Buy a financial calculator, learn how to use it. Become passionate. Become like a “tree hugger” about real estate. Develop a network of relationships with people that have similar interest and are generally positive and confident. Try to find a mentor. Ask questions.
This is a good time to mention there are a lot of “Snake Oil” schemes associated with get rich quick with real estate. Be cautious. I’ve seen and heard of most of them. They are usually crap and only appeal to greedy people that don’t want to work or earn their wealth, just take advantage of someone else.
5. Courage
It takes a certain amount of internal horsepower (guts) to act on an opportunity. The unknown is risky. You don’t want to be foolish, but if you are prepared, and if you have done your home work, make a bold decision.
Some basic rules I follow:
1. Don’t be afraid of Debt (if it’s genuine wealth asset debt).
2. Never, never, not do something because you don’t know how. Try it, make a mistake, figure it out, learn it.
3. Work as hard as you can. Be prepared to earn you success. You don’t have to cheat someone to earn wealth. Be prepared to create value by know what to do.
4. Never give up. Persistence and determination is better than “lots of brains”.
5. Develop relationships. You will never build wealth on your own, you must have the help and support of your family, friends, and the people you meet. They gotta like you, they gotta trust you.
6. Know the talk. Know the meaning of the following terms. Know them, but don’t advertise that you know them.
A. Net Worth
2. Cap Rate
3. Cash on Cash
4. NOI
5. Leverage
6. Amortization
7. Gross Rent Multiplier (worthless)
8. Depreciation
9. Appreciation
Prepare yourself to “Get Lucky” by learning some basic things:
1. Time Value of money
2. The difference between money and wealth
3. Understanding mortgages and debt
4. Understand tax advantages
5. Learn to recognize properties where you can create value.
6. Get ready for the big foreclosure boom.
7. Learn how to operate a financial calculator.
8. Develop a team…Banker, appraiser, broker, etc.
9. Network with people with similar interest.
10. Be interesting yourself.
8. Never sell (there are some exceptions)
Now, let’s say you have decided that’s it’s ok to be wealthy and you decided on a monthly amount of money you need to be able to spend your time the way you want too. Financially independent! The figure you decide, is $8,000 a month. A modest amount, but if you don’t have any consumer debt, and it’s pure cash flow, it gives you a lot of freedom, financial freedom. Maybe the $8,000 monthly is what you would like for your retirement income. YOU MUST make a specific decision. It’s important to always have the goal it the back of your mind.
I know this process works. I hope you can make the decision and get lucky.
New chapter from my book, The Washington Landlord Guide. Zaran K. Sayre
