When it comes to you and your money, these can be very confusing times. Which
way is the stock market heading? Is the real estate market coming apart at the
seams or simply correcting itself against record highs? There is a lot of money
out there, yet major companies are laying people off by the thousands. Interest
rates are low. Are they edging lower or heading up? And the dollar is at an
all-time low. How will that impact the economy?
There are many, many questions--and even more opinions--yet very few clear
answers. The best you can do is research as much as you can, sort through the
opinions, study the facts, draw your own conclusions and opinions, then make
your decision and take action.
Will all your decisions be correct? No, but at least you've taken action. And
by taking action, you're in the game and increasing your knowledge. What do most
people do? They get overwhelmed with all the data--and granted, there is plenty
of it--and they freeze. In my book, any action beats no action any day.
Where to Invest
So how do you know what to invest in? The answer is there's no perfect answer.
What you invest in should be somewhat personal, but not emotional. What types of
investments interest you? What subjects interest you? Do you love to shop? You
could buy shares in clothing companies. You could invest in an up-and-coming
fashion designer. Maybe a new and marketable boutique is opening and is looking
for investors. Or perhaps a small strip mall of trendy shops is up for sale.
My favorite investment, by far, is real estate. I've been a real estate
investor for 18 years. I'm also an entrepreneur. My husband, Robert, and I have
built many businesses together, the most current being The Rich Dad Company.
Our formula is simple: Step one, build your business; step two, buy real
estate with your cash profits. Our holdings aren't entirely in real estate--we
have other investments, too.
Real Estate
My No. 1 reason for buying real estate is my favorite pair of words, cash flow.
My basic rule is to find a property where the monthly rent is greater than the
monthly mortgage plus the monthly expenses. That will give you positive cash
flow.
My very first property was a small, two-bedroom, one-bath house in Portland,
Oregon. The price was $45,000. The down payment was $5,000, which I didn't have.
My monthly cash flow: a whopping $25 per month.
Why did I buy it?
- The numbers worked.
- The property was a 10-minute walk from where I lived. If there was a
problem, I could be there quickly. I also knew the neighborhood very well
and had a good grasp on why a person would want to live there.
- The house was within walking distance to town and the area was becoming
trendier with new businesses moving in.
- The biggest reason: This was my first rental property, and I was
terrified. I researched this property beyond thoroughly. I knew that if I
didn't buy this property then, I would probably never buy an investment
property. So I held my breath and took the leap. And once I did, I found out
there really wasn't anything to be afraid of.
Another investment Robert and I made was 10 units in a 300-unit
condo-conversion project in North Scottsdale, Arizona. Why did we buy these 10
units? They were the sales model units. These units, all different floor plans,
were decorated and furnished and used as the walk-through models for prospective
buyers. We owned the units and the owners doing the conversion leased them back
from us, giving us a cash flow of 25 percent of the money we paid as down
payment. So if the down payments totaled $200,000 for all 10 units, then we were
receiving a positive cash flow of $50,000 per year.
Our agreement with the owner was that they would lease our units for three
years or the sale of 280 units, whichever came first. The North Scottsdale
market was so hot that they sold the 280 units in nine months. Now we were faced
with a decision: find new tenants and rent the units or sell all 10 units. When
we looked at the numbers, it was clear--the cash flow would be minimal while the
sales price of these units was high, so we decided to sell. All 10 units were
sold within three months. This is how we changed our cash flow investment to a
capital gains investment.
The next question was where we would move the money from the sale of our 10
units. We already knew the property we would buy next. This is where planning
ahead when investing definitely pays off. We took the proceeds from the sale of
all 10 units and executed a 1031 exchange, which allows you to defer paying the
capital gains taxes to a later date--and possibly never--if you've planned and
structured things well. We moved the money into a 288-unit apartment building in
Tucson, Arizona. This property is currently generating about $18,000 per month
in cash flow.
These are just two of my many real estate investments, but they should give
you an idea of my thought process. There are still plenty of other factors to
consider, though.
For instance, I bought properties years ago in Portland because the "Silicon
Forest" was emerging, where high-tech companies were moving to Portland. I
bought an apartment building with five acres attached and then we built
additional units on the five acres. We recently bought a building that by simply
adding built-in washers and dryers in every unit we will be able to increase the
rent, which increases the overall value of the property and then allows us to
refinance the property. And with the money we pull out of that property, we'll
buy another. I bought a single condo last year simply because the developer made
me an extremely generous deal. So there isn't one reason I buy investment
properties. There are many. However, my primary focus will be cash flow.
What Else Am I Invested In?
Gold: The dollar continues to drop in value. It's at an all-time low. It
takes more money to buy the necessities of life than it did one year ago.
Instead of holding money in a savings account, where the value of that money
decreases every day, I'd rather hold it in gold, which has a true and
exchangeable value.
Silver: A one-ounce silver coin will cost you about $15 and there's
only so much silver available throughout the world. Silver is a consumable: It's
used in everything from light bulbs to computers to microwave ovens to cell
phones. With China, India and other developing countries emerging, the demand
for silver will be enormous. It only makes sense that when demand is high and
supply is limited the price will soar.
Paper assets (stocks, stocks paying dividends, private equity funds):
I'm not a huge fan of the stock market, simply because it is not an investment
that I choose to spend a lot of time researching and studying. Plus, I have no
control over the companies whose stock I purchase, whereas with real estate I
control the income, expenses and debt, and I can impact the appreciation or
value of the property. What works for me with paper assets is to have a stock
broker who has the two traits I most admire. They are:
- She researches the companies she recommends. She goes to the company
headquarters. She'll meet with the executive team. She'll study the
financials. And she won't act off a hot tip. When she makes a
recommendation, I know she's done her homework.
- In many cases, she invests in the companies she recommends. She's not
out to make a quick commission. I know she wants me to make money because
her own money is often on the line.
Businesses: Occasionally a startup will come along that grabs my
attention and I'll invest in it. The principle rule I follow with new companies
is "Money follows management." The company may have a fabulous product, but if
there isn't a qualified team and marketing plan behind it, I'll probably walk
away. The first question I ask is, "How will the money be spent?" If the answer
is "Salaries for the partners starting the company," walk away. The capital
being raised should go into building the business, not making the business
owners comfortable.
Find Your Game
Yes, there's a lot of information out there, but it doesn't have to be
overwhelming and it doesn't have to deliver the perfect answers. What's
important is that you decide which investment best suits you and which type most
interests you. Focus on one specific opportunity and be clear on your goals and
outcome. Do the due diligence that'll lead to a clear understanding of what you
plan to do and why, then don't forget to take action.