Tag: Making Money Work

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REI – Acquisition of Rental #3

This post is just a short update on REI. We had a deal drop in our lap.

122.Sagewood.FrontElev

The Deal

We were not specifically looking to buy another property immediately. As detailed in a previous post, we were working on a deal earlier in the year, but it did not work out.

 

A member of the local REIA, who is also a realtor, has been looking out for properties I might be interested in. I had given her the specifics: three-bedroom, two-bath home on a slab foundation, preferably brick façade, in Thibodaux, in a decent neighborhood.

She had showed a couple of homes that were close, but not quite right for us, in addition to a mobile home park that was just too much for us to take on. (This was just prior to my surgery)

She contacted us with a property that fit our description exactly and told us the listing price, $144,500, and to make an offer. She indicated that the sellers were motivated. I looked it over and saw that we would be looking at a similar ROI to the property we bought last year with an offer of approximately $111,300. I did not think that the owners would accept that and they didn’t. They countered with $125,000 and we countered back with $112,451 cash sale with an end of month closing as a best offer. This would give us a ROI of just under 7%, based on a conservative analysis.

We fully expected things to end there. The sellers asked for the weekend to think about the offer, so we agreed.

On Monday, they accepted the offer (to our surprise) and we began the inspection period.

We set the closing date for the first Friday in December, as this was the soonest that the real estate attorney could complete the paperwork.

 

During the due diligence period, we determined that the only things needed were to change the locks, change an over-sized circuit breaker, and some minor cosmetic work.

 

Updated: We now have it listed for rent and are taking applications. The property was rented for January.

122.Sagewood.RentalFlyer2

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

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Personal Improvement – Books That Have Influenced Me Recently

BookList
Books That Influenced Me

 

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Welcome back to another installment of Things I Think About! This week I am going to go over a few books that I have read recently that have had an impact. While some of them cover a mix of topics, to me, they mostly fall into one topic. Because of this, I will break them out by topic and detail the crossover topics, and why I feel that way, for each book I also have them listed separately on my Recommended Books page, HERE.

 

Business

The E Myth Revisited by Michael Gerber

This book speaks to my soul! I “read” the Audible version, (as I do most books due to my 3-hour plus daily commute), recorded by Michael Gerber himself. This book details why a lot of “Entrepreneurs” find themselves overworked, underpaid, and without the ability to grow. It is an interleaved mix of example stories with lessons explaining about each story. The main focus of the book is to explain why developing processes and systems for operating your business will allow you to employ other people to work IN the business so you can work ON the business.

 

The 4-Hour Workweek by Tim Ferriss

A young Tim Ferriss relates how he figured out how to not be locked into common misconception of the American Dream…go to school, get a good job, work like a slave for 20-30-40 years, then retire at an age where there is a good chance that you will have trouble enjoying life. In the 4-Hour Workweek, he details the concepts of mini-retirements, becoming effective and efficient in whatever you do for work, and ideas for small businesses that require little to no maintenance to support you on an ongoing basis.

Granted, as even pointed out in the book, the goal is not to be able to lay on the beach drinking mai tais, it is to free you up to do the things you want to do, including world travel, learning languages, and/or working with non-profit organizations.

This book also qualifies as a personal Improvement book, because a lot of the recommendations for efficiency and effectiveness while working have helped me to reduce a lot of stress at my main job.

 

Rich Dad’s Cash Flow Quadrant by Robert Kyosaki

This book breaks out the different classifications of people earning money. ESBI stands for Employees, someone who works for someone else to make money, Self-Employed, a person working for themselves to make money, Business Owners, owning a business & employing other people, and Investors, those who employ their capital to buy assets. It promotes the idea to be either a business owner or, ultimately, an investor, as this usually provides the best returns on time & money.

 

Personal Improvement

The Obstacle is the Way by Ryan Holiday

Ryan Holiday is a devoted Stoic. He has multiple books and a website dedicated to Stoicism. This book is kind of a manual for achievement. I really enjoy it because it basically lays out my philosophy on life. The short version is “Do what you can to change the things you don’t like in your life…Ignore the things you can’t change.” The Obstacle is the Way takes it a step further in that it guides you to figure out how to change either the situation or your thinking about the “things you can’t change”.

 

Rich Dad, Poor Dad by Robert Kyosaki

Robert Kyosaki tells the story of how he grew up a poor kid, but due to the tutelage of a friend’s father, learned to become a businessman. The book is a simple read but puts forth important concepts…assets are only assets if they will make you money, don’t spend foolishly, and educate yourself to grow. There is also a good bit of advice on real estate investment as a vehicle to become wealthy.

 

Principles by Ray Dalio

Ray Dalio is one of the richest men in the world and got that way by building one of the top hedge fund management companies, Bridgewater Associates. In Principles, he relates his lis life and how he got to where he is, developing his principles for business and personal life as an operating system along the way. This is another Audible entry where the author reads the book to you. It works.

 

Real Estate Investing

Long Distance Real Estate Investing by David Greene

While I don’t invest in real estate outside of my back yard, (for now), this book is incredibly useful as a guide of how to do things. The methodologies and techniques laid out here will work even in a local market. It’s a mix of strategies, tools, and tips to be successful.

 

The Book on Rental Property Investing by Brandon Turner

This book is a thorough primer for anyone wanting to get into rental properties as an investment. It covers everything from finding properties to rehab tips and beyond.

 

The Book on Managing Rental Properties by Brandon Turner and Heather Turner

Hmmm…the title sounds a bit familiar…YES! This is the follow-up book to The Book on Rental Property Investing. It picks up where the previous book left off and takes a deeper dive into what you need to do to manage properties successfully.

 

Loopholes of Real Estate Investing by Garrett Sutton, Rich Dad Advisor

Another Audible author read, Loopholes covers the benefits of and hazards to watch out for when investing in real estate. I have probably listened to this book at least 6 times…right up there with the 4-Hour Workweek and The E Myth revisited. Lots of great advice.

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

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Business Finance – Understanding Cash Flow

An infographic representation of Cash Flow.

 

Today I want to go over Cash Flow and why it is critical to business finance.
There are four basic reporting metrics for business finance:
  • Balance Sheet – Statement of financial position, reporting a company’s assets, liabilities, and owners’ equity at a given point in time.
  • Income Statement – Statement of revenue and expense or profit & loss.
  • Equity Statement – Statement of changes in equity or retained earnings.
  • Cash Flow Statement – Statement of a company’s cash inflows and outflows during a given period of time.

 

I will cover the first three in more detail with later posts because I want to talk about Cash Flow and the Cash Flow statement.

 

Cash Flow
Cash Flow is the total amount of money coming into a business (revenue, income, investments, loans, etc.) and the total amount of money going out of a business (bills, expenses, wages, capital purchases, etc.) over a given period of time. It can be a year, a quarter, a month, or any time period you want to look at. For my purposes, monthly reporting is preferred, as it coincides with other regular monthly financial reports.
Doesn’t the profit & loss report show you the same information?
While reporting similar information, Cash Flow & Profit & Loss Reports serve different purposes. The Cash Flow report gives you an understanding of how you are bringing money into your business and how you are spending it while the P & L report shows you revenue earned and expenses paid.
OK, that still sounds similar, you say.
It may be easier to understand if you look at it from the perspective of different accounting methods. Businesses use either the Cash Basis or the Accrual Basis methods.

“Cash basis – Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees.

 

Accrual basis – Revenue is recorded when earned and expenses are recorded when consumed.”

If you are operating on the Cash Basis method, your revenue and expenses are recorded into your accounting system when they occur. In this case, your P & L and Cash Flow Reports should show almost the same information for a given period, with minor differences like loan principle repayments not showing up on a P & L.
In the case of the Accrual Method, you might earn revenue in a given month, but you won’t see the money from it until the invoice gets paid, which may be a month down the line. As for expenses, you may be paying for supplies immediately, but can’t show them on the P & L until the revenue is earned. So, you are potentially paying for supplies in one month, showing revenue in the next month, and not actually getting paid until the third month.  In this scenario, the P & L would show the expense & revenue in the second month, but the Cash Flow would show the outflow of the expense in the first month, no activity (with respect to the subject order) in the second month, and would show the revenue inflow (invoice being paid) in the third month.
Because of this, you should be looking at both reports to better understand what is going on in the business.
Why is Cash Flow important?
 
To be a successful business, you want to have positive cash flow…that means that you have more money coming in every month than you are paying out in expenses, wages, and bills. This seems like a “DUH!!!” statement, but without looking at both your P & L AND Cash Flow reports, it would be hard to make sure you are able to bring in more cash than pay out in expenses.
Without regularly reviewing the Cash Flow statement, you might think you are breaking even or close to it, until you realize that your bank account has steadily been dropping and you really were not even close to breaking even.
And, as always, let me know what you think in the comments. Ask questions, tell your story.
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Personal Finance: Saving Money Versus Saving Money Versus Saving Money

Saving Money…Maybe you should think of it as Rescuing Your Money!

 

This week I am going to cover saving money. There are many differing thoughts about this topic these days, some of which have valid points. I will also lay out my thoughts on the idea.
Saving Money – Why Should You?
Why should you save money? You can save money for an emergency. You can save money for to buy something special. You can save money for a dream vacation. You can save money for retirement. Your reasons are valid for you.
Tim Ferriss advises that you set dreamlines…goals you want to achieve and figure out how much it will cost, both per month and one-time charges, so you can figure out how to get your retirement now rather than delaying and saving for “one day”. There is also this whole part about coming up with a muse, or business idea that will provide the extra income to cover the costs of achieving that mini-retirement. The other thing is that they should be frequent.
Robert Kiyosaki says “Savers are Losers!”. His reasoning is that no matter how you are saving money, be it in a bank, in a Certificate of Deposit (CD), or in a pickle jar buried in the back yard, you are losing money, at least at this point in time, because of monetary inflation.

“MonetaryInflation is an increase in the money supply which generally results in priceinflation.  This acts as a “hidden tax”on the consumers in that country and is the primary cause of price inflation.Monetary inflation is commonly referred to as the government “printingmoney” although the actual process is a bit more complex than just cranking upthe printing presses but the effects are essentially the same.As the money supply increases the currency loses its purchasing powerand the price of goods and services increases.”

Why under the mattress, In a savings account, or In a Certificate of Deposit Costs You Money
 
Currently the rate of inflation is approximately 2%. Based on the definition above, that means that your money loses 2% of its purchasing power. If your savings account is paying 0.25% interest rate, your money in that account is losing 1.75% with this rate of inflation. If your CD is paying 0.3%, you are losing 1.7%. And if you have it in a pickle jar, you are losing the full 2.0% of purchasing power by not doing anything with it.
Ultimately, as far as I am concerned, instead of just saving money, put your money to work in an investment that will earn you more than the rate of inflation. Historically, the S&P 500 has provided positive returns over the long term, but in some years, like 2008, it had a negative 37% yield.
Overall, accounting for inflation, the market seems to average about a 7% return, but you will be advised to leave your money in the market and let things work themselves out. We have money in the market in the form of traditional & Roth IRAs, regular managed investments, my 401k, and various individual stocks that I play with (not very much).
I, personally, don’t want to devote my time to attempt to master the market.
Why you should make your money work for you
We also are investing in real estate. So far, those investments are working out to about a 9% return. Real estate has many options from flipping, to buy and hold (rentals), to lending, to investing in notes (becoming the mortgage holder for other borrowers). As stated before, BiggerPockets is the best free education on real estate investing you can find.
Additionally, we invested in a high-end door manufacturing business. It is not currently providing a return on investment, but it is improving and still self-sustaining, in addition to providing me and my fellow investors with some of the best business management lessons we have ever run across.
The bottom line, make your money work. To paraphrase the old adage, if your money is not moving forward, it’s falling behind.
And, as always, let me know what you think in the comments. Ask questions, tell your story.
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REI – Analyzing a Property as a Rental

This week is a bit of a follow-up to last week’s article about finding your breakeven point. I covered what you needed to look at and why it was a good idea to know what your breakeven point was before you get into a business. Now I will apply similar principles to Real Estate Investing.

Today, I am going to go over what I look at when I evaluate a property to add to my portfolio. My strategy for real estate investing is Buy and Hold, meaning that I buy properties and intend to keep them long term, renting them out to tenants.

Cost Assumptions

For cost assumptions, I use the asking price, and an estimated cost of improvements (rehabbing property) & estimated closing costs (approximately 3% of price of property).

Finance Assumptions

Use a mortgage calculator to determine monthly debt service payment. Set the desired term (15 yrs, 20 yrs, 30 yrs, etc.), down payment, and interest rate.

Gross Rents

Gross Rents are the total rents expected to be collected on a monthly basis. This can be rent form a single-family home or a multi-family property such as a duplex, triplex, or larger apartment property.

Vacancy

To account for vacancy and deduct a percentage from your gross rent before deducting expenses. I generally use a conservative vacancy percentage like 10%. While I will more than likely not  have 10% vacancy in a year, accounting for it helps me to ensure the  property will always  cash flow.

 

Expenses

So, once I have a property to analyze, the first thing I do is verify the expenses. For the most part, the costs should be relatively the same, with the exception of property taxes.
I account for the following expenses:

  • Property Taxes
  • Insurance
  • Maintenance & Repairs
  • Utilities
  • Advertising
  • Administrative
  • Variable Cost Property Management
  • Lawn Care / Landscaping
  • CAPEX

Property Taxes can usually be found on the local parish or county assessor’s website. You just have to search for the property address and all of the details for the property are listed. Who owns it, what municipal assessed value is, what the property has sold for, and what the city and parish/county taxes are estimated at for the current year.

Insurance can be estimated by getting a quote from your insurance agent/provider or if you have a similar property, you already have an idea what the cost is.

Maintenance & Repairs covers anything short of replacing major components of the property.
Utilities are what you expect to pay for utilities while doing turnover or when the property is unoccupied between tenants.

Advertising is the costs for paid advertising to attract tenants.

Administrative are the costs for anything administrative to do with operating the property as a rental. This covers book keeping, accounts payable, accounts receivable, etc.

Variable Cost Property Management is a percentage of gross rents paid to a property manager to manage the property. I account for this as an expense even though I manage my own properties so in the event I decide to engage a property manager, I already have that cost covered and don’t have to worry about adding a PM cutting into my cash flow.

Lawn Care/Landscaping covers grass-cutting when the property is not occupied and/or if the property is a multi-family property where the tenants don’t normally take care of the lawn.

CAPEX is an amount put aside to cover major repairs such as replacing the roof, appliances, flooring, plumbing, electrical, etc. That way, you have the money to cover these repairs instead of worrying where to get the money from.

 

 

The Analysis

Once I have gross rents, vacancy, cost assumptions, and expense values collected, then the analysis of the property can begin. I use a spreadsheet to conduct my analysis and it is set up to tell me what I need to know. There are inputs for all of the items listed so far.
I enter the asking price, my desired finance terms, estimated gross rents, and estimated expenses.
I then evaluate whether or not my targets are met at the property’s asking price. If it does not, I then start adjusting the price downward until I reach my target numbers.
For me to consider a property a good deal, it must meet the following criteria:
Cash flow >$100 per door and have >12% Cash on Cash Return, if financed
Cash flow >$400 per door and have >6% Cash on Cash Return, if purchased cash
Be in a decent neighborhood

Cash Flow
Cash Flow is the amount of money from gross rents (revenue) remaining after expenses and debt service are covered.
Cash on Cash Return 
Cash on Cash Return is the annual amount of return you get compared to the amount of cash you spent to acquire the property.



By comparing gross rents, total costs, expenses, debt service, and returns I am able to decide if a property will be a money-making addition to my portfolio. By continuing to add properties to my portfolio that cash flow, I get closer to my “Freedom Number”. Where my passive rental income covers my personal costs and expenses, so I don’t have to worry about needing a job.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Overspending, Why And What to Do about It

 

This week, we are going to talk about spending, spending habits, and debt. As I related in a couple of previous posts, My History With Money, Pt. I & My History With Money, Pt. II, I had a bit of a spending problem. While the majority of my debt was from my mortgage, I was having trouble keeping up with payments and just keeping cash on hand. Hopefully, I will be able to provide you with some insight into why we spend and get into debt.

First, here are some statistics I gathered on income and spending in the US:

  • The average pre-tax income for people living in the US in 2016 was just under $75,000.
  • The average annual expenditures for people living in the US in 2016, including food, housing, transportation, discretionary spending, and insurance was slightly over $57,000.
  • Add to that, the average amount of taxes paid between local, state, and federal in US as of last year is about $10,500.
  • What you wind up with is about $8,000 a year (or $666.67 per month) of savable/investable income, based on averages.

The problem with averages is that it smooths out all of the variations in the data. In simpler terms, not everybody can recognize that excess money at the end of the year.

Here’s another bothersome statistic: 43% of Americans in the US spend more money than they make, according to the Federal Reserve.

 

The most common reasons people spend more than they make.

How to address the reasons listed above

If you are in the situation where you are spending more than you make and/or are in a lot of debt, the first thing to do is commit to changing your habits and then doing some things to change your situation.

Budgeting:

Be aware of what money you have coming in and what money you are spending. Break out your spending between necessities and discretionary. Necessities are electricity, water, gas, mortgage/rent, food, transportation. Discretionary spending covers items like cell phones for every member of the family, cable, internet, visits to the casino, cigarettes, beer, and similar things that are not vital to your survival.

Figure out approximately what percentage of your monthly income is needed to cover each necessity and allocate a little more than that requirement to be put aside to cover each one. I suggest putting cash into envelopes labeled for each one. By putting a little more into the envelope, that will help to cover variances in income and costs. This idea is actually based on the ideas put forth in the book Profit First by Mike Michalowicz. The book is aimed at entrepreneurs trying to get their business to a profitable state, but the principles apply to personal finance, also.

They KEY thing is to not touch the money once you put it aside unless you are paying the bill it is dedicated to.

Make sure you are also able to put aside an emergency fund. The amount should be approximately three times your monthly income/take home pay. This goes a long way towards keeping your life steady in the event of bad weather, vehicle breakdown, illness, etc.

Try to stick to only spending on necessities until you are comfortably out of debt. Then start looking for ways to invest some of your “profit” to make you more money. (Since I am not a financial advisor, I can’t offer advice on how to invest that money, but I will cover my thoughts on the matter in a future post.)

Credit cards: 

Only use them if you have the money to pay for what you are purchasing and can commit yourself to not spending the cash on anything other than paying your credit card bill.  If you have a balance on your credit card, don’t use it at all until the balance is paid off. Only then should you use a credit card to buy stuff.

If you already have a balance on your credit card or even multiple cards, work on paying off those balances first. There are two approaches to methodology when doing this, either start paying extra on the card with the highest interest rate and balance, if you can make yourself do that regularly without getting disappointed or pick a card with the smallest balance and pay it off first. This will give you a self-esteem boost by way of accomplishment.

DON’T PUT ANYTHING ELSE ON THAT CARD!

After the first one is paid off, take the monthly allotment of your income that was dedicated to paying off that card and start adding it to what you are paying on the next card. Keep doing that until all of your cards are paid off.

PAY OFF YOUR BALANCE EVERY MONTH!

This is crucial for not accumulating debt. It may even be better for you to have a charge card like American Express, where you are required to pay it off every month.

Don’t “float” your balance from one new card to another without paying it off. It ends badly.

Psychological Reasons for Spending



We are constantly being bombarded with advertising trying to influence us to spend money. Whether it is buy a new car, get the latest phone, or use our credit card to buy your dreams. Advertising implies that if we don’t spend, we are a lesser person. Don’t believe it!

Yes, you do need some of the things you see advertised, but you don’t need to go broke or get in debt to get it.

Buying things to feel better about yourself actually make you feel worse in the long run.

DO something to change the things in your life you don’t like. Don’t waste time worrying about the things you can’t change, because it will only make you feel worse.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Real Estate Investing: How We Started Out

Like the game Monopoly, you can grow your money with Real Estate.

This week, we are going to talk about how we started investing in real estate. It wasn’t an overnight decision, or result, for that matter.

My first foray into real estate investing (REI) was to partner with one my uncles and my cousin (his son) to develop an RV park in the Port Fourchon area. It seemed like a great idea…lots of potential for revenue and extended development. And I knew nothing about evaluating the deal to see if it was going to be a money maker or not. I put up the money to initiate the lease of the land ($20,000) and we proceeded to get a loan from a local bank to develop the park. We had to get permits, evaluations, inspections, etc.  The total amount from the bank came to $150,000. Just as the park was about to open, the BP Macondo/Deepwater Horizon oil spill happened and shut down the oil & gas industry in the Gulf of Mexico. The space was leased to a catering company as a staging area for feeding spill cleanup workers and to facilitate a training space.

We eventually opened up the park and began operating. My cousin and his wife managed the operations.

I began traveling around the world a good bit for work and realized that I could not be deeply  involved in the deal in addition to my wife not being happy with me involving us in it in the first place. My cousin offered to buy us out for $30,000, paid over time. This worked for us as it got our  money back, along with about a 17% total ROI.

While the deal made us money, the stress and aggravation of not being in control left us with a bad taste in our mouths.

Fast forward a couple of years and we decided to remodel my in-laws’ home to set up as a rental. My father-in-law passed away the preceding year, leaving the home to my wife. We got it remodeled after a few false starts and bumps in the road. And started renting it out.

I mostly stayed hands-off of the operations and mainly just helped handle repairs & stuff, since it was my wife’s house (via inheritance).

Towards the end of 2015, I started to get aggravated with my job, (for the nth time), and started a more serious search for something else that I could rely on for income. In January of 2016, I found Bigger Pockets, an online forum/educational platform for real estate investors. It was then that I realized that REI was something that I could do. In fact, in a way, we were already doing it. The thing that appealed to me about it was that successful investors rely on systems and processes to make their businesses run well. WOW! I am a “Systems & Processes” type of guy! It was an epiphany, of sorts.

I started listening to podcasts, devouring forum posts related to my topics of interest, attending real estate investor association meetings, and reading books to learn about how to reach my financial goals through  REI. I put together a 30,000 foot overview of what I would like to do and how I could do it. When I discussed my idea with my wife, she was initially skeptical because I repeatedly come up with plans to make money and either never initiate them or follow through on them.

I continued to learn about buying and managing rental properties, along with operating a business. I became more involved in the operation of the existing rental, more or less making it my responsibility.

So, that is how we got started in REI.

Let me know what you think in the comments. Ask questions, tell your story.

If you like my posts, please share them with others and subscribe to this  blog.

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