From great tragedy comes great opportunity. For the last few years we have all heard the sad stories that came from the sub-prime lending bubble. When this combination of greed and ignorance imploded, it created an amazing opportunity.
Houses went on sale, at the same time interest rates were falling to record lows. This was a once in a lifetime event in real estate; unseen since the great depression. Those who recognized it, and were positioned to take advantage of it, have thrived. I recognized it, but was not in a great position to take advantage of it. I lacked 3 major components that would have positioned me to better exploit this opportunity.
Here are those 3 components and what I have learned.
In 2007 as home prices were coming down I began buying. My first purchase was 3 triplexes in a poverty stricken section of Louisville. I acquired two additional properties in 2007, and kept purchasing homes over the next 18 months.
My first problem: Location
There are 2 aspects of location:
First was my location. I was living in Singapore and my properties were in Kentucky and Indiana. I had a variety of assistance from others, including a “property manager”(more on this later), and partners. I was only able to be onsite about twice a year and lacked the right person to watch my property. It is hard to manage assets from 10,000 miles away.
Proximity to your investment is good
Location of the properties: there is the famous line that 3 most important things in real estate is location, location and location. While I would disagree, it is an important component in your evaluation. I overpaid for those 3 triplexes because of their location, not because of the buildings. They were great buildings in a challenged area of Louisville. I struggled to find tenants worth having. These 3 properties would almost bankrupt me as I learned the next component.
Good neighborhoods attract good tenants
I had very limited experience in owning residential rental real estate. So, I hired a “property manager.” Just because someone calls themselves a “property manager” doesn’t mean they are. To this day I have not found a good property manager who will work in that part of Louisville.
Rent would fail to be paid due to poor tenant selection. It seemed we evicted tenants every week. I paid the lawyer to do the eviction. Eviction process took 2 months (getting no rent). Then I had to pay to clean up and market the apartment again. It is better to have a unit be empty than have a bad tenant.
Bad tenants are rarely profitable
I had bought way to many properties (we had 12 at the peak), to fast. This amplified the cost of my ignorance and lack of experience. Remodeling costs were higher, tenant occupancy lower, and rents lower than anticipated. Only infusion of cash from my wife and I kept the venture together.
When entering into uncharted waters start small (or your inexperience could sink you faster than a lead brick in water).
The last component I lacked was: Capital.
During college and early working years, I spent a substantial part of my income on eating out, expensive liquor, and two brand new vehicles. This included about $20,000 dollars of credit card debt, that was in collections when I finished my undergrad degree. I had just finished getting out of that mess in 2007.
I had very little capital to invest in this opportunity. This was a good thing as I would have probably leveraged it to a level that would have bankrupted us. When I married in 2008 my wife brought capital into the marriage and a great income. This enabled us to purchase several properties with cash. (Her parents and culture taught her about not spending more than you make, I had to learn it the hard way.)
Even though I lacked these 3 components, the opportunities were so amazing. We have been successful! It took 4 years of struggle but now our rental income is one of the main reasons I get to be the primary care-giver for our 3 beautiful girls.
What was your response to the sub-prime crisis?Read More
What is a good deed?
His implication; it was good because I didn’t receive anything in return for it. I wasn’t paid. I spent my gas, time, and energy without any tangible benefit to me.
I had spent all day, cleaning and showing a house to potential tenants. It is a really nice home extremely close to the University of Louisville. I enjoyed living there as a student, the home is nicer than when I lived in it. Now students get to derive the same benefits I enjoyed while living there. Were those activities good deeds?
If we are paid for an activity is it no longer a good deed?
In January one of my daughters contracted strep throat. She couldn’t even keep water down. She was extremely dehydrated and had a fever. After four hours in the emergency room she was doing much better.
Was that a good deed the doctor and nurses performed? I was glad to give them some silly green pieces of paper for what they did. It was a very good deed for my family.
Some will say “Yeah, but that is medical; it is different”
So here a few people who have done good deeds for me in the last couple weeks (most of them received green certificates of appreciation) For more info on green certificates of appreciation I recommend reading “Thou Shall Prosper”
- Plumber unclogging a toilet at one of our properties
- The other 7 people who showed up the monthly Small biz meeting
- My wife who prepared dinner 3 times this week
- The cooks, servers, and managers at the restaurants, where I dined
- The contractors helping me renovate a home
- The people at the utility companies that provide me electricity, internet, water, and fire for cooking
- The road crews repairing the roads in West Lafayette so I have a smoother ride to church and daycare
- The people who make the disposable cups I use to hold coffee
- Bill Gates for having the vision to create Microsoft and the slew of programs I use
- People at WordPress who created the CMS that allows me to post these articles with ease
As you can see there have probably been millions of people who have done good deeds from which I benefited from over the last couple of weeks. Each of us specializing allows all of us to benefit. Unless you are a drug dealer, thief, etc.; your specialization is valuable and a good deed. It provides benefits for those who consume your product or service.
Almost all of us are doing good deeds when we work. I don’t have to do something for free for it to be my good deed for the day. My days are filled with doing good deeds. Whether spending time with my wife and children, preparing the books for a business, managing our rentals, or writing these articles. “It is all good” Be proud of your good deeds today!!!
Who has done a good deed for you today?
Picture a beautiful sandcastle. Hours spent crafting intricate towers and walls. Elements in the sand glisten as the sun sets. In the “perfect” location, Ocean front property. This beach is amazing, gentle sand, clear water, and void of human clutter. It is perfection…
The tide begins to rise. The sky turns dark with angry clouds. The wind begins screaming like a toddler tantrum. The waves become larger and larger… then with a violent crushing force… The sandcastle is obliterated. There is no trace of those hours of work. The beauty of it is gone.
A sandcastle marriage seems great when there are clear skies and calm seas. Everyone will tell you how beautiful it is. BUT when the storms of life, the baggage of the past, frustrations of the current day, and stress of 2 people becoming 1 appear, the greatness fades. That beautiful sandcastle marriage is shattered by the crashing waves of life.
Some foundations of a Sandcastle marriage:
- Infatuation (a powerful feeling that can fool even the best of us)
- Lust (desire to derive personal pleasure, satisfaction, or status from that sexy, powerful, or wealthy person)
- Baggage (lots of intimate experiences with others outside the covenant of marriage or other unhealthy dating relationships)
- Selfishness (My spouse is going to do all these things for me)
- Co-dependency (Need to fix someone else’s problem, making it your problem. Enabling the other person in the process)
- Unresolved emotional issues (most of us have things in our past that could use resolution, perhaps with the assistance of a counselor or physiologist)
None of these provide a foundation for marriage. A long-term successful marriage has a strong foundation. When the storms of life come blasting in; it may damage aspects of the marriage relationship for a season, but the foundation is solid. The couple can easier stand back up and rebuild together on that solid foundation.
Some foundations for a life-long marriage
- Love (a choice one makes, love is not a feeling. Hollywood wants us to believe love is a magical feeling but in reality it is a choice. Infatuation and lust are the feelings often mistaken for love)
- Purity (I can only talk about this one from the other side as I wasn’t pure before marriage. I know what it is like to have your mind constantly bombarded with past baggage. Baggage that comes crashing in on your mind with waves of guilt and shame.)
- Honesty and trust (speaking the truth with gentleness, being trustworthy and trusting)
- Communication (Set aside times to communicate about your life together, Daily is best)
- Vision and goals (What is your shared vision? You can’t have separate visions for your life or your foundation will crack)
- Dedication and loyalty (Divorce is not an option. Be dedicated to finding a solution. Speak well of each other to others and to each other)
- I am sure several of you have some other foundation blocks you could add. Please share them in the comments below.
None of us are perfect with all of these points. Sometimes our marriage foundations have cracks in them. Be quick to address and work together to fix them. While harder to repair, they are so worth taking the time to repair. There is an exponential power released when a married couple comes together with 1 vision and set of goals.
Storms and challenges in life will come your way. Your marriage will be threatened, attacked, and beat up at times. As Dr. Thomas Stanley (author of The Millionaire Next Door and The Millionaire Mind) found in his research, the vast majority of millionaires have long-term happy marriages. Children who grow up in homes with both parents are more successful. Married people have a longer life expectancy. The benefits of making a marriage work far and away exceed the costs.
It is better to build the solid foundation before marriage, but not required. Maybe your marriage seems to be a sandcastle right now. All is not lost. You can start working on your foundation today.
What are some other foundation blocks for a good marriage?
Compounding: the concept of reinvesting our harvest. How reinvesting your returns from investments grows your assets.
Here is an example of the basic concept.
You spend $1000 on a bond that pays 10%/year
|Year||Year Interest||Total Interest||Balance|
|1||$ 100.00||$ 100.00||$ 1,100.00|
|2||$ 110.00||$ 210.00||$ 1,210.00|
|3||$ 121.00||$ 331.00||$ 1,331.00|
|4||$ 133.10||$ 464.10||$ 1,464.10|
|5||$ 146.41||$ 610.51||$ 1,610.51|
|6||$ 161.05||$ 771.56||$ 1,771.56|
|7||$ 177.16||$ 948.72||$ 1,948.72|
|8||$ 194.87||$ 1,143.59||$ 2,143.59|
|9||$ 214.36||$ 1,357.95||$ 2,357.95|
|10||$ 235.79||$ 1,593.74||$ 2,593.74|
|11||$ 259.37||$ 1,853.12||$ 2,853.12|
|12||$ 285.31||$ 2,138.43||$ 3,138.43|
|13||$ 313.84||$ 2,452.27||$ 3,452.27|
|14||$ 345.23||$ 2,797.50||$ 3,797.50|
|15||$ 379.75||$ 3,177.25||$ 4,177.25|
|16||$ 417.72||$ 3,594.97||$ 4,594.97|
|17||$ 459.50||$ 4,054.47||$ 5,054.47|
|18||$ 505.45||$ 4,559.92||$ 5,559.92|
|19||$ 555.99||$ 5,115.91||$ 6,115.91|
|20||$ 611.59||$ 5,727.50||$ 6,727.50|
In 20 years your $1,000 has increased to over $6,700 and you will earn $670 in the next year. In year one notice it was only $100. That movement from $100 to $670 is compounding in action.
If you consumed(spent) that $100 each year, you would only earn $100 each year.
In our next example let’s say we invest an average American car payment each month in addition to that initial $1,000 investment. (We are using $350 for car payment as the average ranges from $300 to $550 per month)
|Year||Year Deposits||Year Interest||Total Deposits||Total Interest||Balance|
|1||$ 4,200.00||$ 324.19||$ 5,200.00||$ 324.19||$ 5,524.19|
|2||$ 4,200.00||$ 776.61||$ 9,400.00||$ 1,100.79||$ 10,500.79|
|3||$ 4,200.00||$ 1,274.27||$ 13,600.00||$ 2,375.06||$ 15,975.06|
|4||$ 4,200.00||$ 1,821.69||$ 17,800.00||$ 4,196.76||$ 21,996.76|
|5||$ 4,200.00||$ 2,423.86||$ 22,000.00||$ 6,620.62||$ 28,620.62|
|6||$ 4,200.00||$ 3,086.25||$ 26,200.00||$ 9,706.87||$ 35,906.87|
|7||$ 4,200.00||$ 3,814.87||$ 30,400.00||$ 13,521.74||$ 43,921.74|
|8||$ 4,200.00||$ 4,616.36||$ 34,600.00||$ 18,138.11||$ 52,738.11|
|9||$ 4,200.00||$ 5,498.00||$ 38,800.00||$ 23,636.10||$ 62,436.10|
|10||$ 4,200.00||$ 6,467.80||$ 43,000.00||$ 30,103.90||$ 73,103.90|
|11||$ 4,200.00||$ 7,534.58||$ 47,200.00||$ 37,638.48||$ 84,838.48|
|12||$ 4,200.00||$ 8,708.04||$ 51,400.00||$ 46,346.52||$ 97,746.52|
|13||$ 4,200.00||$ 9,998.84||$ 55,600.00||$ 56,345.36||$ 111,945.36|
|14||$ 4,200.00||$ 11,418.72||$ 59,800.00||$ 67,764.08||$ 127,564.08|
|15||$ 4,200.00||$ 12,980.60||$ 64,000.00||$ 80,744.67||$ 144,744.67|
|16||$ 4,200.00||$ 14,698.66||$ 68,200.00||$ 95,443.33||$ 163,643.33|
|17||$ 4,200.00||$ 16,588.52||$ 72,400.00||$ 112,031.85||$ 184,431.85|
|18||$ 4,200.00||$ 18,667.37||$ 76,600.00||$ 130,699.22||$ 207,299.22|
|19||$ 4,200.00||$ 20,954.11||$ 80,800.00||$ 151,653.33||$ 232,453.33|
|20||$ 4,200.00||$ 23,469.52||$ 85,000.00||$ 175,122.85||$ 260,122.85|
In this example over 20 years we have invested $85,000 and the current value is over $260,000. Your investment of just $4,200/per year has become a potential income of $23,500 per year.
Here we are compounding our investment by continually adding to it from other sources. This is the idea behind saving for retirement. You can create your own custom calculation here. It is a great way to determine how you can get to your desired saving when you enter into retirement.
Now, to really see the amazing power of compounding; let’s change your percentage return. Instead of mutual funds or bonds, what if we are investing in something with more potential. Maybe it is an investment, where we combine our money with our energy. Creating returns of 50% or more. It is the Power of Seed in action.
What if you average 50%per year on your money and you reinvest that? Maybe it is flipping houses, flipping cars, making jewelry or clothing. What is your passion? If you turned off the T.V. and used your time and talent what could you make?
Let’s take that $1,000 and invest in a “riskier” asset. (In these types of activities the main risks are risk you can control. This means the risk depends on how wise the investor is). Could you use $1,000 and find a way to make $500 this year?
|Year||Year Interest||Total Interest||Balance|
|1||$ 500.00||$ 500.00||$ 1,500.00|
|2||$ 750.00||$ 1,250.00||$ 2,250.00|
|3||$ 1,125.00||$ 2,375.00||$ 3,375.00|
|4||$ 1,687.50||$ 4,062.50||$ 5,062.50|
|5||$ 2,531.25||$ 6,593.75||$ 7,593.75|
|6||$ 3,796.88||$ 10,390.63||$ 11,390.63|
|7||$ 5,695.31||$ 16,085.94||$ 17,085.94|
|8||$ 8,542.97||$ 24,628.91||$ 25,628.91|
|9||$ 12,814.45||$ 37,443.36||$ 38,443.36|
|10||$ 19,221.68||$ 56,665.04||$ 57,665.04|
|11||$ 28,832.52||$ 85,497.56||$ 86,497.56|
|12||$ 43,248.78||$ 128,746.34||$ 129,746.34|
|13||$ 64,873.17||$ 193,619.51||$ 194,619.51|
|14||$ 97,309.75||$ 290,929.26||$ 291,929.26|
|15||$ 145,964.63||$ 436,893.89||$ 437,893.89|
|16||$ 218,946.95||$ 655,840.84||$ 656,840.84|
|17||$ 328,420.42||$ 984,261.25||$ 985,261.25|
|18||$ 492,630.63||$ 1,476,891.88||$ 1,477,891.88|
|19||$ 738,945.94||$ 2,215,837.82||$ 2,216,837.82|
|20||$ 1,108,418.91||$ 3,324,256.73||$ 3,325,256.73|
Your $1000 becomes 3.3 million in 20 years… most likely at some point in this you will need to bring on the energy/time of another person or more. This is basically concept of how Michael Dell started. Building computers in his garage and expanding until he was one of the largest computer manufactures in the world.
A business doesn’t grow in a straight line like our example. It will have ups and downs. One business or idea may reach a saturation point. At that point to earn the large returns; we may have to take the new earnings and find alternative investments or new businesses.
Compounding is the basis of the concept “it takes money to earn money.” Once you have accumulated those bricks of abundance, your money can work in addition to you working. Your money doesn’t have to be lazy. It can have a J-O-B.
What J-O-B does your money have?
Is your money lazy?Read More
We often here the phrase used that “time is money,” (Is this true?)
Many of us work jobs or have worked jobs where we were paid for the time we put in. We clocked hours and were paid, no matter how much or how little we did. So most of us have at least traded our time for money; but does that mean our time is equal to money? Are they the same thing?
What is money?
Money is a tool or store of value that we use to exchange for goods, services, or gifts. Money can be made of a rare and valuable asset, such as gold or silver coins. It can also be backed by those valuable assets. Until 1971 you could trade your U.S. Dollars for a fixed amount of gold and/or silver.
Most money today, has very little intrinsic value. It is called fiat money meaning it has value because of a decree by the issuing nation.
Attributes of Money:
- Can be traded for a good or service we desire
- No intrinsic value (in most cases today)
- It is easy to create more
- It can be accumulated for future use
- Infinite possibility
What is time?
Time is a unit of measure that scientists struggle to understand. We all know it exists, and yet we don’t understand why or how. If you want to learn more here is a complex article and blog about the topic (click here)
Attributes of Time:
- Can be traded for money, goods, or services
- Its individual determines how much they value their own time
- Each of us has a limited time of existence on earth
- We cannot store time (once it passes it can never be used again). We can only use a moment in the moment. Once that moment has passed we can never use it again.
- While time may be infinite, we only have a finite amount
Can we trade money for time?
We can trade our time for money, but no matter how much money you have you can’t buy more time (with the exception of healthcare treatments that can prolong your life). You can’t use your money to redo a past time in your life. Once you have spent time, that expenditure is permanent. No refunds, no exchanges!!!
With No Refunds, No Exchanges, what are you doing to spend your time wisely?
What is more valuable to you? Money or Time?
The insurance companies collect premiums in advance to cover certain risks. The risks covered and the liability limits are defined in the declaration of coverage. With these collected premiums the insurance company then pays current claims and other expenses (such as advertising). The remaining balance of premiums is invested and held in reserve for future claims.
Basic Insurance Company Income Statement:
|Revenue from Premiums||_____________|
|Income from investment of Reserves||_____________|
|Payment of Claims||_____________|
Insurance companies fall into two main groups:
- For Profit (These have owners who expect a return for their investment): State Farm, Allstate, Progressive, Geico,
- Cooperatives, or Mutuals (These don’t have owners, the policy holders are the stakeholders): USAA, Nationwide, Hastings, most Farm Bureaus
Theoretically the Mutual companies should be of greater value to customer, as the customer are the owners. However, profits are only one component of the various factors that determine total value to the insured. I am not for or against either type of insurance company and you can find great value in either type of corporate structure.
Now we will go through each line of the income statement and discuss the strategies implemented by those insurance companies
Several companies utilize a core marketing strategy that focuses on the lowest price for their policies. Progressive utilizes this strategy the most. They encourage you to compare rates (although it is not a simple process). Usually they are the lowest priced option (perhaps you are getting what you pay for?). This is a great marketing strategy, hoping the consumer views it an apples to apples comparison.
Not all apples taste the same. Just like there are several attributes to creating a great tasting and nutritious apple. There are other attributes that reveal the total cost of your insurance not just your upfront premium.
Investment returns on reserves
As a general rule the investment returns are relatively similar for different companies. However, are those returns utilized to provide more value to the customer, paying shareholders, or paying one of the other expenses discussed below.
Note: Warren Buffet uses insurance reserves to fund many of his investments through Berkshire Hathaway (owner of Geico and several other insurance companies).
Customer acquisition costs
Traditionally all insurance companies would work through insurance agents. However, that has changed over the last couple of decades. Several companies now offer you the option to buy directly from them via the internet or over the phone.
There are two types of agents Independent and captive. A captive agent sells the products of one company. All State, Farmers, and State Farm are good examples of this strategy. Independent agents represent several companies in each category of insurance they provide.
Components of Acquisition costs:
- Agents or staffs to handle direct sales
- Advertising (all those ads at our favorite sporting events are not free)
- The more they spend on advertising the less they can spend somewhere else
This entails all components of paying a claim such as:
- Cost of the adjustor
- Cost of the staff to process claims
- Fraud (some people file fraudulent claims some companies can be more susceptible to this which raises their costs)
- Legal defense fees (when those attorney’s you see on TV sue to get more money)
So far in my life I have experience 5 different companies insurance claims process. I was very satisfied with several of them. However, my experience with Progressive was awful. They paid me wholesale value for my car, and were very nasty and rude throughout the process. In comparison my experiences with All State and Hastings were phenomenal. They made frustrating situation as easy as possible for me.
Some companies focus on low premiums prices to attract customers, then they fight to not have to pay their customers when there is a claim. A little research on the internet will go a long way in helping you determine how the claims experience is for different companies. Most purchasers fail to examine this component of their coverage. This is the difference between a cheap blah tasting apple and that succulent full flavored apple.
This includes things like buildings, utilities, some staff, and regulatory compliance. A well-managed company can keep these costs down. These enables them to provide more value to you.
- Next time you pick an insurance company look at the entire picture.
- Ignore cute lizards, cavemen, and annoying spokespeople.
- Research the customer opinions on their claims process.
- Determine their corporate structure.
I choose to mostly work with independent agents (although I have several properties insured through a captive agent with Kentucky Farm). I also prefer to work with well-managed mutual companies (such as Kentucky Farm and Hastings).
Are you an agent… Give me your opinion in the comments below.
What are your experiences? Tell us about it. Help the rest of us make a more informed decision.Read More
What is an Asset?
Definition of Asset: “An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”(IASB)
In other words an asset is something that currently and will continue to produce revenue. As you remember from Wealth creation part 1; we learned the first rule of wealth creation is to have an accumulation of surplus each year. Those accumulated surpluses can then be used to purchase assets or seeds.
Why is this important?
When a farmer plants their seed in the ground, it produces a harvest (revenue). So why can’t we just consume our seed, why can’t we buy more of the things we want. “I earned that surplus, so why can’t I use it for that new car, new T.V. or trip to the Caribbean? ” If you consume your seed you have nothing to plant. If you have nothing to plant you can’t get a harvest.
When we use our surplus to buy assets we create a new source of revenue!! So now, not only do we have our normal revenue; we have additional revenue being produced by these new assets. Later we will discuss different types of assets. You can view a sample Income statement here. The income statement lists some of the types of revenue that come from different types of assets.
The four steps of Seed Power:
- Your Surplus purchases a seed
- We nurture the seed as it grows.
- When the time is right we Harvest
- We spend, give, and reinvest our harvest.
You planted one seed and get to harvest 1000 to 2000 new seeds. Think about the exponential power of your seed if you plant the 1000 seeds. In this example, your asset requires additional effort and resources to produce your harvest. You would need to sell some of your seed to pay for the costs of planting, nurturing and harvesting your seed.
Different types of assets require different amounts of effort and resources to produce a harvest. A stock that pays a dividend requires almost no effort on your part. While a buying a snowplow to clear snow in the winter time requires a lot of effort. I will discuss these differences between passive and active income in later articles.
If you begin to use your income to buy assets and those assets create more income…. Think of your money working for you. You can go on vacation while your assets work and keep income flowing into your pocket. It is possible to not have to work and yet still have income. FREEDOM
Each dollar you receive has the potential to be a seed. Each dollar you have has the potential to work for you. When you consume that seed it is gone…
What are you consuming that could be a seed instead?
How much income are you receiving from your assets each year?Read More