Think about that…

It’s so profound yet so profoundly simple. Think of anything you’ve been frightened of doing in your life. Then after you do it, it’s not so bad!

The reason it struck me is that it’s the same for investing. Typically a beginner investor is not only frightened, but completely intimidated and often overwhelmed as well, by all the new information, the new skill sets they must learn and the new decisions they must deal with. I often tell a beginner investor, if you’re not at least a little scared – you’re not paying attention!

The first one is always the toughest. This is the hurdle, when conquered, sets the new investor apart from all the would-be’s and wanna-be’s out there. There are no official studies, but the figure we bet on in the Real Estate Industry is 1 person will invest (for every 10 that say they’re going to).

Many of these people even call themselves ‘an investor’ already – they just don’t have any investments yet!

PROs:

Firstly, like mutual funds, when your money is pooled with other people in groups, you are somewhat protected from most major catastrophes and the usually bumpy ride of the regular market. You can also get involved in projects that are otherwise completely out of reach of you financially and have a virtually hands-off investment.

CONS:

You are not in control of your investing vehicle at all. Robert Kiyosaki equates it to driving a car without your hands on the wheel. You put your money in and trust on the reputation (or sales materials) of the REIT. Also, REITs are known to often over-pay for investments simply because they can and don’t take the time to research and negotiate as an individual would.

If you’re really interested in pursuing this route, I recommend reading “Investing in REITs” by Ralph Block

I remember being there too. But, more than that, I get that often when people are taught, even by great teachers like Robert Kiyosaki, Donald Trump, Robert Allen – whomever they like – is very simplistic. The great teachers teach the mile-high view. They have to. If you’re teaching a world full of people, you can’t teach at the micro-level. It doesn’t apply to everyone.

Also, it’s an enormous leap to go from the learning phase, the mile-high view, to actually doing it when you get the microscope-detailed view. The conversation goes from excitement and detached desire to build wealth to obligation and money going out the door, not in, just to get started.

My “Investors Guide” is geared at just the US. Much of it simply won’t apply to the rest of the world – their laws and their economy. But it was written to address the questions I get every day from real world investors just learning and getting started. There’s really so many facets to investing, I want the lay-person to be able to get started with access to the detailed questions.

In his book “Rich Dad’s Prophecy” Kiyosaki actually defines what he means by the term ‘cash flow’.

He says there are 4 quadrants to cash flow:

• Rental income,
• Tax deductions,
• Depreciation and
• Appreciation.

The only problem with the definition is for some of the newer investors. Many new investors are only focusing on the first quadrant: rental income.

All too many get scared right out of the game because they don’t take into account the other 3 quadrants, and that’s where most of your money in real estate will be, not in rental income!

Sure, I have properties that cash flow a couple hundred a month. I also have properties that negatively cash flow a couple hundred a month. The real money is how much I save at tax time and the value of the appreciating real estate. If my properties all had a slow year, they may only appreciate $50,000 in that year. Compare that to the couple hundred here or there in rental income – no competition.

Add another $25,000 depreciation (what Kiyosaki calls ‘phantom cash flow’) and thousands more from all the deductions, more likely tens of thousands. Based on that, do I worry much about monthly cash flow?

Nope! 

Yes, there actually is…

It’s a very simple and straightforward formula that anyone can use. It’s actually not even a ‘formula’, but simply a ratio.

All you need to know is the rent amount (or estimated rent range) and the purchase price. The ratio between the two will come out to tenths of a percent. This is your “Rent Ratio”. The larger that number, the more likely you are to cash flow with less down. The lower the number, the better the loan product you must qualify for and the more down payment you may fork out initially.

In Minnesota right now (for example) investors can expect about .5% to .7% for single family homes depending on area, size, etc. And, with ratios like that, an average person would probably have to put 10% to 20% down – depending, of course on the mortgage product they pick.

One of the reasons we are so excited about Texas Investment Property right now is that number – the ratio between cost of the unit & rent – is almost up to 1%. That’s huge! I mean really about the best in the nation. And the best we’ve seen in a very long time. You do however, have to add in 8% for the management though

Here’s an example to illustrate: those single family homes are in the upper 140’s – we’ll use $148 for the example – and the rents will be about $1200 - $1400/ month. 1200 divided by 148,000 equals .81%. 1400 divided by 148,000 equals .95%.

These properties, based on those numbers alone, are quite likely to have some cash flow even before tax benefits or depreciation…

And I completely understand the beginners’ frustration with there not being just one answer… it should be much more simple than all that!!!

I have the same feeling about insurance. I get insurance on all my investments – it’s typically required by the lender anyway. But if I have to change companies or details – OMG, I want to poke someone’s EYES OUT.

The details they need, the personal information, the structural information, my car insurance information, my social security number & drivers license number???

GET OUT! Just give me a ballpark quote! But, for all my frustration, I understand. Real Estate often looks the same way.

Every day – every single day almost without exception – I get the same questions from new investors: “will it cash flow?”. And that’s when I have to become the dreaded insurance agent… I have to ask “How much are you putting down?” and “How’s your credit score?” which most people don’t really know – heck, half the time I’m not sure where mine is either.

I ask questions that – realistically – are the lenders questions. I try to ‘ballpark quote’ people, but it’s tough. I know people want straightforward and universal answers, but there aren’t any. Some people qualify for great interest rates and some don’t. Some people have 20% down on everything they buy, some don’t. Some people get option arms, some people get 15-year fixed mortgages… and everything in between. I can, however, tell them what they’ll be able to get in rent, but the ‘cash flow’ question will depend on them.

Luckily I work with great lenders – ones that specialize in investors, and investing mortgage products. They can quickly and easily help investors target their preferred monthly payments, based on their 2 or 3 favorite loan products that they qualify for.

THEN I actually CAN answer the question, “Will It Cash Flow?”! 

Before one is allowed to drive a car they go to driving school. They even take a test and are graded on their skills. If they have attained a certain level of mastery, they are awarded a license and are allowed to drive.

Unfortunately in the world of real estate investing, there are plenty of classes you can take and books you can buy, but no test or scoring system before you start. I say ‘unfortunately’ because that means no one has to pass a test, or get a license to invest and that means too many people are driving their financial car (their real estate investing portfolio) – without a license. That is why we all too often hear of the failures…

Another unfortunate part of the game is that everyone wants to ‘get rich quick’ like they see on the late night infomercials. And again, if it were really that simple – that universally easy – don’t you think everyone would be doing it? Those products for sale though, sure make the marketers plenty of money.

These snake oil salesmen fork out thousands and thousands just to get the regular air-time to sell their products. If they’re making so darned much money in the real estate market, doing so well independently, why don’t they just give away their methods, share the wealth, teach and mentor for free?

Unfortunately it just doesn’t work that way. You still pay the exact same amount AND you wouldn’t have anyone acting on behalf of you, the buyer. The developer is only looking out for one person – Himself!

Anyone signing papers to go directly to the developer & his agent actually gives up their right to have professional representation of their own. This, to me, makes no sense because they don’t ever pay any money out of their pocket for that representation and usually don’t know the first thing about real estate law, etc.

But realistically, usually these opportunities are not available retail – Joe-Average can’t just access them by just searching online, etc. And if your investment is in MN (where I’m a licensed agent) I actually represent you. I have full fiduciary responsibilities to act and negotiate on your behalf!

If you went directly to the developer and his agent – they’d LOVE to help you out. Then they take ALL of the commission AND they’re only representing themselves in the negotiation, so they can really work and negotiate to their own advantage because you’re not protected! Like a snail without a shell!

And if it were that really that simple – that universally straightforward – everyone would be doing it! The same as “were do I start”, for a thousand people asking that question there are a thousand different answers.

For some people, they own their own house and can utilize some of their equity. For some, loans against their 401K or IRA are appropriate. For still others with good credit but little leverage, investments with some already built-in equity may be the answer for them. And for some, the best option is to pool with other people to utilize their resources – like friends or parents. And once again, the best way to analyze this is to sit down with a qualified lender – one who specializes in investors and knows the ins and outs of the investing world.

A beginner investor could, if so motivated and qualified, get started for as little as $5,000 - $10,000. But I stress – ‘if qualified’. I’ve taken literally hundreds of phone calls and emails from people – good hard-working people – with credit card debt up the wazoo, student loans to the max, very little income, bad credit scores and they are currently renting. And they want to quit their job and be a full time investor! And it pains me each time to have to do a little reality check. If they want to use OPM (other peoples money), they have to be able to show the OP (lender or bank) that they can repay that money on time and with regularity – a bad credit score doesn’t paint that picture.

It’s not that these people can’t invest – absolutely not the case – they just can’t do it right now. For most people in most situations as little as 6 months of diligence can get them on track, extreme situations 2 to 3 years. But anyone can do it. This too, can be assisted by sitting down with a lender. They can recommend the things to do to repair credit issues, tell you how to leverage yourself to qualify for the most money and the least interest, and give you little tips and tricks that will put you right on track.

And I know it’s not the “sexy” part of investing, but it is an extremely helpful first step if you are willing to be vulnerable for a few minutes and share your financial profile with a professional.

I don’t mean to sound like a monk on a hilltop giving some crazy riddle, but really, to know where one is going – to make a map – one MUST know where they are starting. And most people think they know where they are, but in reality – they don’t. If you do know where you are financially: know your credit score, your debt to income ratio, know exactly what your leverage is, what your retirement plan is and how much is in it and what it’s going to provide you when you retire, and all other financial factors that influence investing – you’re way ahead of the pack.

It’s just the same if you log onto Mapquest or Google maps or whatever you use, and know where you want to go, what is the FIRST THING you have to type in? Not your destination, but your origin.

It is the same with buying investment property. Most people are pretty clear where they want to go, but need a little help to find out what they need to get started. I did too. I knew I wanted a comfortable retirement, I knew I wanted to move out of the city a ways, I knew I wanted to start building my wealth, but I didn’t know what my leverage was now, in order to get there.

I too, had to look at where I was starting from. And if there are a thousand people reading this, there are one thousand different answers to that question. Having said that, the items in the first paragraph are among the first things you’ll want to know. Ideally you should sit down with a lender – preferably a broker, rather than a bank – and get pre-approved or pre-qualified. Then you will know what you can afford and when.