6/1/14: Getting to Critical Mass – Rebalancing Your Real Estate

As any real estate investor knows, properties may generate passive income, but owning them is far from passive.

Because even if you have great property managers and you never see your tenants, you still have important decisions to make about markets, debt and equity.

And while most real estate investors focus on doing deals and managing cash flow (both VERY important activities), the smartest ones also pay attention to asset allocation models.

Yes, it’s true.  Asset allocation modeling isn’t just for Wall Street financial planners and paper asset advisors.

Balancing on their chairs in the studio to build on this critical topic:

  • Your massively popular host, Robert Helms
  • His unbalanced co-host, Russell Gray

All businesses have jargon.  So to make sure we’re all in the same page, let’s clarify some terms:

Critical Mass – that’s how much equity you need to invest for cash flow to generate enough spendable cash flow to support yourself in the manner to which you’re accustomed…or would really like to be accustomed!

Asset Allocation – In traditional financial planning, you’d have a pie chart divided into slices for stocks, bonds, cash, precious metals and maybe one or two other things like annuities, fine art, etc.  We’ll talk about what that looks like for real estate investors in a moment.

It's important to rebalance regularly as you build towards critical mass

It’s important to re-balance regularly as you build towards Critical Mass

Re-balancing – this is simply adjusting your asset allocations (how much of each component) to bring the ratios into alignment with your predetermined plan or model (which of course presupposes you have a plan or model!).

Make sense so far?

Most people’s investing lives can be divided into two broad categories:  Accumulation and Consumption (sometimes called Annuity, not to be confused with insurance products of the same name).

Accumulation is just what it sounds like.  You’re accumulating wealth on your quest to reach Critical Mass.

At Critical Mass, you have enough wealth (equity) to deploy for enough Passive Income (money you don’t have to work for) to achieve escape velocity from the gravitational pull of the daily grind.  Or as our good friend Robert Kiyosaki would call it, Getting Out of the Rat Race.

Critical Mass provides the thrust to propel you out of the Rat RaceObviously, the FASTER you can build wealth, the sooner you can get to Critical Mass so you can achieve escape velocity.

In our temporarily out-of-print book, Equity Happens, we spend quite a bit of time talking about equity growth strategies and the important role of leverage.

Now that equity is happening again (did you have any doubt?), we thought it was time to revisit some of the important themes inside the topic of getting to critical mass.

First, you have to be on the OWNERSHIP side of the equation.  That is, you don’t want to be the lender.  You want to be the owner (or part owner).  This is called EQUITY.  That’s why they call stocks “equities”.  In real estate, it’s called being the landlord.

Next, it’s important to pick the RIGHT MARKETS.  The old adage about the 3 most important things in real estate being Location, Location and Location is true.  Because it’s all about Supply & Demand.

When you pick properties in popular areas (demand), where there is some limiting factor in supply, you have a chance of getting APPRECIATION.  That’s people bidding up the value of the property FASTER than the pace of simple inflation.

Of course, what’s “popular” depends a lot on the property type.  If you’re depending on rental income to pay for the property, mansions in Beverly Hills might be low in supply and high in demand among Hollywood elite, but no one’s renting them from you.  And if they did, the rent probably wouldn’t provide enough cash flow to make the use of leverage appealing.

So “popular” might be affordable houses or apartments in B class neighborhoods in areas with a strong, geographically-linked, regional economy.  Or it might be resort properties in a popular area with limited supply and lots of people paying top dollar for overnight stays.

One way to re-balance your real estate during your Accumulation Phase is to REPOSITION EQUITY into hotter markets.  You can use a cash out re-finance (those are coming back!) to move equity out of a property you want to keep; or you can sell the property and use a 1031 Tax Deferred Exchange to transfer the equity without paying tax on any gains.

Now, if you were in the Consumption or Annuity Phase, you might move your equity from a highly appreciated, low cash flow market to a market and product types that cash flow like crazy (but maybe don’t appreciate as well).  So the idea of re-balancing applies within each phase or in transition from one phase to the other.

Does your brain hurt now?  Sorry.  Let’s just do a couple of more concepts and then you can get a snack.

LEVERAGE (i.e., debt) can be one of our best friends…especially during the Accumulation Phase.  Debt allows you to control MORE property with LESS purchase equity (down payment).

Of course, the down side of leverage is you’ll get less cash flow.  But that can be okay, as long as you have enough (with a safety margin) to make the mortgage payments (and you don’t need any cash flow to live on).

And at today’s stupid low interest rates, it’s hard to make the argument that the best use of cash or equity is to reduce mortgage debt.  But that’s a different discussion.

The main benefit of leverage is that it MAGNIFIES GROWTH.

For example, if you own a $100,000 property for cash and a year later its value increases 10%, your wealth (equity) has grown by $10,000.

If you paid CASH, then your return on your $100,000 invested is 10%.  Super.

Now, if you put only 10% down ($10,000) and got a 90% loan, then you grew $10,000 on $10,000 invested, which is a 100% gain. WOW!

Of course, a paid for property will have more positive cash flow than a 90% leveraged property.  That’s the trade-off.  Maybe for you something in between is “optimal”.  That’s where BALANCING comes in.  YOU have to do the math and decide what’s the optimal balance for your situation.

Lastly (at least for this blog)…

You don’t have to wait to build equity.  That is, you might be able to proactively do something to the property or its operation to FORCE equity rather than wait for the market to appreciate.

So, in the previous example, if you put $10,000 down on on a $100,000 property, then fix it up, you might not have to wait a year for the value to increase.  Because you forced it to happen sooner!

Then you can decide if you want to leave the equity there, or reposition it for more property or higher yield (investing extracted equity for higher interest than the cost of the loan).

See?  Real estate asset allocation, rebalancing and equity optimization can be FUN!

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12/30/12: Happy New Year! Your Real Estate Investing Plan

As 2012 fades into the history books and 2013 rises on the horizon of your life, it’s a great time to take a step back from the day to day hustle to think about the future you’re busy building.

Just like a sports team finishing one season and preparing for the next, it’s important to take a look back and see what worked and what didn’t, then assess where you are today and apply the lessons from the past to chart your course for the future.

Sound hard?  Maybe.  But it’s not mysterious and it’s certainly worth it!  After all, what successful business or sports team do you know that just wanders out into the future with no plan?

In studio to ring in the New Year:

  • Your ageless host, the Dick Clark of real estate radio, Robert Helms
  • Your happy hapless co-host, Russell Gray
  • The father time of real estate investing, The Godfather Bob Helms

The big picture of real estate investing and business is planning is being clear on what you want the enterprise to do FOR YOU.  This is important to make sure the business serves you and not vice versa.  So from the beginning of your planning project, take time to ask yourself what you REALLY want – in terms of lifestyle, finances, stress, etc.

Once you have your “dream” scenario in your mind, you need to take a look at the realities of your situation.  What you have to work with play a very important role in the strategies you use to build your portfolio.  People with great credit and documentable income have different options than those with poor credit who are self-employed.  Both can find success, but the paths are different.

On the same note, there are external realities which have to be taken into account.  You have no direct control over interest rates, availability of inventory, rental demand and overall economic factors.  Sure, you can look for optimal geographic markets and certainly some are better than others.  But the point is that external circumstances will open and close doors and require adjustments in your planning.

Navigating all of these variables is the art of planning.  It’s part science and a lot of creativity.  That’s what makes it so fun!

So as you look at the blank canvas of a New Year and consider what you want to build for your future, embrace the challenge of planning.  And you can start right here and now with this episode of The Real Estate Guys™ radio show!

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Join Robert & Kim Kiyosaki LIVE on March 31st, 2011

Rich Dad's Unfair Advantage - The Power of Financial EducationThe Real Estate Guys™ just got back from an awesome visit with Robert Kiyosaki and the Rich Dad team in Scottsdale, Arizona – home of spring training for the World Champion San Francisco Giants!  And courtesy of Rich Dad’s Real Estate Advisor (and our own Summit at  Sea™ faculty member) Ken McElroy, we got a chance to take in a few innings before heading to the Rich Dad offices to interview Robert Kiyosaki for an upcoming episode of  The Real Estate Guys™ Radio Show.

Our interviews with Robert Kiyosaki are always fun and enlightening. You can always count on Robert to tell you what he really thinks!  So watch for that interview, which you can listen to online or via iTunes.   To make sure you don’t miss it, or any of the shows, be sure to subscribe to the free podcast.

In the unlikely event you don’t know, Robert Kiyosaki is the author of mega-best seller Rich Dad Poor Dad.  We’ve had many of our listeners tell us how Robert’s teachings has changed their lives.  Some people in the conventional financial industry and media are critical of Rich Dad (and the feeling is mutual), but the success of the Rich Dad message speaks for itself.  The conventional industry fosters dependency and profits on the public’s financial ignorance.  Rich Dad is committed to empowerment through education.  We like it.

So what’s on Robert Kiyosaki’s mind right now as America struggles to recover from the Great Recession?

Robert Kiyosaki says it’s more important than ever to have a solid real world financial education. Wall Street, the Federal Reserve and Washington DC aren’t to be trusted with your hard earned money.  There are games being played at high levels that victimize the poor and middle class.  And it doesn’t matter which party is in power.  He calls it “the conspiracy of the rich”  and wrote a best selling book by the same title.  For years, he’s been saying the rich will get richer, while the ranks of the poor will swell as the middle class is pushed down. Don’t believe it?  Just read the headlines every day.

So the question isn’t whether or not it’s happening.  The question is: What are YOU going to do about it?

Kiyosaki says (and we agree) that the first and most important thing to do is to make a COMMITMENT to your own financial education.  There are a few things in life that you cannot afford to be ignorant about, and money is one of them.  Otherwise, the people who understand money will find a way to take yours.  The old adage is true:  when experience meets money, the money gets the experience and the experience gets the money.

The VERY GOOD NEWS is that YOU get to decide which side of the equation you’re on. And your success begins with education.  We support the Rich Dad organization because they are committed to education, just as we are at The Real Estate Guys™ Radio Show.  It’s that common bond that keeps us supportive of one another.

So we highly encourage YOU to be in the live or virtual audience on March 31st to discover how YOU can gain an Unfair Advantage through education.  Learn to protect and build your wealth and prosperity – even in (and because of) difficult times.

Click here now to learn more and register for this live event!

Then afterwards, use our Feedback page to tell us what you think.

1/2/11: The Art & Science of Setting Goals – Utilizing All You Are to Achieve All You Want

Happy New Year!

Everyone here at The Real Estate Guys™ Radio Show wishes you and yours the happiest, healthiest and most prosperous year of your life! And to help make that happen, we decided to kick off 2011 with a unique episode on Goal Setting.

We’ve noticed that people are attracted to real estate because of the huge amounts of money that can be made with relatively low risk and front end investment.  What other investment allows you to put a small portion down, get cheap money from the bank, and then pay it off over time with someone else’s (the tenant’s) money?  And if you’re careful about the property type and area, the odds are very good that it will be worth a whole lot more than you “paid” for it down the road!

But is it really the real estate that you love?  Be honest.  For most people, the answer is no.  It’s the MONEY!  Or is it?

Most people don’t really want the money.  They want the lifestyle that money will buy!

So it’s REALLY about the lifestyle. Real estate and the resulting money are merely the tools we use to build the lifestyle.

But like a master builder, before construction starts, there is one absolutely essential tool which will make or break the project:  the blueprint!  Unless the architect provides a well designed plan, no matter how skilled the builder is or how hard he works, the project is doomed before it starts.

So it is with your life.

Most people cobble together a life, putting together a job, relationships, investments and recreation without any real cohesive plan.  No wonder so few people are living the life of their dreams.

No matter what your age, social status, income or resources, as long as you expect to be around for a lot more tomorrows, then today is the perfect time to develop, refresh or refine your life plan.  What lifestyle do you really want to build?  Only then will you know how to invest in your time, energy and money in real estate – or anything else.

So this episode of The Real Estate Guys™ Radio Show features Robert Helms, and it isn’t about real estate. It’s about YOU.  And how you can get clear about who you are, what you want and what you want real estate to do for you.  Dream big because we all have a lot more potential and resources than we realize. The secret is to figure that out early in life and get to work while you have lots of time to build something awesome.  And only you can define what “awesome” is for you.

So we recommend you grab a pen and paper (maybe some tissue), find a quiet place to listen and take notes.  Then schedule some regular meetings with you, to stay focused and moving forward toward the life you design.

In the classic words of Zig Ziglar, “See you at the top!”

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8/22/10: What is Your Risk Paradigm? A Life or Debt Decision

Protecting your money in today’s highly uncertain economy is surely very challenging. Remember when real estate equity and bank accounts were considered among the SAFEST places to keep your savings?  Today, real estate equity has disappeared – and for many people even getting access to whatever equity they still have is next to impossible.  Boy, do we miss those equity lines of credit with their checkbooks and debit cards!

And even though you can still write checks on your cash deposits at a bank, with record bank failures even that old saying “sure as money in the bank” seems a little outdated.  Add horribly low interest rates and, to compound the injury, taxes on your meager interest earnings, it’s enough to make you wonder what this financial world is coming to.

Well, we have good news. There’s a new way to look at an old product – one that is time tested and has survived its fair share of economic turmoil.  And we got such a positive response to our first foray into this topic, we decided to re-visit it with a new guest.

In the radio lifeboat for another voyage into broadcasting brilliance:

  • Host and head lifeguard, Robert Helms
  • Co-host and lifeboat inflater, Russell Gray
  • Seasoned sailer of stormy economic seas, the Godfather of Real Estate, Bob Helms
  • Special guest, “infinite banking” expert, Patrick Donohoe

Right out of the gate we need to set the table, which is no small task with the lifeboat bobbing on the waves:  what does life insurance have to do with real estate investing?

Think about what a bank account has to do with real estate investing and you’re on the right track.  But unlike a bank account, our guest explains that certain types of life insurance – thought greatly misunderstood – offer far greater flexibility than bank accounts.  And though they aren’t FDIC insured, insurance companies are arguably more stable and conservatively run.  Unlike banks right now, you don’t hear a lot about record number of life insurance companies failing.

We also address why so many CONSUMER financial gurus are down on cash value life insurance, yet corporations like Wells Fargo and Wal-Mart buy tons of it.  Could it be there are BUSINESS purposes that make it very useful for BUSINESS people?  We say all the time that real estate investing is a business, so it makes good sense to see how businesses are using this financial tool.

For example, how’d you like you to take a tax deduction for making a deposit in your bank account?  Hmmm….that’s an interesting concept!  What about getting a loan against your equity without having to qualify?  Try doing that with a property!  And unlike property, the value isn’t determined by market forces, so your equity doesn’t disappear in a market downturn.

The point of this episode is that insurance can do a lot more than manage risk and pay a benefit. Our job is to expose you to some of the possibilities.  Your mission, should you choose to accept it, is to explore those possibilities, learn how to use this powerful tool, and decide when and where to use it to advance your real estate investing program.  It seems the economic storm isn’t over yet, so it might be a good idea to know how to operate the lifeboat.  It’s a matter of life and debt.

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8/15/10: How Capitalism Will Save Us – An Interview with Steve Forbes

The Real Estate Guys™ sit down and talk with Steve Forbes about jobs, the economy and real estate.

We don’t know about you, but any time a billionaire, a CEO of a major company, a best selling author or a legit presidential candidate is willing to sit down and chat, our response is always, “Yes!”.   In this case, our special guest for this episode, Steve Forbes, is ALL of those things wrapped into one.  So we’re super jazzed to bring this exclusive interview to you.

In the broadcast booth at the Freedom Fest conference in Las Vegas:

  • Your Host and interviewer extraordinaire, Robert Helms
  • The just-happy-to-be-here Co-host, Russell Gray
  • Special guest, Forbes Magazine CEO, Steve Forbes

 

 
Mr. Forbes was the keynote speaker at the Freedom Fest conference and remained in attendance for the entire event.  In spite of a recent neck surgery, he was very accommodating and so Robert was able to sit down with Mr. Forbes for an impromptu interview.

Steve Forbes with Russ and Robert at Freedom Fest. Russ wrestled Steve into doing the interview, which broke Russ’ glasses and injured Steve’s neck. But the interview went well and we were all smiles afterwards.

We decided to ask him about his latest book, Why Capitalism Will Save Us – Why Free People and Free Markets are the Best Answer in Today’s Economy. Mr. Forbes’ thesis is that too much government is bad for business because it increases costs, diminishes productivity and takes too many resources away from creating jobs for an ever-growing population.  He calls for “sensible rules of the road” to provide a basic framework in which free people can conduct business.  Of course, the great debate is over what’s “sensible”.  His position is that less is more.

What we’re really interested in is jobs. Jobs are where our tenants get their rent money.  It’s where home buyers get the income stream to make the mortgage payments that prop up the property values that create passive equity.  Jobs are near the top of our due diligence check list when evaluating a market to invest in.  It’s one of the reasons we like Dallas right now.  Among U.S. markets, it’s doing pretty well.  Ironically, another great job market is Washington DC, but if there’s a changing of the guard over the next couple of elections, that could change.  But we digress…

So Mr. Forbes shares his thoughts on the economy, job creation and the role of government in real estate, specifically Fannie Mae and Freddie Mac.  In his position as the CEO and editor-in-chief of Forbes Magazine, he gets to talk with many of people who shape, interpret and respond to public policy.  We really enjoyed our time with him and hope you will too!

On a side note, Steve Forbes is the nicest billionaire we’ve ever interviewed.  Actually, he’s the only billionaire we’ve ever interviewed.  But he’s still a very nice guy.  So, if you’re a billionaire and want to come on the show and be nice to us, just give us a call.  Our door is always open. 🙂
 

 
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