OPM = Opium

Do you know what OPM stands for?

Other People’s Money and it’s what get rich quick schemers tell you to use to do everything from buying real estate to…well really I’m just talking about buying real estate.

House for SaleI was on vacation at my house/rental property in California and I kept hearing ads on the radio about a real estate investment seminar where the star of a house flipping show will teach me, the listener, how to invest in real estate using other people’s money. “The Palm Springs area is an ideal place” to use these techniques, the voice said.

The funny thing is that when I got back home to my primary residence, I heard the exact same voice of the exact same television star saying that my town in NJ was an ideal place for these techniques.

What this person was really saying is that there are plenty of suckers in Palm Springs and plenty of suckers in NJ. This house flipping is easy and can be taught to anyone drug is the opium being pushed on innocent people who lack some common sense and want an easy way to success.

Real estate can be a great investment, I’ve invested in real estate and now own three properties, but it’s not easy, it’s not short term, and no one is giving you money without a proven track record.

Money can be made flipping houses, I don’t doubt that, as a matter of fact, my nephew has been quite successful doing it, but it’s his full time job and it was something he grew into building from a different but related business. Flipping houses is not something that can be done on weekends or in your spare time.

I know (if anyone actually reads this) that there will be some who say, “but I’ve done it, I flip houses on the weekends, in my spare time and it works.”

My response is if it works so well, why don’t you do it full time? If it’s so lucrative why not quit your 9-5 and get serious about it? The reason is that it probably doesn’t pay as much as you think and when you really do the numbers you’ll see that.

Don’t get sucked up in the it’s easy to make money (especially if you use other people’s money) game. It’s a losers game.


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You Can’t Get Rich Working for Someone Else or Can You?

 
I’m sure you’ve heard or even repeated the expression “You can’t get rich working for someone else.” I’ve said it but I’ve grown to realize it’s not true. I’m not talking about high level executives with huge salaries, stock options and bonuses that make them a millionaire each year. I’m talking about a normal person with a good, but not extraordinary, job.

stacks-of-cash-2The secret (I hate that word because it’s not a secret, it’s common sense) is to save, often aggressively, work, really hard, and invest, wisely. A couple of weeks after writing this I saw a bit of news about a school teacher who left behind an estate worth $10 million when she died. Along with her twin brother they lived by these three “secrets” and it paid off.

SAVE

Wealth is about opportunity but being in the right place at the right time isn’t opportunity, what you’re able to do when you’re in the right place at the right time is. If you meet an inventor with a great new produt who needs investors, you’re at the right place at the right time but if you don’t have the money to invest it doesn’t matter. That’s why aggressive savings is so important. I’m not talking about normal savings like the advice you’ll read in magazines, I’m talking about serious savings. My wife and I have saved, on average, nearly 25% of our gross income each year. It would have been higher if not for item number three on my list, investments (which some will view as savings but read on to discover why I don’t).

Read here about a woman, Leah Manderson, who maxed out her Roth IRA (that’s $5,000) while earning only $28,000. That’s a 17.87% savings rate. Can you say you’ve saved that much? If not then you aren’t saving aggressively.

WORK

A job is a means to an end. We have to work to survive (unless you want to grow a long beard, live in a shack, and kill your own dinner). A job is also a means to security when we’re too old or tired to work.

While I would highly recommend doing something you love, you should also maximize your earning potential by advancing through the ranks and negotiating well. Hard work means being the go-to person, the lynchpin as Seth Godin puts it.

It has been my ability to increase my income and my aggressive savings that allows me to move on to each What Next.

INVEST

You can invest in yourself by working hard and you can invest your money by contributing to your retirement (401k, IRA, etc.) but that’s not the kind of investments I’m talking about.

I’m talking about investments that require active participation like rental real estate, it’s an investment I’ve used throughout my life (I’ve seen a lot of people use it as an investment very badly). It’s also an investment that requires sacrifice. I can’t have a fancy and expensive house for myself if I’m also buying homes for rentals.

I have also had side projects (some would call them businesses but I don’t think many of them rose to that level). What they did do is provide some extra income to invest in other ways. It also allowed me to learn a lot about myself and business in general.

Now than that I’m older, more established, and secure I’ve invested in actual businesses, recently opening a franchise. The key with all of it is that my job, the thing people say won’t make you rich, made all my investments possible. I call it corporate sponsorship. None of these investments can be considered savings since there’s no garuntee that I’ll get a return or how big that return will be. Once I sell an investment, then fine, the proceeds will move over to the savings category.

You can get rich working for someone else if you’re smart about it and are willing to do more than those who say you can’t get rich working for someone else.


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Home, Investment, or Both

 

I’ve heard it said that your primary home, the place you live, is not an investment but I disagree. I have been very clear that it is not an ATM, a source of cash to be used to finance an unsustainable lifestyle but I do believe it’s an investment. I know I’ll get strong opinions on this from a lot of people but first let me explain.

When people hear the word investment they often think of stocks, bonds, mutual funds, or business ventures but there is a lot more that you can invest in including intangibles. You can invest in time, spending time with family and friends. You can invest in yourself by exercising and taking care of yourself. You can invest in knowledge by being curious and always learning.

When it comes to your home it is an investment in stability, in yourself, in a better future. Handled recklessly buying a home can lead to disaster. Handled properly, like other investments it can provide decent returns. How? Let’s start with a simple example.

Assume you’re 25 years old and are buying your first home. You spend what you can afford and put a proper 20% down payment (crazy right? – it shouldn’t be) on a $100,000 home (keeping the math simple here). You would have liked to buy a bigger $200,000 home but simply couldn’t afford it. Ten years later, assuming “normal” appreciation of 3% per year you sell your home for $135,000 the equity you’ve built up plus your other savings and investments allows you to purchase a $200,000 home.

ToolbeltNow let’s look at two other options. First, you’re a handy person and over the years you make improvements to the house at considerably less cost than if you had hired people to do the work. When you sell the home in ten years it commands more than the “normal” price increase and you sell it for $150,000. Now combined with your other savings and investments you can afford to buy a $250,000 home. Second, let’s assume that you paid extra toward principle each month and were able to build even more equity. When you sell in ten years at $150,000 you can now afford a $300,000 home.

The term investment doesn’t mean you’re going to get rich or that you’re even going to get a positive return, any investment has risk and that goes for housing as well – I think we all know that now.Home Values Chart

People who say it’s better to rent point out facts such as you’re not paying property taxes and insurance but the fact is you are. As a landlord I make sure your rent covers my expenses which include property taxes and insurance. When you leave the rental you have no equity to show for it.

To me a home is a great investment because it serves two purposes; the first is as a place to live and the second is as an asset that gives you more options in the future. Used properly a home is indeed an investment just not a get rich quick scheme.


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Right but not Perfect

 

How do I do this? How do I write a post called “Right but not Perfect” without sounding like a jerk, like an egotistical self-centered idiot? Well, I don’t know that I can. You have to have a certain amount of all of that in order to put yourself out there and say “I have answers.” If I’m going to criticize others I better be able to back that up, otherwise I am a jerk.

Anyone offering advice, be it financial, personal, business, or otherwise, is saying “I know better than you.” That’s ok because sometimes they do, other times it’s just a second opinion, a different perspective than you have.

Financially speaking I’ve done well. I’ve made mistakes but they weren’t catastrophic, they didn’t do irreparable harm, or really any noticeable harm. I’ve been right about a lot of things such as the housing bubble but I was also wrong about the housing bubble too.

What? I was right and wrong? Yup, and lucky too.

I’ll start with a big mistake that could have had serious ramifications. When I got my first job out of college I immediately went out and bought a Jetski. Jetski 750SXThis could have been the start of a reckless spending spree, a lifestyle I couldn’t afford but it wasn’t, because I made a deal with myself. I told myself I would buy the Jetski but save aggressively after that. I stuck with my plan!

In 1995, at the age of 25, I bought my first home, a townhouse. My aggressive savings paid off and so did my parent’s help, letting me live in their house rent free. It happened to be pretty much the bottom of the market. That was just luck. I had a roommate to help defray the costs, that was smart. In 1997 my girlfriend, Julie (yeah she’s my wife now), moved into my townhouse because the home she owned (purchased when she was just 23) had burned down, that was really bad luck.

House FireWe invested part of the insurance money as the house was being rebuilt and doubled it. Partly luck, partly good judgment, it was a highly risky move but it paid off. We didn’t go overboard when the house was completed, buying furniture and expensive electronics, we were frugal, we lived well below our means, something that continues to this day.

In 2000 we bought our first rental property at the Jersey Shore. I thought it was the height of the market, that home prices couldn’t go up any more, that was dumb. As prices continued to rise I could have cashed in but I didn’t. I was right in 2005 when I wanted to sell and wait until prices crashed to buy again but I didn’t. Was it a mistake? Maybe but I’m not going to complain about a successful investment because it could have been more successful.

When it comes to stock investing I’ve done well, too, but made serious mistakes. Not one, not two, but three stocks I owned have gone completely under. I lost everything I invested in them but I knew the risks and didn’t lose my shirt. I had a comparatively small percentage in each stock. As the saying goes, I didn’t put all my eggs in one stock basket. Again, I had a plan and I stuck with it. Those losses caused me to completely rethink my investing strategy and now I subscribe to what is known as passive buy and hold investing (though I think passive is a misnomer).

My second rental property has lost value, a substantial amount of value. Here again this could be considered a mistake but once again I knew the risks. I wasn’t trying to time the market, to buy at the bottom. I assessed whether I could afford it, whether I would make money in the long term, not the short term. If that meant I had to hold it for 5, 10, 15 years or more I was ok with that. I had a plan and I stuck to it. I’m three years into the investment and it looks like it will be closer to 10 years that I’ll need to hold onto it. That’s fine.

I haven’t been perfect but no one is. I’m satisfied with how things have turned out so far and I’m looking forward to the future. All I can do is give you some insight into my success and my failures and let you be the judge of whether I’m someone who can offer you anything worthwhile. 


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