Tuesday, February 23, 2010

How Do I Know What To Invest In?


Before you know the quickest path to take, you have to know where you want to go. Do you want to invest in order to pay for your child's college? To retire? Or for reasons that are short term, like going on a trip? Are you looking to quit your job and just live off your investments? These are questions you must ask yourself before you know which vehicle is appropriate for you.


Once you have a figure in mind about why you are investing and the time line it is going to take to get there, educate yourself as much as possible.

The three types of investments are:

1. Real estate

2. Paper assets

3. Business

The majority of the world will advise you to invest in paper assets, but it is a very slow and risky way to become wealthy.

Look at it this way:

There is a reason why the bank won't lend you money to invest in the stock market, but they will lend you money to buy investment property.

There is also a reason why the insurance company will secure your real estate, but not stocks, bonds and mutual funds. I am sure you've noticed at your bank that mutual funds are not "FDIC" insured.

Banks and insurance companies are the leading financial institutions in the country, if not the world. Part of being a good leader is being a good follower! If you want to get rich, do what rich people do!

Real estate is a very lucrative investment for 3 major reasons:

1. Cash flow

2. Equity

3. Future appreciation

For instance, if I buy a house that appraises for $100,000 for $60,000 dollars, I have created a very lucrative investment for myself.

I can either:

A) Put it on the market for $100,000 dollars and net $80,000 once Realtor fees and closing costs are paid, and make $20,000 using NONE of my own money to buy the real estate in the first place. It is hard to do in this market climate, but still possible.

B) I can offer owner financing on the property to these sea of buyers who are denied bank loans, due to the financial crisis. I can sell the property to them for $100,000 and 20% down - which would be $20,000 upfront. The new balance on the note would be $80,000. And if my original payment on $60,000 dollars was close to $400 dollars - I could charge 9% interest to my owner financed buyer on $80,000, which would be $600 dollars per month.

In this example, I would make $20,000 upfront, and cash flow $200 dollars per month, month after month. And when the buyer refinances, I make an additional $20,000 (without Realtor fees, because you don't need a Realtor to sell an owner financed deal)

C) I could simply rent out the property for let's say $850 per month (if the market warrants that) and cash flow $450 per month and wait to sell when the market conditions improve. Because in 5 years, the property value may appreciate (especially if you live in the Midwest, where real estate markets are not so volitile) So the same property that is worth $100,000 may be worth $110,000 or more in 5 years or so.

I can also take the proceeds of the sale I make, and reinvest them BACK into real estate tax free. It is called a 1031 exchange. So, I can continue to re-invest over and over and over again, using Uncle Sam's money interest free.

And last but not least, you can start your own business.

Right now is the age of the entreprenuer, with all of the jobs going overseas and corporate lay offs - more and more people are starting home based businesses online. It can be something as simple as writing an Ebook one time, and selling it for $20 dollars. Just in case you don't know, an Ebook stands for an "Electronic" book, or a digital product.

You create the asset, and it is something you can sell over and over again for the rest of your life. You can also sell OTHER PEOPLE'S Ebooks for a commission. This is just one example out of millions for a business you can start online. You can also open a restaurant, or any number of things.

The most important key is to find a person you really admire and respect when it comes to money. Some people have greater ambitions than others. But the most important thing I can tell you is to not take advice from somebody who's driving a Honda if you want to drive a Mercedes.

A lot of people take financial advice from 20 somethings fresh out of college who work at investment firms. They make $40,000 per year, and it is their job to sell you their companies products. So OF COURSE they are going to tell you their companies products match your needs the best!

The best thing to ask your financial advisor is "How much money do you make per year?" And if that is the type of money you want to make yourself, then listen to them. If you want to make one million dollars per year, find a person who has that level of income. (They are more common than you think!) Most of those people hang out at a business that they own, or at the real estate investors association.

Find a person you admire, who has what you want, and let them help you draw up a plan. You have to know what it is that you want before you can make a plan to achieve it. If you want to retire in 5 years, you will have a certain plan. If you are comfortable retiring in 20 years, you may want to invest in mutual funds, CDs, or maybe buy one or two properties per year.

YOU have to decide what is best for your situation, and know that anything is possible.

1 comment:

  1. We have been looking at investing short-term AND long-term and these are some great tips, thanks:) I'm going to send Nathan along to look at this:)