Everyone is an Investor

Most people measure wealth by the amount of money (and assets) you have. However, I think we will all agree that a more important measure of wealth takes into consideration what you can buy with that money. To be a millionaire these days doesn’t mean quite what it used to.
Given this expanded definition of wealth, and considering the effects of inflation if you were to invest in something that paid you 3% a year, your net gain in wealth would effectively be 0% a year. While if you left your money in a checking account, which usually doesn’t pay any interest, you would in effect be losing 3% of your wealth every year.
So, one of the consequences of inflation is that it means everyone is an investor whether they know it or not in the sense that your wealth is changing over time due to various market conditions. This is why we feel so strongly that everyone should have at least a working knowledge of the basics of investing so you can make informed choices with your money.

INVESTING DEFINITIONS

Return

Return is the most basic investing term. It’s simply a measure of how much money you made (or lost) on your investment. If you invest $100 and get back $150 your return is $50.

Return on Investment or ROI

Return on Investment or ROI is the second most basic investing term. It is a measure of the money gained or lost on an investment compared with the initial investment amount. For example if you were to invest $10,000 and make $1,000 in your first year, your return would be $1,000 and your return divided by your initial investment or return on investment would be 10%. A high positive ROI is a good investment, while a negative ROI is a bad investment. Here is the expected ROI on some common investment vehicles:

Checking Account: 0% - 1%
CDs: 3%-4%
Stock Market: 10% average, although it varies greatly.
Return on Investment = Return / Initial Investment

Cash Flow

Cash flow is an investment term that refers to the money you get back from an investment on a monthly basis after all expenses have been paid. If you own a property that rents for $1,000 a month (income) and you have to pay $800 in expenses (mortgage, property taxes, property management, miscellaneous repairs, utilities) your cash flow would be $200.
Cash flow = rent – mortgage – property taxes – vacancy loss property management – utilities – repairs

Cash-on-Cash Return

Cash-on-cash is another investment term that gets thrown around a lot, especially in real estate. Cash-on-cash is simply the cash you get back at the end of the year divided by your initial cash investment. For example if you were to buy a property with a $10,000 initial investment and you made $1,000 in cash flow during the year your cash-on-cash would be 10%. This is not a measure of overall ROI because it doesn’t include any appreciation or equity in the property, because you won’t be able to realize their gains until the property is sold.
Cash-on-cash = cash flow / initial investment

After Tax ROI and After Tax cash-on-Cash

What most people forget to include when calculating their return are taxes. Would you rather make $1,000,000 and pay $500,000 in taxes or make $800,000 and pay $100,000 in taxes? In any investment you make, your after tax returns are more important than your before tax returns. In general for short term investments like a CD you any returns are taxed as ordinary income. For example if you pay 33% of your income in to the government at tax time and you buy a CD with a 3% yield, you are really only making a 2% return (1% must be paid as taxes). Comparing this to inflation which is on average 3% means you are actually losing wealth over time with a 3% CD. One of the big reasons why real estate is such a good investment is that you get several tax deductions to own real estate (depreciation, property taxes, mortgage interest, etc.).

Most investors believe after tax cash-on-cash to be the most important number to look at when making an investment in real estate, especially in down or sideways markets. After tax ROI = before tax ROI + tax benefits after tax cash-an-cash = before tax cash-on-cash + tax benefits

EXAMPLE (PREMIUM CLASS)

CATEGORY ONE

Renovated 2 & 3 bedroom homes with specific performance assurance! Potential rents based on area and or condition being $350 to $500 per month and neighborhood re-sale prices range from $45,000 to $75,000.

Purchase Price ………………………. $25,000 (w/o providing End Buyer/Tenant)
Closing Costs ………………………………………………………………. $2,500
End Buyer/Tenant Cost ………..…………………………………………… $5,000

Estimated Return Analysis
Premium Class … Category I Property
Purchase Price: $25,000
Closing Costs: $2,500
Fee To Tenant: $1,000 (refundable)
Fee To Sell: $5,000 (refundable)
Tenant Buyer Offer Price Range: $50,000 to $60,000
Typical Seller Concession Range: $5,000 to $10,000

Example-Purchase Price: $45,000 minimum

Owner (Investor) Carry Note @ 10.125%

Monthly Income: $379.69 (Cash Flow)

Total Annual Rental Income: $4,556.25 (14% to 18% return)

RESALE ANALYSIS

Example Purchase Price: $45,000
Taxes: Paid by End Buyer
Insurance: Paid by End Buyer Mgt Fee (l0%): $455.63
Profit at Resale: $12,044.37

 WHAT IT MEANS TO YOU!

Total Annual Return: 56% to 96% (assuming sold at 12 months)
Approximate monthly cash-flow of 18% plus
Monthly Payment: Est. $380 (less 10% Mgmt. Fee $342)
12 Months of Net Payments: Est. $ 4,104 Exit from
Refinance or Sale of Note (Less 3% Mgmt. Fee)

WHY REAL ESTATE

Would you like to be Wealthy in 15 years or less?
I’m going to tell you exactly how you can be very wealthy within 15 years. Ready? Buy cash Flow Positive Real Estate.

You buy real estate with positive cash flow, this means your renters pay your mortgage + some more. Ok, so you buy the property with 5-10% down. You get renters to live there. They pay more each month in rent than you pay in total expenses – this includes mortgage, taxes, property management fees, etc. After 10-20 years, the mortgage will be paid down, creating equity for you and the price will also have appreciated, creating more wealth for you. Rents will go up, meaning even more cash every month for you.

Two Powerful Ideas: “Leverage”, and “Cash Flow”
Leverage (What is leverage?)
Leverage in real estate means gaining control of an asset worth a large amount of money (like a house) with a small amount of money (your down payment).

Stocks/bonds/mutual funds have ZERO leverage
To buy a stock or other similar asset you need to come up with 100% of the value of that asset. That’s called ZERO leverage. This is one of the main reasons why a real estate is far superior!

A Simple Example
Let’s say you bought a house valued at $100,000 with a $10,000 down payment. Now the value of that property appreciates by $20,000. You sell the house at $120,000 for a profit of $20,000. This is an incredible 200% return on your investment although the asset itself only went up by 20%. That’s leverage at work!

What is Cash Flow?
Positive cash flow is when you get money paid to you each month to own that asset. Negative cash flow is when you are paying money each month to own that asset. Cash flow is the ability of an asset (a property) to give you money on a regular basis. In Real Estate, this is accomplished through rent.

Why is cash flow important?
A positive cash flow property will make you money every month regardless of the appreciation or depreciation of the property itself. This means you can hold the property indefinitely and wait for the property to appreciate in value.

Creating Positive Cash Flow
The only way to create positive cash flow is to buy a property which is renting for an amount greater than its monthly expenses. This is virtually impossible in California and very difficult in most states. This is very possible in certain sections of the country however, which is why investing out of state makes a lot of sense.

The Smart Investor
● The smart investor knows the best time to buy is in a down market.
● The smart investor buys only undervalued properties, not over-hyped properties.
● The smart investor buys in markets besides his own backyard.
● The smart investor puts education first, because in the world of real estate “experience” is much too costly.