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How To Start Investing For Financial Independence, Part 1.
Today, I am going to start a multi-part series about how to go from being a beginning investor to being “financially independent” in a steady and predictable way. At our website, we get tons of e-mails about how do I start, how do I start with little $’s, etc., etc., etc. If you are asking this question, congratulations because you are ahead of most. All of us have been there at some point.
I must warn you…. What I am about to share here for free is what “gurus” across the nation charge thousands of dollars for in weekend seminars. The “secrets” revealed are going to seem pretty simple because quite frankly, there are no secrets. The methods used here have been done for centuries and there is no real reason to complicate them. Let’s apply these principles to see how fast someone might become financially independent without betting the farm.
Realize that everybody has wildly different starting points and different financial goals. For this series of articles, we assume that an individual has access to at least $15,000 liquid capital (or home equity) to start, is at least breaking even with their current income versus expenses, and has decent credit to obtain financing. Note there yet?.... See the footnote below.
To start, what you need is to make your money grow while keeping your current income stream, and current expense level in place. I can’t say this more plainly…..To change your current financial path, you have to us your money and your time to grow additional income streams that increase wealth. There is many ways to do this but we are going to use investing in real estate as an example.
Now for beginners, here is the really bad news…… As an investor, you reap rewards by putting your money in HARMS WAY. You do everything in your power to minimize your risk but bottom line is that real investors make money by taking CONTROLLED risks. As investors get better, they learn how to make fantastic investment returns doing things that all their friends and relatives thing is crazy….. However, they know exactly what risks they are taking are why those risks are small in comparison to the potential rewards.
One reason people really like real estate investing is leverage; i.e, you can purchase an expensive property using 0-20% of your own money while financing the rest. So if you put 10% down for example, and then the property goes up by 20%, you have made a 200% return (ignoring expenses, taxes, etc. for simplicity). Of course this works in reverse… If the property drops by 20%, you have lost not only your original investment but have to come up with another 10% as well….. Ouch!
For someone beginning, here is what I would suggest:
1) Look for an opportunity that will return at least 150% in 2 yrs or less;
2) Be mentally and financially prepared if the investment does not work out;
3) Have VERY good reasons why you don’t think you will lose money…… You may not make as much as expected but you would rather not lose money at this stage.
4) Be patient. This single result should not either make or break you but it is crucial to a longer term plan.
In our Mastermind Group, we are bringing out a land project (see related article Land Investing that appears to meet these criterion (each investor has to decide for themselves). So let’s say the purchase price is $150,000, with 10% down and another $3,500 in closing costs. With good credit, then the financing obtained would make the land payments for 2 years while waiting for growth.
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Now let’s say after you did your analysis, looked at what had happened in the past, looked at why you thought more and more people would want this property, etc., you decide that you think this property will average 20%/Yr escalation over the next 2 years. MORE IMPORTANTLY, you decide that barring a major meltdown in the market, you think there is little chance that you can’t at least break even after 2 years.
So if you end up being right about the growth, then you might net a tidy $43,000 (before taxes) or so after everything is considered. After long term capital gains at 15% let’s say, then you just picked up about $36,000 of the “market’s money”. That is money that if you take a loss on the next investment will not be nearly as painful as if you lost your original money. When you combine this with your original investment amount, you now have around $55,000 of operating capital for step 2.
Realistically, you cannot predict how much you will make from the investment. When I invest, I try to establish in my mind what is reasonable. Frequently, I have been surprised to the positive and made much more than expected. Sometimes I have made less. The key being to put yourself in a low risk situation where you have a strong reason to believe the market will go in your favor.
To accomplish this first step, let’s look at what you really had to do:
1) Had to be willing to put $$ in harm’s way;
2) Had to educate yourself enough to evaluate the risk and the opportunity;
3) Had to find the opportunity or be in a position to have the opportunity presented to them;
4) Had to act.
I would like to comment on the education side. As a former professor, I have seen very smart people spend 1,000’s of hours and 10,000’s of thousands of dollars educating themselves to “earn a living”; this is a great move in many cases. On the other side, I have seen very smart people who want investing to be a major source of income but will not spend any time or any money educating themselves.
To me, this is a recipe for disaster. By the time we finish this series, you will see that with a few simple steps, implemented over time, many people can easily produce more money than from their regular job. Furthermore, many people will put 100’s of thousands of dollars at risk but know almost nothing about what they are doing. If you chose the path of making your investment dollars grow steadily with time, I hope this does not end up describing you.
** Footnote: If you are not yet at that level, here is what I suggest. First, read Michael Masterson’s book called “Automatic Wealth”. This is an excellent book on how to rapidly change your financial position while staying employed. Next, I would read Van Tharp’s new book called “Safe Paths To Financial Freedom”. Van uses a very different thought process from many and so adds a great deal of rounding. Like anything else, you will not agree with everything written in these books but they provide some great thought processes. When you have some capital and are cash flow positive, them come back and revisit this article.
About the Author
Dr. Chris Anderson is a leading authority on real estate investing and has been referenced in many venues including the New York Times and USA Today. Free sign up at GetPreconstructionDeals.com for education and articles. Visit Mastermind Group for world class investing projects.
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