Saturday, January 30, 2010

How to get rich overnight

I am a member of REIN the Canadian Real Estate Investor Network about which I will write later. This is what I wrote on the REIN  forum regarding investing in general.

How to get rich overnight

Lately I have read a lot of postings by many budding real estate investors about how to make a lot of money without having money.
How naive (did I spell that right?)
How naive (must be my French spelling!)
How naive (I checked the dictionary and it is spelled correct.)

Thesaurus: English United Kindom (in MSWord) naive =
1. inexperienced
2. immature
3. adolescent
4. green
5. raw
6. youthful

I prefer “Green”
Gosh, I do remember Don Campbell stating that real investing is not something that makes you rich overnight. Yet, when reading on this board, you would think everybody is throwing their job overboard, hunt down a J(oint)V(enturer) partner or a yellow letter candidate and off you go floating gently, at top speed, to Belize. Returns of 60, 70 or a meagre 80% are common place. Guess what, I clearly remember aforementioned Campbell telling his audience not to quit your day job, yet!

Investing, whether it is real estate or stock market investing is a game of building and patience. It is three steps forward and two, or better two and a halve, and sometimes four steps back. Seldom can you make money without money although having a working wife can help. Even better, if YOU and your partner or spouse work and save for your investment career.

Investing is the art of converting your income into a pile of eternal wealth generating assets. Unfortunately, even when you reach the pile, you still have to make sure that it doesn't shrink because you lose focus.

It says nowhere, that wealth only comes from real estate, ask Bill Gates or good old Warren. Yeah the Donald, after how many bankruptcies? And I bet the Kyosaki guy earned more money with his books and courses than he ever made on real estate.

To invest, you need to build your wealth systematically, follow a plan to fulfill a vision (your Belize). Your job provides you the means to live from day to day and, when you live below your means, you can save and gradually build the basis of your pile. But you have to carefully tend your pile or it quickly becomes a pile of sh... (at the tender age of 57, I still love ‘poop and pee’ jokes).

You have to establish a safe home base, a place where you and your family can live, no matter what. Getting a down payment for your residence is your first job. If you work in a corporation, they often have savings plans where the employer matches your contribution dollar for dollar and sometimes better. Use them to the max, these are goldmines. RHSPs may help as well and friendly relatives may come in handy too. Don't spend 16K on a bloody wedding and a piece of glitter. Don't waste your money on a BMW that turns to rust within 10 years. Save it for your down payment.

You live below your means (I don't mean you squeeze yourself and make live on earth a living hell just to save that extra penny). It has to be balanced. Do you really need to spend XMAS in Mexico? Do that, once your pile is throwing of its fruits in plenty. Instead buy a nice Xmas tree and enjoy the 6 dollar glass balls and the glowing angel on top. Sit there with a nice cup of hot chocolate together with your wife and young kids (preferably with a Dolly Parton Xmas song in the back ground). I just loved those moments with my kids, rather than rushing amongst crowded herds of tourists in the airport.

Xmas is also a time of salary raises. Now here is a favourite of mine: If you are happy with cheap wine, then don't buy the expensive stuff. Because afterwards when you can't afford the expensive stuff any longer, the cheap wine will taste awful!  So when your raise comes, don't spend it - add it to your savings.

Buy the house you need, not the one that takesyou to your maximum credit level. Because, then it becomes a pile of sh... that drains your wealth generating capacity. Your house is part consumption and part investment. And, it is the foundation of all the wealth that will come your way in the future.  Once you bought your place, pay the mortgage off ASAP. Just image, every monthly mortgage payment you don't have to pay you can use to buy at least one dishwasher or... it becomes money for your next investment.

Now it is time to start RRSPs and TFSAs etc. This is the time to learn to invest first in stocks and bonds and later to diversify into real estate. Don't speculate, invest. Whether it is real estate or stocks and bonds, learn first the fundamentals. Look what is behind the curtain. These days you can build wealth with cheap index funds that nearly instantaneously create a diversified portfolio. These are your liquid investments --- not to sell in a panic in a market crash. When ready sell some of it to make your first investment into real estate.

The cheapest way of investing in real estate is investing in REITS - real estate income trusts. Buy the big ones, RIOCAN, BOARDWALK these are my favourites but there are others as well. Don't just put money in them, but study their annual reports and learn from the masters. Buy 1 share at least of Berkshire Hathaway (now after the split 50) and learn from these masters as well: good-old Warren and Charlie.

Now you are ready to start to diversify into your first rental property. Don't chase the JV partners, start on your own. Learn the trade, one mistake at a time. Oh, did I forget to tell you?




Some of you who read my other posts, may remember my close encounter with financial disaster in the 1982 real estate crash of Alberta. I was nearly bankrupt. One of my renter victims, or better she-who-did-just-come-in-to-check-out-the-place, asked me if I wanted to go hiking with her and a group of friends. This year in March, we will be married for 25 years. So really, nothing is for nothing.


Another thing I learned from this disaster that stuck with me my entire life:
When I was trying to rent that condominium I got stuck with during the 1982 real estate crash, I just could not afford that the darn thing stood vacant. Let alone that it stood vacant for several months. When I got notice of yet another renter moving to a cheaper place (and I was already renting out below the mortgage and condofee payments), I could not sleep at night. Wasn't it for the fact that I was distracted by my day job as a geologist, a profession I dearly love, I probably would have developed ulcers. As is, I only suffer from time to time of indigestion - nothing that a couple of Rolaids can't handle.

So the lesson is, don't go into the rental business unless you can handle a couple of months of vacancy. Don't go into real estate until you can handle not only the profits but also the losses. The real estate crash of Alberta in 1982 is a rarity, although the one going on in the U.S. right now is probably worse. You need to have a plan as to what to do about such an event if you could see it coming. I was never very good at foreseeing a stockmarket or real estate crash. Yet, don't build a bunker so conservative that you are paralyzed by fear.

Admit that crashes happen, but do not let these things stop you from investing. If you don't sell in a panic, time will pass and things will recover. In the end they always do - just have enough reserves to get by.

For the rest of the real estate story, you can find plenty of ideas and concepts on the REIN forum. There is a wealth of knowledge to be found on this forum. But be aware that knowledge can be used for good and bad. And partial knowledge is a great source of trouble. I sure don't know it all. But I felt that it was important to set the record straight on J(oint)V(enture) investing and all that stuff.

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