Thursday, December 2, 2010

Mr. Wasser (yes, people really call me that), could tell me how to start investing?

Sure I love to! Lately this blog has covered mostly current issues. But many readers may wonder where to start, just like the writer of the e-mail summarized in this post's title. My early postings discuss many basic investment concepts so I refer everyone to that portion of this blog.

But for those who don't have the time, here is my Quick Start manual. If you don't have time, then don't invest! Hahaha! Sorry, I couldn't stop myself. This is how I answered Bob:

Hi Bob (not his real name),

Nice to hear from you. Sure, I can give you a couple of tips on investing. Investing is like building a business in that it will provide you income from your assets. It differs from a business in that your money is supposed to work for you while in most businesses you work in it to make money. Real Estate investing as taught by REIN is kind of a hybrid because you have a lot of hands-on involvement. What I mean by this is illustrated in the next two examples:
  1. You invest in a GIC. Basically you put your money in this investment and every once in a while you receive interest income. You don't do anything but sitting in your chair and collect mullah!
  2. You invest in a rental property. The property appreciates over time and as such you make a profit (hopefully). But you also use it for running a rental operation which provides cash flow to cover expenses and mortgage payments and maybe a bit of the cash remains in your pocket. To do so you have to work though; you manage the investment: find renters and oversee the rental operation. You do maintenance; drive back and forth to show the place. Etc. So in fact owning rental properties is a lot less passive and requires your time and efforts. For this you get paid in addition to the appreciation profits
Best way to start is building a strong financial base. That is to own a house where you live. You are the best tenant you can ever get as a landlord. So especially in the beginning see your house as an investment and only buy what you need not what your ultimate dream is. Because your near term goal is to build the foundation of your wealth. It is much easier to start living a modest affordable lifestyle and later in life, when you can afford it, to add more luxury. That doesn't mean you should squeeze every penny into your savings either; live has to be enjoyable.

It is like wine. In the beginning you may enjoy your wine even though it is a bit cheap. Since you don't know much about wine, you probably enjoy it as well as an expensive wine. But if you start out drinking expensive wines and later on you are forced to start drinking cheap wines instead that may be a tough thing to do. So always live below your means but still allow yourself a decent life.

That is how you get savings. So the next question is what to do with your savings. In my view paying off the mortgage on your residence is the best thing you can do. Once paid off nobody can take it away and so it is a rock solid part of your financial foundation. Guess what? Interest paid on your residential mortgage is not tax deductible. Even worse, if you put your savings in a GIC or savings account you have to pay taxes on the interest you make plus the interest you earn on your GIC is a lot less than the interest you pay on your mortgage. I used to say that once I paid off my mortgage, I could buy every month a new dish washer or TV without noticing the financial difference. Or... you can add that money into your savings.

Also, you can buy a residence with a basement that you may rent out as a rental suite. Say for $800 per month. That would add another dishwasher per month (an expensive one). So this would accelerate your mortgage pay down dramatically.

While paying off your mortgage, learn about investing. Read books, go to REIN seminars (you don't have to be a member). Don't read only about real estate, but about stocks and bonds as well. An investment portfolio ought to be diversified - this in my mind is critical. You can open a play account with Canadian Shareowner Association. They also provide investment education similar to REIN but quite a bit cheaper (membership is $90 per year vs REIN $2400).

Once you paid off your house, you can start looking into other investments and if you rented out your basement you have build already some experience as a landlord. You can then decide whether you like being a landlord or not. Hope this helps, if you want to we could meet over coffee.

I would like to stress that I am not a professional investment advisor and as such, you are liable for whatever you do with my advice. I do not recommend stocks and I won't take any responsibility for my recommendations or ideas. I did have a Realtor License but I cancelled it - it is not for me. I love to BS about investments and you can find a lot of my thinking on my blog . Good news is my blog is for free. Bad news is that I am not a professional writer and it may be in places unreadable :)

I forgot to mention one thing to Bob and that is the most well kept investment secret in the whole wide world! And... I am going to reveal this secret if you subscribe to my new investment letter. Which you may buy for a measly $2500 per year. Yes I am just kidding. That is... about the investment letter.

But I am not kidding about the secret that I am about to reveal. No not in my next posting, but right now in the next few lines. Are you ready to learn about the most reliable and predictable source of cash flow?

Something that no self-respecting investment advisor will ever tell you about. Say: "Yes"! Shout "Yes I want to know!". Well the answer is: your job. Now how is that for a let down? But it is true. You do not need to invest money for this, the ROI is virually infinite and you don't have to use leverage! The only investment is your time. Now time is a priceless commodity and it is irreplacable so don't waste it on a job you don't like.

But as a semi-retiree, I can bear witness of the incredible impact a job has on your investment cash flow. Your job finances your lifestyle and what will be left of your salary will go into financing investment opportunities. While you work, your investment cash flow will accumulate into even more investment capital. And in a non-monetary sense, your job is an endless source of social entertainment.

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