Future Money » Real estate

Using OPM When Investing In Real Estate

Zen Foo — Thu, 03 Jun 2010 04:14:42 +0000

Using other people’s money when investing in real estate. This method is being practiced all the time and it is much easier than many thought it would be. Many people don’t want to invest in real estate because the perception of high capital of entry, but many practices done by many investors, the capital is really very minimal if the investors are creative enough or good in negotiation.

Who are the other people so nice enough to lend us money to invest in real estate?

Bank – If you have credibility and pay you bill on time, for the bank it is why not? just as you swipe your credit card for a few thousand dollar purchase that end up in servicing the high interest each and every month. You might as well borrow the money to make you richer by investing in real estate. Of course it will be back to square one if you get the bank money to pay the purchased properties and then having to service it yourself, the number of real estate properties loan you can service is only limited by your own active income. Fortunately, we can use another people money to service the loan installment – your tenant.

Tenant – The equation of OPM will not be completed if tenant is not included. If you are the landlord, then your tenants are the one who work for you to make you richer. For rental property that fetches zero to positive cash flow, in another word rental income is more than the loan installment plus property maintenance cost, the investment is self sustaining.

If investor can achieve zero-positive cash flow on every rental property, then he/she can keep buying more and more real estate and banks are willing to lend as much as they deem fit. By doing this patiently and with due diligent, many people are able achieve financial freedom and better. So are you still wondering why the rich get richer?

Why Can’t I Get Rich?

Zen Foo — Thu, 12 Nov 2009 06:16:49 +0000

Have you read How Not To Become Millionaire?

The moment Johnny chose to enroll into the private university, he has been placed onto high roller of debt and consumption. The average tuition fee of private universities is few times higher than those of public university. His peers, most of them are from rich and wealthy families whom also have a lot of free money, given by their parents, lying around for disposal. In order for Johnny to blend in to his new friends, he has no choice but to join his peers in most of the high consumption activities hence started to cultivate the consumption patterns.

1. Start Up High and Get Higher

Johnny’s father thought of kick starting Johnny life really put him high up above other fresh grads (Let us pick one of the fresh grad for example, his name is Jimmy). Jimmy started with monthly salary of $2,500 per month, yet he only owned a car half the price of Johnny’s. If let say 3 years later both Johnny and Jimmy decided to upgrade their vehicles, who do you think has a high barrier in term of cost to upgrade, Jimmy or Johnny? The answer is obviously Johnny. With his first car cost up to $70 thousands, he would probably think of buying a mid-size car that easily cost up to $120 thousands. Where by Jimmy would probably go for the entry model of Japanese cars that costs up to $60 to $80 thousands, still almost half price of what Johnny’s upgrade.

2. Opportunity Cost

Johnny paid $600 per month for 2-bedroom apartment, yet if he chose to share it with one of his friends; he would have saved half of the rental and put them into saving account. A saving of $300 per month can become $3,600 per year and $7,200 in two years. By the end of second year he could have $7,200 saved from the rental and started investing.

3. Long Term Surrounding Influence and Loss of Time

Johnny has cultivated the high consumption ways of life since early of his adult life. That also explained the method he used to release stress over busy working life. Partying and bar hopping, happy hour many nights in a week. He wasted a lot of valuable time in these unproductive activities when he could have done something more beneficial for his future, such as read up a book or plan for his financial future.

4. Instant Gratification and Pursuing of Material Items

Like most of the people, Johnny practice instant gratification. He bought expensive gift for himself, and roll them all into credit card debt. Even though he only paid as little as $200 per month, which he thought was a smart move, yet the most he spent paying every month was the cost of money, which is the interest rate. Remember that Johnny’s friends are mostly from rich family, throughout university life and they have been frequently hanging out together. The spending patterns and buying choice of his friend largely contributed to Johnny’s clothing and goods brand choices. Since his friends are from rich family, it is natural that they have very different perception on value of money against brand. Living under peer pressure, Johnny would gradually adjust his value judgments on material items, without him aware of it.

5. Asset or Liability?

Johnny doesn’t understand the meaning of asset and liability. Simply put, asset will put money into your pocket but liability will take money away from your pocket. When he bought his first condominium, he thought it is an asset, because the real estate broker and banker told him so. And so Johnny got the biggest unit in the floor. However, since he paid more than thousand every month, it is definitely a liability. It is an asset, but it is the bank’s asset because bank get paid in term of interest every month, and bank would get paid as long as Johnny services the loan.

6. Snowballing High Consumptions

A nice condominium unit in the mid-upper class area contributed heavily on Johnny’s future consumption patterns. First of all, a nice condominium unit will not be completed without a tasteful touch of renovation and interior design. Johnny borrowed heavily on personal loan in hiring contractor and interior designer. He spent all his saving in acquiring tasteful looking furniture to go along with his home décor. All his furniture designs has to blend well to the décor, else it would seem out of the place. Imagine what would happen if a piece of budget sofa sits in that tasteful design living room? And where can you put the cheap carpet? Besides, in order for him to blend into his rich-looking neighborhood, he saw no choice but to upgrade his car to a full sized. It costs him double the price of his previous car, another fresh liability rolled into his balance sheet.

7. Lack of Financial Intelligence

Even though Johnny earns very high income, he has no financial education. He couldn’t distinguish investment from gambling. That’s why he liked to relate stock investment to gambling which equals to buying a lottery ticket and not winning. He didn’t realize it takes a lot of financial literacy to excel in stock market, the financial intelligent required to read and understand financial statements and economical variables. The reason he made a loss in stock market and mutual fund was because of buying people ideas instead of his own intelligent. He didn’t realize hot mutual fund will eventually get cold. It is the slow train that takes you cross countries. Insider tips most of the time turns out to be a hype that speculators purposely created to make instant gain out of the loser – Johnny.

8. Work Hard to Increase Liability!

Johnny lived in delusion, believing that the more he earns, the more likely he will become rich. He hoped that one day he could also become wealthy by first having nice car and house. That’s not likely to happen. He didn’t realize his neighbors moved into the area only after they got wealthy. As Johnny’s income increase over the year so does his expense. There are many factors that could contribute to his rising expenses; his adopted way of life to instant gratify, pursuing of material items, and environment impacts. The problem will multiply when he has a family, Johnny could never imagine his way of life could have profound effect in his loved one, such as his wife and kids, and very likely they too, will adopt his spending patterns. This is when trouble is looking for more trouble.

Learn The First Important Step To Achieve Financial Freedom (Part-3)

Zen Foo — Wed, 14 Oct 2009 02:00:05 +0000

Financial Freedom

Financial freedom is achieved when one is able to live in his mean without earning an active income. In other word, one’s passive income is more than enough to support his desired lifestyle. Passive income is defined as income earned without one actively involves in the income generating activities, while active income is income earned that requires active involvement in the income generating activities. A person who is financially freed, can choose to work or not as long as he wants but still live in his desired lifestyle - indefinitely.

In the Action Plan to Financial Security (Part-2), action plans are defined to come out with income streams that could support one’s basic lifestyle. In order to be financially freed, one needs to come out with higher passive income streams that can support their desired lifestyle, freely. To be able to spend freely, one usually don’t need worry too much on his spending habits and the amount he spends. However this is very subjective, to some people, to be able to spend freely, he wants to be able to buy luxuries and still have abundance of money left to support his lifestyle. While for some other people, to be able to live and spend freely don’t require that high of a cost.

Action Plan to Financial Freedom

Since to be able to live and spend freely are subjective and depend on the person’s desired lifestyle, in your action plan, you need to list of the desired items and state the costs involve, such as below:

Upgrade to a higher range car with a monthly commitment of 1,500 to 2,000. Totally around 18,000 to 24,000 per year including higher insurance cost and maintenance fee.
Buy a home/condominium in a good neighbourhood with monthly instalment of 2,500 to 3,500. Totally 30,000 to 42,000 per year, including miscellaneous costs.
Buy the luxury items you always wanted like jewelries, watches, handbags, clothes and etc. Try to give an estimated lump sum total for these item, say 20,000 per year.

Total expense in above 3 desired items = (18,000 to 24,000) + (30,000 to 42,000) + 20,000 = From 68,000 to 86,000

These are my ideas of luxuries. If you have more desired items, you may list it down into your action plan and add to the total expenses, after all, the definition of financial freedom is very subjective from one person to another. Since this is the extra from your basic lifestyle, it also means you need additional income streams that could generate as much as 68,000 to 86,000 per year.

The same steps you need to follow in drawing out an action plan to become financially free; list out as many income opportunity ideas you can come out with, the step-by-step descriptions, targetted income for each, deadline to realize each income stream, etc and then total up these passive incomes. It is also make sense to expand the same passive income streams that provide you the financial security. Since you have the experience and also the know-how, it will be easier to think of innovative ideas to expand the existing passive incomes. Below are some general ideas to improve the existing income streams:

Part time business – Look out for expansion business opportunity. Look for greater innovation for higher business income, or improve business efficiency and reduce cost. If the business is easily duplicated, it will be easier to expand (open new branches).
Internet business – open to more internet business opportunity, there are a lot of ways to improve internet business revenue. Upgrade your existing web site in appearence. Improve sales letter effectiveness. Optimize internet traffic so more people get to know your product. Create more intellectual properties/product.
Blogging – Enrich the content of your existing blogs by providing more informative and unique contents to attract more audience. Besides, one also can use other third party services to improve the blog’s viewing traffic such as article submission to reputable sites, press release, link exchange, etc.
Dividend – top up to existing stock ownership, one also can increase the return in stock dividend. However, in order to largely increase the dividend return to support the desired lifestyle, investment capital is also huge, approximately half to a million.
Real estate rental income – acquire more positive cashflow income. Again, in order to largely increase the rental income to support a different lifestyle, one needs to acquire many more of such assets thus require more intensive upfront investment capital and time to raise the capital.

If you have successfully completed the action plan to become financially free – total additional passive income that is more than enough to cover your desired lifestyle expense. Then congratulation! you have made the first of a thousand steps to achieve financial freedom. You may start to work on the steps defined immediately. Along the journey, you need to constantly review your progress by referencing the action plan. For easier review, it is also a good idea to come up with an exhaustive check list of steps or items that are done or to be done. To end this article, I wish the best of luck to our financial freedom!

There is a saying…

~~ A journey of thousand miles starts from a single step ~~