Archive for the ‘ Financial Education ’ Category

Your Personal Financial Statement

Last year I posted this video blog on the Renegade Detroit Real Estate Investors’s Blog, and I’ve had some people contact me recently about this very topic.  So, I’ve decided to re-post this video here on Drive To Freedom.

In the video you’ll see me explain all about the personal financial statements that you should be keeping track of.

Income & Expense Statement

Your income & expense statement is just as it sounds.  It lists all of your sources of income along with all of your expenses.  It will tell you whether your saving money each month or if you’re going further into debt.  Typically I like to track my income & expense statement on a monthly basis because most income and expense categories fall nicely into this time period.  However,  you can track things however you like whether it is daily, weekly, monthly quarterly, or yearly.

Balance Sheet

Your balance sheet is the second financial statement you should be tracking, and I also recommend you track this on a monthly basis.  Your balance sheet is simply a listing of all your assets along with all of your liabilities.  The “bottom line” of this statement is a calculation of your net worth.

So What’s the Point???

So why should you track all of this stuff?  For anyone that has this question the first thing I would ask them is do you know where you are at financially?  If you cannot tell where you are spending your money, how can you hope to save money for the future?  If you do not know what your net worth is, how can you expect to retire some day.  These are very important questions that I think many people do not focus nearly enough time on.  Personally I want to retire some day, and I would be much happier if that day was sooner than later…so I study these statements every month, and most times I look at them several times a month.

When I review these statements there are a few key questions I constantly ask myself:

  1. Where am I spending my money…and I study my expense column.
  2. How can I reduce my expenses…and I continue to study my expense column.
  3. How can I make more money…I look at my sources of income and income producing assets.
  4. How can I increase my net worth…I look at how I can invest in more assets, how I can reduce liabilities.

These are all compelling questions when you ask them and have real data to look at and analyze.  Once you have these statements they become very powerful because you can use them to start planning.  The answers to the four questions above should result in changes you make in how you live your life every day.  Perhaps it means you’re going to reduce your expenses by not getting that cup of Starbucks every morning.  Or perhaps it means you’re going to increase your income by focusing the next few months on buying a rental property.  It really depends on your mindset and how committed you are to improving your financial picture.  If you’re aggressive like we have been you’re going to try to do everything because the more you do the sooner you’ll find yourself financially free…and that’s the point to what we’re doing.

The bottom line is that your personal financial statements are your compass pointing you down your path to financial freedom…without them you are simply lost.

If you would like a copy of the personal financial statement shown in the video you can download it here —> Personal Financial Statement.xls.

2012
08/03
CATEGORY
Financial Education
4 comments

Are You Smarter Than a 14-Year-Old?

Last week we told you There’s a House Down the Street For Sale…You Should Buy It!  Have you started looking yet?

Well, Willow Tufano definitely took our advice, and as a result she ended up on the Ellen Degeneres show.  Here’s the interview:

 

Now, if a 14-year-old girl can buy a house down the street and generate a boatload of cash flow from it, don’t you think you could too?  The offer from last week still stands.  For the first 5 people that contact me, I will offer to mentor you through your first purchase free of charge.  In addition I will be giving you a free copy of my book, The Millionaire Model: How to Fund Your Retirement with Real Estate, once it comes out around April 15th of next month.

Three people have taken me up on the offer so far, so there are still two slots left…

2012
03/25
CATEGORY
Financial Education
Uncategorized
3 comments

What’s the Real Rate of Inflation and What are You Doing About It?

You may have seen stories in the news talking about the inflation rate indicating it is not as low as you think.  According to the government, the inflation rate is 3.1%.  This number is based upon the Consumer Price Index (CPI), but some are arguing it is more like 8% because the CPI does not accurately predict the costs for everyday expenses like gas, food, etc.

Well, in true engineer form I took this as a challenge.  What is the real inflation rate, and more importantly what is MY inflation rate.  So, I sat down and started looking at my income and expenses over the past 6 years.  I have very accurate records going back to 2006 for what I have spent money on and how much income I have made (sometimes it pays to be an engineer, and if you’re like my wife Kelly you’re rolling your eyes right now).

To get a picture of my personal inflation rate, I looked at the following categories of expenses:

  • Salary
  • Gasoline
  • Auto Insurance
  • Food
  • Medical / Dental Insurance
  • Utilities
These expenses certainly do not represent all of the income and expenses I have seen over the past 6 years.  However, they they do represent things that have been purchased consistently and have been subject to fluctuation in prices.  For example, I have not included expenses like taxes or mortgages payments because these are either fixed expenses, or they are influenced by factors other than the economy.  So, with this list I was able to calculate my personal inflation rate.  The chart below shows how these expenses have fluctuated for me over the last 6 years.  (Again, these are real numbers representing what I have actually spent or made in income).

The is certainly a lot to talk about in this chart, but the bottom line is that when I look at my personal inflation rate over the last 6 years, it has averaged 3.2%.  This is remarkably close to the rate the government has predicted using the Consumer Price Index (at 3.1%).  This may just be coincidence, but I cannot tell for sure.  I do know that it is clearly lower than the 8% I’ve seen predicted in other news stories.  The other good news for me personally is that my income has increased on average 4.5% over the past six years.  This means I’ve been able to stay ahead of the curve.

Now with all of that said there are certainly a few things that concern me about the inflation rate in the near future.  Just yesterday I paid $4.19 for a gallon of gas.  Then, when I got home, I received a letter in the mail from my long-term care insurance provider indicating that they would be increasing my insurance premiums by over 80%!!!

Why are we seeing these kind of things happening?  Well, if you haven’t been paying attention, here is a very good article explaining why we are seeing prices go up so dramatically.  It isn’t because of a war over oil or a natural disaster somewhere in the world.  It’s because our government has been printing money like it’s going out of style.  Below is a chart showing how the money supply has increased since 1917.

Between 1937 and 1971 the money supply doubled, but between 1971 and 2005 the money supply increased 13-fold!  Since then the rate of increase in the money supply in the US has gone exponential.  This is certainly not sustainable, and only means one thing – the value of the dollar will go to zero most likely resulting in hyper-inflation.

So what can you do?  Well, the obvious thing is to get rid of every dollar you own and buy real assets.  These include things like gold, silver, real estate, etc.  Notice I did not mention paper assets like stocks and bonds.  If the value of the dollar plummets it will have a profound impact on the economy, and in all likelihood the stock market will not fair well.  I have begun doing this by purchasing real estate, cashing out my 401k and I intend to start buying gold and silver real soon.

So, the question is, where are you putting your savings?  Hopefully it’s not in dollar bills…

2012
03/11
CATEGORY
Financial Education
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It’s Tax Time…Are You Prepared?

Yep, it’s that time of year again.  Last week I met with my tax accountant and by enlarge things went pretty smoothly.  I know a lot of people hate tax season, and I firmly believe it is because they are not prepared.  Well this blog is going to get you organized.  If you can pull all of these things together before you sit down with your accountant, the meeting will go just as smoothly as mine did.

Income Statements

You’ll want to gather all of your income statements for the year.  The good thing is that normally these statements are mailed to you in the form of W-2′s from employment or 1099′s from business or investment income.

Deductions

Similarly you’ll want to gather up proof for all of your deductions.  Below is a list of common deductions:

  • Mortgage interest on your personal residence
  • Points paid on mortgage or refinancing
  • State or local taxes you paid
  • Property taxes
  • Student loan interest
  • Charitable Contributions
  • Medical expenses (if they were more than 7.5% of your Adjusted Gross Income)
  • Unreimbursed job expenses
  • Job search expenses
  • Tax preparation fees

For more information on these and more tax deductions have a look at Kiplinger’s article on The Most Overlooked Tax Deductions.

Tax Credits

It is important to make sure you have all of your deductions lined up, but it is even more important to take advantage of tax credits.  Deductions reduce the amount of income you have to pay tax on, but tax credits reduce your tax bill dollar for dollar.  For instance, if you get a $500 tax credit, that puts $500 in your pocket.  So, if you qualify for tax credits be sure to take advantage of them.  Here are some common ones for your 2011 tax filing:

  • Child tax credit
  • Child and dependent care tax credit
  • Adoption tax credit
  • Hybrid or electric car credit
  • Earned income tax credit
  • Home energy tax credits

For information on these tax credits and some more uncommon credits check out this article from efile.com.

Okay, for most people, this is the extent of the tax organization that needs to be done.  However, as you’ll see below, most people are missing out on the tax advantages of investing in real estate.  By investing in real estate, you will be generating income from your properties, but this income is largely offset by the tax advantages described below.  The net result is that you are creating tax-free income!!!

Rental Property Expenses

All of the expenses incur while renting your property are deductible against the rental income you generate.  These include expenses like mortgage interest, property taxes, property insurance, management fees, utilities, legal fees, and accounting fees.

Depreciation

This is the big one – a gift from Uncle Sam. As the owner of investment properties you are able to deduct the depreciation expenses on your properties. The property is fully depreciated over 27.5 years for residential properties and 39 years for commercial properties. So how does this work? Well, let’s say you have a rental property where the improvements are worth $55,000. You would be able to depreciate the value of the property over 27.5 years and deduct this from your taxes. This amounts to a $2000 deduction every year, and that’s just for one property!

Home Office Deduction

If you make an area of your home a dedicated office, you can deduct a number of expenses associated with your home. These include your heat and electric bills, mortgage interest, property taxes, association fees, property insurance. The way it works, you determine what percentage of your home is dedicated to your home office and you can deduct this percentage of these expenses. For example, if your home office is 10% of the size of your home, you can deduct 10% of these expenses.

Business Related Vehicle Mileage

Kelly and I use our personal vehicles on a daily basis to run our real estate business. The mileage we log on our vehicles is deductible, we only need to keep track of the miles we drive.

Travel, Meals & Entertainment

We all have to eat right.  Well, in the course of doing business Kelly and I spend a lot of time eating or meeting with other investors.  We may even travel out of town to look at investment opportunities in other areas.  These travel, meals and entertainment expenses are all deductible.  There are certain rules that apply, but you can certainly take advantage of them and lower your taxes.

Okay, so this about does it…if you can gather all of this information together before you meet with your accountant, the meeting should go very well.

2012
01/30
CATEGORY
Financial Education
2 comments

You’ve Got to Be Crazy To Invest in Rental Property

Whenever I talk to friends and family about investing in real estate I can tell that they are very intrigued with what we are doing.  However, I also get a sense that they think we’re a little crazy.  Well, maybe we are a little crazy but Kelly and I see investing in real estate in a different light.  Most of my family probably has a 401k’s or an IRA as their primary investment for retirement.  Well, to us it’s crazy to sock away money every month into the stock market in the hopes that it will go up for the next 30 years without any crashes.  My last post “Another Loss for the Year…Time to Cash in the 401k” shows exactly why I feel this way.   With the recent history of the stock market, we’ve all seen that movie before, and it doesn’t end well.  So, unlike the rest of the lemmings, we got a little crazy and started investing in real estate.

Now, I know they’re thinking we’re crazy because everyone has heard horror stories about tenants gone wild, or major issues people have run into while renting a property out.  Heck, I even have a great first hand story of my own.  When I was 10 years old my parents moved us to Michigan, and instead of selling our home in Chicago, they decided to rent it out.  Their horror tenant never paid them a cent, trashed the place, and because of sympathy from the courts it took about six months to evict them.  When all was said and done my parents decided to sell the property only to have it burn halfway to the ground the day before they were set to close.  It was a complete disaster for my parents, and it really set them back financially.  However, now that I look back, I can see the mistakes they made.  They didn’t fail because renting the property was a bad idea, rather they failed because they made mistakes all along the way.  They didn’t screen their tenants at all, they hired the next door neighbor to “look after the place”, and they certainly didn’t follow the rules for eviction when they needed to.

Well, our approach to renting properties is certainly a little different.  Kelly and I have taken the time to learn about investing in rental properties, and as a result, we’ve had a lot of success.  Now, I’m not going to say it’s been all sunshine and roses, but we certainly haven’t had anywhere near the issues my parents faced with their rental property in Chicago.  Have we had tenants not pay the rent, sure, but we’ve never had to evict anyone yet.  Have we had maintenance issues, sure, but we’ve budgeted those costs into our rentals.

You see, to be a successful rental property owner you have to anticipate what can go wrong.  If you can anticipate these things, you can manage things to either prevent them from happening or minimize the chances of them happening.  This is our approach, and we try to set up every aspect of the investment so it will be successful.  This includes the locations where we are purchasing, how we rehab our properties, how we screeen our tenants, how we set up our contracts, and the list goes on and on.  The beauty of it is that we are in complete control of the investment.  If things aren’t going right, unlike an investment in stocks, we can actively manage the investment making changes to get things moving in the right direction again. 

Currently we have 5 rental properties in our portfolio and after we pay all of our expenses, make monthly contributions to our reserve account and pay all of our loans we still cash flow approximately $1800 per month.  When I compare this to how my 401k has performed over the last few years, it really makes me crazy…but that’s why we continue to invest in real estate, and you can too.  If you’d like to talk about real estate investing, please give me a call or shoot me an email anytime and I would be happy to talk.  Maybe we can make you a little crazy too!

2012
01/08
CATEGORY
Deals We're Doing
Financial Education
Getting Started in Real Estate Investing
1 comment

Another Loss For The Year – It’s Time to Cash in the 401k…

So, I was going over my personal financial statements today.  I make it a habit to do this at the beginning of every month, and being that it is the beginning of the year, I also like to spend some time looking at how we did over the past year with our finances.  I really had a good laugh when I took a look at how my 401k performed this past year (although I should be crying). 

At first glance, I thought I had done pretty good because my account balance is actually up from where it stood at the beginning of the year.  However, after looking a little closer, the reason my balance is up is because of the loan payments (I quit contributing 3 years ago) I made to the account.  If you take out my loan payments, I had a net loss of $429.53 for the year.  Really, a loss?!?!? 

So I decided to look into things a little further.  With my 401k I’ve taken a simplistic approach and I simply invest in the S&P500 because most funds don’t beat the S&P on a yearly basis and it really simplifies everything.  So, if you look at the S&P 500, we started the year at 1271.89 and it closed the year at 1257.60 for a loss of 1.1%.  So, it makes sense that I lost money.

But I didn’t stop there…I decided to look at my 5 year performance.  To my dismay the loss has been even bigger over the last 5 years – the S&P500 is down 11.3% since January 2007.

Okay, so I haven’t made any money over the past 5 years, so I decided to go all the way back to when I first opened my 401k.  I’ve been at my job since January of 2000, and I opened my 401k in April of 2000.  To my dismay, the S&P500 is down over 16% since April of 2000.  This represents an annual loss of approximately 1.3% every single year I’ve been investing in the S&P 500.  At this rate I’m doomed to be greeting shoppers at Wal-Mart. 

Honestly, this simple exercise of looking over my 401k performance over the last year has confirmed to me why Kelly and I have quit investing in the stock market and we’re putting all of our money into real estate. 

Now, let’s compare this putrid performance in the stock market with just one of our property investments – 630 Lydia in Pontiac, MI.

We purchased this property in August of 2010 for $17,500 (yes that figure is right).  When we purchased, we took out a loan of $12,000 on the property, so our actual investment in the property was $5500.  So let’s take a look at how we did with this property – here are the actual numbers from this past year:

Rental Income – $11,815.92

Property Expenses – $6,890.68

Mortgage – $1,320.00

Cash Flow $3,605.24

So we made $3,605.24 on this one property last year making a 65% return on our $5,500 investment – a tad better than what I got out of my 401k.  Perhaps I might be able to skip the Wal-Mart gig after all. 

Honestly, I’ve been thinking about cashing in my 401k for a while now and putting the funds into real estate.  Even with the penalties and taxes I would have to pay to cash it in, I’m confident I will be much farther ahead buying a few more rental properties.   After looking at the performance over the past year, I’ve decided it’s time.  The 401k is going to get cashed in and we’re going to be purchasing some more property.

Stay tuned…

2012
01/02
CATEGORY
Deals We're Doing
Financial Education
Market Analysis
Market News
3 comments

Drive to Freedom Business Plan

First off, happy new year to everyone out there.  As the New Year approached we began our annual ritual of reflecting on the year that had passed.  In 2011 we had both successes and failures, but one thing remained consistent – we kept moving forward.  As we move into 2012 we have tried to clear our thoughts and develop our goals, both for this year and beyond.  To help in this effort we decided to put together our business plan for obtaining financial freedom.  So, without adieu, here are the details of our plan:

Drive to Freedom Business Plan

Ultimate Goal

Our ultimate goal is to obtain financial freedom which means we will have more monthly passive income than expenses.

Intermediate Goal

Generate $6,000 in cash flow per month – This is not how we measure financial freedom, but this level of cash flow will be a healthy step towards us achieving financial freedom.

How We Will Generate $6,000 per Month
  • Acquire 12-20 rental houses that generate $300-$500 in monthly cash flow
  • Our aggressive goal is to add 1 property to our holdings every 2 months
How We Will Finance These Properties

We will fund these properties with all of the following sources of capital:

  • Private money lenders – one of our main financing strategies is to develop partnerships with private individuals.  They will put up the money and we will put together and manage the investment property.  We will use these lenders for all of our exit strategies.
  • Self-directed IRA – Most people don’t know, but you can invest in real estate from your IRA.  It just needs to be set up as a self-directed IRA and there are certain guidelines that must be followed.  We will use our own self-directed IRA along with partners’ self-directed IRAs in our investments.
  • Hard money lenders – Hard money lenders provide short-term, high interest loans that are normally utilized for flipping properties.  We may use this sort of financing from time to time.
  • Seller financing / land contracts – In the right situation, seller financing can be advantageous, and we will utilize it where we can.
Buying Criteria

Since we will be holding these properties, we will have very strict criteria for the properties we will purchase.  These criteria are aimed at maximizing cash flow and appreciation for all of our properties.  Below are a summary of the criteria we have:

  • 3 bed, 1+ bath, basement & garage
  • Nice neighborhoods with good schools
  • All properties must meet our guidelines for turnkey rental properties
  • All-in cost to purchase & rehab must be less than $60,000
Exit Strategies

We realize that we will not be able to hold every property we purchase, but we can generate profits from flipping properties.  These profits can be reinvested in the purchase of properties that we hold.  We will utilize the folllowing exit strategies for the properties we purchase:

  • Turnkey Flip
  • Retail Flips
  • Long Term Hold
  • Lease Option Sale
Timeline
  • Reach $3,000 in passive income by December 2012
  • Reach $6,000 by December 2012

So this is it.  This simple business plan will direct us in our investments over the next year and it will help guide us toward our goal of financial freedom.

2012
01/01
CATEGORY
Deals We're Doing
Financial Education
1 comment

Day 45 – This is Why You Buy Title Insurance

Well today is day 45 in our drive for $60,000 in 60 days, and we had a little bit of an interesting situation that came up on one of the properties we’re selling.  We received the title search back from the title company and the following line item appeared on the title report”

Payment Agreement and Lien in favor of Charter Township of Waterford dated May 1, 1975 and recorded June 12, 1975…

My first reaction was…what the heck is this!  We had purchased the property in March of 2009, and this never came up on the title report back then, so I immediately responded to the title company asking what this was.

They did in fact send me a recorded document showing that in 1975 the township of Waterford levied a special assessment against the property for the installation of sewers.  The total assessment was $1,840, and furthermore it specified that an interest rate of 6.5% would be levied on the lien.  So being an engineer with a great story problem in front of me, I quickly calculated what the total amount due would be if this lien had in fact gone unpaid all of these years.  It turns out the balance would be well over $17,000!!!

I began to smile…yes, I began to smile, because I knew that we were protected from this sort of thing because we had in fact purchased title insurance when we bought the property back in 2009. 

As it turns out, Kelly took a trip down to the Waterford Township offices, and as expected the title company had missed the recorded document discharging the lien against the property.  The assessment was actually paid off in 1975, so there was no issue.  However, had there been an issue, our title insurance would have saved us the $17,000.

The moral of the story here is never buy a property without title insurance!

More to come…

2011
08/11
CATEGORY
$60000 in 60 days
Financial Education
Leave a comment

Day 24 – Build a Great List of Contractors

Today Day 24 and we’re going to talk about a technique we’ve used to build a very good list of contractors in a short amount of time.  Over the past year, we’ve had a lot of difficulty finding good contractors.  The process is very slow, but once you find a good contractor you want to hold on to them and keep them very busy.  We’ve been able to do that with our contractors, but inevitably there are times when we’ve needed additional help because our go to guys were busy on other jobs. 

So, I’ve decided to put together a system for streamlining the process of finding contractors.  So far it has worked very well.  Here’s what we did…

Step 1 – Create a Simple Website

The first thing we did was to set up a simple website www.MichiganTurnkeyContractors.com.  We’ve placed a video on the site explaining what we’re looking for along with a simple questionnaire for contractors to fill out.

Step 2 – Create a Craigslist Ad

The next step was to market this website.  So, we put out a simple Craigslist ad that looked like the following:

We Need Residential Contractors!

We will be rehabbing a number of homes in Pontiac & Detroit and we need contractors for all types of work. Please go to http://www.MichiganTurnkeyContractors.com for more details. Thank you!!!

Step 3 – Watch The Leads Roll In

We were amazed at how quickly our list was able to grow from this one piece of marketing.  Literally in the first day, we had 18 new contractors signed up – painters, electricians, plumbers, you name it.  Since then the list has grown to well over 100 contractors.

Step 4 – Schedule Quotes

The next step in the process is to schedule quotes with each of the contractors on the list.  We haven’t completed this step just yet, but on our next rehab project we plan to set up an open house of sorts for contractors.  We’re going to spend a day out at the house and schedule the contractors in 15 minute intervals.  During this initial meet and greet, we’ll be having them quote the work on the house, and we’ll be evaluating them on the a number of items:

  • Did they show up on time?
  • How do they present themselves?
  • Are they professional?
  • Are they organized?
  • What is their experience level?
  • Do they have references?
  • Are they licensed?
  • Are they insured?

When we receive their quotation, we will evaluate the competitiveness of the quote along with how they have organized the quote.  All of these things will be indicators for us on how good of a business the particular contractor runs.

Based upon our experience with contractors over the last year I’m expecting quite a few of them to receive below average grading, but I’m sure we will find a few diamonds in the rough through this process…and we’re going to keep those guys for sure!

More to come…

2011
07/21
CATEGORY
$60000 in 60 days
Financial Education
Networkding
Time Management
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We’ve Developed Our Business Plan to Take to the Bank

 

Last week in our blog post We’re on A Quest to Raise Money for Michigan Turnkey we talked about our plan to approach local banks about providing funding for our business Michigan Turnkey.  Obviously we cannot just walk in and ask for money, so we’ve spent the better part of this past week putting together a business plan that we can present to the banks. 

This plan covers the following:

  • Our Mission
    • To grow our business by exceeding the expectations of our customers
  • Our Systems
    • Property Evaluation System
    • Turnkey System
    • Buyer Marketing System
    • Turnkey Selling System
  • Our Team
  • Our Background
  • Sample Deals We’ve Done
  • Our Request for Funding

We will review this plan with a number of banks, and our objective is to obtain a revolving line of credit that can be used to fund the deals and rehabs that we will be doing.

Our next step is to research and select the banks we’re going to approach.  More to come…

2011
01/20
CATEGORY
Business Development
Financial Education
Financing Deals
3 comments
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