Don’t take on more than you can chew
What sort of risk can you tolerate? How much risk can you take?
Getting an understanding of your own attitude to risk will help you create a real estate investment strategy that truly reflects this. Your personal risk profile will dictate the type of real estate investment strategy you can pursue comfortably without losing sleep over it or sacrificing your current lifestyle.
Risk is the extent to which you are willing to expose yourself to a potential loss, in return for a particular gain, or reward.
Being trained as an accountant and being the sole income earner in his 40s, I am naturally cautious in the things I do.
Your risk profile can range from being conservative, cautious and prudent to assertive and aggressive. The more risk you take on, the higher potential is your gains, assuming you have mitigated the potential risks.
Unfortunately, most investors wouldn’t consider risk as part of the process of buying real estate, be it a personal risk or even property risk.
Most people have a low-to-moderate risk profile. Being opportunistic, they also want to get into real estate development because there is a perception of quick profits. They don’t understand that real estate development is a high-risk strategy with potentially low margins if things do not go as planned. While the potential returns of real estate development appeals, the risk often doesn’t, especially to the novice.
Given the different types of properties and different real estate investment strategies, and the fact that some risk levels aren’t suitable for everyone, it is important to assess your own personal risk tolerance, just as you would when discussing investment in managed funds or shares with a financial planner.
Your desired level of involvement and commitment in the real estate buying process can also vary from passive to active. If your involvement level is passive due to time or knowledge constraints, then it is imperative that you hire the services of a professional who can provide evidence of their expertise in the area in which you need their assistance. If your involvement level is active, then you need to ensure that you do a lot of due diligence yourself when investing in mitigating the risks.
Risk is the factor
There’s a lot of literature that talks about the factors that make up a successful real estate investor — but far too many of those books (and seminars and websites) don’t ever really delve deeply into calculating risk.
They just avoid these things.
My personal tolerance for risk (or, as the case may be, intolerance to low reward) is the single most important factor in any real estate investment.
A personal risk profile is composed of three elements: risk tolerance, time commitment, and monetary goal.
Firstly, risk tolerance varies from ‘none’ (i.e., when you can barely afford to invest in the first place or a loss would directly affect your lifestyle) to ‘extreme’ (i.e., when you have enough disposable income that you have trouble deciding what to do with it).
Most people fall around the ‘low’ category. They could manage if they suddenly lost a few thousand dollars, but that’s about it.
What risk tolerance do you have for real estate investing?
In general, you shouldn’t consider real estate as a viable form of investment unless your risk tolerance is at least on the upper edge of ‘medium’.
Secondly, time commitment varies from ‘single parent of three with a full-time job’ to ‘I have got a lot of time on my hands’.
This is where real estate investing can get really hairy. It’s totally viable for one person to single-handedly dedicate time to search for real estate, attend open inspections and perform a range of due diligence.
What’s your time commitment to real estate investing? Do you have lots of free time? Or do you struggle with time management?
Thirdly, there are essentially two ways you can make money in real estate investing:
(1) Real estate market appreciation – This is when the real estate becomes more valuable due to a change in the market. Market appreciation is a tricky game and can be riskier than investing for cash flow income.
(2) Cashflow income – This type of real estate investment focuses on buying a real estate and operating it so that you can collect a stream of cash from the net rental income after paying all expenses.
Therefore, your monetary goals will break down into two essential types: You either want to invest because you’re setting up for cash flow, or you want to invest because you want capital growth. Both kinds of investment outcomes are equally important and real estate investing can only lend itself primarily to either one when your real estate investment strategy is set up appropriately. The two cannot be your main investment outcomes.
The things I look for in an investment are:
(1) strong capital appreciation;
(2) steady cash flow;
(3) liquidity – ability to take my money out either by selling or borrowing against my investment;
(4) ease of management;
(5) a hedge against inflation (if possible); and
(6) good tax benefits.
Examining the major categories of investments, you’ll recognise that not many fit the bill when it comes to all of these criteria.
To grow your wealth in the current uncertain economic environment you’re going to have to invest in assets that have the ability to appreciate in value and grow in value steadily and surely without major fluctuations in value.
Prime residential real estate is one of the investment vehicles. Now that doesn’t mean it’s perfect because the property is not as liquid as many other investment classes.
Your financial mindset is your foundation to success
The reality is that you cannot invest capital or money into real estate unless you already have it. You cannot get capital without earning or inheriting it and keeping it.
Having a full-time job does help with the financial serviceability of your investment loan or mortgage, in most cases. Without a job, it is going to be difficult to start anything.
It’s not sexy but financial budgeting is the only way to ensure you’re able to balance your income and expenses and save enough to invest. It allows you to see where you’ve been spending your income and helps you plan for bigger expenses and investments down the line.
The key is to spend less than you earn. The value of your financial discipline should not be underestimated.
If you are just saving your money in a bank account, then savers are losers because the money saved is not working for them. Your bank is the winner because they can lend out your savings to others at a higher interest rate.
People who saved or have savings locked away in a bank account are then taxed.
In contrast, people who are in debt through investments and have business losses are offered tax breaks.
The reality is that we are living in a tax system that promotes debt and liabilities rather than savings and financial freedom.
The financial discipline to save and manage your money and cash flow is part of your personal financial thermostat ingrained in your subconscious and will determine your financial outcome.
Are you working hard for your money? Or does your money work hard for you?
Mentally, are you set for having a high income, a moderate-income or low income? Are you programmed for saving money or for spending money? Are you programmed for managing your money well or mismanaging it?
Reframing your mind is your key to financial success, especially if you have poor financial literacy and financial management skills.
Have you ever wondered why some people seem to get rich easily, while others are destined for a life of financial struggle? Is the difference found in their education, intelligence, skills, timing, work habits, contacts, luck, or their choice of jobs, businesses or investments?
The shocking answer is none of the above!
Ever wondered why lottery winners most often lose it all.
If you go from living paycheck-to-paycheck, does it sound right that you will know the best things to invest in, and the best tax and asset protection strategies?
Looking at the statistics, 76% of Americans[7], 50% of Australians[8] and 31% of British[9] workers are living paycheck-to-paycheck.
Money arriving by luck or circumstance is simply easier to spend than money earned through hard work. It’s like finding a $20 bill on the sidewalk and splurging at your favourite coffee shop.
The researchers found that lottery winners tended to have below-average education and income, which might translate into lower financial literacy than the average not-that-financially-savvy person.
No doubt, you’ve read other books, listened to tapes or CDs, gone to courses and learned about numerous money systems. What happened? For most people, not much! They get a short blast of energy and then it’s back to the status quo.
Procrastination occurs when people put off critical tasks they need to complete, possibly forever.
People tend to like instant gratification. Procrastination gives the instant gratification of doing what we want at that moment (such as watching a favourite TV show rather than reviewing the household budget).
Some argue that financial decisions are particularly prone to procrastination because they can be complex and daunting. Or it could be just ahead in the sand approach, hoping that things will go away without confronting the reality.
There is a theory that people tend to pay less attention to their decisions if the consequences fall many years in the future. This makes it easy to put off retirement planning without paying heed in the current moment to the financial toll or consequences that will be felt in the distant future. Your future self may well regret that choice.
The reality is that if your subconscious financial thermostat is not set (or re-set) to a high level of success (especially for financial success and the achievement of goals), nothing you read, nothing you learn, nothing you know and nothing you do will ever make much of a difference. Not a bit!
What many people do not realise is that we are all taught and conditioned in how to deal with money by people who didn’t have a lot of money in the first place. As such, the importance of having the right mentor and model is vital to your financial freedom.
We have developed our subconscious financial thermostat through what we heard about money, what we saw when we were growing up and when we were involved in specific negative incidents involving money (or the lack of money). It could also be living the life of frugality.
Poor people are focused on spending their money, living day-by-day, perhaps hoping that their government will give them their pension or financial handouts. Unfortunately, the decline in Government tax revenues and the raising of national debt levels have resulted in constant changes to pension eligibility rules and policy that will make reliance on taxpayer handouts more uncertain in the future.
A major problem facing governments and individuals is how to fund the retirement of an ageing population in a situation where there is a declining number in the workforce per retired individual.
With the ageing population, one of the problems is that too many people will be dependent upon the government to solve their individual problems. Today we’re facing even bigger problems because the masses have delegated our personal financial responsibility to the government.
If you are not currently managing money well, it just means you were not programmed to.
Perhaps the greatest obstacle people have to become rich is that they ‘think they already know’ about money. Yet it is precisely our version of ‘right’ or ‘correct’ that has led us to our current financial status.
We are not born knowing how to manage money. There is nothing holding us back from wealth and financial freedom except our own ignorance or mindset.
My strengths and passion are not in real estate investing …. What’s next?
What are the options available to you if you do not have the required cash deposit or equity to buy a real estate investment property? Do you have time to devote to real estate investing? Do you have sufficient knowledge to invest in real estate? Do you have any interest in real estate investing?
Let’s understand the various sources of income.
We can generate personal income by becoming:
(1) an employee working for an employer, either part-time or full-time;
(2) a self-employed working in our own small or home-based business;
(3) a business owner managing a business, a business system or a network marketing system; or
(4) an investor living off the cash flow or capital growth generated from real estate investment, or paper assets like shares or bonds.
Employees can be presidents of companies or janitors. It’s not so much what they do that matters, but the contractual agreement employees have with the organisation that hired them, which is the security of getting paid regularly.
I would argue that job security is getting rarer:
(1) when we move past the ‘use-by date’ of our professions (yes, each profession has a use-by date):
(2) when we move towards retirement or eligibility for retirement
(3) when there is a cost-cutting organisational restructure that makes high paying jobs redundant
(4) when full-time jobs are slowly transitioning into part-time jobs
(5) when jobs move to lower-cost countries
(6) when technology replaces jobs.
While full-time work has evaporated, older workers have been staying in the workforce in much greater numbers – both in full-time and very much so in part-time.
At the start of this century, just 3% of those over 65 were working part-time. Now 7.3% of those supposedly in the retirement age are working part-time.[10]
Therefore, job security is risky or becoming riskier in the current employment and economic situation.
People working as an employee can also be a real estate investor if they have enough savings for the deposit or down payment for a real estate investment.
Alternatively, employees can own a part-time or home-based business that they could do after working hours.
Unfortunately, the old conventional wisdom, “Go to school, get good grades, get a good job, work hard and everything will be O.K.” doesn’t work anymore. Our school systems have focused on training our children to be employees rather than to be business owners, investors, and entrepreneurs.
After leaving school, employees often end up with lots of expenses and may even fall into debt, especially university debts. This means that they must cling ever tighter to secure employment or job just to pay their bills. They are essentially stuck in the Rat Race of life and will never be financially free.
I can’t imagine that this will happen to my children unless I take control of my family’s situation by changing my financial thermostat and encouraging and teaching them to be more entrepreneur.
By being employees, they can work only so hard and get paid only so much for their hard work. For most people, there is a limit as to how much money hard work can produce.
Self-employed, on the other hand, are people who want to ‘be their own boss’. They don’t like to have his or her income dependent on other people and they expect to get paid for their work. Their independence and the freedom to do things their way, and being respected as experts in their field are much more important than mere money. If they work hard, they expect to be paid well.
Unfortunately, employees and self-employed trade time for money. The bottom line is that they can only earn money when they work. This is a limit as to how much they can earn.
Worse still, most tax systems around the world do not favour employees and the self-employed. Tax expense is deducted from my salary or pay even before any money is deposited into my bank account. There are essentially no or very little tax advantages for employees and the self-employed.
Company tax, on the other hand, allows business owners to generate whatever level of income they want, claim all allowable tax deductions they want and pay as little tax as possible through aggressive tax minimisation strategies. None of these strategies is available to employees or self-employed.
Debt and taxes are the main reasons most people will never feel financially secure or achieve financial freedom.
Governments continue to raid compulsory savings, pension or superannuation funds to pay for their budget deficits through constant policy changes. For example, you cannot withdraw your savings until 65 or 70 years old. Governments make it harder to withdraw with stricter qualification rules.
What many people don’t understand is that whatever you and your employer put into the superannuation fund is no longer guaranteed to exist when you decide to pull it out. These funds are subject to market forces.
In other words, one day I could have money in my superannuation account. If there is a stock-market crash, which every market occasionally has, my account balance could be cut in half or even wiped out. My ‘guaranteed of lifelong income’ is now gone.
The chance of this occurring is higher as we have experienced during the 2009 global financial crisis.
That’s why self-managed superannuation funds are becoming more popular as it gives control back to the employees in terms of the type of investment vehicle their fund can invest in.
Besides employees and the self-employed, there are two other groups of people (business system owners and investors) who make their money work for them to generate a passive income (hence financial freedom) rather than working for their money, trading time for money.
A business system is defined as a repeatable process that produces a profit.
Business system owners and investors are motivated by freedom; the freedom to choose and the freedom to earn as much as they want. They create business systems and invest in real estate or equities.
The reality for most of us employees is that we really need to keep our jobs for as long as we can. Of all assets, time is the most precious. It takes time to make money.
So decide how fast you want to get to where you want to be. This could be starting a home-based business, part-time, now. Work on building up your part-time business after office hours, at night and on weekends. Starting a business part-time will teach you priceless business skills such as communications, leadership, team building, and taxation.
You cannot be a business owner if you don’t know how to sell. Let’s face it, we all sell in some form or another. We sell our skills at work as employees to get the promotion we are eyeing on and we sell an idea when we try to convince someone else about our point of view.
The key to starting a business is to figure out if my idea will ever make money before I invest tons of time in it. Ask whether my potential customers are willing and able to pay me for the service or product (demand question), and asking whether I am willing and able to provide the service or product to them (supply question).
Options for making money online include advertising, software development, sell physical products, affiliate marketing, coaching, and online information products.
Generating multiple income streams for financial freedom
If you are wondering why am I telling you the different types of ways you can generate personal income so that you can potentially have multiple income streams, hang on further.
Like many of you, I work for my income as an employee. As a side business, I used to run my own professional consulting and training company as a self-employed. In both situations, I am still working for money. When I don’t work, I do not generate any additional income.
Since graduating from university with accounting and law degrees, I have been busy with climbing the corporate ladder and starting a family.
Then reality hit me one day when I was 46. I realised that age is catching up and in no time, I will be 65, the official retirement age for most industrialised countries including the United States, Australia, and Britain.[11]
The official retirement age will slowly increase to 70[12] with 51% of people planning to keep working, at least part-time, in retirement and 18% of people are planning to not retire at all.[13]
With these sobering statistics, what will retirement look like for me? Do I have enough to live off my savings? Can I still do the things I enjoy?
During this time, I was also trying to change employment without much luck.
Then my colleague said something that turned on the lightbulb for me, “Let’s face it, it is hard to find a job at our age. Nobody is going to hire us.” She was 50.
I had another light bulb moment when I asked my colleague how old he was and why was he still working? He was 76 and said, “I’d rather work because my friends who retired all pass away after six months of retirement.” Moreover, he still has a mortgage to pay off!
This has prompted me to start investing in real estate.
I have also evaluated three other types of business systems for the potential to generate passive income:
(1) develop my own business system;
(2) buy an existing system (e.g., franchises); and
(3) buy into and become part of an existing system (e.g., network marketing).
Each business system has its strengths and weaknesses, yet each ultimately does the same thing. If operated properly, each system will provide me with a steady stream of income. I do not need to trade time for money. The problem is getting started and getting it up and running now.
When I retire as an employee, I can continue to keep my mind engaged in doing the work I am passionate about by managing the business I had already started and built up during my employment as an employee, which has also given me additional income.
However, be careful that you do not start something that will be in competition with the terms of your current employment contract.
Final words
If you are not lazy, have the right mindset and financial thermostat, and have the desire and motivation to make a positive change and become financially free, then you can certainly find something that matches your personal strengths to generate long-term passive income in a less risky environment.
The starting point will always be your WHY, or the reason for wanting to be financially free. Your why will determine your financial goals, which will then determine your long-term strategies to get you to your goals.
My WHY gave me the power and motivation to do the HOW.
The reason most people do not do what they can do is that they do not have a strong enough why.
Write down your dreams, goals, and plans on becoming financially free. Review these frequently and be accountable to someone about your progress towards fulfilling them.
The key is to avoid the distractions of the tactical hell that only focuses on short-term opportunistic behaviours. I do not want to be distracted by becoming a short-term opportunity seeker. I rather want to be a strategic investor or business owner.
Most people look for the easy road to wealth. I want to be different. The problem with the easy road is that it usually ends in a dead-end. I can be busy with nothing to show for it.
Stay focused on your WHY and your chosen long-term wealth-creation strategies to get you to your financial goals. You may need to regularly review these goals for currency.
There are many, many ways to be financially free, but there are only a few personal reasons why you want to be financially free.
Adopt Nike’s ‘Just Do It’ motto. Start with baby steps and don’t chew on more than you can handle.
My passion has given me the energy and motivation to succeed.
Learn from your mistakes. I have made many. By making mistakes, you will be free from the fear of not doing anything.
I know that procrastination and analysis by paralysis can stop my financial freedom journey in its tracks.
If we are an employee working for someone else, our careers have a use-by date. The truth is that if we have not made it by the age of 40, we never will. Let’s face it, we can all be technically obsolete by age 40. This effectively means that we will always be working toward our next career and devoting some time to retraining or networking towards a new career.
The key question is how teachable and flexible are we, at this age, to re-skill and retrain in new things?
From a financial literacy perspective, most working adults do not know the difference between an asset or a liability. Assets make money flow into our pockets whereas liabilities take money out of our pockets.
We work hard for job security and collect liabilities thinking that they are assets. We are then hammered monthly by paying bills to feed those liabilities we think are assets, like a mortgaged home.
Worst still, I could be out of a job by age 50, with no real survival skills for life outside my current career or employment. As an employee, you may have dedicated your soul to the job thinking that you have the security of income until you retire at age 70. It is no longer the case.
Here is the rub. People do not become obsolete. Their ideas can be obsolete.
Therefore, how fast you relearn, retrain and reinvent yourself will determine your road to financial freedom, to change the old way you used to do things, to invest in real estate or equities, or to start a business.
I had to go through this journey myself. It has been a struggle and I am still learning.
All I ask you to do is to stop, think and look into the future.
Come join me on this journey.
If we want to be financially free, we need to educate our brain to look for things that will make us financially free. We need to train our minds to look for business opportunities and investments.
Develop a retirement contingency plan by leveraging on our current employment income before it is too late.
People cling to job security rather than trust in their personal abilities and strengths. It is really hard to find true security when our survival is dependent upon someone else. Companies do go broke, move offshore, or restructure by terminating employees.
We do not really need to look at our financial situation until we lose our jobs, have an accident, think about retirement, or until it’s too late.
Employees will often ask, “How much will you pay me if I do this job for you?”
The reality is that we cannot be financially free if we go around looking for people to pay us for what we do. There is an infinite amount of time we have in a day. This limited time and resource will be a constraint in terms of how much money we can make.
If we want to be financially free, we need to reframe to think in terms of how many people we can serve. The less we have to physically work, the more people we can serve. In exchange, the more money we can make. Money is the outcome of being financially free.
Three asset classes that can get us closer to our goals are real estate, paper assets, and business.
Apart from being an employee or a self-employed, we have the option to be a business system owner or an investor. Within each of these, there are different strategies you can adopt, especially if you start now, way before retirement.
If you just want to be an employee all your life and not become an investor or business owner, then financial freedom will only be a dream. It is getting riskier by the day for employees. Granted, some people just want to not take the risk and depend fully on Government welfare or pension, if there is such thing in the future.
Success is the freedom to be who you are doing the things you are passionate about.
The million-dollar question is this, “How can I use my God-given strengths to serve more people with less work and for a better price?”
I wish you all the best in your income generating endeavors if you choose to accept this assignment!
[1] https://www.biggerpockets.com/renewsblog/2012/09/20/biggerpockets-memphisinvest-survey-investors-revealed/
[2] http://www.corelogic.com.au/news/a-profile-of-the-australian-investor-who-where-and-what
[3] http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4050437/
[4] http://www.abc.net.au/news/2016-08-23/sports-betting-losses-on-the-rise/7777388
[5] www.ato.gov.au
[6] http://www.huffingtonpost.com/2013/08/03/top-5-regrets-of-the-dying_n_3640593.html
[7] http://money.cnn.com/2013/06/24/pf/emergency-savings/
[8] http://www.abc.net.au/news/2016-02-15/many-australians-living-payday-to-payday,-out-of/7168566
[9] http://www.onrec.com/news/statistics-and-trends/almost-one-third-of-british-workers-live-paycheck-to-paycheck-careerbuild
[10] https://www.theguardian.com/business/grogonomics/2016/aug/22/why-unemployment-is-no-longer-the-best-indicator-of-the-economys-health
[11] http://www.forbes.com/sites/jasonoberholtzer/2011/03/22/effective-retirement-age-vs-official-retirement-age/#12a4f1657a9d
[12] http://www.adelaidenow.com.au/news/south-australia/treasurer-joes-hockey-confirms-pension-age-rises-to-70-for-those-born-after-1965/story-fni6uo1m-1226903894804
[13] http://www.forbes.com/sites/laurashin/2015/05/05/why-the-new-retirement-involves-working-past-65/#581f4dfb4417