John Schaub s Strategies and Solutions

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1 John Schaub s Strategies and Solutions Celebrating 38 years of providing quality information to investors in single family homes and notes Written for students of Building Wealth One House at a Time Go to for coming events and updates Do You Want to Make a Lot Of Money or Be Rich? # 1401 January/February Although making a lot of money and being rich are not mutually exclusive, more people make money than are actually rich. Why are so many high-income earners unable to write a check for $100,000, while people who never earn a high income accumulate millions of dollars? I don t want to discourage you from making a lot of money if you have that ability and your work produces what we perceive as a high income. Employment that traditionally earns a more modest income can bring satisfaction that is more rewarding than a big paycheck. Working 80 hours a week may make you a lot of money, but leaves little time for the rest of life. The faster you make a lot of money, the faster you are likely to go through it. You know the stories of lottery winners, famous athletes and entertainment stars who blow through millions of dollars. It is inconceivable for anyone who built his or her fortune through investing that anyone with that amount of money could lose it all. I knew a man who made millions of dollars before his 30 th birthday. He soon had a passel of good friends. I remember his business Christmas card that featured his office staff, which numbered more than 30 people. Because he had fallen into a lot of money, he made the mistake of thinking he was smart and could do it again. People with far more experience lured him into investments that failed, and soon he filed for bankruptcy. On the flip side, today I know many students who started with nothing and own ten or more free and clear houses. That s not a large fortune, but it is enough to provide a very comfortable lifestyle for them. High Earners Are Often Big Spenders. George Clason, in his classic book The Richest Man in Babylon noted, Now I will tell thee an unusual truth about men and sons of men. It is this: That what each of us calls our necessary expenses will always grow to equal our incomes unless we protest to the contrary. If you make a lot of money, you probably hang with others who make and spend a lot of money. It takes more than a little willpower to skip a great vacation when your friends blow $10,000 on a weekend trip. Pro Serve Corporation of Sarasota, Inc publishes Strategies and Solutions 6 times annually South Tamiami Trail, Suite 4, Sarasota, FL Annual Subscription $ Pro Serve Corporation of Sarasota, Inc. All Rights Reserved. Quotation by permission only To subscribe go to or call

2 The 10% Solution However, if you take Mr. Clason s advice to heart, you will set aside 10% of all you earn and invest it for your future. Starting this early in life has a powerful effect. If you begin at age 25 to save $500 a month and invest it at an average return of 8% for just ten years, you will be ahead of another who waits to 35 to start saving and they will never catch up. After 10 years of earning 8%, your accumulated dollars will now earn more than the $500 a month forever. Take Joe who earns $5000 a month. It would be easy to spend it all, but he disciplines himself to save $500 a month. If he can invest it at an average return of 8% over the next ten years he will accumulate $92,082. At this point the account will grow at $ the next month and more the following month. If he stops making contributions, but keeps this full amount invested until he is 55 it will grow to $429,190. If he keeps making contributions of $500 he will have $1,757,149 at age 55. If Joe doesn t start until he is 35, and then make a $500 a month contribution it will take you 55 years to catch up and I doubt that you want to be working until you are 90. Let s pause for a reality check. You can t get an 8% average return in a bank, and probably not in the stock market. Plus the above numbers assume that the profit accumulates tax-free. We can solve the tax problem by opening a Roth IRA and using it to save and invest. If you learn to invest in property, then 8% is a very achievable return. With safe leverage, you can do better. The same investor who learns to use that $500 a month to buy one house a year will have far more than $92,082 at the end of ten years. If fact if he starts buying houses worth about $100,000 today, using my 10/10/10 plan (at least 10% below the market, no more than 10% down and at least a 10% gross cash flow) assuming a modest 3% appreciation, the first house will be worth $134,000 in 10 years. Because you bought it 10% below the market and put about 10% down you would have $54,000 in equity in the first house. Your last house purchases would have about $28,000 in equity (A $134,000 house you bought it 10% below the market with 10% down), so your average equity would be $41,000. Your ten houses would have equity of about $410,000. Plus you would have cash flow each month you could use to continue buying. Clason goes on to share his 5 Rules of Gold. His advice is timeless and practical in today s world. It helps me if I substitute the word wealth for gold. The Five Laws of Gold From the Richest Man In Babylon 1. Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family. If you have never saved 10%, you might think this to be beyond your ability. If so, start with 5%. You will learn that you don t miss that 5%. Then move up to 10% or more. Notice he says not less than 10%. When you have a good year financially you might be able to put 50% or more of your income way. This will jump start your investment account, and can become addictive. On the other hand, you may know someone who saves nearly everything, spending little on life s pleasures. It s a personal choice, but I would not trade the 40 years that I have been skiing with my family and friends for another million in the bank today.

3 You can do both. You can save and invest and enjoy this great adventure that is life. You may be staying in a budget hotel and trading off comfort food for fine dining in your early years, but that s part of the adventure and will make the finer things in life even more special when you can afford them. Once you get comfortable saving 10%, add another 10% for charitable giving, and another 10% for self-improvement. Declining an expensive meal once a week to make a gift to someone in need builds self-confidence and contributes to a positive attitude. Find a person with loads of self-confidence, who is happy, and you will find a cheerful giver. 2. Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field. The three elements in the formula for multiplying your wealth are: time, return and continued investment (time X return X continued investment.) I suggest that you set up a separate investment account. A Roth IRA will work well for this. Then, do not take money out of this account until you reach the point where the account will support your lifestyle. Using the numbers from above, once Joe accumulates $1,757,149 he can take out the 8% in earnings of $140,571 each year without spending the principle. If you use leveraged real estate as your investment of choice, your returns are likely to be higher. You can use leverage when you buy property in a Roth IRA, but it has to be nonrecourse debt. That means that if the IRA is unable to pay the debt, it could lose its original investment, but it would have no liability for the rest of the debt. Owner financing is generally non-recourse debt. Some banks are now making non-recourse loans to IRAs that buy property, as it s becoming a big business. Buying an option in your Roth is another way to use leverage without recourse. I discuss this technique thoroughly in my new recorded course Buying Real Estate Options and if you have a Roth using options will help you achieve your goals in far less time. When you own property in a Roth or other type of retirement account, carry plenty of insurance to protect against any claims that may be filed against any property, and buy lower risk property. A house in good condition in a neighborhood with mostly owner occupants is a relatively safe investment, and reasonable to insure. 3. Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling. A challenge of investing is getting information that you trust. We are all hesitant to tell others about the details of our finances and at least half of us don t like asking for directions. I learned that making money grow is neither an inherent skill nor intuitive. The concept was not taught it any school I attended, and it s rare to find a rich teacher. However, investors who have been successful typically are not worried about competition and are often willing to share what they know with a more-novice investor who is working hard to succeed. If you re my age and you are looking for an older, wiser investor, you have lots of opportunity. To 80 year old

4 investors, I look young and (here is the really good news) they have time and are very willing to talk with me. Set a goal this year to take someone to lunch that is older, wiser and a lot richer than you are, and then let him or her do the talking. Bring a list of questions, but let them share their successes and other less profitable experiences with you. These seminars can make a difference in your life. One side benefit is that should you ever need money for a deal, you have identified a potential investor. Rich people know other rich people, so if they are not willing to invest, they may have a friend. To be clear, do not make offering them an investment the purpose of your first meeting. Learn from them. Respect their experiences. If you are stuck with how to put a deal together, ask for their help. In short, make a new friend. You may be able to do something to help them one day. If they have one million in the bank earning less than 2% interest before taxes, a safe investment, like a 50% first mortgage at 5% would dramatically increase their income. 4. Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those who are skilled in its keep. Have you ever had a good friend give you a hot tip? If you took it, how did it work out? If I had the money back that I have lost because I made a decision based on friendship, not sound financial principles, I could buy a nice new airplane. Looking back, nearly all of those deals were in ventures unfamiliar to me, and probably none would have been approved by an impartial third party advisor. This is important advice to take, especially as you accumulate more gold. I have noticed that some people take significant chances with their retirement account money that they would not take with their personal money. Have a plan. Make adjustments to it as you learn more, but don t get sidetracked into an investment you know little about just because you friends are getting into it. Do you have an impartial third party who could look at a potential deal and give you advice? If not, find one. It could be a fellow investor, your CPA or another trusted advisor. I am happy to give you a quick read on a deal you are considering. The best way to reach me is by schaubrealestate@gmail.com A person closer to home might be better as they would have a better feel for your local economy and market. I continue to buy houses, not because they are exciting, but because they are easy to understand and produce fairly predictable results over the long term. I have never lost money on a house I bought for an investment. I can t say that about my ventures into other investments. Don t experiment with money, it s too expensive. In addition, I continue to buy only in my town. I have concluded that trusting the job of managing to others cost me too large a share of my profits. Out of town managers are not only expensive to hire, but the tenants they rent to are not nearly as good as my tenants. I know this

5 by the amount of net income I collect here compared to out of town. In addition, you won t know the market in another town like you will know your market. 5. Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment. In my recent class on Retirement Investing, the discussion of not trying to force your assets to produce more income than is reasonable was a hot topic. Unfortunately, many retired investors become victims of either con artists or someone who does not understand the business who promise them higher than normal returns. This happens to some very experienced investors. Many of these deals are made through note brokers or third party, commissioned agents. When someone is receiving a commission on a deal, never wonder whose interest they have in mind. It s not yours, it s theirs. If you are an investor, then you know what a reasonable return is on your investment in today s market. That number will change with the times, so you have to keep up with the markets if you continue to invest. When the home mortgage rate for a 30-year fixed rate loan is 5%, then 10% is a good return on a safe investment. When someone offers you a 15% return or higher in a 10% market, you are unlikely to receive your money back, much less any profit. I recently saw a television show titled American Greed which unfortunately featured an old friend of mine, who I knew to be an otherwise successful investor. My friend loaned $500,000 to a man who promised him a 25% return on his investment. Other people in his town also invested with this con artist who was an attorney and (hold on to your hats) a seminar instructor. I cannot tell you what prompted my friend to make this investment, but I do know he lost the entire amount, as did the other investors. The con man is now in prison, but that is little help to all who lost a lot of money. Greed is a powerful emotion and it s hard for even the wisest investors to avoid the temptation of the promise of a high yield without the responsibility of doing any work. Whenever you are presented with a golden opportunity to make a return that is much higher than seems normal, stop and reread this page. Con men use words like guaranteed return or risk free investment. You know that there are no guarantees or no risk investments but when they couple that with 25%, and then offer to pay you a couple of months in advance, your emotions may overcome your common sense. Opportunities in the New Year Markets across the country are recovering and the markets that dropped the most seem to be leading in the recovery. In states like Florida where the foreclosure process is lengthy and the number of foreclosures was large, there are still a many loans in default. As prices rise, banks are becoming more aggressive in foreclosing. However, this is still a good time to buy, because the rental market continues to be strong in most markets.

6 In addition, in areas where flood insurance is required on institutional loans, the food insurance rate is about to get a lot more expensive. Flood insurance is a program subsidized by the federal government, which is not paying its own way. By raising rates, the beancounters hope to get the program to break even. This may result in opportunities for a buyer who can pay all cash or obtain private financing that does not require flood insurance. Three Deals You Can Make to Increase Your Profits in the Coming Year. 1. Buy a better house than your competition and negotiate a bigger discount avoiding the competition. Never bid against another for a house. Instead, look for an empty house in a better neighborhood and you might buy a better house at the same price. Higher priced properties take longer to sell. Find one that has been on the market for many months and make them an offer you like. Tenants love them and you can demand higher rent. 2. Buy a note at discount and renegotiate it. Even though we are in the recovery period, there are still hundreds of thousand of notes in default. Many of these are in second position. The holders of these notes are often happy to entertain an offer for a small fraction of the face amount. Find a property where the owner wants to stay, buy the note at a big discount, then renegotiate the payments with the current owner to allow them to keep the property. You will earn a great return on your money and the homeowners will get to stay in their house with a payment that they can afford. 3. Use an option to fund part of the down payment for another investor. I often get approached by investors that have found a good deal, but are short on cash. It s a good idea for them to have some cash in the deal, but suppose they have half of a $20,000 down payment and have negotiated owner financing on the balance at 5% for 20 years. If you buy an option to purchase half interest in the house for half of the loan balance for the next ten years, you would have a relatively safe, low management investment with the potential for a significant profit. A 20 year loan will pay down about 37% in principal in 10 years, and hopefully the house will appreciate. If the price goes up then your original $10,000 could easily double a couple of times, a good return on a passive investment. Best wishes for a happy, healthy, and prosperous New Year. Thank you for being a loyal subscriber. Let me know if I can ever do anything to help you with your investments. JS Building Wealth One House at a Time - Beyond the Book John's Acquisition and Management seminar in John s hometown January 18 & 19, 2014 Sarasota, FL Holiday Inn Lakewood Ranch Saturday & Sunday, 9am to 5pm both days Single registration $549, two pre-register together $950 (Special room rate $109 Hotel # ProServe ) Register at or call Join us for a reception at our home Saturday evening after the class buying experience