How To Start Investing For Financial Independence, Part 2
Last week, we started a multi-part series about how to go from being a beginning investor to being “financially independent” in a steady and predictable way. Many, many people want to overly complicate this process so let's briefly, let's recap that discussion.
The bottom line steps that I suggested in the last article was:
1) Look for an opportunity that will return at least 150% in 2 yrs or less;
2) Be mentally and financially prepared if the investment does not work out;
3) Have VERY good reasons why you don’t think you will lose money…… You may not make as much as expected, but you would rather not lose money at this stage.
4) Be patient. This single result should not either make or break you but it is crucial to a longer term plan.
I gave an example where a hypothetical person had gone through this process and ended up with a profit of $43,000 (before taxes) and $36,000 of after tax profit. When this profit was combined with their original investment, they now had around $55,000 of operating capital for Step 2.
Before we get to Step 2, let's take a step back. For a lot of people, if I told them that somebody made $43,000 on a quick investment, they would think these people had "struck it rich". Kind of like winning the lottery, right? NO! In the grand scheme of things, this investment will do very little to impact their financial independence. That is, it will take discipline to now use these profits to go into the next investment, and then use those new profits to go into the 3rd investment, etc. So, in our opinion, this first investment was merely a stepping stone towards a much bigger objective.
In Step 2, most savvy investors will now realize they have just been given some extra monopoly money, or money that was not originally theirs, to work with. In the investment and trading world, this is referred to as the "market's money"; i.e., money that you got from the market that you can then use to generate revenues above and beyond what was possible with your original investment. Quality traders can use this concept to produce huge % returns in a year while risking no more than 10% of their original portfolio.
So let's say the investor now decides to repeat the process and buy two more preconstruction lots in a different development. In the two years since the first investment was made, suppose now that property has escalated. In addition, the investor finds a good deal on two lots and each is $250,000 to purchase.
Now, the investors visits their check list to see if this makes sense:
1) Look for an opportunity that will return at least 150% in 2 yrs or less -- yes, they have reason to believe this will occur for their down payment amount;
2) Be mentally and financially prepared if the investment does not work out--yes, they don't think it will happen but if they lose their entire 10% down payment, they are ok with this.
3) Have VERY good reasons why you don’t think you will lose money…… You may not make as much as expected but you would rather not lose money at this stage -- They have done their due diligence and feel strongly about the investment.
4) Be patient. This single result should not either make or break you but it is crucial to a longer term plan-- they are not swinging for the fences but rather patiently using the previous market's money to increase their investment.
Well, like the other investment, suppose this one works out in their favor. In their two year holding period, the lots experienced a 35% increase in price. Not bad. They were hoping for more since they knew some places had that kind of increase in a few months but they are not complaining. After closing costs, the investor had about $55,000 invested and netted a total of $162,000 after expenses. Of course their silent partner, Uncle Sam, wanted their cut so now they are left with a $137,700 in profits and $192,700 in working capital. Not too bad after only 4 years.
Now let's ask the question are they financially free? We'll, I doubt it. The investor could probably now survive for 2-3 years on the nest egg but only if they did not reinvest it. However, if the family and friends find out about this gain, then they will think the investor is now "rich" and living like the Vanderbilts...... For anybody that has made it to Step 2, you know they are far from rich because now they want to invest to go to Step 3 and this will likely consume most of their money. Frequently you will find people in the $0.5 -$2Million dollar net worth in this category where they are doing great on paper but they don't have any more "extra" money to spend than they did a few years ago. After Step 3-4 however, this can change dramatically.
Before we conclude this week's article, let's talk about a very common, and deadly mistake. In the language of Texas Hold'em poker, it is the All In mentality. Frequently, after a first success, people now feel bulletproof and decide they want this process to go faster. They leverage everything the have and take on as much risk as the banks will allow them. If things work out for them, they will explode their wealth with that step. However, if something slips up, they are in trouble.
Most people believe nothing like that can happen to them they are too smart. I mean everybody knows that real estate does not go down, Right? I know a gentlemen who is extremely smart, extremely business savvy, and grew his net worth to well over a BILLION dollars. Within a few years of that mark, he net worth was NEGATIVE and had to declare bankruptcy because of real estate. The process of building wealth in a controlled fashion over 6-10 years is so straightforward that I cannot see taking those kind of risks to make it happen in a much shorter time frame.
Chris Anderson is a leading authority on preconstruction real estate investing and has been referenced in many venues including the New York Times and USA Today. Get updated information about preconstruction projects at GetPreconstructionDeals.com.