Making money through property investing by generating a passive income is a sweet proposition for anyone.
It is a rich man who doesn’t dream of making money without having to lift a finger for it, and the poor man who fools himself into thinking it is possible.
Talk to any successful property investor and you are bound to get the same story; that in order to create a passive income, you’ll have to work damn hard to achieve it.
Lisa Dudson, co-author of Create Wealth, a bestselling book on property investment, says many who go into in real estate suffer from a delusion that there is easy money to be made in housing.
“The whole passive income thing is a bit over-used and under-estimated, really, because nothing is free in this world – you have to work for it,” Dudson says bluntly.
A successful property investor, financial planner and entrepreneur, Dudson knows of what she speaks.
The tough talking 40-year-old Aucklander has sweated her way to financial freedom, and along the way advised hundred of clients and readers how to do it right in real estate.
Dudson says very few ever get to the stage of achieving a genuinely passive income, where rental revenues are creating positive cashflow instead of being used to finance debt.
Why?
Time for one. “It doesn’t happen in five minutes; it sometimes takes 25 years,” she says.
Patience aside, making a profit in property takes sound planning, strategy, wise counsel and firm financial foundations.
These four areas are the focus of talks that Dudson gives to property investors when she is invited to speak on the subject. She’s a regular on the lecture circuit.
Dudson drives home the same message for clients, most of whom she sees after the damage has been done.
“I’ve seen a lot people this year that have $3 million to $4 million worth of property, but they also have 95 per cent debt on it. They’re just sitting on diddly- squat at the end of the day, because if they sold it all today, they’d probably have zero in this market.”
Dudson says investors who blunder into property without a proper game plan are setting themselves up for disaster.
“They’re building up all these properties and buying all these things, but it’s not actually delivering a hell of a lot to their bottom line. Then they say they’d like to retire in five years and I say, ‘Well, how the hell are you going to do that!’ They haven’t actually given it any thought. They’re not sure what they are trying to achieve.”
If property investment requires air- tight planning, clear thinking and foresight, it also requires the right kind of personality.
Dudson says some investors might actually be better suited to the stock market, but they’ve forged into property often for no other reason than “because everyone else was doing it at the time”.
She believes that is one of the main benefits of professional advice; getting guidance about investment options that take into consideration risk tolerance, interests, desired and required rate of returns and long-term goals.
Ironically, many are drawn to property because of the belief that it is one area of investment that doesn’t require professional advice.
Andrew King, Dudson’s co-author in Create Wealth, says many view it as a safe alternative to the stockmarket, given what’s happened with finance companies and more recently the stock market crash.
“A lot of people view it as a bit more secure. They see it as something they can do themselves and have control.”
And while Kiwis have a reputation for being property crazy, King says the numbers do not back it up.
“People say New Zealanders over- invest in property, but it’s just not true. There’s only about 7 per cent of the population that does buy investment property. And that’s because it requires more effort than simply giving your money to a fund manager,” he says.
Tangible or not, at the end of the day most investors just want some assurance they’ll make some money.
Dudson doesn’t believe one is better than the other by measure of return.
“But there is for an individual – one that is better than another,” she argues.
“It depends on how active or passive you want to be with your investments; it depends on how much risk you want to take on, it depends on where your interests lie, what your skills are, all of those things are really important when deciding which investment strategy to choose.”
King agrees property is not for everyone but he has a personal preference for property. He thinks there is more be gained from it.
“A lot of sharebrokers and financial planners love to pull out these charts that show shares outperforming property but I haven’t seen a decent one yet. A decent property, done properly, will always out- do the sharemarket, I believe.”
So what constitutes a decent property done properly?
King points to several factors including buying at the right time, buying in the right area, building up equity and being a good landlord. The importance of the latter should not be under-estimated as a key factor in boosting the bottomline.
“You’ve got to treat tenants like customers, and if you treat them well, they tend to treat you well. If you manage a property well, maintain it, treat the budget well, spend money on maintenance, know the residential tenancy acts and know your rights and responsibilities – all those sorts of things – you save yourself a lot of time, a lot of grief, and you will maximise your income return.”
It is a formula that has served Rotorua’s Debbie Van Den Broek well. Last week, she was named Landlord of the Year by the New Zealand Property Investors’ Federation.
She started with one property 20 years ago and worked her way up to “less than 20″ with her husband.
Van Den Broek says persistence, hard- work and high standards as a landlord have landed her in good stead financially.
“No matter what area, lower or mid class, I like to have a house that is of a good standard of repair with unstained carpets, vinyl that is not all chipped to pieces, a stove that looks clean and you want to cook on and good quality thermal drapes. At least when your tenant moves in they don’t need to clean it immediately and you’re inclined to have people look at the house more if they move in when it’s in good condition.”
She demands as much from her tenants in return and is vigilant about screening.
“I do face-to-face interviews, reference checks, credit checks . . . I will try to go around to their existing house to see how they’ve kept it, I’ll pass by their car and if it’s full of empty McDonalds wrappers and rubbish, well, I think my house is going to look like that fairly soon, too.”
Getting to where she is today, didn’t come by chance or without mistakes. Van Den Broek credits a good friend and mentor in Wellington for inspiring and advising her. She also counts financial guru Robert Kiyosaki (of Rich Dad, Poor Dad fame) and real estate tycoon Dolf De Roos as key influences.
Dudson, also an avid reader, says personal interest is another driver of success. “You’ve got to have some kind of interest in it because you’re going to have some s . . . . . experiences.”
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How to make money from property
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A recent article by Robert Kiyosaki entitled Preparing for the Worst caught my eye. After all, isn’t this sound financial advice for all of us? That’s why we Fools have things like emergency funds.
The article, however, wasn’t about wills, life insurance, or anything like that (which is what I was expecting based on the title), but rather a list of reasons why Kiyosaki thinks that “The worst is yet to come” in the stock market. Unfortunately, however, Kiyosaki doesn’t tell us how to go about preparing for it.
I’ll have to admit that while some of his reasoning as to why we may have more tough times ahead in the market (and I don’t profess to know one way or the other the way the market’s headed over the short or even intermediate term)Â seems plausible on the surface, I think he misses the mark in a few places.
1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.
Government’s hand has been a very heavy one in the economy lately. Everything from bailouts of companies like AIG and GM to the Cash for Clunkers program is evidence of this. Maniplating the stock market? I’m not so sure. Manipulating the economy (which has an impact on the stock market)? Absolutely. I wish the manipulation were related only to the stock market and not to the economy as a whole, because I fear that the long-term ramififications of many of the government’s recent actions may place an unnecessary drag on the economy for a long time to come.
2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.
While each of the above entities certainly had a hand in creating the mess, laying this problem solely at the feet of financial istitutions is a bit like blaming McDonald’s and Burger King for America’s growing obesity problem. We gladly borrowed all that money and took out loans for all kinds of stuff despite a lot of good financial advice that’s readily available to us that urged us not to take on too much debt (you know, at places like this Fool.com outfit I keep hearing about) just like we gladly and willingly wolf down Big Macs and Whoppers despite all of the information out there telling us we should be eating broccoli instead.
3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.
That demographic changes will alter the economic landscape isn’t exactly new, but I’m not so sure that I follow this logic. Yes, baby boomers had good earning power and spent money on lots of ’stuff’ — but what are earnings? After all, they’re something someone is willing to pay these boomers for their work — and while there are exceptions, each and every one of these boomers was hired, and paid, because his or her employer at least had the perception that the value of the work they were receiving was at least as great or greater than the value of the money they were paying.
If we are to fear the economic impact of retiring baby boomers, I think its the loss of their productivity, not the loss of their consumption, that we should be most concerned about.
4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.
I agree that this is one of the greatest economic challenges that will be faced within the next generation. No matter what one’s individual views are as to how to best handle this impending problem, I believe the decisions we ultimately make here will have a large impact on our economy and financial well-being for a very long time to come. My only fault with Kiyosaki here is that he never gets to the “Preparing” part that was in the article’s title.
5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire.
I couldn’t disagree with Kiyosaki more. Sure, lots of money flowing into and out of the market can sometimes cause some pretty big short-term changes in overall stock prices. In the long-term, however, I firmly believe that stocks are ultimately valued by the amount of money they return (or are expected to return) to their shareholders. Sure, short-term irrational ‘blips’, some lasting several years, can, do, and will happen — but 401(k) plans are most definately not a Ponzi scheme.
My differences from Kiyosaki aside, I do still like the title of the article. After all, if nothing else, the recent housing and credit crisis, our struggling economy, and the looming pension, Medicare, Social Security, and other obligations faced by private companies and the government alike tell us that we should, indeed, do our best to be financially prepared for tough times — whenever and however they should strike.
As far as what to do to prepare, well, there are some blue tabs at the top of your screen right now that, if you click on them, have a lot of information and ideas as to how to go about doing exactly that.
Regards,
Russell (a.k.a. TMFEldrehad)
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Is the worst over?
~ Robert Kiyosaki ~
“Is the crisis over?” is a question I am often asked. “Is the economy coming back?”
My reply is, “I don’t think so. I would prepare for the worst.”
Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.
The stock market has been going up since March 9, 2009. Talk of “green shoots” fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:
1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.
Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking… and I don’t blame them. A global panic would be ugly and dangerous.
2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.
Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.
In the 1980s, our government’s hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.
While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, “Sometimes the cure is worse than the disease.” I say the government stimulus cure is killing us frogs.
3. Old frogs don’t hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years — their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.
The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.
4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it’s my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare…Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.
5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they’re concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.
The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.
The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker’s money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬– and pay their pound of flesh.
Demographics show that we are entering a battle between young and old. I call it the “Age War.” The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.
This war is not coming…it is upon us now. This is one of many reasons why I remain cautious and say, “The worst is yet to come.”
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Preparing for the Worst
If you’re new to investing, this stock market tutorial will give you a general overview of stocks and demystify the whole process.
There is a common misconception that only the wealthy can invest in the stock market. This is simply not true.
It is essential to have a general understanding of stocks before you begin investing. Since you have chosen to read a stock market tutorial, you’re clearly taking the initiative needed to join in on this wonderful opportunity to earn additional income.
This stock market tutorial will discuss just the basics on stocks. Upon finishing, move on to the next level of advancement. Before long you’ll be a stock market tutorial graduate! Perhaps you’ll be the next Donald Trump someday! But let’s not get too far ahead of ourselves!
Where Do People Learn About the Stock Market?
Many jobs will offer stock options to their employees through the company. A simple investment such as this can result in some wonderful long term returns.
Another place people get started with stocks is from a family member such as a parent who takes the time to teach them. Some couples handle their stocks together, and some parents talk to their teenage children about stocks.
Other sources for information on the stock market include: a stock market tutorial such as this one, books, business magazines, and more.
What Are Stocks?
Stocks are portions of ownership (also called “sharesâ€) in a company. Growing companies sell these shares to help fund further development.
Why Should You Invest?
The question of whether to invest is yours to decide. Let’s assume since you’re reading a stock market tutorial you’re already convinced. You may still want a few reasons to invest, though. Here are some benefits to investing in the stock market:
Stocks grow over time. When the stock grows you can sell it at a higher price and thereby turn a profit. However, in selling it, you relinquish the opportunity to generate future income from that stock to the new investor.
The main reason to invest in stocks is that you can make more money more quickly, if you invest in the right stocks, than you can through other methods of investing.
Types of Stocks
Stock types are broken down by the risk involved. There are low risk stocks, moderate risk, and high risk. These terms seem fairly self-explanatory even in a basic stock market tutorial.
Low risk stocks are best when you start out. As you might guess, you can invest in low risk stocks without negatively impacting your finances in a major way. The lowest types of risk are found in older, historically successful companies. Newer companies whose future is uncertain are considered high risk.
How Do You Choose What Particular Stocks To Invest In?
There are many factors that can affect the desirability of a stock. One is called price to earnings ratio. Is the company making money? Have their profits increased over the past year? Are they in debt over thirty percent? There are many others.
This is where having a stock broker comes in handy. A stock broker can help you keep track of your facts about various companies and make recommendations on which ones may be wise investments.
The necessity of your involvement in the research of companies before investing should never be underestimated. You don’t want to just trust your broker with your money. You want to work as a team.
If you intend to get serious about investing in stocks, you’ll need to continuously monitor the market on a daily basis online, on television, and in print.
Hopefully this very basic stock market tutorial has taken the mystery out of investing in the stock market. This is only the beginning of what could be a very prosperous future for you and your family! Just be careful and be diligent with your investments!
About the Author: Steven Miller is passionate in learning financial freedom & wealth creation with 21st Century Academy’s self-made millionaire Jamie McIntyre who has learned from the likes of Tony Robbins, Robert Kiyosaki and many more.
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Stock Market Tutorial: The Bare Basics
