"Rich Dad" by Robert Kiyosaki

The Money Defence

Creative Real Estate Financing
by Rodney Brooks

There are literally hundreds of different ways to acquire real estate. In future articles, and in my blog, I will be sharing some of the many different innovative techniques used in creative real estate financing. In this article, were going to explore a very useful and profitable creative real estate financing technique commonly called Lease Purchase Options. For ease of explanation, we will refer to Lease Purchase Options as Lease Purchase.

What exactly is a Lease Purchase?

A Lease Purchase is a process where a rental agreement is combined with a purchase or an option contract. Price, length of contract, escrow instructions, rent credit and other pertinent terms are all negotiated in advance. This allows the tenant/buyer to have a defined percentage or dollar amount to be credited to a down payment or off of the total purchase price of the property when a payment is made. First and foremost, you must know what needs, wants, and desires the "right" property will fulfill. It is obvious that those needs, wants, and desires will be the requirements of someone. That someone is the investor. It is the investor who establishes the value of any piece of property in the marketplace by his or her requirements.

A real estate investor always has only two considerations. Those two things are:

1. A return on investment or Profit. (also known as ROI) 2. A return of investment or Security.

Remember that no matter what the circumstances are surrounding an investment, these two considerations are always the same: some form of profit (i.e. dollars, property exchange or other goods and services, tax savings, personal use) and security, or an assurance that the original investment will remain intact and can be recovered.

The Lease Purchase, (also known as a lease option), has everything an investor needs to make a profitable investment in real estate. Utilizing small down payments of 1% to 2%, an investor can control properties that would usually require 10% to 30% down, without ever having to see a lender or go through the loan application process.

There are three different ways a good deal can generate profits.

1. Cash upfront with option consideration

2. Cash monthly in the form of rent

3. Cash at closing or a note

Other options involve "flipping" of the optioned property to a third party or just acting as a consultant for the buyer and seller, retaining a portion of the option agreement. Controlling properties by creating a lease purchase option is, by far, the best way to be involved in controlling homes and obtaining great cash flow, high profits and minimum risk. Lease Purchase may be the best way to create a quick cash flow for the first time homeowner or even the seasoned investor.

The key ingredients in putting together a profitable Lease Option are:

1. Finding a motivated seller

2. Determining what his Needs and Wants are and creating a win/win situation

3. Finding a tenant/buyer

Question: Where do I find a Motivated Seller? Good question.

Remember a motivated sellers' number one objective is to get rid of their property - as soon as possible. A sellers' motivation can come from many different situations:

* Relocation - job transfers * Financial difficulties * Death/divorce * Tennant problems * Change in family size * Building a new home

You need to determine what the sellers' motivation is once you contact them. Often a seller is facing financial difficulties and at other times it's just that he no longer wants to be bothered with the property because he now has other interests. Our first priority then in talking with the individual initially is to determine Wants versus Needs. Most motivated sellers fall in the Need category. Their situation may not be negative. In the above list there are some items that are very positive for the seller. But still it remains, that this property is no longer needed for whatever reason(s).

You can find these deals:

* Looking in classified ads - "Homes for rent or lease" or "For sale by Owner" ads. You can ask if they would be interested in giving an option to buy their property if you lease it from them. * Distributing flyers and/or mailers stating, " I can buy or lease your home" or "I can buy or lease your home in 24 hours! Any size, any condition, any location. Call (your name) (000) 123-4567 * Running an ad in your local paper stating you are looking to lease a home. You can ask if they would consider an option after the owner contacts you.)

Question: Where do I find tenant buyers?

Your tenant/buyer is someone who desperately wants his or her own home, but for one reason or another, getting bank financing will not work for them at the present time. They either have credit problems, don't have the large down payment necessary to qualify or they don't have a high enough income. - You have the ability to give this person an opportunity to realize their dreams.

* Run an ad such as this: "Rent to Own. If you can rent you can own! Stop paying off your landlords' mortgage! You can rent to own your own home even with poor credit! Call (your name) (000) 123-4567 * Send mailers to occupants in neighboring apartment complexes asking if they're tired of renting and if they would like to own their own homes.

Some benefits of a lease option for the Investor are:

1. You now control another persons' asset. You're in a position to make money on a property you don't even own.
2. Provides a positive cash flow opportunity.
3. You have no closing costs.
4. A Lease/Option agreement is a unilateral contract - the seller must perform. You are not bound in any way. If the property should depreciate in value or some other catastrophic event occur, you can simply walk away.
5. You don't have tax or insurance costs.
6. You are buying the property tomorrow at today's prices.
7. Little or no money needed up front.
8. Very little management needed. Tenant/buyers take much pride in the property and therefore tend to keep it up and even improve upon it. That's because they have an interest in owning it - not just renting it.

About the Author
Rodney Brooks is President and CEO of Brooks Global eBusiness Solutions. Rodney can be contacted by email at: brooksglobal@yahoo.com Fror more information on Brooks Global eBusiness Solutions, visit our blog at: www.brooksglobal.blogspot.com

How to Avoid Dumb Investment Mistakes
by Stephen L. Nelson, CPA

Smart people sometimes make dumb mistakes when it comes to investing. Part of the reason for this, I guess, is that most people don't have the time to learn what they need to know to make good decisions. Another reason is that oftentimes when you make a dumb mistake, somebody else--an investment salesperson, for example--makes money. Fortunately, you can save yourself lots of money and a bunch of headaches by not making bad investment decisions.

Don't Forget to Diversify

The average stock market return is 10 percent or so, but to earn 10 percent you need to own a broad range of stocks. In other words, you need to diversify. Everybody who thinks about this for more than a few minutes realizes that it is true, but

it's amazing how many people don't diversify. For example, some people hold huge chunks of their employer's stock but little else. Or they own a handful of stocks in the same industry.

To make money on the stock market, you need around 15 to 20 stocks in a variety of industries. (I didn't just make up these figures; the 15 to 20 number comes from a statistical calculation that many upper-division and graduate finance textbooks explain.) With fewer than 10 to 20 stocks, your portfolio's returns will very likely be something greater or less than the stock market average. Of course, you don't care if your portfolio's return is greater than the stock market average, but you do care if your portfolio's return is less than the stock market average.

By the way, to be fair I should tell you that some very bright people disagree with me on this business of holding 15 to 20 stocks. For example, Peter Lynch, the outrageously successful former manager of the Fidelity Magellan mutual fund, suggests that individual investors hold 4 to 6 stocks that they understand well.

His feeling, which he shares in his books, is that by following this strategy, an individual investor can beat the stock market average. Mr. Lynch knows more about picking stocks than I ever will, but I nonetheless respectfully disagree with him for two reasons. First, I think that Peter Lynch is one of those modest geniuses who underestimate their intellectual prowess. I wonder if he underestimates the powerful analytical skills he brings to his stock picking. Second, I think that most individual investors lack the accounting knowledge to accurately make use of the quarterly and annual financial statements that publicly held companies provide in the ways that Mr. Lynch suggests.

Have Patience

The stock market and other securities markets bounce around on a daily, weekly, and even yearly basis, but the general trend over extended periods of time has always been up. Since World War II, the worst one-year return has been -26.5 percent. The worst ten-year return in recent history was 1.2 percent. Those numbers are pretty scary, but things look much better if you look longer term. The worst 25-year return was 7.9 percent annually.

It's important for investors to have patience. There will be many bad years. Many times, one bad year is followed by another bad year. But over time, the good years outnumber the bad. They compensate for the bad years too. Patient investors who stay in the market in both the good and bad years almost always do better than people who try to follow every fad or buy last year's hot stock.

Invest Regularly

You may already know about dollar-average investing. Instead of purchasing a set number of shares at regular intervals, you purchase a regular dollar amount, such as $100. If the share price is $10, you purchase ten shares. If the share price is $20, you purchase five shares. If the share price is $5, you purchase twenty shares.

Dollar-average investing offers two advantages. The biggest is that you regularly invest--in both good markets and bad markets. If you buy $100 of stock at the beginning of every month, for example, you don't stop buying stock when the market is way down and every financial journalist in the world is working to fan the fires of fear.

The other advantage of dollar-average investing is that you buy more shares when the price is low and fewer shares when the price is high. As a result, you don't get carried away on a tide of optimism and end up buying most of the stock when the market or the stock is up. In the same way, you also don't get scared away and stop buying a stock when the market or the stock is down.

One of the easiest ways to implement a dollar-average investing program is by participating in something like an employer-sponsored 401(k) plan or deferred compensation plan. With these plans, you effectively invest each time money is withheld from your paycheck.

To make dollar-average investing work with individual stocks, you need to dollar-average each stock. In other words, if you're buying stock in IBM, you need to buy a set dollar amount of IBM stock each month, each quarter, or whatever.

Don't Ignore Investment Expenses

Investment expenses can add up quickly. Small differences in expense ratios, costly investment newsletter subscriptions, online financial services (including Quicken Quotes!), and income taxes can easily subtract hundreds of thousands of dollars from your net worth over a lifetime of investing.

To show you what I mean, here are a couple of quick examples. Let's say that you're saving $7,000 per year of 401(k) money in a couple of mutual funds that track the Standard & Poor's 500 index. One fund charges a 0.25 percent annual expense ratio, and the other fund charges a 1 percent annual expense ratio. In 35 years, you'll have about $900,000 in the fund with the 0.25 percent expense ratio and about $750,000 in the fund with the 1 percent ratio.

Here's another example: Let's say that you don't spend $500 a year on a special investment newsletter, but you instead stick the money in a tax-deductible investment such as an IRA. Let's say you also stick your tax savings in the tax-deductible investment. After 35 years, you'll accumulate roughly $200,000.

Investment expenses can add up to really big numbers when you realize that you could have invested the money and earned interest and dividends for years.

Don't Get Greedy

I wish there was some risk-free way to earn 15 or 20 percent annually. I really, really do. But, alas, there isn't. The stock market's average return is somewhere between 9 and 10 percent, depending on how many decades you go back. The significantly more risky small company stocks have done slightly better. On average, they return annual profits of 12 to 13 percent. Fortunately, you can get rich earning 9 percent returns. You just need to take your time. But no risk-free investments consistently return annual profits significantly above the stock market's long-run averages.

I mention this for a simple reason: People make all sorts of foolish investment decisions when they get greedy and pursue returns that are out of line with the average annual returns of the stock market. If someone tells you that he has a sure-thing investment or investment strategy that pays, say, 15 percent, don't believe it. And, for Pete's sake, don't buy investments or investment advice from that person.

If someone really did have a sure-thing method of producing annual returns of, say, 18 percent, that person would soon be the richest person in the world. With solid year-in, year-out returns like that, the person could run a $20 billion investment fund and earn $500 million a year. The moral is: There is no such thing as a sure thing in investing.

Don't Get Fancy

For years now, I've made the better part of my living by analyzing complex investments. Nevertheless, I think that it makes most sense for investors to stick with simple investments: mutual funds, individual stocks, government and corporate bonds, and so on.

As a practical matter, it's very difficult for people who haven't been trained in financial analysis to analyze complex investments such as real estate partnership units, derivatives, and cash-value life insurance. You need to understand how to construct accurate cash-flow forecasts. You need to know how to calculate things like internal rates of return and net present values with the data from cash-flow forecasts. Financial analysis is nowhere near as complex as rocket science. Still, it's not something you can do without a degree in accounting or finance, a computer, and a spreadsheet program (like Microsoft Excel or Lotus 1-2-3).
 

About the Author
Seattle, Washington accountant Stephen L. Nelson CPA has written more than 150 books. His bestselling book is Quicken for Dummies, which sold more than 1,000,000 copies. His books have sold more than 4,000,000 copies in English and have been translated into more than a dozen other languages.

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