A lot of folks these days don’t seem to expect a whole lot out of today’s youth. This is why there is a record number of 20 and 30-somethings still sitting around in their parents basements—”finding themselves”. Statistics show that of our Generation X’ers, 32 percent of men and 28 percent of women are already back at home with mom and dad after leaving some ten years ago. We all love our Mom and Dad, but eighteen years is plenty of love for most of us.
It is never too early to begin planning your financial freedom. In fact, many young men just starting their career have already begun an RRSP (Registered Retirement Savings Plan) via their investment managers suggestion. This is all fine and dandy, if you are looking for a middle class retirement. But if you are looking for a little more comfort (yacht, supermodel, supercar, “good” hair transplant, etc.), then you are going to need something a little more substantial.
Michael Farr, author of A Million is Not Enough, tells us a million dollars is not as much as people once thought. “It is a tough love message,” says Michael. “A lot of people are going to end up working longer than they expect.” Michael reasons we should count on living 90+ years with future health care, so we are looking at some thirty years of retirement. If you took one million dollars and spread it out over the course of thirty years, you would have approximately $50,000 (adjusted for inflation and modest interest earnings). Not quite the lavish lifestyle you might have expected.
Robert Kiyosaki, “Rich Dad Poor Dad” author and entrepreneur says, “I don’t subscribe to what they call the standard financial planning of get a job, work hard, save money, get out of debt, invest in a (RRSP) and diversify in mutual funds.” Robert believes that you have to be somewhat aggressive in your investments and start early. One of his favorite forms of investment has always been real estate. This is something that is easy to learn, execute, and has a proven track record.
The key to successful real estate according to Robert, is resisting speculation. Never purchase real estate with the speculation it will increase in value several years down the road. Only purchase property that offers immediate cash flow. “If it doesn’t produce immediate income (cash flow),” says Robert. “I won’t buy it.” For instance, Robert describes a solid real estate investment as a property purchased with a mortgage of $800 and a rent value of $1,200. That is $400 of cash flow in your pocket every month. “I’ll take that deal all day long,” affirms Robert.
But as a young entrepreneur, you are going to have one immediate problem. It takes money to make money with real estate… and if you’re just starting, chances are you just don’t have a lot of it. It is a catch 22, how are you supposed to make money without money and how can you have money without first making it? This is where OPM comes in. There are several ways to go about OPM and it falls under the three categories of friends/family, commercial lending/credit cards, and venture capitalism.
Hitting up grandpa-big-pockets may seem like the most easily accessible resource, but there is a “good, bad, and ugly” to this story.
- The “Good”- Most family members, assuming you have a good relationship, will trust you and be open to the opportunity.
- The “Bad”- If your family becomes your investor, your personal finances will no longer be just your business. You will have to answer to everything you buy until the day the debt is paid.
- The “Ugly”- Combining business with family is one of the major causes of feuding and hard feelings. If you don’t have to go here… don’t!
Credit Cards… with 18 percent interest rates, let’s just set those aside for now, shall we.
Commercial lending can be a very valuable resource for real estate purchases. The key will be your approach. Cliff Robertson of The Champions Group offers his advice on how best to approach a commercial bank for optimum interest rate and acceptance:
- Step 1- Find a bank or lender that is interested in offering a personal loan. A payday loan is fast cash (and comes at a price) so many look to secured loans. Pickup the phone and call several. Once you have narrowed your prospects, visit them in person.
- Step 2- Know your financial status. What is your credit like, are you overextended, etc. Contrary to popular belief, this step is a small part of the lending decision as long as you don’t have any major skeletons in your closet.
- Step 3- What the bank is most interested in according to Cliff, is the projects income potential. Their decision will be based off the presentation of your business plan and if they see your idea as generating enough cash flow to pay the note in reasonable time.
Since you probably won’t be dealing with the traditional large sums of money that is considered true venture capitalism, we will refer to this source as private funding. The idea here is to use someone else’s money with a promise to return it with a certain percentage (10 to 12 percent generally). Private money for real estate is one of the easiest to gain since you have property security on your side. You are not asking $250,000 to design a redneck truck hitch mounted toilet seat, you are offering a tangible investment with predictable value.
Another way of paying back your private investors is to make them a partner. This guarantees them share in the profit, rather than percentage. The negative of a partner is that you can’t pay them off and get rid of them. They may want to be a part of the decisions, have a say in the planning, and worse case, try to gain control of what you started. There is no right or wrong, it mostly depends on how well you know the individual and how easy you think it would be to work with them.
OPM enables a young real entrepreneur to leverage their limited resources, soften the impact of housing market cycles, and purchase hot property deals they wouldn’t otherwise be able to. There may be no such thing as a money tree, but OPM is as close as you can get… legally, that is!