Latest / Cash Flow for Life / Chapter 3: Determining Your Investing Resources
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- 00;00;00;07 - 00;00;29;05 Michael Sarracini Chapter three Determining Your Investing Resources. In the previous chapter, you learned how very able real estate investment is for securing a financially independent future. Now it's time to show you how able you are to accomplish your goals and become a successful real estate investor. Now, this isn't a pass fail exercise based on how much money or how much knowledge you have available right now. 00;00;29;08 - 00;00;54;04 Michael Sarracini Hey, Michael, there's another hole in the couch. Maybe we should buy a cover for it. Well, unless you're hiding a bank account somewhere, I think you can forget about buying anything this month. Scott. I just collected and deposited the rent for the landlord, and we're broke again. And I'm getting very tired of potatoes. We went right out not long after that conversation and purchased our first rental house. 00;00;54;07 - 00;01;12;19 Michael Sarracini And then we did it again in the same year. So it's not about whether you have money now or not. However, knowing what you do have or how you can free up some cash is a part of the process of setting up a realistic time frame for reaching your objectives. 00;01;12;22 - 00;01;47;10 Michael Sarracini Notice that we're talking about timelines, rather than an exercise to determine whether you have the resources to start your real estate investment activities right now. We'll show you that you are ready now, whether it's cash in the bank or the will to succeed, you have the basic necessities to begin your real estate investing business. This chapter is about assessing your abilities, temperament, risk tolerance, and financial condition so that you can use the information to set your goals and develop a timeline for reaching them. 00;01;47;12 - 00;02;12;24 Michael Sarracini As we move through these self-assessment steps, remember that you belong here no matter where you fit financially. You're in a very mixed financial group when we consider everyone that's going to read this book. Some of you will be broke. College students, like the two of us were back then. Some of you will be people with some wealth. Some will be lots of wealth, and the rest of you will fall somewhere in between. 00;02;12;27 - 00;02;34;28 Michael Sarracini Those with businesses or greater financial resources are likely to have some of the financial evaluation pieces that we're about to discuss already in place. They can move through the exercise faster. Even skipping areas, if you want those with little to no cash, will find a great deal of valuable information here for getting on track with a plan and creating attainable goals. 00;02;35;01 - 00;03;09;29 Michael Sarracini It doesn't matter where you fit into the activities in this chapter. It just matters that you know that you do fit. This chapter isn't about financial resources. You'll be evaluating personal knowledge and attributes as well. Some of this evaluation will influence early investment activities, and some will come into play farther down the road. This is the time to learn more about yourself and how this self-knowledge will fit into your investment activities and strategies, now and in the future. 00;03;10;02 - 00;03;35;21 Michael Sarracini Tolerance for risk. Starting out with a discussion of risk isn't meant to intimidate anyone, because risk is a part of any investment activity. If it weren't, everyone would be rich with no losses. Buying any stock on the exchange and watching it grow steadily in value. In the previous chapter, we gave you several reasons why real estate investment can be a hedge against risk. 00;03;35;24 - 00;04;04;01 Michael Sarracini Real estate balances out an investment portfolio nicely, substantially reducing overall risk. Owning real estate has historically been a stable and profitable enterprise. Now is a good time to take a look at your personal attitudes about risk. Decide how you will plan for a real estate investment and determine the timeline for growing your investing business. None of these actions are based on your financial situation. 00;04;04;03 - 00;04;31;05 Michael Sarracini Whether you're sitting on a pile of cash or you're a financially strapped student, knowing how to handle risk will help you set your goals and create a workable plan for the future. Very low risk tolerance. Whether you're extremely rich or totally broke, if you fit into this group, you check your pockets every morning for holes because you don't want even a penny dropping out on the ground during the day. 00;04;31;07 - 00;04;50;23 Michael Sarracini You take an umbrella to work even when the sun is shining, and there's no prediction for rain, just in case it does rain. Betting in the office football pool is completely out of the question. You end up with double and triple items in the kitchen cabinets because you buy plenty of them on the way home, thinking you may not know what to prepare for dinner. 00;04;50;26 - 00;05;12;08 Michael Sarracini You don't want to risk having to go out again if you see yourself in this description. It doesn't mean that you shouldn't start your real estate investing business. Actually, you're probably the person who will benefit most from this book and our coaching. There is little chance of you building future wealth in any other way, such as investing in the stock market. 00;05;12;13 - 00;05;33;07 Michael Sarracini You just wouldn't be able to sleep at night wondering what your stocks were going to be worth tomorrow, especially if there had been bad news today. Using leverage is something most of us do. Whether it's a loan for a car or a home mortgage, so you're likely to have used other people's money to finance the things you need. 00;05;33;10 - 00;06;02;06 Michael Sarracini Your low tolerance for risk doesn't mean you won't use leverage to purchase properties, just that you'll be much more careful in your valuation and selection of appropriate rental homes. This book, and ultimately real estate, will provide the tools and confidence for you to become a successful real estate investor with lifetime cash flow. Spend as much time as necessary to learn the math and evaluation tools for selection of property. 00;06;02;08 - 00;06;34;16 Michael Sarracini This will give you the confidence in your ability to understand your local rental market dynamics. So develop this confidence locally. Figure out what renters want and learn what they'll pay to get it. If you're in this risk tolerance group, you're in precisely the right place at the right time. Everything that's successful real estate investment promises in the way of returns and financial security is available to you and at a risk level that will allow you to sleep soundly. 00;06;34;18 - 00;06;57;13 Michael Sarracini Normal risk tolerance. Most people fall into this group. We leave the umbrella at home, even if it's cloudy. The weather person didn't predict rain, so we take a little chance. The office football pool is fun, and it's just a buck, right? So why not? We sometimes arrive home from work and find we need to go out and get ingredients or basics to put a meal together. 00;06;57;15 - 00;07;22;03 Michael Sarracini If we don't have much money, we think we should put enough together to get into the stock market or at least buy some mutual funds and save for retirement. Those with some money are in the stock market. Watching it and trying to predict which industries and stocks will move and when. Stock market investment accounts, bonds and mutual funds are common investment vehicles for the normal risk group. 00;07;22;06 - 00;07;47;00 Michael Sarracini It doesn't mean that those in this category aren't cautious, and there certainly aren't happy when the market takes a dive in their investment account balances dive with it. However, they are optimistic that they will see growth over the long term. Leverage is a tool this group doesn't mind using. Many will try to get the lowest down payment possible with a home mortgage, because they want to use their cash in other ways. 00;07;47;03 - 00;08;09;23 Michael Sarracini Besides, the home will increase in value anyway, so why tie up cash unnecessarily? Some in this group will also trade stocks on margin, using a leveraged account to control more stock than the cash they have available in the account to purchase it. If you're in this group, it's easy to get excited about your financial future and lifetime cash flow. 00;08;09;25 - 00;08;38;19 Michael Sarracini Maintaining a balance and taking on only realistic risks should not be a problem for you. Perhaps running through the last batch of numbers one more time before signing a purchase contract is a good idea, because your excitement can bring about hasty decisions at times. High risk tolerance. Those in this group don't even own an umbrella. They are the ones who set up the office football pool, and they're constantly trying to up the stakes. 00;08;38;21 - 00;09;01;04 Michael Sarracini Using leverage is second nature to this group. They trade stocks on margin and end up with margin calls to put more cash into their trading account when the market is down and they exceed the margin lending percentage if they're allowed. If you're in this group, you're not worried about what's in the cabinet or fridge for dinner because you have a bet with a coworker with dinner as a payoff. 00;09;01;07 - 00;09;30;11 Michael Sarracini Whether you win or lose, you're going to a restaurant. You're already seeing yourself sipping cocktails on a beach in front of one of your retirement homes. This real estate investment thing is just what you needed to offset the lousy performance you've been experiencing in your other investment accounts. Our goal for you is to try to keep you from skipping the whole chapters and jumping into highly leveraged properties without the proper due diligence. 00;09;30;13 - 00;09;48;17 Michael Sarracini Every risk group wins wherever you fall on the risk tolerance spectrum. You'll find what you need to succeed in this book. And with our mentorship and coaching programs, we'll keep you on track for lifetime cash flow through rental property ownership. 00;09;48;20 - 00;10;23;16 Michael Sarracini Your current knowledge level. How much do you currently know about buying, selling and renting real estate? Whether you've never owned a home or you've bought and sold several for personal residences, real estate investment in rental property involves a whole new knowledge set. For example, attention to issues, property condition evaluation and repair or renovation estimation. Local, regional and national real estate market trends and what they mean to the rental property investor. 00;10;23;19 - 00;11;02;10 Michael Sarracini Property valuation to ensure the right purchase price to achieve your investment goals. Rental market demographics and trends. Purchase, holding and liquidation costs for the investor. Property management from legal and financial perspectives. Tax considerations in real estate investing. There's more, but that should give you an introduction to the components of a successful real estate investing business. Remember, our goal is to eliminate for you the expensive process of trial and error. 00;11;02;12 - 00;11;25;19 Michael Sarracini Remember that quote from chapter one? Here's where it begins to take on real importance. The first thing you should do is realistically assess your current knowledge. From my parents own a home and I live there too. I've actually rented out many homes before. It's important for you to recognize your knowledge, strengths, and weaknesses early on in this process. 00;11;25;21 - 00;11;52;20 Michael Sarracini We want to leverage your strengths even if you've done some rental property investing. You're reading this book because you believe there's more to learn. And you're absolutely right. We told you in the first chapter that we were one thing above all, which is record keepers. We kept journals of every success, mistake and detail of our rental property investing, and we still do to this day. 00;11;52;23 - 00;12;21;13 Michael Sarracini You're here to take advantage of these journals and use this book and our mentorship to take you to a new, exciting, and highly profitable real estate investing business threshold. No matter what you know, right now at this point. So regardless of your present knowledge, we'll get you to where you need to be. What's important now is to take some time to stop and write down what you know, including what you don't know or think. 00;12;21;14 - 00;12;28;08 Michael Sarracini You should learn to become a successful investor in creating lifetime cash flow. 00;12;28;10 - 00;12;51;09 Michael Sarracini Cash on hand. Whether you're sitting on a pile of cash or a ratty couch with holes in it, there's lots of information here for you. Your starting point is to determine what you have available for real estate investment cash, or if there's nothing, how to begin to free up some cash so you can get started. 00;12;51;11 - 00;13;14;16 Michael Sarracini You're sitting on a ratty couch. Okay, so you got zipped for cash. Zilch. Nothing. Nada. Maybe you're like, we were in college and struggling to even make rent with a job after school and late night homework. Maybe you're one of the millions in the country who is just making it from paycheck to paycheck, never really managing to save any money at all. 00;13;14;18 - 00;13;36;02 Michael Sarracini The cash you have in your bank account isn't enough to carry you for even a couple of months. If your income stops today. Now is the time to sit down and determine where your cash is going every month. Some call it a budget and you'll need to develop one right away. How much is coming in? And where does it go out? 00;13;36;04 - 00;14;04;22 Michael Sarracini Your first step is to understand where your money goes. Don't miss a penny that you spend. Keep a small notebook or recorder with you. Note every expense, no matter how small. One of our clients was absolutely amazed at his monthly coffee house expenses. Once he took the time to keep up with them. Once you've determined where your money is going, it's time to see if you can reroute some of it for better uses. 00;14;04;25 - 00;14;26;10 Michael Sarracini What about a straight coffee instead of a latte or making it at home? One of our students simply just quit using the coffee house as a study hall, and her expenses dropped around $80 a month. Study where your cash goes and how you can cut your expenses. Instead of thinking about a 3 or 6 or $8 specialty coffee. 00;14;26;12 - 00;14;49;08 Michael Sarracini Think of those 3 or $8 as square foot of flooring for your rental property. Now you have something to build on. Each coffee you avoid is adding square footage to the first rental property. You're going to buy. A technique like this makes it tangible for you to understand where the money will go, and how it will drive your future lifestyle. 00;14;49;10 - 00;15;12;07 Michael Sarracini Now you have a whole new way of looking at that cup of coffee. Later in this book, we'll give you some ideas for raising funds for investment as well as how to borrow intelligently. Right now, you should begin to build on your own resources before you look to other people's money. Remember, the first step is knowing what comes in and what goes out with your money. 00;15;12;14 - 00;15;36;12 Michael Sarracini You're sitting pretty. Okay, so maybe you're not sitting on a ratty couch. Sitting pretty can cover a wide range of financial situations. You're possibly sitting on some cash, maybe a lot of it. If you grew tired of the stock market gyrations and took that money and put it into interest bearing accounts. Maybe you have bonds. It could be liquidated to free up some cash for real estate investing. 00;15;36;14 - 00;15;59;09 Michael Sarracini What about retirement savings accounts? Or you could still be in the stock market, but could sell some of your holdings and free up some of the cash for real estate investment. Is your cash in your home that could be used? Financial statements. It's important to know where you stand. If you have an accountant to do this for you, or one who is already going to do it for you. 00;15;59;10 - 00;16;22;13 Michael Sarracini Great. If not, you need to get an accurate picture of your financial position at this point in your real estate investing education. If you have a business you're already familiar with income statements and balance sheets. These financial evaluation tools should be applied to your personal financial situation as well. Your income statement will document the source of your income and the amounts. 00;16;22;15 - 00;16;54;12 Michael Sarracini It will also list and calculate your expenses, ending up with a profit or loss at the bottom. Just as if your personal life was a business. It's like an ongoing movie on how you make money, how much you make, and how you spend it. While you may be sitting on an expensive leather sofa instead of a ratty couch with holes on it, you still must account for your income and expenses to see where you can improve your financial position to free up funds for real estate investment. 00;16;54;14 - 00;17;26;15 Michael Sarracini In fact, you'll probably find more areas in which to save than will be our financially challenged readers. As for the balance sheet, this isn't a movie. This is a snapshot. It represents your current financial position or your financial position for one moment in time and for the numbers entered on them. At that moment, the calculations in the balance sheet result in your net worth, a snapshot of the net result of your assets and liabilities by revising your balance sheet twice per year. 00;17;26;18 - 00;17;49;25 Michael Sarracini You'll be able to track your progress and reduce liabilities and increased assets. And cash is an asset. So lifetime cash flow will result in a balance sheet that will put a smile on your face and money in your accounts. If you don't know where to get started. We've included a simple income statement and balance sheet for you to not only track your income and expenses, but to understand your net worth today. 00;17;49;28 - 00;18;25;18 Michael Sarracini Simply get them at the book resource site WW key buyer.com/cash flow for life audiobook. That's key.com cash flow for life audiobook. This is where your resources are. Resources reviewed. In this chapter, we asked you to assess the current resources available to you at the beginning of your real estate investment activities. Through this book and our mentorship, you'll be constantly improving both your knowledge and your financial position. 00;18;25;20 - 00;18;55;29 Michael Sarracini Tracking that improvement will be exciting and will clearly show your progress towards lifetime cash flow. Action steps. Number one think about your tolerance for risk and where you fall in the three examples. It doesn't really matter where, but it's important for you to identify this so we can focus on your training. Number two do the knowledge exercise. Sit down and write down what you know about real estate right now. 00;18;56;01 - 00;19;19;22 Michael Sarracini Buying, selling, renting and the financial aspects of real estate investment. Write down where you need to add to your knowledge as well. Make this a simple bullet point list. It should take no more than 5 or 10 minutes. Number three develop a budget or income statement that clearly sets out where every dollar comes from and where every dollar goes. 00;19;19;24 - 00;19;45;16 Michael Sarracini You can get a sample at key. Dot com slash cashflow for life audiobook. Number four. Determine where you can cut expenses and improve your cash flow. Every dollar you save can be returning cash flow later through real estate investment at number five. Get an accurate picture of your financial situation and what you have available for investment right now. 00;19;45;19 - 00;20;06;18 Michael Sarracini Remember, if it's nothing, that's okay. We just need to know. It just means that you need to work on other resources and will help with that. What's next? Financial leverage is a part of real estate investing and an important one. In the next chapter, we will learn about leverage and see some useful examples.