Rehabbing: Keep It Minimal

Leo Babauta of Zen Habits has a great post today about creating a minimalist home. I love the idea because our thought process is so closely associated with our physical environment, and having a clear living space naturally leads to clearer thoughts. Leo is one of my favorite bloggers because he consistently produces high-quality, insightful posts, a feat that is harder than it may seem. Check out the article for his excellent justification of why to keep furniture and knick knacks to a minimum.

This reinforces one of the golden rules of rehabbing. For some reason, people have a tendency to attempt ambitious rehab projects when a more straightforward rehab would be preferable. Keep in mind, when people buy a house, they’re purchasing a lifestyle as much as they are a physical property. With the ever-increasing speed of our culture, people want simplicity. After years of touting the newest technological innovations and the “office away from home”, the hotel industry has been rebranding itself in recent years to once again focus on sleep and comfort. Solitude, peace and clarity are at a premium right now. Keep this in mind when considering additions to your next rehab project.

Financial Freedom: Maintaining Your Newfound Wealth

Stories of bankrupt lottery winners are all too common, and the reason is that maintaining a high level of functional wealth requires financial discipline. People like T. Harv Eker like to discuss the “financial thermostat” – an internal, self-correcting mechanism that automatically adjusts your level of wealth to a particular level. I think it’s a good description, but in order to regulate one’s financial temperature, one has to develop a mature viewpoint about money.

Money doesn’t bring satisfaction, but it might be true the other way around, because it’s impossible to be rich without having a wealthy mentality. As you make your money in real estate, you have to adjust your spending patterns so that you start saving more. You have to put some money away for the long term. In Rich Dad, Poor Dad, Robert Kiyosaki defines “rich” as the state of having investment income that covers all of your expenses. He says that the wealthy first put their money into investments and then use the investment money to pay for luxuries, whereas the poor spend their money first on luxuries (which are constantly depreciating) and never get into the long-term investments. Ben Stein and the author of “The Millionaire Next Door” share a similar sentiment, as do many of the brightest minds in finance and wealth management. People who can’t hold on to their money are often brilliantly creative when it comes to finding ways to dispose of it.

Very few people think they’re bad with money, but I think there’s a natural spending tendency in most of us that needs to be channeled into an effective system. Just as the best athletes are not only naturally talented, but also practice frequently, financial heavyweights usually have some sort of system in place to ensure that they uphold their wealth building principles. One way is to have a certain amount of money deposited into an account every month. Most banks will do this for you, and if not, it’s probably time to find a better place to put your money. Another good way is to budget. This is a particularly relevant practice for younger people, who often aren’t forced into budgeting in the same way as people juggling a mortgage, insurance, children, healthcare, and all of those other expenses, but it is a useful skill for everyone. Simply determine an amount you would like to save or invest each month, and find a way to fit your expenses into the remaining amount available. This causes you to think about which expenditures provide you with the greatest benefit, and will hone your shopping skills. It can also be an exercise in self awareness: I find that I enjoy good food and good people more than I do sensory excitement, so I’ve started to rent movies and invite friends over for dinner rather than forking over $12 to see a movie (and $10 for theater food). I’ve cut down the money I spend on clothing, but I’ve kept spending constant in categories such as books and modern furniture.

Human beings are incredibly adaptable. Just as lottery winners can adapt to spending all of their money, so can you adapt to spending slightly less if you commit to saving a little bit more each month. Because of compounding interest, this minor change in habits can pay off greatly in the end. There’s no greater luxury than the freedom that comes from not having to count your pennies, and putting your energy into the things that matter most to you.

For young people, no matter which income level, Ramit Sethi’s blog is a tremendous resource. Ramit recommends dividing your money into three accounts:

1) A standard checking account (ideally, with no minimum balance, and with free checking). Keep only the money you will need to spend soon in this account (no more than $1500).

2) A high-yield savings account. Places like ING have options that provide a 4-5% return, compounded monthly. Use this money for big purchases that you plan to make within the next 5-7 years, such as cars and other large, infrequent purchases.

3) A retirement account. If you can get an employer to match your 401(k) contributions, then max those out first. When no employer-matching 401(k) is available, then the best option is a Roth IRA (rather than a standard 401 (k) or Traditional IRA). Also, invest in index funds rather than mutual funds.

How to Triple Your Productivity: Learn To Delegate

One of the major things that separates true real estate investors from those who end up quitting or failing is the successful investor’s ability to delegate tasks. Despite the “lone ranger” image that some investors hold of themselves, real estate investing is a team sport. Get the right contractors, realtors, inspectors, finders/bird dogs, and lawyers on your side, and not only will you be surrounded by specialists, but they’ll be making you money.

If you can spend a little money and do 5 deals a month, you’ll be way better off than someone who doesn’t spend that money, and as a result, can only do 1 or 2 deals. That $300 you save by fixing the plumbing yourself won’t look so good when you’re cramped underneath the kitchen sink with a wrench while your competitors are closing another deal. Not only that, but every day that you’re not selling your property means another day of taxes and interest to pay.

Some tips for delegating tasks effectively:

1. Get the Right People: Find the best people for your team. Don’t spend time with unlicensed contractors and those who are cheap for a reason. You don’t want to spend exorbitantly, but find qualified professionals who are worth more than they cost.
2. Make Them Like You: Reward them for a job well done. Bring them continuous leads. Be likeable - nobody likes working for a jerk.
3. Don’t Over or Under-manage: Psychologists have consistently proven that 1) People work best and are more motivated to work when they feel they have some control over their work, and 2) Productivity decreases when workers are unsure of what to do next. Find a healthy balance of these two things; avoid unclear work orders or excessive micromanagement.
4. Set Clear Expectations: Protect yourself. Get everything in writing. Document all communication and interaction. Follow up projects. Ensure that things are being carried out according to plan.

4 Ways To Avoid The Housing Bubble

If there are two things that everyone knows about real estate investing, they are: “I don’t have the money to get started” and “It’s too risky”. These people never end up investing. The risk argument usually has to do with the uncertainty of the market, or “the bubble”. True investors do deals that are successful no matter what the market’s mood. Those with money can buy and hold to ride out the inevitable swings; the rest of us can work quickly enough to ignore the bubble entirely.

The transaction costs of real estate exchanges are prohibitively expensive for most people to play real estate like they do the stock market. Instead, real estate investors make money by providing a service that is inherently valuable. There are four main ways to provide a valuable service and get out quickly enough to circumvent any market losses:

1. Buy and sell concurrently - by profiting from the spread between two long-term contracts – usually selling at an increased rate to someone who couldn’t otherwise buy – as part of a terms deal. By including appropriate contingency clauses and keeping a buyers list, you can structure both contracts to begin at the same time, creating a steady flow of profit.
2. Sell a better product than you buy – rehab and “flip” an unattractive property. Aim to be out of the deal within 3 months, and if you do things right, it should never take more than 6 months from beginning to end. Build in a fairly large profit margin, and have a comfortable “hedge” margin for any disasters.
3. Help others avoid greater losses - by working around foreclosures. Get to know the people at foreclosure auctions and buy from lenders who want to get the properties off their books. Better yet, work with the defaulting homeowner before the lender even forecloses. Either way, you can get the property at a deep discount and resell it, with a profit margin that negates even the most catastrophic market.
4. Don’t buy in the first place - negotiate and analyze as you would with any other deal, including the necessary contingency and assignment clauses in the contract, and then assign the purchase contract to another investor who will buy the property and carry out the deal by him/herself.