I recently looked up the definition of the term Investment.

Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin “vestis”, meaning garment, and refers to the act of putting things (money or other claims to resources) into others’ pockets. See Invest.[citation needed]. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se.

I was shocked to find that the last phrase suggested that there are expected returns without any “work” involved.  That seems both comical and inaccurate to me.  I tend to find that successful “investors” are those who are realistic, as they expect to “work” on their investments.  By “work” I mean manage your investments, not painting the walls.  I did that type of “work” in the beginning of my real estate career, however I “work” by simply managing my investments now.  I don’t own a single stock, just cash and houses.

There will be “work” with Real Estate.  There will be “work” in any worthwhile investment.  There will be maintenance, there will be bad tenants, and there will be management.  If that is above your head, or beneath your standards, good luck with a mutual fund.  Anyone who believes that you can become wealthy (or even get ahead) without some element of “work” is insane.  Work is part of any good investment.  Even if you buy a mutual fund, you likely “work” on some sort of qualifying analysis of the fund.  You will track performance; you will likely even do some of your own homework on these funds.  This time spent analyzing your positions and investments is “work”.  Many brokers will encourage you to sit back and relax, and continue to dump your cash into their fund whether it is up or down.  Heard of dollar cost averaging?  Not my favorite investment strategy in the world.

The longer I am involved in my type of Real Estate (single family foreclosures), the more I believe there is no better investment available.  There are specific strategies that provide for the level of success my investors and I enjoy.  Listed at the bottom of the post you’ll see just a few simple guidelines that provide great insight to what works in today’s market.  If you’ve ever read my site before you’ll see a similar theme, own (don’t flip) Real Estate.  The reason I own Real Estate rather than “flipping” real estate is several fold.  First, it generally works better.  It’s typically hard to do poorly on a project if you buy it in foreclosure, rehab the property with our resources, rent it out for 3-5 years and ultimately sell for a nice gain (long term capital gain that is, of course = less tax).  Secondly, flipping is difficult to time.  Flipping is a nice thought in good markets, but prices are typically higher and competition forces us to bid up, or pay more on the front end.  Flipping in “bad” markets is typically hard because buyers are scared due to the media frenzy and inventories are high creating competition on the back end.   Don’t get me wrong, I do “flip” properties in a sense, but the flip is typically over a 3-5 year period.  The investments involve a longer hold period and a rental period.  This is what I advise all investors to do, and it is a practice that has worked for me time and time again.

Many investors think the point of this or any investment is to “make money”.  The problem of course is that investors all too often have a “right now” mentality.  The true nature of any investment is actually deferred gratification.  You sacrifice today for a potential future benefit.  Many bright eyed and bushy tailed Real Estate investors come in thinking they are going to “make money” in real estate.  Some do, many don’t.  If you want to “make money”, work more hours at your job, get a second job or better yet, get yourself a better job!  To really be a true investor, utilize your capital (or better yet, do what I do, and utilize the banks borrowed funds) to create a return and ultimately capital and equity.  If you want to create a phenomenal future income stream, buy single-family foreclosures around $100K.

The Truth About Cash -

So are you concerned with the economy? Good.  You should be.  How do I hedge against any economic crisis?  I buy houses.  Economic times are good = home values soar.  Investors win.  Economic times are bad = rental demand causes rents to soar.  Investors win.   We win either way.  These “first time home buyer” homes are the great equalizer within the economy.  This may sound odd, but homes do not really go up in value.  Dollars go down in value.  That’s right; homes appear to appreciate, when in actuality it is our currency that is plunging in value.  Inflation has been around forever, and will likely grow at a rapid pace in the near future.  Our economy is literally driven by oil.  (Nice pun eh?)  I see prices over $4/gallon.  That’s angering to me, but what am I going to do?  Buy a hybrid?  No.  I’m 6′4″ and I’m sticking with the SUV.  What is this $4/gallon going to do to us?  It’s going to create inflation.  It’s going to drive everything (including home prices) up.  Dollars are worth less; therefore it takes more of them to buy the same goods.  The “appreciation” effect of homes will return.  Historically homes have outperformed inflation at times and underperformed at others, but the bottom line is your homes tend to hold (often increasing) their value relative to other goods.  My rental homes help me hedge against inflation and are ultimately what I call, the GREAT EQUALIZER.

I remember asking my dad when I was young, “Why do homes go up in value and cars go down?”  He explained that cars eventually lose their utility.  They are worth less as they get used up.  I bring this up because it is important to note that the useful life of a home is EXTREMELY long.  Older outdated homes tend to become rentals and rental real estate is a huge part of our economy.  Tight credit markets lead us to a bulging rental market that has driven prices up.  I estimate that rents are up 20% based on numbers I see come through our office and based on my portfolio.

Saving is another alternative often touted as a wise option.  Some will suggest you live like a pauper and save 10% or even 25% of your income.  Pack your lunch, skip the “expensive” coffees and save your way to a million.  Great idea right?  Wrong.  Horrible idea.  Enjoy your life.  I’m not talking about spending like a fool.  I’m talking about investing aggressively in a low risk, high reward medium that can change your lifestyle so the $3 coffee won’t put you in the poor house.  Without getting into the difficulties of actually saving money, it’s important to note that many Americans have quite a hard time actually saving anything.  Saving is one of the worst ideas I have ever heard of as a means to retire.  You just can’t save enough.  Saving is difficult and spending is so easy.  The amount of discipline required to save enough to retire capital to retire on is likely unattainable.  If you were to have saved $1,500,000 over the last (or next) 30 years, (which would have been difficult or impossible for many folks) and you had those funds in a savings account, you’d generate around a 3% return.  That would yield you $45,000/yr.  Not good.  $45,000 will not get you very far in an economy that is in a hyper-inflationary mode.  $1,500,000 invested in my program would likely buy you 14 - 20 homes.  While it’s nearly impossible to calculate, the raw numbers would look something like this.  Obviously this is an estimate, but I believe it to be an accurate estimate.
16 homes at $1,150 in rent = $18,400/mo.

Less Vacancy of 10% = $16,560

Less Management Costs ($1,120/mo.) = $15,440

Less Maintenance (est. $1,000/mo.) =  $14,440

Less Taxes & Insurance (est. $4,000/mo.) = $10,440

$10,440/mo. *12 mo. = $125,280

This is a hand free method of investing that will triple the return of a savings account.  One more thing, each of my projects is around 30 - 40% undervalued.

When considering your equity position, you’ll generate $30,000 to $50,000 per project in equity.  We’ll be conservative and suggest that $30K in equity is created in every purchase.

16 homes at $30K equity = $480,000 in equity.

$125,280 in cash and $480,000 in equity = $605,280 in net worth increase.

This is a 40% return on $1,500,000.

PS - it will involve some “work”

Rules that work for me.

1. I buy homes well under valued - Typically 60 - 70 cents on the dollar (in this market we are getting some at 50 - 60 cents on the dollar).

2. When the market is “bad”, I buy.  I’ve bought 3 homes in the last 2 months, 1 in Aurora, 1 in Joliet and 1 in Carpentersville.

3. I buy cheap homes - I tend to buy first time homebuyer homes.

4. I rent my properties out - “Flipping” is generally, good fun for TV shows, but “Owning” real estate allows you to create real wealth. - Donald Trump doesn’t flip homes, he owns buildings.  Doesn’t that make him a landlord?