Starting the Journey to Freedom

A balanced approach to investing can help you achieve the goal of personal freedom—whatever that means to you.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-02-25.

I’ve gotten several questions about the cash flow diagram in my last post, so I’m going to explain it in detail today.

First, if you haven’t already read Robert Kiyosaki’s short book Rich Dad, Poor Dad, I highly recommend it. I even bought copies for many of my friends and team members. It’s a short read, but it packs a lot of financial intelligence in amongst its folksy yarn. It’s not biography (or necessarily factual), but the fictive stories illustrate his points.

Kiyosaki categorizes income into two income families, each of which comprise two types of people:

Kiyosaki’s Quadrants

Active Income

• Employees (E) have a job and work for someone else.
• Self-employed persons (S) have a job but work for them selves.

Passive Income

• Business owners (B) have a system that employs other people’s time, energy, and intelligence to generate income without requiring the business owner’s direct input.
• Investors (I) put their money to work to make more money.

If you look closely at these two graphics, you’ll see how they align. Real estate wholesaling and redevelopment are essentially forms of employment or self-employment. If you don’t work at them, the income goes away. Rental and interest income are more passive, but managing rental properties can become a jobby-job. Ask me how I know.

That said, you could turn your active businesses more passive by employing enough people to minimize your active effort in them. That’s the goal, isn’t it?—to have the business create the income you use to buy your way out of it.

These are lessons I’m still working on. It’s very easy for me to get down into the weeds of my investments until managing them takes so much time I’m not creating new opportunities. Moving from the left side of the graphics to the right requires a real shift in mindset. It requires stepping away from the illusion of security into the security that comes from understanding how money works and how to make it work for you. That’s not an easy transition, but at least I can see where I’m going.

The goal of any income stream should be wealth creation. Wealth eventually becomes self-sustaining, unless you gamble it away or try to live above the means it provides. When wealth becomes self-sustaining you have achieved a goal most of us only dream of: freedom.

 

Balanced Investing in Real Estate

I address a group of investors with Ryan Connell of Grand Coast Capital and Paul Esajian of FortuneBuilders.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-02-20.

We are attending a real estate investing convention hosted by FortuneBuilders this week. Anyone who has ever an event like this knows that you are running from the time you wake up in the morning until the time you fall into your hotel bed at night. There is so much to learn and so many people to meet!

And the people are the best part of it. I met another investor who lives in Milam County, where our ranch is and where we hope to retire someday. Isn’t it ironic that I had to travel to a convention to meet a neighbor with whom I have so much in common?

But the highlight for me was being asked to address a group of fellow investors about investment strategies and how you can be fully invested in various aspects of the real estate economy and still have a comfortable degree of diversification. I hadn’t spoken in public since I left the corporate world a few years ago, and this crowd was the largest I have stood in front of since I left rock and roll behind in the 1980s. Being asked to explain your investment strategies to a crowd of more than 300 fellow investors is very exhilarating and very humbling.

A balanced approach to investing can help you achieve the goal of personal freedom—whatever that means to you.

My points echoed the advice of all my mentors:

• Wholesaling and redeveloping properties should only be one part of your overall strategy. These activities have the highest reward, but that means they also have the highest risk.
• A rental portfolio can help you build real wealth over the long haul, but it is also not without risk.
• Putting your money to work by buying into or investing with a hard money lender can generate moderate income while spreading the risk over a much broader pool than lending on a case-by-case basis, but the returns can be lower.

For the last point, I have a considerable chunk of my investment portfolio in Grand Coast Capital, but I still engage in private money lending. While I intend to increase my Grand Coast investment over time for a more certain return I still enjoy helping my fellow local investors achieve their goals when I have free capital to invest with them.

JP Getty once said that the best way to get rich is to help others get rich. Not only is helping others efficacious, it is the most rewarding path. Helping others is not just part of our mission statement at Hermit Haus Redevelopment, it is our core value.

So I would be remiss in my helpfulness if I failed to include this caveat: Nothing you do in the investment game is without risk. As my dad used to say, “If it was easy, everyone would do it.” What he didn’t say was that if it was easy (or risk-free), there wouldn’t be any profit in it.

 

Cloudy Title

We found out about a bogus $14,000 lien against one of our rentals today. Bogus liens are a multi-million dollar industry. Photo by: WUNC

This post originally appeared on the Hermit Haus Redevelopment website on 2016-02-04.

It is ridiculously easy to put a lien on someone’s property in Texas.

This morning I was talking to our banker at First Texas Bank about a Home Equity Line of Credit (HELoC) we are in the process of taking out in the company name using a house Suna and I own free and clear. This is a strategy to help build credit in the Hermit Haus name. The company is responsible for paying back the loan, but Suna and I are still on the hook. It’s like cosigning for your kid’s car.

During that call, I found out that a bank put a lien on our Lloydminister property—the one we own free and clear—in the name of Susan Kendall and her husband. The bogus lien is for roughly $14,000. That’s no pittance in anybody’s book.

Apparently, having a name that sounds like someone else is good enough. Someone at that bank decided that Susan Kendall must be the same person as Sue Ann Kendall and filed a lien on our property. Texas has no mechanism to check the legitimacy of these liens. The state blithely assumes that anyone filing such a lien must be correct and homeowners are guilty until proven innocent.

I have known about the possibility of these bogus liens for years, but I have never encountered one before. In checking with a couple of Realtors, I was told situations like this one happen “all the time.” The problem apparently amounts to millions of dollars each year in legalized fraud or robbery, depending on how you want to look at it. The good news is that the lien holder can’t force us into foreclosure. They have to wait until we find out about their scheme or sell the property.

Many people don’t find out about one of these bogus liens until they have a contract to sell their property. Then they are under too much time pressure to fight the fraud and end up paying for someone else’s debt just to be able to sell their own property. But on the positive side, it’s the title company’s job to clear these things up, and, given time, they are pretty good about clearing them up.

Luckily we found out with time to fight. Keep following this series to learn more as I do.

 

Communication Is Key

The siding is up on the kitchen bump out.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-02-03.

The Blue Ridge project is still running behind schedule, and there were a couple of developments that will put it farther over its budget this week.

First the good news: the cabinets and countertops are in in the kitchen and both bathrooms. The granite countertops really pop against the white cabinets, which are not quite Shaker style. We even had the folding table in the laundry room topped with the granite.

And the siding is up on the kitchen bump out—the one where we had to remove the brick facade last week. Part of it got knocked down, and it was safer to remove the rest of the brick than to repair the remainder. The horizontal HardiePlanks echo the siding on the other three sides of the house. It looks good, even in the weird default primer color. It will look even better painted to match the house.

That brings us to the bad news and the title of this post. Last week, we messaged the contractor, Chris, a picture of the color fan showing the color we wanted matched against a wall. The contractor asked if we were sure, and we responded that we were without really understanding what he was asking. The problem is that each blade of the color fan has a range of shades of the color ranging from very pale to dark. We had used the lightest at a different house, and that one had a note written on it. Chris thought we wanted the color with the note, and we thought he would understand we wanted the one that matched the background against which we took the picture of the color fan blade. Neither of us actually mentioned the name or color code.

So when I showed up to inspect the property today, I asked in all innocence if they had just sprayed the house with primer. “No. That’s the actual color you guys chose.” Argh! The whole exterior of the house is the wrong color. So we get to buy more paint and pay to repaint the house: More money over budget and more time lost!

The bottom line is this: when you are talking with your contractors (or human beings in general), be as specific as you can. If you’re talking about paint, talk color codes and names. It’s an easy mistake to make and a difficult lesson to learn—again. Get Sue Ann to tell you about the time I had her house painted orange.

 

Taxes

Taxes hurt, especially when you can’t plan for them. Photo source: Bitmoji

Let me tell you how it will be

There’s one for you, nineteen for me

‘Cause I’m the taxman, yeah, I’m the taxman

—George Harrison

I got a property tax bill in the mail today from DeWitt County for the Yorktown farm. Property taxes in Texas are usually due by the end of January. This is February. Surprise!!

Without going into too much detail, let me just say that the bill is well into the five digit range. And because they would normally have been due a few days ago, I just took advantage of an investment opportunity, so I don’t have that kind of free capital. I don’t like to let my money be anywhere near as lazy as I am. I want it to work for me.

“I’ll get you…and your little dog, too. You’ve got to pay your taxes. Pay! Pay!” Photo source: Villains Wikia

There are a couple of bright spots on this dung heap. First, the county admits they were late getting the tax bills out (because they were “understaffed,” they said—whose fault is that?). Because of that, they are allowing until the 27^th to pay the taxes “without penalty.” That would be nice if people (other than my dad) left that kind of money lying fallow in a moldy bank account somewhere. Now I have to find it.

The real bright spot is that I “paid myself first,” as Robert Kiyosaki puts it. I put my money to work in an investment that will earn far more than the penalties I’ll incur for paying the property tax late. And since there are a half dozen separate bills, I can string the county out paying them off over time as more money come is.

This situation worked out much better than if I had paid the taxes before the opportunity came along.