Rich Dad Education Blog

For the last several months, this newsletter has discussed areas in real estate that are overlooked or underutilized. Too often, many novice real estate investors only utilize the buy-fix-sell model simply because it is comfortable and easy. The knowledge acquired from buying homes, fixing them up, and successfully selling them provides invaluable real estate investing experience. This experience not only provides immediate profits, but benefits the investor no matter what strategy is later utilized. For many investors, however, this soon ends up feeling too much like a job rather than an investing career.

This feeling is understandable, since the buy-fix-sell model prevents an investor from generating the cash flow necessary to escape the rat race. There is no true wealth-generation in this model, and no real assets are accumulated. While financial necessity or lack of experience may force the utilization of this model, many real estate investors begin to seek other alternatives or exit strategies.

A natural area that many investors turn to is the landlord investment strategy. This fulfills the financial principles of cash flow, and can be an excellent strategy for many investors. Some investors, through time or lifestyle constraints, do not want to put in the property maintenance and management work that is required of a landlord. When investors in these situations learn of lease options, they often never look back.

Lease Options

Conceptually, lease options are extremely simple to understand—there are abundant examples throughout society. Normally, when one leases something, they are simply giving the right of possession to another for a specified period of time (term) and for a specified consideration (rent). This occurs in high frequency in the car industry. If you lease your car, then you simply get the car for X amount of months for X monthly payment. Oftentimes, you are given an option when you lease your car to buy it after the agreed upon period of time expires. You have the option to buy the car, but do not have the obligation to do so. After the lease expires, you can simply return the car if you so desire.

Fundamentally, the lease option for real estate works in a similar manner. As the owner of the property (the lessor), you will be leasing your properties to individuals (lessees). This gives the option to purchase the property after an agreed upon timeframe. The lessee must pay something for this option consideration, which typically comes in the form of an upfront lump sum payment or a partially prorated amount spread over the course of the lease.

This option consideration is one of the key features of the lease option. Aside from the initial cash that the option consideration generates, it also helps you, as the investor, weed out those who might have an owner mentality from those that have a rental mentality. Those with an owner mentality will generally be more responsible and genuinely treat the property as if it were their own, as it very well might be. This can eliminate many of the headaches associated with traditional rentals. Never underestimate the mentality of ownership in how an individual treats your property. If someone does not live up to their end of a properly worded lease agreement, you can evict them and keep the cash deposit they gave for their option consideration to help pay for the repairs (which is typically more than a rental deposit). While this instance is rare, it is yet another advantage of the lease option.

There may be times that the tenant does not exercise their option. In this scenario, one of the advantages of the lease option is that you have not been hurt. You received a large payment for the option consideration, and received monthly payments that generated cash flow and helped pay down any potential principal on a loan. Now you can simply start the process all over again.

Amount of Option Consideration and Length of Lease

There are no set rules for how large the amount of the option consideration should be or the length the lease should be. One to three percent of the sell price is normal practice, but varies according to the finances of the tenant and your own motivation to make the deal. Lease terms also vary in length, as many prospective buyers may need two to three years to iron out their credit issues. As a general rule, the shorter the lease, the less risk to you as the seller.

Finding and Interacting with Buyers

The targeted buyers for lease options are often individuals who desire to be homeowners who have bad credit or lack the means to obtain traditional financing. Finding these buyers can be done through traditional marketing means such as online ads, newspaper ads, or signs. Flyers at apartment complexes, Realtors, model home sales people, or mortgage brokers are other possible lead sources. High impact phrases such as “No Bank Qualifying,” or “Why rent when you can own,” should attract many buyers, especially in today’s tightening credit market. Setting up a website is easier to do than ever before, and can serve as a place to highlight your properties and discuss the advantages that lease options can provide prospective homebuyers.

There are many advantages to highlight in your advertising, on your website, or with prospective homebuyers in person. Among these is the ability to start living in their home now while working on credit issues during the one, two, or three-year term that was agreed upon in the lease option. This time period could also demonstrate responsible homeownership through timely payments and upkeep of the property. There is also the opportunity to put smaller down payments than their credit might allow through traditional financing means. In addition, they can lock in their price for the existence of the lease. If the market crashes, they are under no obligation to purchase the property. On the other hand, if the market soars, they can buy the property at the agreed upon price. In today’s market conditions, this can be a major selling point for many prospective buyers.

For many, real estate investors who learn about lease options never use another strategy. Many others simply use it as one additional exit strategy in their real estate investment strategy book. No matter what type of real estate investor you eventually become, having multiple exit strategies at your disposal can greatly aid your overall success as an investor.

Posted 07:36 AM | Permalink | Comments (0) | TrackBacks (0)

In 1973, the Chicago Board of Trade (CBOT) opened the Chicago Board Options Exchange (CBOE), and the modern era of options trading began. Since its inception, options trading has exploded in popularity. In recent years, billions of options contracts have been cleared annually. As more and more investors seek to control their own financial future, options become one of the first investment vehicles that new investors investigate.

If the incredible popularity of options had to be summed up in one word, it would have to be leverage. For an example of leverage, let’s assume that you have $2,000 to invest. You are interested in purchasing shares in company XYZ that is currently trading at $50. If you were to simply buy shares of stock, then you would only be able to purchase 40 shares. However, let’s assume that the $50 strike price call options are going for $2. With options leverage, you could buy 10 contracts (each contract equals 100 shares) at $2 per share, and control 1,000 shares. The power of leverage and options in this scenario would allow you to control 25 times more stock for the same investment.

Owning 25 times more stock for the same investment offers much higher returns on investment than simply purchasing the stock, which is the natural appeal of options. One must always remember, however, that leverage cuts both ways. While there is higher profit potential, there is also a much higher loss potential with options investing. For this reason, it is strongly advised that you gain experience through virtual trading before you make any live trades.

Technical Matters

The same rules that apply to purchasing stock apply to the purchasing of option contracts. The ability to understand technical analysis—such as trends, support and resistance, candlesticks, and general chart reading—is essential before entering the world of options. Remember, you are not guessing or gambling; you are basing your trades on the expected probability of a stock behaving in a certain manner based on the history of the chart. The options world can be extremely profitable to those adept at technical analysis, and brutally cruel to those who are simply in it for the action. Technical analysis is the foundation of Rich Dad’s Financial Market education. If you want to know more, contact a customer service representative to see what program might best serve you.

Option Strategies

In the coming months, this Rich Dad newsletter will discuss many specific option strategies that may appeal to your investment style. There are aggressive strategies that try to capture potential large movements in stock prices, and numerous conservative strategies that allow for constant cash flow. Undoubtedly, there will be a strategy discussed that appeals to your level of risk tolerance. Before any of these strategies can be initiated, one must understand the fundamentals of the option world. The following simplified example uses some the essential terms and concepts of option trading to understand, before looking into specific option strategies.

Oscar the Options Trader

Oscar is extremely bullish on company XYZ. The company has been trending upward for months, and has hit resistance at the $50 level twice in the last week; a breakout pattern appears to be occurring. Oscar’s analysis of the chart shows that once the stock breaks the resistance of this $50 barrier, there could be significant movement upward. Of course, as a disciplined technical trader, he waits for his trigger (i.e., the moment the stock goes above 50) to enter the position.

Oscar decides to use a call option as his means to invest. Call options can be used when one expects a stock to rise higher, and gives the contract buyer the option of buying the stock in the future at a set price before the contract expires. Oscar is not forced to buy anything in the future; he simply has the right to do so if he so desires.

Oscar has two decisions to make when he buys the call option. First, he must select the expiration month—the point in which the options contract will expire. There will be several months to choose from, but the option expiration date for each month is the Saturday following the third Friday of each month. Thus, the third Friday of the month is the last trading day for all expiring equity options. This day is known as expiration Friday. It is one week before the current expiration Friday and based on his technical analysis, Oscar chooses an expiration date two months away. It is important to remember that after the options expiration date, the contract will cease to exist.

The second decision Oscar has to make is to pick a strike price. For our call option example, the strike price is simply the price where the stock can be bought up to the expiration date. There are normally many choices of strike prices that can vary and $1, $2.50 and $5 increments. For example a $50 dollar stock is likely to have strike prices at $47, $48, $49, $50, $52.50, $55, etc. The strike price you choose should be based on your technical analysis done on the underlying stock in combination with the expiration date that you have chosen.

The premium you pay for this options contract will be determined by numerous factors including the strike price chosen, the expiration date, and other factors such as volatility and interest rates. For example, in last month’s article, the VIX was discussed, and how, during recent sessions, the VIX hit a 52-week high. During these times, your options contracts are going to be more expensive than during times where there is a low amount of volatility.

Back to our example, based on his technical analysis done, Oscar picks a strike price of $55 with an expiration date that is a little over two months away. If he is right on his breakout, and the stock rises in the coming days and weeks, then Oscar stands to make a tidy return, as the value of his options contract will rise in value. Conversely, if the stock stays stagnate, then the options contract will start to lose value through time decay. If the stock starts to go down, then the options contract will start to lose value.

One of the most exciting things about options trading is the wide variety of options Oscar has to manage his trade once he begins. What starts off as a simple call options can evolve into numerous other strategies that help mitigate risk or secure profits based on additional information with each passing day. The wide variety of strategies available make options an exciting world worth exploring. Next month’s article will begin exploring these strategies, with ways to manage a call option trade that performs better or worse than expected.

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Michael Jordan was cut from his high school basketball team. No matter how many times you read that sentence, it still is amazing. The man who would go on to win six championships, five MVP awards, ten scoring titles, and be named by ESPN as the greatest North American athlete of the 20th century, did not even make his high school basketball team his sophomore year. He was deemed too short to play at that level.

Being cut from an amateur athletic team produces a variety of responses in young men and women—for Jordan, he used it as motivation. He trained vigorously, set his goals high, and the rest is history. He never let go of the motivating influence of being cut from the team, as was illustrated many years later during his Hall of Fame induction speech. Jordan unceremoniously chided the high school basketball coach who had cut him. That act might have been petty, but it was obvious that the motivation created from being cut had long survived.

Michael Jordan is far from the lone example of people who failed only to eventually succeed. As previously mentioned, Jordan was named the greatest North American athlete of the 20th century by ESPN, which is owned by the Walt Disney Company. The man who founded this company, Walt Disney, did not immediately find success. In fact, Disney had wanted to become a newspaper artist, but was fired from his first newspaper job because his boss felt that he lacked imagination, and did not have any good ideas.

Disney personified the entrepreneurial spirit from a young age, and did not let this early firing stop him. He decided to launch early businesses based on animation, only to have those businesses fail and put him into bankruptcy. At this point, Walt Disney had been fired, had failed at business, could barely pay rent, and had no money for food. So what did he decide to do? Move to Hollywood, and start a new business. At every point of failure, his dream became larger and larger. It was almost as if failure fueled the size of his dream. Generations of children and adults alike have been the beneficiaries of this perseverance.

Disney might have taken a different path without the technology available to him at the time. This technology was the result of relentless dedication of tireless inventors such as Thomas Edison. Thomas Edison is credited with developing the phonograph, the motion picture camera, and, of course, the incandescent light bulb. These are just some of his better known inventions, as his prolific inventing career ended up with 1,093 U.S. patents in his name. He also founded 14 companies—one of which is General Electric, one of the largest companies in the world.

Edison’s eventual success must have shocked his early teacher, who had told Edison that he was too stupid to learn anything. Edison also lost early jobs for lack of productivity. Edison never gave up on his passion and dreams, and he literally changed the world because of his perseverance.

Jordan, Disney, and Edison are far from alone as examples of individuals who went on to greatness after initial turmoil, setbacks, and failure. Here are a few more examples:

JK Rowling – Fired as a secretary. Went on to pursue her dream to be a writer and created the Harry Potter series.

Mark Cuban – The colorful owner of the Dallas Mavericks was fired as a salesman at a computer store. Never worked for anyone ever again and has amassed a billion-dollar empire.

Elvis Presley – Performed at the Grand Ole Opry once early in his career only to be told by the manager that he had no chance of success and ought to go back to his truck-driving job. Presley went on to become The King and one of the bestselling artists of all time.

Stephen King – His first book, Carrie, received numerous rejections.

Steven Spielberg – Rejected from the University of Southern California School of Theatre, Film, and Television multiple times.

Oprah Winfrey – Fired from her job as a television reporter because she was “unfit for TV.”

These are just a few of the names that went on to great success after initial failures and setbacks. While serving as a wonderful source of inspiration, it also makes you wonder what great art, books, inventions, songs, businesses, and technology is not available today because the journey was too hard or the criticism too much for those that housed the inspiration.

Thomas Edison was told as a child he was too stupid to learn anything, and Walt Disney was told he lacked imagination and good ideas. Thankfully, they possessed the inner strength and passion for their ideas to not let these criticisms stop them. It is amazing how much criticism we can face when we let the world know what our dreams are, even from those closest to us. Remembering famous examples of individuals that fought through their own critics should help us as we face those that do not understand, are jealous, or do not support the dreams you want to achieve.

Your Life and Your Dreams

There is a wonderful quote from Robert Kiyosaki that summarizes why those successful people in this article went onto their success: “The size of your success is measured by the strength of your desire, the size of your dream, and how you handle disappointment along the way.” Each of these famous people achieved tremendous success because they were passionate about what they did, had vision, and overcame the disappointment they encountered.

The recipe for success is no different for us than for Oprah Winfrey, Michael Jordan, Thomas Edison, or Walt Disney. Find something that you are passionate about, something that you truly desire to achieve. Dream big and eliminate the word “unrealistic” from your vocabulary. Be prepared for the setbacks that are likely to occur along the way, as how you handle them can very well be the difference between achieving your dreams and wondering what could have been many years from now.

We have wonderful and inspirational examples all around us. Use them as a source of motivation as you start your days in the coming month, and who knows? Maybe someday, someone will be using you as an example of motivation along with the likes of Elvis and Edison.

Posted 07:30 AM | Permalink | Comments (0) | TrackBacks (0)

Michael Jordan was cut from his high school basketball team. No matter how many times you read that sentence, it still is amazing. The man who would go on to win six championships, five MVP awards, ten scoring titles, and be named by ESPN as the greatest North American athlete of the 20th century, did not even make his high school basketball team his sophomore year. He was deemed too short to play at that level.

Being cut from an amateur athletic team produces a variety of responses in young men and women—for Jordan, he used it as motivation. He trained vigorously, set his goals high, and the rest is history. He never let go of the motivating influence of being cut from the team, as was illustrated many years later during his Hall of Fame induction speech. Jordan unceremoniously chided the high school basketball coach who had cut him. That act might have been petty, but it was obvious that the motivation created from being cut had long survived.

Michael Jordan is far from the lone example of people who failed only to eventually succeed. As previously mentioned, Jordan was named the greatest North American athlete of the 20th century by ESPN, which is owned by the Walt Disney Company. The man who founded this company, Walt Disney, did not immediately find success. In fact, Disney had wanted to become a newspaper artist, but was fired from his first newspaper job because his boss felt that he lacked imagination, and did not have any good ideas.

Disney personified the entrepreneurial spirit from a young age, and did not let this early firing stop him. He decided to launch early businesses based on animation, only to have those businesses fail and put him into bankruptcy. At this point, Walt Disney had been fired, had failed at business, could barely pay rent, and had no money for food. So what did he decide to do? Move to Hollywood, and start a new business. At every point of failure, his dream became larger and larger. It was almost as if failure fueled the size of his dream. Generations of children and adults alike have been the beneficiaries of this perseverance.

Disney might have taken a different path without the technology available to him at the time. This technology was the result of relentless dedication of tireless inventors such as Thomas Edison. Thomas Edison is credited with developing the phonograph, the motion picture camera, and, of course, the incandescent light bulb. These are just some of his better known inventions, as his prolific inventing career ended up with 1,093 U.S. patents in his name. He also founded 14 companies—one of which is General Electric, one of the largest companies in the world.

Edison’s eventual success must have shocked his early teacher, who had told Edison that he was too stupid to learn anything. Edison also lost early jobs for lack of productivity. Edison never gave up on his passion and dreams, and he literally changed the world because of his perseverance.

Jordan, Disney, and Edison are far from alone as examples of individuals who went on to greatness after initial turmoil, setbacks, and failure. Here are a few more examples:

JK Rowling – Fired as a secretary. Went on to pursue her dream to be a writer and created the Harry Potter series.

Mark Cuban – The colorful owner of the Dallas Mavericks was fired as a salesman at a computer store. Never worked for anyone ever again and has amassed a billion-dollar empire.

Elvis Presley – Performed at the Grand Ole Opry once early in his career only to be told by the manager that he had no chance of success and ought to go back to his truck-driving job. Presley went on to become The King and one of the bestselling artists of all time.

Stephen King – His first book, Carrie, received numerous rejections.

Steven Spielberg – Rejected from the University of Southern California School of Theatre, Film, and Television multiple times.

Oprah Winfrey – Fired from her job as a television reporter because she was “unfit for TV.”

These are just a few of the names that went on to great success after initial failures and setbacks. While serving as a wonderful source of inspiration, it also makes you wonder what great art, books, inventions, songs, businesses, and technology is not available today because the journey was too hard or the criticism too much for those that housed the inspiration.

Thomas Edison was told as a child he was too stupid to learn anything, and Walt Disney was told he lacked imagination and good ideas. Thankfully, they possessed the inner strength and passion for their ideas to not let these criticisms stop them. It is amazing how much criticism we can face when we let the world know what our dreams are, even from those closest to us. Remembering famous examples of individuals that fought through their own critics should help us as we face those that do not understand, are jealous, or do not support the dreams you want to achieve.

Your Life and Your Dreams

There is a wonderful quote from Robert Kiyosaki that summarizes why those successful people in this article went onto their success: “The size of your success is measured by the strength of your desire, the size of your dream, and how you handle disappointment along the way.” Each of these famous people achieved tremendous success because they were passionate about what they did, had vision, and overcame the disappointment they encountered.

The recipe for success is no different for us than for Oprah Winfrey, Michael Jordan, Thomas Edison, or Walt Disney. Find something that you are passionate about, something that you truly desire to achieve. Dream big and eliminate the word “unrealistic” from your vocabulary. Be prepared for the setbacks that are likely to occur along the way, as how you handle them can very well be the difference between achieving your dreams and wondering what could have been many years from now.

We have wonderful and inspirational examples all around us. Use them as a source of motivation as you start your days in the coming month, and who knows? Maybe someday, someone will be using you as an example of motivation along with the likes of Elvis and Edison.

Posted 07:30 AM | Permalink | Comments (0) | TrackBacks (0)