Rich Dad Education Blog

Cash flow is one of the primary reasons people are attracted to real estate investing. In their desire to escape the rat race, many real estate investors have the primary goal of generating enough cash flow so their expenses are covered by the income they generate. Once this occurs, they can take that true first step towards a state of financial independence for perhaps the first time in their life. The process of transitioning from earning a paycheck to replacing it with real estate income may not happen overnight, but it will happen if you have the dedication and acquire the how-to knowledge of becoming a successful real estate investor.

Single-Family Homes

As with most area in real estate, the same principles apply at the beginning of the real estate investing process. Some of these principles include estimating property worth, analyzing repair costs, and finding motivated sellers. Motivated sellers are essential to almost any real estate strategy as one of the key principles in real estate investing is buying right. Once you have located a potential motivated seller, there are many techniques in which you can utilize to negotiate the buying of a property for little to no money down in a deal that makes sense for both sides.

Step 1: Find Motivated Sellers

It is important to remember that a motivated seller is someone who needs to sell their home, and not someone who simply wants to sell their home. This need can be the result of financial hardship or acquiring a new job out of state. Whatever the reason, the seller must have a strong desire to get rid of their property as soon as possible.

In today’s economic climate, motivated sellers are perhaps easier to find than ever before. While they do represent a small percentage of the overall market, motivated sellers can be discovered if you are willing to spend the time and know where to look. A few techniques to find motivated sellers include:

• Research classified ads in major newspapers
• Search internet ads
• Review radio and TV station classified ad sites
• Review the Multiple Listing Service (MLS)
• Research old or expired MLS listings
• Call on for-rent signs and ads

Whatever techniques you use, look for keywords that indicate the need to sell. At the end of the day, you want to be looking for motivated sellers, not properties. Motivated sellers are the building blocks of many real estate strategies.

Step 2: Buy Right

You need to be very selective about the properties you are going to own as long-term rental properties. You will own these properties for a long period of time, so due diligence should be done in the investigative stage in at least the following areas:

• Determine the crime in the area
• Determine the ratio of rental properties to owner-occupied properties
• Find the vacancy rates for similar properties
• Determine proximity to selling points (schools, public transit, etc.)

A little homework done on your end can go a long way to avoiding frustration in future months and years. This step is simply to identify properties that will be easy to rent, and to pick communities that you will be personally comfortable dealing with.

Step 3: Determine Cash Flow

Cash flow can be calculated by a simple step-by-step formula:

1) You need to evaluate what you can reasonably charge for rent based on what similar properties are renting for
2) Deduct all monthly expenses (property taxes, insurance, utilities, and maintenance)
3) Include vacancy factor
4) Deduct management fee
5) Deduct maintenance fund fee (for future repairs)
6) Deduct cash flow you desire

The resulting number will be the net rent to pay the monthly payment created by step four—financing the property. (Not included in this calculation are any repair costs before the property can be rented. Be sure to include these in your calculation if applicable.)

Step 4: Finance the Property

There are many cases where traditional financing is not available. In addition, for most investors, it is unlikely that traditional financing can get us to the point where we can buy enough properties to generate the type of cash flow we are looking for. Some people turn to private-money options at this point to finance their deals.

Private-money lenders are usually just average professional people or other real estate investors who have access to capital. These individuals are far more likely to invest in your projects if you have demonstrated that you have successfully completed a few real estate projects in the past for a profit. Finding private-money lenders does take some effort, but it is not as difficult as you might think. Work on your presentation, utilize your networking skills, and utilize social media. If the potential deal is solid, then you will likely be successful in your private money search.

Another alternative to traditional lending is seller financing. If you find a motivated seller, then it is important at some point to ask if they are willing to consider seller financing. Using the seller as a source of funding your investments is a highly practical and popular means utilized by experienced real estate investors. This type of financing can create a true win-win scenario for both parties.

One of the most popular methods of seller financing is the lease with an option to buy, better known as the lease option. In the September issue of this newsletter, lease options were reviewed as an exit strategy, but they can also be used as a potential entry strategy. For example, assume you want to buy a property for a long-term rental. You have located a motivated seller in a neighborhood in which you would like to own property, and they are open to seller financing. If you utilize some sort of lease option, here are some factors you will need to consider:

Option Consideration: This is the initial down payment that the buyer would require. It can vary in size, and naturally you would want to be as low as possible.

Length of Lease: This is usually directly tied into the final payment discussed in the next point.

Balloon Payment: In a traditional lease option, there is usually an option to buy at some point, where you pay the remainder of the balance and purchase the property. You may be able to eliminate the balloon (or at least reduce the balloon payment amount) by negotiating graduated payments into the deal. If the option to buy is in five years, this payment can be quite large, and could force you to refinance or lose the property. Graduated payments in each year (50 per month second year, 75 per month third year, etc.) should be offset by increased rents. For every year the final payment is delayed, it makes the final payment due more manageable.

Seller financing is a crucial skill not only to rental properties, but to many other real estate strategies. If you want to learn more about seller financing, contact a Rich Dad Education representative today to see what courses are offered in this field.

Step 5: Find tenants

Choose your tenants wisely! Your number one goal in this step is to find qualified tenants. Describing the ins and outs of the tenant screening process could easily justify an article itself. There are many legal requirements that prohibit what you can and cannot ask. If you don’t gain the knowledge through your coursework, be sure to consult a real estate attorney once you get to this stage to receive proper guidance.

Step 6: Being a landlord

Many people who strictly want to invest in rental properties for cash flow purposes budget in property management in step three of this process. Property management can do all aspects of managing your properties, or you can contract them to just do tasks you don’t enjoy or don’t have time to handle. It’s up to you which services you want to do yourself, and which services you want to have the management company do for you.

A few parting tips once you reach the landlord stage:

• Take good care of your property
• Treat your tenants with respect
• Always maintain a professional relationship with your tenants
• Make sure your tenants know all the rules.
• Enforce the rules

Rental properties can be a wonderful source of cash flow, and with every property you own, you come one step closer to escaping the rat race. Next month, we will discuss another means of generating cash flow with commercial property.

Posted 02:18 PM | Permalink | Comments (0) | TrackBacks (0)

One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, competent traders can analyze the market conditions, their personal risk tolerance, and their financial objectives, and then choose the option strategy that best fits all criteria. Some traders find specific option strategies that work best for them, and others utilize numerous strategies depending on the market situation they encounter.

The key for any option strategy is to know the market conditions that need to be present to use the strategy, how to execute the strategy, and whether the strategy fits within their risk parameters. There will always be a little terminology to learn with any strategy, but once you get the basics down, you will discover the terminology becomes easier and easier with each strategy that you learn.

Covered Call

One of the primary reasons that traders utilize covered calls is to generate cash flow. Covered calls are also utilized to offer some downside protection, and can be used to grow your portfolio. This can be done using stocks that you already own or stocks that you buy with the specific intention of writing calls against them. Covered calls are one of the first strategies that many investors learn, and are extremely popular among traders who wish to generate cash flow from the markets, but don’t have time to manage their trades during market hours.

Steps for Executing Covered Call Trades:

1) Build a watchlist of stocks with good fundamentals. The first step is to find candidates that would make good covered call trades. Because you are going to own the stock, fundamental analysis plays a large role in selecting the stock you will ultimately end up using. Good traders will build a sizeable watchlist of stocks with good fundamentals to give them multiple candidates to choose from. Good fundamentals decrease the probability of a bad news occurring, and many stock search programs can assist you in filtering out stocks with good fundamentals from stocks with average to below -average fundamentals.

2) Pick a stock in a neutral to bullish market. Some traders are fine choosing stocks with good fundamentals where the stock is in a sideways trend. They have the experience to take advantage of these trends, and will actively monitor the trade, and make adjustments if necessary. Remember, you are going to own the stock, so picking stocks in a moderate uptrend increases the chances that you are going to make a profit on the trade. Covered calls should not be utilized in volatile markets because the potential gain is minimal versus the potential downside loss that a volatile market can create.

3) Choose a strike price. There are two schools of thought in choosing a strike price. You can pick an out-of-the-money call option, or sell an in-the-money call option. While you have greater chance at assignment, selling in-the-money calls are is popular among traders who wish to protect against downside risk. A trader may have a stock in his portfolio that is experiencing selling pressure, and wishes to help protect gains he might have made up to this point. To offset the losses, he sells an in-the-money call. For every dollar lost from that point, he makes one back from the decrease of intrinsic value on the option.

Be sure to analyze the time value left in the option to help determine which option you should choose. For example, it would make no sense to sell a $35 option at 7.10 if your stock was at $42.00. There would be simply little reward.

4) Determine the month you are going to sell. As a general rule, you will want to choose the next available month. This will allow you more flexibility in managing your trade and more monthly opportunities.

5) Use technical analysis to determine entry point. Many traders time their entry into the covered call trade by using their knowledge of technical analysis. For example, let’s assume a stock is approaching a resistance point of $35. They own the stock already, and then decide to write a $35 call at resistance on a stock they wish to own long term. Another potential entry point might be if this same stock pulls back to a support level at $30. As soon as the stock demonstrates price movement upward, an astute trader might buy the stock at that point and wait to sell the call until it reaches the next resistance point, in order to capture more profit on the stock. This is known as legging in.

6) Monitor your trade. There will be times that the trend reverses, that your stock will fall through support, and you will be facing a losing situation. You need to check your stock each day at night or in the morning before the market opens, whatever your routine allows. Most days, you probably will need to do nothing. There are a few situations, however, you may need to monitor:

a. You will encounter situations where there is little time value left in the option you sold, and have captured the majority of potential gains possible. You may want to buy to close the call you originally sold.

b. If the fundamentals on a stock change, the market becomes volatile, or if support is broken on a stock, your rules may dictate that you exit the trade even though you are staring at a loss. In this situation, you would buy to close the call you originally sold and sell the stock.

c. If the call expires at expiration, you may choose to write another call on the same stock. Go through the same routine again to determine whether the stock still makes a good covered call candidate.

With covered calls, there is always the risk of being assigned (called out) on your position. Also, the stock may suddenly breakout of a resistance point, and the trader will lament that they simply didn’t hold onto the stock. Traders with experience have long accepted these situations, and don’t become overwhelmed with the what ifs of trading.

Married Put

The married put is another option strategy that is used when the trader or investor owns the underlying stock. Where covered calls are used primarily as a means to generate cash flow, married puts are used as a type of insurance policy when investors want to hold onto their stock, but are concerned about potential downside market risks. The primary benefit that investor receives is that they retain all benefits of stock ownership. They still receive any dividends, voting rights, etc.

How the Strategy Works

Let’s assume an investor has 2,000 shares of stock XYZ.

1) The investor would need to buy 20 put contracts at the strike of their choosing. The put contract guarantees a selling price of the stock.
2) The put serves as an insurance policy on the underlying stock with the insurance premium equaling the premium of the contracts.
3) The married put protects against sudden movements of the stock and situations where a stop loss might not full protect the investor.
4) The maximum profit is still unlimited.
5) The maximum loss is simply the stock purchase price minus the strike price chosen minus the premium for put contracts.

The married put is not for every trader, and may have very situational needs. For many investors, the use of a stop-loss is sufficient for their trading needs. However, if you find yourself in a situation that you wish to retain the shares of stock but want to minimize your risk, it is always good to have a variety of option strategies available to meet your particular needs.

Next month, we will continue to review different option strategies by examining the straddle and strangle.

Posted 02:13 PM | Permalink | Comments (0) | TrackBacks (0)

In a very popular song written by David Coe (and later covered by Johnny Paycheck), the artist laments how his boss is a “riggity dog” and how the “lineboss is a fool” as he sings that he can’t wait to see their faces when he gets up the nerve to say:

“Take this job and shove it. I ain't working here no more”

You may never have heard of David Coe, or even heard the lyrics to the song, but undoubtedly the reference will be familiar to you as it has become part of our culture. There are countless scenes in movies and television shows where characters emotionally tell off their bosses. These characters have reached their limit, and leave a job despite having no viable opportunities in front of them.

Oftentimes, when these scenes are played out on the screen, those watching laugh and cheer on the person quitting in such a rage—perhaps because we admire the temerity of such an individual or in part relate on all too real of a level. While we might not have fanaticized in graphic detail on how we might quit our present jobs (or maybe far too many of us have), it is likely that anyone reading this newsletter has dreamt, planned, and is working on ways to get out of our current line of work. After all, there is nothing in the Rich Dad philosophy that celebrates remaining in the E quadrant for life.

We can celebrate these moments on television or the big screen, and work towards the day we exit the rat race. However, we need to maintain an awareness of how small the world really is. How many people do we truly get to know over the course of a lifetime? How many opportunities will present themselves in the coming years? Will we lose out on the opportunities because we offended or insulted someone, or thought that someone was simply too unimportant to get to know? Can we afford to close doors simply because it makes us feel better in the moment?

Urban Legend

This story is centered around a joke that several co-workers play on one of their fellow workers. The worker regularly played the lottery, and bought a ticket nearly every day. One day while out to dinner, the co-workers copied the numbers from his lottery ticket and gave them to a waitress. During one point in the meal the waitress came up and said the winning lottery numbers had been announced, and asked if anyone was interested in them. After the man with the lottery ticket said yes, she read the numbers. The man checked his ticket several times before standing up to announce he was quitting and went around the table to insult his boss, each of the co-workers, and even admit that he had been having an affair with his secretary.

Talk about burning bridges.

Now, we might say that this is not in our character or that we would never do that, and perhaps you are right. We might not quit with quite so much vocalized rage, but it is likely that you do things every day that close doors without knowing, or don’t do the little things that can keep doors open.

Meetings, Conventions, and Social Gatherings

Those that have been successful in real estate know the power of networking. From building your Power Team to attending local Real Estate Investment Association (REIA) meetings, successful real estate investors likely have large networks to draw from. They meet Realtors, lenders, and fellow real estate investors at these meetings, all —of which could play a critical role in their future business dealings.

Whether at these meetings or other social settings, it is likely that you have met someone and felt that they could not assist you in your future dealings. You mentally close the door on this relationship. This is potentially a huge mistake. You never know where someone may be in five years, or where you will be in five years, and how that person may be able to help you.

In today’s age of social media, it is very easy to setup a social media page (i.e., Facebook, LinkedIn, etc.), dedicated to your business, and you should try to “friend” or connect with each and every person at one of these meetings. There is absolutely no downside to this approach. Who knows where your next source of private money might come from.?

Keeping Doors Open in One-on-One Dealings

In real estate and entrepreneurial fields, it is likely that you will make numerous offers, attempt to obtain financing, and place many different proposals before many different people. Today’s “no” may become tomorrow’s “yes.” Being gracious and professional to everyone you meet will keep those doors open. Focus on becoming the ideal professional.

The Ideal Professional

Dream of becoming the type of professional who has the following qualities:

• Kind
• Courteous
• A good listener
• Always makes eye contact
• Sends birthday wishes and holiday greetings to all of their contacts
• Is respectful
• Remembers names
• Smiles
• Is honest

Becoming this type of person will mean that you will have a happy and productive life. It is also a very good way to approach business. Along the path of success, you will meet all sorts of people. Some you will care for more than others. At times, there will be individuals who test every ounce of patience you have. What does it cost you to be nice and courteous to even those most contemptible of individuals? It costs you nothing, and you stand to gain both emotionally, spiritually, and even financially.

The Flip Side of Closing Doors

While we can always actively attempt to keep open the lines of communication to business relationships, we can also go that extra step by attempting to open up doors that would otherwise remain sealed. Modern technology and changing social norms have made this easier than ever. If you have never tweeted on Twitter or sent a friend request on Facebook, then you are about to be in the minority. According to checkfacebook.com, nearly 156 million Americans have a Facebook account.

This may be uncomfortable for many who are not familiar with social media, or for those who don’t want to share their thoughts with the entire world. If you don’t want to set up a personal site, then set up a business account on one of the many social media sites dedicated to professionals (i.e., LinkedIn). Utilize it, and invite all of the contacts you meet at meetings, conferences, or one-on-one dealings. For real estate investors, you can use social media to share potential deals that you need partnerships or financing on. You can use it to find members of your Power Team. You can use it for whatever you want. It’s free, takes little time (don’t tell that to your teenager), and can be one of the most powerful tools at your disposal.

The interpersonal relationships we make often define us as individuals, and can make or break our success in the business world. For all of those stock traders that took the time to read this article, you may not need people as much as the rest of us in your cold and calculating world of charts, patterns, and indicators. However, it can’t hurt to get to know a few people if you ever want to change professions.

Posted 02:03 PM | Permalink | Comments (0) | TrackBacks (0)