Rich Dad Education Blog

Too often investors are one-dimensional in their approach to real estate investing. While these investors are light years ahead of individuals who take no action, these investors are still potentially limiting their success. One-dimensional investors also potentially limit their personal satisfaction by not exploring additional areas of real estate investing. You should never let the fear of the unknown, or a lack of confidence in your own ability, prevent you from exploring new areas of financial investment.

Commercial real estate is one area of real estate investing that is often overlooked. Many individuals bypass even investigating commercial real estate, simply because the topic intimidates them. This is unfortunate because commercial real estate can be a tremendous source of cash flowa primary reason many investors get involved with real estate in the first place. Many who have braved the world of commercial real estate have found they are able to generate more cash flow and wealth through commercial real estate then through any other real estate strategy, and that commercial real estate t is actually fairly straightforward and easy to learn.

Never limit yourself because of a lack of knowledge, or fear that an area of investing is too big for you. By learning the basics of commercial real estate, you can determine if this is an area that interests you, and one that might work for you.

Reasons People Invest in Commercial Real Estate

Perhaps the number one reason that people invest in commercial real estate is the wealth building opportunities it provides. One deal completed in commercial real estateas a general ruleis more likely to produce cash flow than one deal completed in residential real estate. In addition, there is a level of cash flow protection that commercial real estate offers that residential real estate does not. If you buy a residential single-family home, then you are dependent on renting out that unit to produce cash flow. In commercial real estateparticularly when multiple units are involvedyou can have one or two units unoccupied, and still generate levels of cash flow. You also have the added benefit of having longer leases with certain types of commercial property.

Aside from financial considerations, many individuals choose commercial real estate because of lifestyle considerations. The central nature of commercial real estate means that if you own a commercial real estate property, you can deal with all prospective and current tenant issues at a single location.

Types of Commercial Real Estate Investing

In a broad sense, commercial real estate is any property that is used in conducting business. Four of the most common types of commercial real estate are:

Retail - The commercial retail market comes in all shapes and sizes, ranging from regional shopping centers to community malls to strip centers. The strip center is where most investors will first step into the retail market.

Industrial - Includes bulk warehouses, office warehouses, large manufacturing spaces, research and development parks, industrial parks, and storage spaces. Industrial-specific investments can be a wonderful source of income if purchased correctly. One of the members of your power team should be someone familiar with the industry you are investigating, and should be able to do inspections on the property.

Office - Office property can vary from high-, mid-, and low-rise buildings to garden offices. A garden office is usually considered to be a one- to five-floor complex with multiple buildings and open space in between. Investing in garden offices or apartments may be a great way to begin your investing with cash flow, and also offers the ability to hold large areas of land for future development.

Residential (multi-family) - Apartment buildings are perhaps the most popular choice of investment for the beginning investor. Technically, any property possessing more than four units is considered a commercial property. Apartments will always generate a need in society, as there will always be a segment of the population that cannot, or does not want to, purchase single-family homes.

In recent years, foreclosures, declining homeownership, higher lender standards, and a changing demographic base have all created more demand for apartment buildings. In their forecast for 2012, Kiplinger anticipates that home prices will continue to fall, around 2%, while home construction overall will increase by about 15%. The vast majority of this increase will be in apartment buildings “to serve the hot rental market” (www.kiplinger.com/businessresource/economic_outlook/).

While apartment buildings offer tremendous cash flow opportunities, other commercial deals might be a better fit for your investing goals and objectives. If you are interested in commercial real estate, don’t simply lock into one area unless you have investigated multiple types of commercial real estate to see what might be the best fit.

Property Valuation

Where comps are used often to determine the value of a single-family home, the property’s ability to produce cash flow is a primary deciding factor in determining a commercial property’s worth. Comps work with residential properties because it is fairly easy to compare one home in an area with others based on recent sale price, comparable size, condition, type, and year of construction of other homes in the area. Finding comparable commercial properties is often more difficult, and thus, different criteria are used in determining a property’s true value.

Remember, you are not buying a home to live in; you are effectively purchasing a business, and a detailed analysis of the cash flow the property can generate is an absolute must. The ability of the property to generate rental income is perhaps the most important criteria to consider. Other things that you should consider are the size, condition, and location of the building, financial stability of the market you are looking to invest in, and levels of competition that you are competing against.

Finding the Deal

Just as circumstances happen in residential properties to create motivated sellers, circumstances also occur to those who own businesses. Owners of commercial property can encounter personal and professional challenges that put them in a situation that forces them to sell, creating excellent opportunities for the savvy investor. The cash flow in the buildings they own may be positive, but extenuating circumstances may force the sell. Your knowledge of dealing with motivated sellers should be applied in these situations.

Finding deals in single-family homes is fairly straightforward to the nature of that type of investment. For beginning commercial real estate investors - as with any property you investigate - you should first ask yourself “Can the property I am looking to acquire generate positive cash flow immediately?” If it can, then you can continue with your due diligence. If it cannot, then you are probably best to continue your search.

When conducting your due diligence, be sure to work with the appropriate members of your power team to determine whether the deal makes financial sense. Commercial real estate can be extremely profitable, but there is also less room for error. Be sure that you acquire the knowledge necessary before you begin any venture. Rich Dad education offers classes in commercial real estate, taught by instructors who have vast experience in this field.

Commercial real estate can be an exciting area of investing. The advantages and cash flow generating opportunities are abundant. Many of those that succeed in commercial real estate would never consider residential properties as the work-to-reward ratio doesn’t compare. Whether or not it ends up being an area that fits your objectives, it would behoove you to investigate commercial real estate in more depth.

Posted 09:12 AM | 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 one or two option strategies that work best for them, while 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, to know how to execute the strategy, and to know whether the strategy fits within their risk parameters. When a trader anticipates a move to the upside, there are several strategies that the trader can utilize. For example, a trader may buy the stock, purchase a call, or use a bull-call spread. Correspondingly, when a trader anticipates a move to the downside, they may short the stock, purchase a put, or use a bear-call spread. The choice in strategy often depends on the trader’s personal trading rules, based on their risk tolerance and financial objectives.

There are also market conditions that many traders encounter when they anticipate a large movement in the price of a stock but are unsure of what direction the price will go. For example, the earnings report of a stock may be coming up, and a trader’s analysis indicates that a potential large movement may occur based on what the earnings report shows. A trader may also encounter a very volatile market and want to use option strategies that will allow them to profit from a rise in volatility. In these situations, some of the most widely used option strategies are the straddle and strangle.

Straddle Overview

Straddles are very straightforward and simple in their execution. A straddle is executed when:

An equal number of calls and puts are purchased at the same strike price (ideally, at the money) with the same expiration date.

Straddle Trade Evaluation:

Cost: Price of call option + Price of put option + Commissions
Maximum Reward: Unlimited
Maximum Risk: Price of call option + Price of put option + Commissions
Upper Breakeven: Call strike + cost
Lower Breakeven: Put strike - cost

As all traders know, there are only three directions a stock can move: up, down, or sideways. The straddle is a bi-directional strategy designed to capture profitsno matter what direction the stock goes.

When Are Straddles Used?

Traders typically utilize straddles before expected important news events, such as earnings reports or major economic announcements that might greatly affect the overall market or the underlying stock. Because straddles involve the purchase of at-the-money calls and puts, the trade has potential to make money regardless of how the market reacts to the news.

Because at-the-money options are used in the trade, traders ideally want to enter straddles when implied volatility is relatively low, or if you are expecting a rise in volatility. At-the-money options are sensitive to changes in implied volatility and if you experience a drop in volatility, your options will likely decrease in value. Conversely, increases in volatility will likely cause your options to increase in their immediate value as option premiums become more expensive.

An important note: Because of time decay, many traders develop rules that close out straddle trades at least one month before expiration.

Risk Analysis

While straddles can capture profits in both bullish and bearish moves, one of the main drawbacks to straddles is the inherent cost to purchase both a call and put option. Because the straddle utilizes at-the-money strike prices, there will be little to no intrinsic value with the options you purchase.

A risk to reward ratio must be conducted in accordance with your own personal trading rules. If implied volatility is high at the time you enter the trade, then the cost of the options premium likely will cause the risk associated with the trade to be out of balance with the potential rewards in a movement of the underlying stock price.

Managing the Trade

When the news breaks, one side of your trade may quickly increase in value, but that will also mean that the other side of your trade will be decreasing in value. Your exit strategies and how you manage your trade will likely impact the profitability of your straddle trade. There are several techniques you can use as your exit strategy:

1) If you entered a straddle trade based on a news event (i.e., earnings) and the news creates a large movement in price based on the news event, you can exit both sides of the trade and take your profits. If you stay in your trade, then you risk having the stock revert to previous trading ranges.

2) One thing that you should always be aware of with a straddle is the inherent drawback that many options have - time value. If the expected move does not occur, then both the put and the call option will lose value every day. At this point, you can choose to do one of two things:

a. Close out both sides of the trade. Both the put and call option will likely have lost some value at this point. However, if your initial reason for the trade is no longer present, then you will need to evaluate your reasons to stay in the trade.

b. Close one side of the trade. Your technical analysis may indicate that there is reason to stay in one side of the trade and not the other. You should have a valid reason for doing this based independently on the technical data available to you.

3) If you experience a rise in implied volatility before the news event that makes your trade profitable before the news event, then you can exit the trade with a profit. If you believe that implied volatility may be peaking, it might be wise to take your profits and move onto another trade.

The most important thing to remember in any trade is to have your trading rules established in advanced so you are not winging it. The best traders are calculated, and know how they will react in the various market conditions they encounter.

Straddle Example

Company XYZ is announcing earnings in seven weeks. Your analysis of the company’s history indicates that there have been large moves around the last couple earnings, and that the stock is prone to large movements. Implied volatility has been relatively low, and you believe a straddle trade might also benefit from spikes in volatility in the coming weeks.

XYZ is currently trading at $25.00, and you explore strike prices two months out. The 25 call options are selling at $2.50, and the $25 puts are $2.00. If you bought one contract of each, your trade would have:

Net Debit = $450
Max Risk = $450
Max Reward = Unlimited
Upper Breakeven = $29.50
Lower Breakeven = $20.50

Your worst scenario would be if the stock stayed at $25.00 after the earnings announcement, as that would be your maximum loss. Both the call and the put are likely to retain some time value as long as you are not close to expiration. Your actual breakeven points will be much closer to the current price, as long as there is not a drop in volatility or you hold the trade within several weeks of expiration.

Strangles

Strangles employ the same basic strategy that is used involving straddles. The main difference is the structure of the trade. Where the same strike price is used for straddles, different strike prices are utilized for strangles. For example, with a straddle, you might:
• Buy an at-the-money call
• Buy an at-the-money put

With a strangle, you would purchase a call and a put option at different strike prices. For example:
• Buy an out-of-the-money call
• Buy an out-of-the-money put

Because you are utilizing different strike prices, at least one of the strike prices will be out of the money. At times, both of the strike prices will be out of the money. This naturally creates a lower cost basis for the trade, and the trade will carry less risk. It must be noted, however, that while there will be less initial cost, the breakeven points will be farther out as well. The stock will have to have a larger move to produce profits. If you choose to utilize the out-of-the-money strangle strategy instead of a straddle, there must be some reasoning behind the strike prices you purchase (i.e., the stock has demonstrated that it can make that type of move in the timeframe). If you simply buy them because they are cheaper, then you are entering the mindset of the gambler.

Another reason traders sometimes employ the strangle over the straddle is that they believe there is a stronger likelihood the stock will move one direction, but still want to capture the movement in the other direction in case the stock doesn’t behave as anticipated. This type of trade is not for the novice, as correctly guessing the impact news will have on a stock price is extremely difficult.

Strangle Example

Company XYZ is currently trading at $60 a share. Your analysis of the stock’s history indicates dramatic movement historically around earnings. You decide to employ a strangle purchasing the $65 call for $200 and the $55 put for $175. There is also currently relatively low volatility, making option premiums cheaper and giving you the ability to profit from spikes in volatility.

Net Debit = $375
Max Risk = $375
Max Reward = Unlimited
Upper Breakeven = $68.75
Lower Breakeven = $51.25

If the stock does not move about $65 or below $55, then your options will expire worthless, and you would experience maximum loss of $375 per contract. As noted above with the straddle, however, the call and the put are likely to retain some time value as long as you are not close to expiration.

Next month, we will discuss one of the most popular cash flow generating option strategies available, the iron condor.

Posted 09:07 AM | Permalink | Comments (0) | TrackBacks (0)

Outstanding individuals have a vision of who they want to become, and what they want to accomplish. Regardless of the circumstances they find themselves in, they dare to dream of a better life and becoming a better human being. While they may occasionally look out a window and daydream of the day that this occurs, they remain focused on their vision for their life and steadily work each day to reach their destination.

The end of each calendar year marks the time that many individuals reflect on what they have accomplished during the past year and set goals for what they wish to do in the coming year. For people that have a clear vision of what they want to accomplish in life, the setting of goals for a coming year is an exciting time. They can take the time to measure what they have accomplished, analyze what still needs to be done, and outline the steps they will take in the coming year to get them closer to what they want in life. For those just starting out on a newly formed vision, the setting of goals is an essential activity. Goals can give direction, provide motivation, and help you create the working template of what you want to accomplish and who you want to be.

One thing that is a certainty, the days of 2012 will eventually pass. The only variable is how you use the valuable time that you have been given. Will you simply let the days pass without accomplishment? Will you adhere to your own personal status quo? Will you be a better financial position one year from now? The upcoming year, 2012, is a leap year, so you even have an extra day to accomplish what you set out to do!

If you did not set goals this past year, there is no time like the present to start. Your goals are your dreams, the destination you want to get to, and the creation of the world and surroundings you want to live in. Spend some time in the coming days to think about what you want to accomplish in life and what you can do in the coming year to make that a reality. If you have a process that works for you in setting your goals, then by all means, do it! However, take the process of goal setting seriously, and don’t simply write down a few goals, or think in your head what your goals are. Take that extra time to analyze what you want and what you need to do this coming year to help you get closer to your dreams. As you engage in this process and find your thoughts wandering or feel a little lost, use the steps below to help you create the process that will help you set your goals.

Steps for Setting Goals

Step 1: Eliminate fear from your goal-setting session.

Many people do not set goals because they are afraid they will fail. Ironically, the moment an individual doesn’t dream to become more than they are, they immediately destine themselves to be limited in life. In the process of setting goals, emotions such as fear must be eliminated before you even begin the process. If you do not eliminate fear from the goal-setting process, it will be far too easy to limit your goals with sayings such as “I can’t do that,” “That goal is too big,” or “I have failed at that before.” Do not limit yourself, as you have the capacity to do tremendous things in this coming year if you have the right mindset.

So, before you do anything else, make the conscious decision to eliminate all aspects of fear from your goal-creation session. Be excited and embrace what you will accomplish in the coming year, and how these goals will help you achieve what you truly want in life.

Step 2: Write down your dreams in life.

Nobody knows your dreams better than you. What motivates you? What do you really want to accomplish in this lifetime? Do you want to be financially independent? Do you never want to work for another person again? Do you want to own a record studio? Do you want to travel the world? Do you want to provide your children the opportunities to follow their dreams?
Dreams are perhaps the most powerful force in the world. They provide us the image of what we can be and what we can accomplish in this life. No matter how dire the circumstances we find ourselves in, dreams allow us to escape the moment and project our future self and our future surroundings. As Robert Kiyosaki said, “I am successful because I am driven by my dream instead of my circumstances. Focusing on my goals helps me overcome disappointment and enables me to accomplish what I set out to do.”

Writing down your dreams in the course of a goal-setting exercise helps provide some direction while setting goals. For example, if my dream is to become a professional writer, then this dream sets the stage to accomplish the individual goals I set out to get me closer to my dream in 2012. Your dreams will serve as a motivational force for you to accomplish these individual goals in the coming year.

Step 3: Write down all potential ideas for goals that will help you accomplish your dream.

This is your proverbial brainstorming session. At this point, do not worry about practicality, feasibility, or whether these potential goals are realistic or not. Simply take some time to jot down any idea that could help you accomplish your overall dream. A simple rule to follow: if it pops in your head, write it down.

You may want to take a few days to accomplish this step. While one intense brainstorming session might capture the majority of the ideas you can come up with, great ideas can pop up anywhere, in the car, in the shower, or riding an elevator. For this step, take the extra time to produce as many ideas as possible that you can analyze in step four.

Step 4: Analyze your brainstorming ideas and focus your list.

At this stage, you will have numerous ideas that can serve as the basis for your goals in 2012. Now analyze each of the goals in relation to each other to determine what order the goals need to be accomplished in, the priority each individual goal has in accomplishing your dreams, and making your goals measurable.

Order - Accomplishing any overarching dream often requires a series of sequential tasks. For example, if your dream is to retire on a ranch in Montana one day, there will be a series of events that need to take place in order for that to happen. Determine if there is order that events need to happen, and naturally prioritize the events that need to occur first.

Priority - You may have several goals that focus on different dreams. One of your goals may be to become financially independent, and another goal may to become physically fit. While different goals can absolutely be accomplished in the coming year, you should analyze at this point if the goal is truly important to you, and the priority it has in relation to your other goals. Narrow down to things you truly are passionate about.

Make Goals Measurable - Let’s assume that one of the goals you made during your brainstorming session was, “I want to become a better person.” While this is an admirable goal, how are you going measure whether you accomplish it? Break down the goals you are passionate about into measurable components.

Step 5: Determine time constraints and practical application.

At this point, you should have a few goals that you are passionate about that will help you accomplish larger dreams you have in life. Each of your goals will require a certain amount of time and resources to accomplish. You should absolutely shoot for the stars and push your limits in the coming year, but also make goals that can be accomplished with the time and other resources you have available to you.

You should try to analytically determine whether some of the goals you have set are feasible. If you only have on average three hours of free time per day, then how much of this time are you committed to use to accomplish your goals? Can the goals you want to set be accomplished in this time? After breaking down each of the goals you set in step four, you may find that there is simply not enough time to accomplish them all. You may need to narrow down your list further.

As you estimate the time, this is a good place to write down estimated completion dates for each of your goals. If your goal is to exercise for one hour each day, then no completion date would be needed as it is a continual goal. However, if you wanted to do three real estate deals in the coming year, then write down when you want the first and second deals finalized.

Step 6: Talk with friends, family, and business partners.

Once you have reached this stage, solicit input from those close to you. They may give you ideas that you missed, bring up potential constraints you have not thought about, and give you encouragement about your goals. You will likely need the support and assistance of those close to you to reach your goals in the coming year, so including them in the process at this point can let them know of the expectations you have set for yourself.

Step 7: Write down and post your list.

Once you have finalized your goals for the coming year, don’t be a coward. Remember, in step one, you eliminated fear from this process. Print your list and post it in prominent places in your life. Frame your goals in a place you see every day at home and work. Post them on your Facebook account, create a screen saver to remind you, or find other creative ways that will remind you of your goals on a daily basis. Let the world know what you are going to accomplish, and don’t fear what others may think.

The Coming Year

During the course of the coming year, unexpected setbacks may occur. While some setbacks are unforeseeable, try to envision the hurdles you may have to overcome. If your family requires more time of you, how will you adjust? If you are sick for a certain period of time, what will you do? If you lose your job or primary source of income, what will your plan be? While you will not be able to anticipate every situation, visualize how you will encounter situations that are less than ideal. Hopefully, this vision is one that has you demonstrating strength and tenacity.

Whatever you do in the coming year, make a resolution to forward progress. You have amazing capacity to accomplish what you want in this life. Wake up each day with a determination to make your dreams a reality. If you have a clear vision of what you want in life and do what you need to do each day to make that vision a reality, then don’t be surprised if you wake up one day and it actually happens.

Posted 09:04 AM | Permalink | Comments (0) | TrackBacks (0)