The 3 L’s of Success is the twelfth in a series of articles to help you reach your goal. What are your goals? I know you thought about it! You know, it is your dream, wish or resolution you made! Before you can get to where you want to be, you need to know where you are going. You wouldn’t get on a bus, train or plane without knowing where it was going.
One of my first major investments was real estate. I bought my first house when I was twenty-seven (27) years old, but I spent considerably more on my first apartment building. My first apartment building was a nine (9) unit which was a mix of one (1) and two (2) bedroom units. Before I bought my first building, I did not know anything about rental property. I think I spent more time interviewing and talking to various real estate professionals before I found one I could work with. Most real estate people hate first time buyers because it requires more work. Becoming a landlord was not easy!
When my parents bought assets, they generally paid cash. The only exception was their first house. Using a mortgage to buy rental properties is typical, but generally requires a different loan to value. When I bought investment property, banks required a 35% down payment. They treated it like a business with all the risks. The increased down payment meant more equity, but the mortgage at a relatively low interest rate helped me leverage my invested capital.
When I started investing in rental property, I put together a team of professionals which included my attorney, CPA and banker. My banker was an important part of my plan because I needed to get mortgages to buy property. II quickly learned that bankers treat real estate as illiquid. Real estate cannot be sold quickly. They even treated the cash flow as less than steady. Bankers like things that are more assured such as stock dividend on triple A stocks and bonds. I decided to add a business to make me more liquid.
A Landlord is an owner of a house, apartment, condominium or real estate which is rented or leased to an individual or business. There are a lot of horrible stories about landlords and tenants, but it is up to you to avoid these issues. Landlord Nightmares provides one perspective. Owning rental property is a business and you can run it any way you like. If you screen tenants well, you can avoid most of the nightmares. You must manage your business for the kind of results you are comfortable. Tenants expect you to run your business well too. They want certain services and repairs provided in the lease.
Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. I used mortgages to leverage my investment. If you bought a business using borrowed funds, you probably would not earn a profit for several years. Rental property is normally leveraged by using a mortgage at a lower interest rate than business borrowing. If you buy the property right, you will earn a positive cash flow right away. If you run it well, your profit increases every year because you either increase rents or allow for natural turnover. Over time, your rental income pays the mortgage off and you achieved a steady income and you still have increased value when you sell your investment. The value of the investment is based on the gross income, hence the benefit of leverage.
Liquidity is the degree an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity ranges from a money market account which is immediately liquid to real estate which is illiquid. Real estate takes time to sell and price will be affected. When you have to sell your house quickly, price is the first thing that must be reduced. If most or all your investments are in real estate, you are at the mercy of the market. I decided to add a business that would improve cash flow and evaluated as a business. It improved my liquidity and provided diversity in my investments. I was always part of my plan to accumulate a variety of income streams and investments.
This is the twelfth article in the series about success; I expect to publish throughout 2012. There will be twenty-six (26) of them, one for each letter of the alphabet. The 3 L’s of success are landlord, leverage and liquidity. I think everyone wants success in life; business and career; however it takes a concerted effort to reach success. The difference between the impossible and the possible lies in a man’s determination.” Tommy Lasorda sums it up much better than I can!
I started this series because I run into so many people who have difficulty reaching success. They want to know my secrets! So I thought I would share them in a format that will be most helpful. I also think this format may make it more interesting and easier to use. My goal in these articles to provide useful and interesting information that will help you succeed. The 3 L’s of Success is now a series.
Photo by: PunkToad