You have to know the difference between assets and liabilities. Many people don’t understand what a true asset is. It’s a generator of revenue versus a liability, which will drain your bottom line.
We have to stop spending money on non-revenue generating items, such as your personal residence and automobiles. Your home isn’t an asset unless it generates revenue or provides cash flow. Here is my question for you, is your personal home an asset or a liability? Prior to this article, you would have said my primary residence is an asset. Here is how you can define the difference. An asset will feed you and a liability will eat you. Does your home, your primary residence produce an income for you or do you have to feed it each and every month to be allowed to stay there? Many of you right now are realizing that your primary residence is not an asset after all and is, in fact, a liability because you have to keep paying to live there. The question then becomes how do I make my home and asset? You have to figure out a way to get your home to generate income greater than your monthly payment. You can do that through sub leasing space, bringing in a tenant or creating rooms for rent. I have client in San Diego, who has been a single woman for 30 years and she makes a lot of money by renting rooms to college students. She gets $500 per room in a four bedroom house and is making an extra $1,500 a month just renting rooms. Certainly she has perfected it and you need to be aware of the liability of bringing the wrong people into your home, but the point is, make your home an asset.
Some of you may own your home free and clear and think, well yeah, that makes it an asset. No, it doesn’t because you never own your home free and clear. If you think you do, I would encourage you to stop paying your property taxes and see what happens. You are always at risk of losing your home if you don’t feed it. If you own your home free and clear, the way to turn it into an asset is to go down to your local bank, get an equity line of credit against your home. Let’s say you own a home free and clear that’s worth $200,000 and you can get a line of credit against it easily for $.50 on the dollar or $100,000 at five percent. That $100,000 loan is going to cost you $5,000 a year. Now you take that $100,000 and you go out and you generate a 15 percent annualized rate of return, which is $15,000. You pay off the loan amount off $5,000 a year and you have now netted $10,000 net positive on top of the borrowed funds. That is one easy way to turn your primary residence into an asset.
Also, to put your house in financial order, I want you to invest. Rather than remodel your kitchen or buy a new car, I want you to put money in places that will generate money and give you a return. And stop sacrificing. Instead of figuring out what to sacrifice to save $100, figure out how to make more money. You also need to understand the difference between spending money on an expense and investing it in an asset that will generate income.
Finally, you need to know when and how to save. You should put money away in a 401(k) or a self-directed IRA. My personal income goes into self-directed IRA’s so that I can invest in private money mortgages. That way it is always earning a higher and stronger rate of return. For those of you that are employed, I would hope that you are participating in your company’s 401(k) plan and maximizing your contribution. That is the easiest, no brainer money because it is pre-tax dollars going into the 401(k). If you have been under an employer and you participated in the 401(k), you have now left, you need to roll that into a self-directed IRA where those monies can be used for down payments for fix-up and repair. You need to start developing and building an account that is post-tax contribution.
I will give you a great example. I am closing on this house in the next couple of weeks. I picked it up for $73,000. I put $500 down out of my self-directed IRA. I then over-financed it, so my purchase price was $73,000 and I got a loan for $83,000. That covered most of my closing cost and fix-up cost. I did have to dip into my IRA a little more and my total IRA investment ended up being about $10,000. That property sells soon with my net profit being about $30,000 in less than five months. So when you look at a $10,000 investment out of my self-directed IRA with a $30,000 profit that is a 300% return all tax free, but the fact that I did it in less than 12 months means my actual annualized return is over 600 percent. That is the kind of loan, the kind of deals I want you doing. I want to make sure that when you hit 59.5, if you haven’t yet, that you have a retirement outside of social security.
Lee Arnold is an international speaker, trainer, author and licensed broker who has spent many years perfecting the real estate and private money mortgage lending process through thousands of transactions. Lee is a leading expert on private money mortgages and has been featured as an investment strategy expert by Forbes, the Boston Globe, Market Watch, Reuters and Business Week. He has also consulted and taught for Donald Trump Companies.
As a master of networking, Lee connects private investors to borrowers from across the United States and Canada. To leverage the power of these relationships Lee and the Secured Investment Corp’s executive leadership team have created Cogo Capital – The Private Money Company, Lake City Services and The Lee Arnold System of Real Estate Investing. This family of companies has become the fast growing private money mortgage firm in the United States. Key to the company’s values is integrity and trust.
Reprinted with approval from The Lee Arnold System of Real Estate Investing.
© Copyright 2014 by The Lee Arnold System of Real Estate Investing