The Real Wealth Expert Panel

Greetings from the metropolis of Cedar Crest, NM!

Today’s post comes from a question from a friend of mine.  It is a detour from real estate, but like most of us, we have investments in different types of vehicles….stocks and mutual funds for example.  So…I thought this may be helpful for some of you…..

Rob, I have a meeting with my financial planner next Tuesday.  I primarily invest in mutual funds and stocks.  My portfolio has dwindled buy 50%.  I would like to know what questions I should ask my financial planner in order to right the ship.

I took the question to my good friends Emily and Steve….you can read both of their replies below….

There is a lot of information here….so feel free to print out…..

Response from Emily:

Hi Rob,

Emily Cressey Real Estate Investor and Coach

I think it’s a great question, and I would be glad to weigh in with some thoughts.

There’s nothing like suffering a down market to make you stop and re-evaluate your investment strategy.

However, a down or volatile market is rarely the best time to sell off mutual funds.  These are the days to stick to your strategy and dollar-cost-average your way into the market while prices are low.  (As I write this, I don’t think the market is particularly low or undervalued, I’m just speaking in general about when the market is “down.”)

Most mutual fund investors invest for the long term with the assumption that the market will go up approximately 11% a year on average.  However, with the current political climate and anticipated changes in increased government spending and government debt, as well as the potential government-takeover of the private medical sector, I think it’s reasonable to question these underlying assumptions, and hedge your bets a bit in case the next 100 years in the stock market don’t perform as well as the prior 80 years have.

One of the biggest things to look at is your asset allocation.

Within the stock market, you may have created some diversity.  Personally I invest in the following funds:

• S&P 500 – 35% of portfolio
• Small and Midcap Index Fund – 35% of Portfolio
• Total International Fund: 25%
• REITS: 5%

I don’t have a larger share of REITS because I have real estate investments outside of my stock investments.

I am more heavily invested internationally now than I have been in the past due to concerns about the future of the US economy.

I hold no bonds because their primary purpose in a securities portfolio is generally to provide stability – at the cost of lower returns.  I am young enough that I don’t seek security in my portfolio at this time.  I am chasing the higher returns.  This may change as I get nearer to the age at which I plan to start pulling money out of the portfolio or living off its returns.

I do have about 5-10% of my investable assests available as liquid cash reserves that are available to invest in various things including real estate or stock should an excellent opportunity present itself. This also lends some stability to the portfolio should something terrible happen.

In addition, I keep a 6-month emergency reserve for my family, separate savings accounts to save up for things like furniture or a new car, and operating capital for my businesses in case a rental property goes vacant or I need to do a repair on a house, pay my accountant, etc.

I think as far as questions to ask your financial planner go, I would focus on evaluating your overall portfolio strategy at this time to see if it still meets your needs.  Do you have the cash reserves, the portfolio-stabilizing bonds and cash, and the life insurance and operating capital you need to meet your needs?  Are you comfortable with the overall risk and return of the assets you are holding?  Do you need to re-balance anything?  And finally are there other asset classes that it makes sense for you to diversify into… real estate you own and operate, businesses, private mortgages, gold, etc.  My parents says their best-performing asset last year was a loan they made to me.  Personally, my cash-flow real estate is doing well, it’s always nice to get checks in the mail!

There are lots of ways to invest – but they are not all “easy” things for your financial planner to sell.  If you are willing to put the time into other types of investments, start with some books at the library (Or this blog, if it’s commercial real estate), and find out what people do who are successful with those investments, and what the risks are, as well as the ramp-up-time.

A lot of people are risk-tolerant on paper, but then when there is a shake-up, they have trouble staying the course.  It’s no fun to lose a million bucks just because the stock market has a bad day.

If you’re not comfortable with the losses you’ve taken, don’t just “Sell” to stabilize things, but look toward starting to buy some different asset classes that will create a more stable base for your net worth.

Also, remember to see what you need to do for your different goals – saving for kids college is a much different time line and should have a different strategy than saving for retirement.

I invest for retirement and my son’s college separately.  Our goal is 20% of our income going into retirement savings.  After we’ve covered that, our extra savings goes into paying down our mortgage.  Currently we’re not putting any more money into real estate at the moment, because it already represents a significant chunk of our assets, and we’re trying to diversify a bit to spread out the risk and return.  The nice thing about paying down debt is that you get an immediate, guaranteed, tax-free return!

Well, that was long-winded, but it hopefully will give you some good things to think about.

The challenge about financial planning in the abstract is that there is so much that is about YOU, and your situation, and not just “What the book says.”  I think you’ll have a great conversation with your financial advisor, and please let us know if you have any further questions!

Response from Steve:

Rob,

Before I give my answer to your friend’s question, I’m going to answer a that wasn’t
asked but that I believe is very relevant …

“How can I optimally work with any advisors”?

I strongly believe in and use advisors myself (attorneys, book-keepers,
CPA’s, physical training, financial mentoring, business mentoring and have
in the past used financial planners for years).

I believe three of the most significant keys to the effectiveness of your
advisors are:

1. Are my advisors really advising me for my best interest?
Are they teaching me HOW to think about things or just saying “do this”?
You of course have to expect and ask for this as often people want to take
the easy way out and just have someone tell them what they need to do.  For
example I really like my Iron-Man triathlon coach … except she doesn’t
really want to explain WHY we’re doing certain things.

2. Is my advisor actually DOING what’s being advised or are they simply
making money from giving the “advice”?
This is especially true in the area of financial planners, many of whom are
doing poor financially themselves.  This is why I’m following my passion of
teaching/coaching others as their “personal CFO” … to teach them HOW to
think financially what’s best for them.

3. And lastly and this is an important one … The quality of my advisor
depends on ME and the questions I ask.
While I greatly appreciate the advisors I use, the quality of the questions
I ask makes a big difference.  For example notice the difference with the
following two questions about the same topic.

“Should I invest in this opportunity”?

“What should I think about before I choose to invest in this opportunity,
and what are the risks I should consider before doing so?  How CAN I
optimally make this investment”?

For example if I was asked the 2nd question I might reply with the following
helping you think through the following.

“It depends” … What upside do you see (is it worth considering assuming
this works out as planned and will you do this type of investment again …
if not why bother looking further?  Let’s review the risks associated with
this type of investment.  (NOTE this may heavily depend upon YOU … for
example since I invest in cash-flow apartment complexes I view them as safe,
while I’m no longer involved with stocks and thus for me they’re more risky.
WHATEVER type of investment you choose you should at least understand the
basics of them (see attachment).  Many people invest in mutual funds which
are very easy but not many know that if you purchase towards the end of the
year you’ll likely be charged taxes as though you’d owned the fund all year.
As you grow as an investor you’ll learn to ask better questions and hence
get better answers.  You do NOT need to know all the details but at least
how the basics work.  ASK your advisor to explain them to you.

Some suggested questions first for YOU (not your advisor):

1. What is the goal of this investment (i.e. have enough money in 10
years for most of my daughters college education)?

2. Do I understand the “basics” of how stock and mutual fund
investing     works?  If not you may want to read “Take on the Street -
What Wall     Street and Corporate America Don’t Want You to Know & What
you Can Do     to Fight Back” – Arther Levitt, former chairman of SEC.  I
am NOT     saying you shouldn’t invest in stocks or mutual funds … I did for
years and others are still doing it successfully.  I have more of a     bias
for real estate as I have advantages there vs. the stock market
where I don’t.  I would recommend you learn about options, puts, and
calls which can protect you if you’re investing in the market vs. the
advice “just invest for the long term” … which by the way mutual     fund
companies don’t do (i.e. their turnover ratio is often greater     than 1 where
they sell every stock in the fund at least once a year).

OK, so I’m a little long winded and as you can see I have an opinion on
this, let’s get back to the “original question”

Questions for your financial planner?

1. How are you compensated from my investments?
* Is it a flat fee (i.e. % of your $’s invested) or commission / loads on
your investments?  For example in the insurance world brokers receive a
larger commission for selling more expensive “whole life” policies vs. term.
It helps to understand any potential biases.
* There are some great financial planners and some really do know about the
stock market, but interestingly enough last I heard about 80% of the index
funds (such as S&P 500 index) outperform the actively managed funds with
much higher fees.  If my portfolio over time isn’t doing better than “the
market” … such as S&P 500) maybe I should just invest myself in low cost
index funds, and then as needed pay an advisor (maybe for services rendered
or by the hour) for advice.  Again, I DO recommend advisors but in the right
context.

2. What changes would you suggest, and why?
KEY follow-up question – “will you guarantee that”?  In most cases the
answer will be “no, of course I can’t guarantee that stocks on average
return 12%”.  The reason I mention this is to learn to recognize someone’s
opinion vs. fact.  You can’t always get facts but often opinions are
presented as fact

Thanks Steve and Emily….

Until next time…..rob

Networking - How valuable is it? Picture by Corey Robinson

Real estate investment clubs are an invaluable resource for investors of all experience levels. Whether it is finding a seasoned professional in the area to be a mentor or forging partnerships for future opportunities, real estate investment clubs offer a low cost opportunity to build substantial and lucrative contacts.

What can I gain from a real estate investment club?
Real estate investment clubs can provide you with the “in” you need for the markets you want to invest in. Many members have long-term experience in the market and will be able to share their experiences with you. Many clubs also offer professional development courses as part of their regular meetings that can offer you tips and tricks for use in your own investment strategies. It also will provide you with a common ground to talk with other professionals in the area that have similar experiences and interests.

If you are new to real estate investing, these clubs are great for introducing you to people who have worked with private investors. Additionally, many club members have years of experience in working with a wide variety of financial products including private financing, credit partners, conduit lending, mezzanine lending, and government backed mortgage securities like Fannie Mae, FHA and Freddie Mac. These meetings offer informal ways to pick the brains of the pros in your area and be introduced to their financing contacts.

How can I network at a real estate investment club?
As the old real estate saying goes, it’s all about “location, location, location.” If you attend the meetings, you gain the exposure.

To get value out of a real estate investment club, you should:
• Contact the group president or membership officer to find out more about the club. If the club is focused on strip malls and you focus on multifamily properties, keep looking.
• Ask to attend a meeting.
• Once you’ve attended a meeting determine if you like the structure of the group. If it seems like everyone was trying to sell something or you don’t like the founders, keep looking.
• Once you’ve decided that you like the group, become a member.
• Take business cards.
• Dress professionally.
• Introduce yourself to every person there and exchange business cards.
• Send a thank you email or note to every person with whom you exchanged cards within 2 days.
• Ask to present a success story or lead a seminar for the group.
• Attend any local area conventions or affiliated meetings.
• Become a member of the board.

Networking can also provide you with investment opportunities you might not otherwise know about. Regardless of market conditions, investment properties are always available. However, finding the properties and opportunities can be an arduous task. The informal sessions at the clubs will provide valuable conversations on investment options that others may have passed up or do not qualify to invest in.

I’ve been investing a long time. What other tips can I use from real estate investment clubs to grow my business?
If you are a seasoned investor, than you know the more people you maintain relationships with, the more likely you are to prosper. If you regularly write articles for real estate press or maintain a real estate blog, ask to add your contacts from the club to an email list or listserv. Sending relevant articles about the market or your experience is a valuable way to build your credentials as an expert investor. Remember that if you do regularly email a list of people, you first need to obtain permission and provide an opt-out feature. Additional requirements may be necessary according to the appropriate state laws.

How do I find a real estate investment club?
There are several Internet and print resources available including:

http://www.nreiclub.com

http://www.creonline.com/clubs.htm

As with all inquiries, do the appropriate research.

Hello from the overpopulated metropolis of Cedar Crest, NM!  I am heading out this week to find the meaning of life.  Okay…I am exaggerating…but I am taking another hiatus.  Am I running from life?  You could say that.  Well…not really…I still plan to blog.

This has been a tough few days for me…and probably for all of us in some way.  Trying to get our minds around what just happened with the 7 billion bailout and wondering what the impact will be….and add our own personal traumas makes for a very funky time.

On the personal level, things are always funky (at least in my opinon).  We (I use “we” loosely) all deal with family issues, broken relationships, disappointments, and tragedy…it is all part of life right?   I find that anything that deals with personal relationships are always a risk….always fragile…because people change.

Where people are involved there seems to always be the risk of turmoil and pain. Think about it….business partnerships, marriage, friendships, family, and relationships in general.   When have you been hurt?  Chances are it is because of someone else.

“Okay Rob….so what is your point?”

Well….the things around us are going to get worse.  Much worse. So how will the fact that not only do we have to deal with the day-to-day issues (relationships)….but compound that with the instability of the external components or our life (i.e. the economy)?  Well…the answer may surprise you.

“I suppose that since most of our hurts come through relationships, so will our healing.” – From the book The Shack by W.M. Paul Young

WealthLifelines

I have always believed that deep relationship lead to success in all areas of life….even in tough times.  Even at the risk of getting hurt……authentic relationships with partners, teammates, clients, family, friends, etc,. will be the key factor in not only surviving the economic downturn but also the internal turmoil we all go through.

Is it that simple?  Depends on you and me.

Until next time…..rob

Hello!

I have something special for all of you today. I have invited my friend, Paul Lufkin, to write about his thoughts on successful investing in our funky economy. Paul is an economist as well as the owner of Living Water Funding. When Paul speaks…..everyone listens including me! Paul has committed to write a five-part series on “How to be a smart investor in a tumultuous economy.” Today, you can read part one below. Please remember to register your email in the left hand corner so that you can be sure not to miss Paul’s future segments. Enjoy…….

How to be a smart investor in a tumultuous economy – Part I

By Paul Lufkin – Living Water Funding http://www.livingwaterfunding.net/

What is happening to our economy? Are we in a temporary cyclical downturn or is something more fundamental afoot?

I’m of the mind we are in a structural paradigm shift that will change our basic assumptions concerning investments. Smart investors recognize this and are doing things far differently then the typical investor. Heck, even sitting on the sidelines until you get a clearer picture of what is going on will turn out to be a winning play. As boring as it sounds, you will be much better off than following some of your conventional wisdom concerning investments in the past. Don’t be an investment lemming right now. Stop and take stock of all your assumptions.

When the dot.com bubble started crashing in the late 90’s, the Fed was alarmed and started looking for another bubble to prop up our economy. Where did they look? Real Estate. The sub-prime mortgage mess was nothing more then the blessing of the Fed to produce a “collective looking of the other way” while a vast segment of our population not normally qualified to be a part of the banking/real estate industry became major players for the first time. Did it work? Sure, for about 4 years in the early 2000’s fortunes were being made accommodating this unlocking trillions of wealth coming into the market.

But now the chickens are coming home to roost. What is the unraveling going to look like? It is helpful to know a bit about the law of gravity right now. The Fed is limited in its ability to defy this gravity. They are trying to push on a string to get it to move. The string won’t move, it can only get pulled to move. The Feds can no longer pull on the string of the American Economy, they are now pushing it. There is a little movement but, ultimately, the string is not moving. The trillions that have come into the real estate market are now coming out. Fear and greed of the market is more powerful then any government action. Always has been, always will.

What to do in this economy? Don’t invest until you get a crystal clear view of what this new investment paradigm is going to look like, pure and simple. Cash out, stay liquid, invest in precious metals you can readily get to as well as cash. Precious metals will be a hedge against inflation and cash a hedge against deflation. My particular percentage diversification is 70% inflationary hedge and 30% deflationary hedge.

But if you must invest now, here are some pointers:

#1 Search out large holders of real estate where their balance sheet right now is far more important to them than their income statements.

I’ve heard some investors bragging how they’re getting property for 70 cents on the dollar. I think they are getting the short end of the stick.

There are successful investments coming down at 25 cents on the dollar. If you must invest, set your point of entry at much lower then what you thought a good deal was before. Why? Because you can get them if you’re patient. Trillions are coming out of the market. Get ahead of this curve. There are desperate large developers out there who want to shift large amounts of real estate to a cash position. They want to shore up their balance sheet for their banks.

#2 Purpose in your mind that you will be prepared for a coming economic disaster. Position yourself and start to develop a comprehensive plan that as people begin losing their heads and make emotional decisions, you will keep yours and will coolly profit from the situation.

#3 Tap into some unsecured commercial lines of credit from banks. I know of one major bank giving an unsecured $500,000 line of credit, minimal documentation, fast closing (they really need production). Layering several of these banks together and having these funds at the ready will position you for some great opportunities to get in and out when people sell in a pinch. The nice thing about these lines of credit on your business is that they don’t show up on your personal credit report and you don’t pay interest when you are not using them. Prime plus 0 is not out of the question for select borrowers.

Next – Part II Specific Real Estate Investments that do well in an inflationary environment.

Part III Specific Real Estate Investments that do well in a deflationary environment.

Part IV Some historical examples of successful real estate investment during times of financial crisis.

Part V Some historical examples of successful investments during times of financial crisis.

Today, My son, Colt (9 years old) and I were watching the Texas Tech and Oklahoma State basketball game (Texas Tech lost). A commercial came on for some diet food/program with Dan Marino and other celebrities. My son looks to me and says….”you should get that.” I was stunned! I replied…”Do you think I am fat.” Then he said….”Well…no….but you are not thin either.” So….after I finish writing this blog….I am taking my fat self to the gym.

First of all….please register your email address at the top left corner of this blog and I will send you a free video on the topic of “Business for cash flow, Real Estate for wealth.”

Today, let’s discuss how to take advantage (passively and/or actively) of the current and coming opportunities in residential and commercial real estate….yes that is right….real estate, for the investor, is hot!

First of all a active investor is someone doing a lot of work to get the deal done. The active investor is someone who is finding the deal, putting it together, closing the deal, and managing the asset (not all apply but you get the picture…it is someone doing a lot of work). On the other hand, a passive investor is investing in someone else’s project for a return/equity

Most people think real estate is a bad investment right now. That is true is you have no clue what you are doing. But…this is good news for the rest of us. As I have said before….”Buy low, sell high.” Foreclosures are at an all time high, therefore foreclosures, in my mind, are low hanging fruit (for the active investor). If there was ever a time to invest in real estate…specifically Bank Owned Properties (REOs) the time is now….even if you do not have the money to invest. Now if you have money to invest and you are not too crazy about “sweat equity,” investing passively in the current “motivated seller” market is a great option.

Before we talk about “active” investing, if you are a passive investor looking for investment opportunities, I encourage you to visit The Real Wealth Company (selfish plug) . Specifically, register at their private investor page (another selfish plug)to get more information.

So….here are the top three tips to get in the game (as an active investor) and take advantage of the flood of foreclosures on the market. Why only three? Well, there are several more…but the three below are critical….failure to do any of the following three will almost guarantee failure.

1) Get Educated: Educate yourself in creative real estate investing. Short Sales, Subject Too, Lease Options, Options, Real Estate Contracts, etc. If you have no idea what I am talking about? That is okay…you can learn. There are a lot of good products and mentors out there. I started with Mentor Financial Group (MFG) back in 2003. This is a great place to start. There are other programs out there BUT MFG educated me and I am very thankful for that. If you are not willing to hand over 6 – 7K for the mentorship fee…..there are plenty of books and home study courses out there….but I highly recommend getting a mentor.

2) Be a Student: Whether it is reading a book or following the advice of a mentor, if the advice is coming from an experienced and successful source….do it! Stick with the plan. I have seen so many students sign up for a mentorship program and then start rebelling….they start doing it their way. What a huge mistake. When I talk to people on the phone about their real estate business, I can tell right away what the end result will be. One key indicator is when a student does not do what is suggested. Being a student means doing what an experienced and successful source is recommending. But it also means taking responsibility for your actions. When a student, or anyone for that matter, starts blaming others for their troubles….I know chances are slim for success with that person.

3) Wealth Lifelines – You are who you hang out with: It is key to associate yourself (hangout with) with successful real estate investors….in other words…change your friends! Yes…that is right….if your friends or work mates are telling you that real estate investing is for losers or “risky,” STOP taking advice from them. Start to develop Wealth Lifelines…in other words…find the people in your area that are successful in real estate investing. Stay away from the nay-sayers and find successful people that are taking advantage of the amazing opportunities in the current market. I cannot explain in words how important this is. I will say it is the number one reason people become successful….”success breeds success.”

A lot more information coming your way on how to take advantage of what is happening in the economy!

Until next time……