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Friday, March 28, 2008

Rich Dad 2008 Predictions Part 1

Stop and listen. Here's Rich Dad's predictions for this year. When the video ends, at the bottom you can pick parts 2, 3 and 4.

The Spare Time Co. or boosting your personal bottom line and getting out of the Rat Race with a business in the basement

When playing Cashflow, most players in 101 won't start the small businesses "in the basement" like the software company or widget company thinking it's a lot of money with no payoff and a chance to lose your money. This is the same attitude that they have in life. The network marketing in 202, Spare Time Co., on the other hand, every wants to do because it's cheap and easy (too easy, really).

Most things in life take real effort. Taking the time to come to Cashflow games and getting out of the Rat Race takes effort to. It just happens to be enjoyable so it doesn't seem to be as much work. Most people that play with the Twin Cities Rich Dads and Moms are in the E Quadrant. Remember the Cashflow Quadrant? We are all trying to make our way to the Investor and Business Owner quadrants. Going through the S Quadrant (self-employed) is an excellent way to move in that direction because of extra income and business growth.

Of course, not all small businesses make it. But there are enormous tax benefits to having a "business in the basement" that is not a hobby as defined by the IRS. And that doesn't mean the business can't be your hobby either! After all, improving your economic means is about life style as well, right?

Any type of business or investing takes effort and your part-time business would too. The pay-off could be immediate but probably takes some amount of money to start and perhaps on an on-going basis for a while, but when you reach profitability, you have cash flow. We've all heard about "delayed gratification" and this kind of falls into that category.

What kind of things can you do? The possibilities are endless. You could be an online affiliate marketer, have a ecommerce site where you do no product fulfillment or orders, follow the system laid out in "The 4 Hour Work Week", build picnic tables, create websites, manage real estate, plan parties, walk dogs, etc. You could do all of the work yourself, some of it or none it. There's still planning, managing and funding it (and other things too) but it doesn't have to kill you.

So when you think about your goal of getting out of the Rat Race, do you think that extra income and an asset you can sell later perhaps would help? And think of the education you'll get!

One real important aspect of the business in the basement, or any business for that matter, is it changes how you are taxed. Remember what Rich Dad says: in a business, you make your money, you pay your expenses and you are taxed on the rest. As an employee, you make your money, you are taxed and you pay your expenses on the rest. When you have a business, there are a number of expenses that are legitimate business expenses. So it costs less to live, and you keep more.

What could be better?

More banks freezing HELOCS

Yesterday, I got word from another investor that her HELOC was frozen, this time by Bank of America. This is the third large company that has frozen the HELOC of someone I know personally. So consider your strategies where HELOCs are concerned. And think about maybe refinancing them with a small bank.

Sunday, March 9, 2008

Lessons learned from March 9th

Last night we had a good crowd of eight people at my home in Leominster. In attendance, we had, in addition to myself, were regulars James Greelish, Mike Marques, Susan Sudhalter, Dan Langford and Bob Kay. Marria St. Michael was back for a third time and in attendance for the first time was Terry Keane.

James, Mike, Dan & Marria played Cashflow 202. As he usually does, James got out of the Rat Race twice by about 10PM. I believe everyone got out on their table.

Sue, Bob, Terry and I played Cashflow 101.

I played the teacher. Because the monthly cash flow is lower than occupations I normally play, it was much longer before I started taking big deals. Things moved pretty slowly for me for quite some time, buying 400 shares of MYT4U at a reasonable price of $10, even though I immediately landed on charity and in my next 3 roles I had for paychecks. Shortly thereafter, I partnered with Bob and Sue on a limited partnership with a doctor's office and then immediately I was downsized.

Things were looking great when I bought a "great deal" for $35,000, a government owned home with a tenant, for $2000 down and $220 per month cash flow. Just before my next turn, a buyer appeared and I sold the house for $135,000, putting $102,000 in my pocket. I paid my bank loan plus my credit card and retail debt and still had $90,000 in cash!

On my next turn I drew a Big Deal and it was the 60 unit apartment building. Perhaps I should have passed on it. It was initially a net neutral deal for my monthly cash flow: with a down payment of $200,000, I borrowed $110,000 to make up the difference in the cash I had on hand but the $11,000 in monthly cash flow covered the loan. I still had a decent monthly cash flow of about $1600. Had I passed and taken a different big deal on a subsequent turn, I'd have retained cash, increased my cash flow and I may or may not have exited the Rat Race sooner.

After a couple more turns, and starting a software company in my basement, received a paycheck and borrowing more money from the bank, I got laid off again. My cash flow shrank to less than $100 and on a subsequent turn to about -$300. I survived and then sold the limited partnership, double the money for myself and partners and then sold the MYT4U stock for $40 after a split. After paying debt down, I was back to good cash flow and still had cash. In the mean time, Bob exited the Rat Race getting $600,000 as his initial Cash Flow Day.

Bingo, now there was a private lender offering better rates than the bank. I had a Big Deal Opportunity for a 8-Plex but didn't have the cash for the down payment and there were no partners in sight. But with the private money rates from Bob, borrowing the amount I didn't have the cash flow made the property cash flow. Bingo!

Now I refinanced my remaining bank debt with Bob increasing my loan from him to $127,000 but my monthly payment was only $6350! Adding the cash flow from the 8-Plex and refinancing the remaining $104,000 bank loan dropped that payment from $10,400 to $5200 and Bob had $6350 cash flow from me in the Fast Track. Great investment for him and such better financing for me that I was immediately out of the Rat Race with passive income of $12,700!

Ultimately I won because of a little luck. I loaned money to Sue in the Rat Race so she could buy a property that now made sense where it wouldn't have before because the cost of the money would have been too high and I bought several businesses. But I won because the Russian Oil Deal paid off with $75,000 in cash flow.

So I learned two good lessons:

(1) I jumped on a huge deal that immediately netted me no extra income, took all of my cash and gave me a lot of debt. Had I waited for a less expensive big deal, I would have had more flexibility and cash. I don't know if I would have exited the Rat Race sooner but I do know it wouldn't have felt like a struggle. Ultimately, despite some financial pain, it still paid off handsomely, primarily when I got to the Fast Track with monthly cash flow of $1.3 Million. Maybe sometimes being circumspect pays off. Or not. It's a matter of risk tolerance and while I still did the deal, I had less stomach for it than usual.

(2) Debt strategy and exit is a major component of success. Sometimes, paying a seemingly high rate for debt is okay (think hard money, borrowing downpayments, or even using credit cards on a daily basis while running a balance), IF you have exit strategies for this debt. For example, paying down to reduce what you pay monthly is a valid strategy and the only one that "stock" rules allow for. But life isn't like that. Refinancing and restructuring of debt are real world examples of debt strategies that allow you to get cash or reduce the cost of debt.

Strategies change over time and debt should be no different. Say you bought a property with hard money for the purchase and rehab. You bought well and now the property is occupied and you have an appraisal that shows your debt is 65% of it value. Maybe you paid 5 points are paying 15% on the hard money. You'd want to refinance, right, especially if you could at Fanny Mae rates. You'd cut you debt payments in 1/2!

My strategy changed for debt when Bob got out of the Rat Race since I now could get a money backer that would help me along beautifully while giving him returns he was happy with. I call that WIN-WIN! He got a 60% yield and there's only one business with that kind of yield in the Fast Track. Does he have risk? Sure, if I were to go bankrupt in the game on unsecured debt, he'd have a problem and lose his money. Would it kill him? Hardly but no one would like it. The bank takes the same risk on bank loans.

I went from struggling to being free because my strategy evolved and I had a new exit. So look for your options and act when conditions change.

Private Lending from the Fast Track to the Rat Race

We actually added private lending before but i forgot to get it added with the house rules. It's added now. So now, just like in life, you can get a private mortgage, just like you can find a money partner!

Fast Track players can lend to Rat Race players at the same terms and conditions stated in the house rules for borrowing from the bank except that the rate is 5% instead of 10% per month. Hey, that's still 60% per year and only one Fast Track business has a yield that good.

Now, debt restructuring and refinancing is a strategy that can be pursued in Cashflow, just like the real world, in addition to just paying down debt. In other words, it makes "good debt" even better.

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