Tag Archives: stress

R.E. Strategies: Investing Debt Free Vs. Leveraging Properties

When making financial plans there are two basic schools of thought to get your information from. One group says that debt is bad, and that you should limit or eliminate all debt as soon as possible. The other group argues that getting rid of consumer debt is wise, but that borrowing money to buy investment properties or start businesses can be a smart investment.

Who do you listen to? The answer is that it depends. For example let’s look at the debt approach.

If your strategy is to purchase single family homes at favorable mortgage terms, receive monthly cashflow, grow equity and increase the value of the property over time then this strategy may work. However the alternative, no-debt strategy would leave you saving up and purchasing the whole investment with cash. Sound difficult? You bet!

So which strategy is better? Well that depends on which provides a better, risk-reward ratio. The following are a few risks we should be aware of when investing in real estate: Law suit risk, credit risk(that we won’t be able to pay the mortgage, thus losing the property), cashflow risk (that costs will rise to the point where we don’t receive adequate cashflow). These are just a few risks.

Of these three risks, which ones are effected by taking out a loan? Credit risk and cashflow risk are both effected. Credit risk isn’t even a concern with the no-debt approach(because there’s no mortgage) and cashflow risk increases with the debt approach because there’s increased monthly expenses in the form of loan payments.

A different risk we haven’t discussed yet is the risk of loss of capital. For example let’s say you make the investment in a limited liability entity and are thus only able to lose the money you have into the deal. With the all-cash approach your risk is much higher than the debt approach.

Overall the risks of using debt are slightly higher. However in terms of returns the returns can potentially be much higher than if you only use cash. In addition, purchasing a property with cash takes longer to save up for , lengthening the time it takes to make the original investment in the first place.

So which is better? It all comes down to if you are willing to take slightly more risks to potentially make much more ROI. As long as you are sure to never borrow more than 80% of the value of a property, the debt approach will usually work slightly better. Lastly, the most important takeaway is that simply investing is the most important step. So stop waiting and start taking steps towards financial freedom today!

The Purpose of Investing

The whole purpose of investing is to turn money into more money – it’s to be able to buy more things than you bought in the past. However, why not put all your money into savings? If I can lose “all” my money in the stock market, why not play it safe and keep everything in savings? There are two reasons. 1) You probably want to grow your money, not simply keep it safe. And 2) the value of money goes down over time. Wait, you might be asking, isn’t $1 always worth $1?

Yes and no. While $1 will always be the same, the amount that $1 can purchase generally goes down over time. Let’s use an example. Let’s say you have a small collection of 10 Legos. While you really love Legos, you only have these 10, so you tend to be really careful with them – you like them a lot.

One of your friends offers you an apple for one of your Legos. You refuse because you don’t want to have 9 left. However, a few months later, after Christmas and a birthday, you have received 36 more Legos. Your friend comes to you again and asks to trade one apple for two Legos. While you don’t like the idea of giving away more Legos, you don’t mind as much any more because you now have 36. So you do the deal.

What changed? Why were you willing to give more Legos up for an apple when before you wouldn’t even trade one for one? That’s because the Legos became less rare. This has to do with supply and demand. While demand for Legos stayed relatively the same, the supply increased, which decreased the value of the Legos relative to the apples.

We could get really technical with economics but for now the general principle can ring true with money as well. As the amount of money out in circulation, both physical and electronic, increases, the perceived value, and therefore the purchasing power of those dollars, decreases. In the last 100 years, inflation has gone up at about 2 to 4% per year.

The scary thing is that inflation continues even when your money isn’t growing. For example in 2008 when the whole real estate market and stock market crashed, inflation continued. Meaning, not only did stock investors lose 37% on their money, they also lost an additional 3%+ in purchasing power! Ouch!

In times of great economic panic gold often increase in price because it can act as a fear mechanism for investors when times get tough. When people in the market see inflation increasing and economic certainty decreasing, they often view gold, which has been used as money for literally thousands of years, as a safer location for their money.

The bottom line: real estate and stocks are fantastic investments for anyone looking to outpace inflation over long periods of time.

Should You Work on a Tip-based Salary or Hourly?

Do you value security or potential of higher income? That is essentially what it comes down to. Over the last few years I have had the opportunity to work in both the back (the grill line) and the front (as a host and busser) of the restaurant. I’ve had the opportunity to work at higher end restaurants (a sushi restaurant) with positive work atmospheres as well as lower-priced restaurants (Cracker Barrel) with slight less positive work environments.

Which is better?

To me clearly the former. However often because of connections, resume or simply location, starting at a higher end restaurant isn’t always an option. Although to be clear, higher end doesn’t always mean more positive work environment.

So back to the original question, which is better, to work at a tip-based job or something more stable like an hourly job?

If you believe in your abilities to work hard, be personable, sell to customers, and meet the basic requirements of your job, then the tip-based job will pay you much more over the long-term. However if you aren’t sure of you skills then working an hourly job can be better.

There are 2 keys that you need to follow when working a commissioned job verses a regular job:

1) How much you make is ultimately up to you (and the overall business of the restaurant)

Taking responsibility for every aspect of your job, especially when you get paid via tips, is crucial to making money. If you don’t acknowledge and adapt to weaknesses, mistakes and challenges along the way, you won’t be able to make the money you are probably aiming for.

2) Communicate with your supervisor as well as your fellow employees

Without communication, especially when the restaurant is busy, you risk losing your income, confidence, and sanity all at once. When things get busy, it can be especially easy to slack off when it comes to taking to the people around you. However when this happens items get dropped, customers, employees and managers get pissed, and you usually don’t get the type of tip you were striving for.

Ultimately I recommend getting a tip-based job over an hourly job simply for the reason that it can challenge you more and usually brings in more income.