The Iceman's 4 step plan to create wealth (I need help with 1 and opinions)

[NorthernStar]

posted by Northern Star:


OK, but you only mentioned the mortgage and real estate related comments. I did say above that my anti-mortgage bias is fairly extreme, and that it isn't "anti-mortgage" per se but merely anti-debt, and most people think of their mortgages as "special debt" and I personally think debt is debt except in circumstances where it's being borrowed at x rate to achieve x+y return.



Most early mortgage repayment plans do nto involve spending significant extra money like that -- the most common of which I am aware is making 1/2 the payment every two weeks, which amounts to an extra payment per year that the spender would just otherwise waste on crap anyway, but which shaves off years from the backend of the mortgage. This is not a bad plan, and if any of the cheerleading about the value of owning real estate is to be taken seriously, then surely low-stress measures which increase the rate at which one builds equity shouldn't simply be poo-pooed.



Right, and you're saying this like it's a good thing ... would you recommend food stamps as a way to build wealth?



Am I misunderstanding you here? You're saying that there are no tax-deffered or tax-exempt investments aside from real estate?



I did not say you can't make money in real estate -- I said the exact opposite, that there are ways in which you can make lots of it. I simply made a few factual observations that old farts and broke people and real estate salesmen tend to gloss over, for example that the majority of "part time real estate speculators" lose their money, just like the majority of day traders (and sports bettors, and people trying to earn money selling shit on eBay etc. etc. etc.) The difference between real estate and other ways for the common man to lose his ass is that it tends to happen a lot more quickly, since the barrier to entry tends to be a lot higher.

Real estate is great passive income if you've got enough that you need something that pays better than CDs but offers less risk than stocks. It also is great if you've got gobs of liquidity, great credit, lots of spare time and drive -- you can almost always make a killing in speculative rehab/development if your/your bank's pockets are deep enough. But this is not how most people think of real estate as an investment, and it is against the more common mentality that I was cautioning.

I could make a massive list of all the crap that can go wrong with real estate, but I'm sure you know them if you've been involved with it for that long. But again, I said merely that real estate is overhyped and that lots of people lose money in it. Nothing controversial about either take.


Phaedrus

Phaedus:

We agree that debt in general is bad. Credit card, car loans things like that will cost you money. The first thing to do is try to eliminate all of the "bad debt".

My point of paying the mortgage off was missed. In general if you make one extra mortgage payment a year you will pay off your mortgage of 30 years in 23 years. This is a bad plan. Take that same mortgage payment and increase a tax differed account like a 401k by that mortgage payment. At the end of 30 years you will have more in your 401k and a paid off house than the person who pays his mortgage off in 23 years and then puts all of that money into his 401k.

There are two real good points to real estate. One which was obvious and i didn't mention is the leverage. You purchase an investment property for $100,000 and put $10,000. Assume the $10,000 is enough to make the property cash flow. The property goes up 3% or $3,000 in a year, that is a 33% return. It is hard to find other investments to do that.

The second which I mentioned is the ability to do a 1031 exchange to avoid capital gains. I could have an invesment proerty that went from $100,000 to $200,000. Sell it and purchase a nice retirement condo in Arizona using a 1031 exchange. Rent it out and then move down their and live in it for 2 years. Sell it for $200,000 and pay no taxes on the $100,000 in gai. Show me a plan with some other investment to do something like that, make money and legally not pay any taxes. I would love to hear about it.

Northern Star

 

[CalvinTy]

Fascinating thread. I don't know why I skipped over this thread until now, but a lot of concrete information here! (Even opinions on both poles about some aspects are discussed by posters without showing too much emotion to cloud their comments). Excellent posts by Phaedrus, SSI, Northern Star... to name a few.

I have read so many financial articles online in the last few years, but just like the majority of people out there, I have yet to apply many excellent advice for my particular net worth. I know I'm going to re-read this thread again & again as well as having this thread bookmarked. I only wish I had something to contribute to this thread with any advice that I have learned, but the mentors here have covered a lot of ground, really.

Thanks, Iceman, for starting up this great thread.

* CalvinTy

 

[GoBlue34]

A buddy of mine has a 10 year 2nd mortgate at 7%, is that considered "good" debt as well or should he pay that off?

He has it because he didn't want PMI insurance.

 

[CaptainBone]

Damn, you people are rich. I was hoping there'd be something in here for the rest of ushno: . My base salary is 49K and I have a side job that I absolutely hate most of the time (umpiring). Any other thoughts on how to get a side business going?

If your talking about baseball.. try doing over 150 games a year like I do.
By the end of the year (November), its a welcome vacation until March.

 

[NorthernStar]

A buddy of mine has a 10 year 2nd mortgate at 7%, is that considered "good" debt as well or should he pay that off?

He has it because he didn't want PMI insurance.

Not knowing his total financial picture, if his choice is to make larger payments on the 2nd and pay it off early or increase his 401k, I would increase the 401k.

A new law is in place for any home purchased or refinanced starting in 2007 which makes private mortgage insurance now tax deductible. It's about time the government got something in taxes right. Now they need to make all health related costs tax deductible and all day care costs tax deductible.

Northern Star

 

[sean1]

There is no other market that allows you with $100,000 to make the same returns that sports betting allows with the same risk.

When you start talking millions, real estate and other markets get enticing, but at low dollars, just make your money betting bad numbers.

Sean

 

[sean1]

The other thing to do is start businesses. They can be very lucrative. Unfortunately, they usually require money up front or investors.

I've probably started 6-8 on shoestring budgets and 2 or 3 of them have been successful. The ones that failed failed due to lack of funding - not lack of results. The results just grew to slow due to lack of a good sized marketing budget.

I'm at the point now, where I am comfortable between work and sports, and where I won't start any future businesses without proper funding but with funding would in a heartbeat. I've got plenty of ideas - probably 5-8 real viable ideas that could be highly lucrative, but would run anywhere from $50,000 to $20 million to get off the ground (Most on the lower side - although I have one knock out that would revolutionize real estate)

The idea is the easy part. Finding financing is the hard part - especially when already leveraged.

So anyways, if any of your angels out there are looking to start businesses, drop me an emial. WIl has my email.

Sean

 

[Phaedrus]

posted by Northern Star:

My point of paying the mortgage off was missed. In general if you make one extra mortgage payment a year you will pay off your mortgage of 30 years in 23 years. This is a bad plan. Take that same mortgage payment and increase a tax differed account like a 401k by that mortgage payment. At the end of 30 years you will have more in your 401k and a paid off house than the person who pays his mortgage off in 23 years and then puts all of that money into his 401k.

This is a good plan on the face of it, but presupposes that a) the person has a 401(k), b) that 401(k) and real estate tax codes won't negatively change within a 30-year timeframe, and that c) the value of the 401(k) doesn't go down. It's a "superior choice" as long as everything stays the same or gets better without a hitch, for three decades.

There are two real good points to real estate. One which was obvious and i didn't mention is the leverage. You purchase an investment property for $100,000 and put $10,000. Assume the $10,000 is enough to make the property cash flow. The property goes up 3% or $3,000 in a year, that is a 33% return. It is hard to find other investments to do that.

Leverage=debt

x amount of money, defined as the amount you budget for the task, and usually all you can afford, almost never ends up being enough to get a piece of real estate to cash flow.

The 33% return assumes that NNN income from the property is sufficient to service the debt. It also assumes that 33% is an actual liquid return.

The second which I mentioned is the ability to do a 1031 exchange to avoid capital gains. I could have an invesment proerty that went from $100,000 to $200,000. Sell it and purchase a nice retirement condo in Arizona using a 1031 exchange. Rent it out and then move down their and live in it for 2 years. Sell it for $200,000 and pay no taxes on the $100,000 in gai. Show me a plan with some other investment to do something like that, make money and legally not pay any taxes. I would love to hear about it.

Again, this spirals out to the outer periphery of a "perfect" investment environment where everything goes off without a hitch, costs are stable, taxes static and you can always find the buyer and seller you need to make your dreams come true. This is why I am so critical of real estate -- not because there's anything wrong with real estate per se but because if I applied your logic to any other sort of investment in the world, from websites to gold to options to Hummel figurines the listener would say, "Wow, that sure is a lot of variables. Sounds pretty risky." But with real estate it's somehow okay, just because it's real estate. People pretend (or are stupid enough to believe) that real estate can't go down in value, or fail to appreciate faster than inflation, or that tax advantages can't be yanked out from under you overnight (see also: 1986)


Phaedrus

 

[Anti-liberal]

Real estate can be great, but it's work too. You have to look very hard to find a rental that can give a positive cash flow these days, for instance. Always make a real estate investment with clear investment goals in mind and an exit strategy. The money is made when you BUY, not when you sell. If you look hard enough, do your homework and make an astute investment, the downside is greatly minimized.

 

[DarrylParsons]

Great thread!

Lots of very solid advice.

My story is more about trading money for freedom. I'm 39 years old now and have been a professional gambler for the last 8 years. Before that I was an HR director for a big tobacco company. I was responsible for the whole Eastern European region... 7 countries, 4 big manufacturing plants, and over 2000 of our own employees plus a few hundred on various contracts.

My career was growing at a stellar rate. Already pulling $150k per year in cash and benefits at the age of 29, the sky seemed like the limit.

But then I had an identity crisis. I felt sick to the stomach every time I looked in the mirror and thought about all the fake smiles I gave each day pretending to be someone I'm not. I felt a lot of guilt for being an ever more major player in what I felt was nothing more than an organized crime operation. I didn't like who I was and what I was becoming. So after a few months of questioning myself, seeing psychologists, and battling mild depression, I decided to pull the plug and get out.

Looking back it was the best decision I ever made. I'm making a lot less now than I was back then, but it's still plenty enough to support a wife, 4 kids, and still be free and enjoy most of the good things in life.

I haven't lost my power drive, though. If the world ever became fundamentally different, like during or after a nuclear war, say, then I could see myself getting back into the fray and trying once again to work my way to the top, only this time for a cause I can believe in.

So what's my point? I guess it's that having really big bucks in today's world is overrated. The really valuable stuff is having freedom, spending time with family, and being true to yourself. Those things don't cost a whole heck of a lot. If your income is already enough to have that, then I think it's best to focus your energies on other things besides getting rich.

 

[SSI]

Daryl, that was a great post............. i see a lot of similarities in that and my current situation......

just scared to take the leap..........

 

[TheRightSide]

Here's mt take on this.

My parents growing up never had alot of money. Dad was at a auto supplier, Mom was a bus driver for a school system. But that didn't mean we grew up poor. My Dad got some money when his Mom passed. Now for stupid people they would have went out and got a new car or a bunch of useless shit they didn't need. No way, not my Dad. He bought some rental property. Hell the place was better than our house. He found a great deal in a very nice and trendy area OUTSIDE of Detroit. A duplex with a house in behind it. So that's 1 property with 3 sources of income. Paid $65,000 for it. We did all the fixing up that we could and over the years he would do some major improvements to it(About every 3 years). This property went so well he bought 2 more in another up and comming trendy area. Both of them were duplexes. So now at 3 properties he has 7 ways for income. He knew enough that it was all about getting the max out of each property. Only later did he buy houses for single family housing.

All the while we built our family cabin upnorth from Detroit. Doing almost everything ourselves it was built at a very nice price. Also he bought that property way before that land was worth what it is now. So now they are retired. I bought the house that I grew up in.(Great deal part of our wedding gift) He has sold the smaller duplexes that that were already paid off. Still has the 1st one he bought and 2 other houses that are all paid for. So now living upnorth with no water bill, no morgage and very little living expences they are doing whatever they like when they like.

TRS

 

[TheRightSide]

LOL My 2nd thought on this.


I would like to think I have a better start to life than my Dad and Mom did. I am not 40 yet and have had 2 businesses so far in my life. My 1st was carpet cleanning business. This was the easiest and cheapest start up business I could think of. I had a van already and just needed the equipment. I was advertising in the Detroit News TV guide every 2 weeks. I also passed out fliers door to door in the cities just north of 8 mile. Now Sean earlier said about not having the proper backing to give it a good go. I agree 100% with this satement. LOL I didn't have nowhere near the money I needed. But I was doing pretty good, even got a few accounts at all the local Ponderosa's to clean the carpet every 2 weeks.

Than the Detroit News and The Daily Free Press joined in on a Joint Operating Agreement and that made it so only 1 paper would come out on Sunday. Well to say that fucked me would be an understatement. The cost of an add in the TV Guide book tripled and pretty much destroyed me. I was only up and running for about a year when this happened. I should have kept much better records of when I cleaned a person's carpet and call them every 6 month's or so. So I sold my shit and got out of that fucked up business. Everybody would undercut the prices anyway and there was too much involved to do it on my own.

2nd business is the Vending Business. This takes very very little work to do well. The machine is my employee. I don't have to pay it or have insurance on it. It doesn't call in sick or goofs off. I have 2 stops now with just adding 1 yesterday. It's all cash that is close to impossible to get busted for taxes. LOL We will pax taxes though the wife is worried about not doing it right. So my advice to many of the younger people here is to find something that won't consume your life and give it a shot. I hope in the future I can drive to all my vending stops (I want 30) than go to the track in the afternnon. I can think of nothing better than working my ass off for myself.

TRS

 

[DarrylParsons]

That's cool TRS. I'd have done it much like your dad if I were any good with my hands.

SSI: You'll know when the time is right. I have a feeling it'll be pretty soon, though.

 

[Anti-liberal]

Great thread!

Lots of very solid advice.

My story is more about trading money for freedom. I'm 39 years old now and have been a professional gambler for the last 8 years. Before that I was an HR director for a big tobacco company. I was responsible for the whole Eastern European region... 7 countries, 4 big manufacturing plants, and over 2000 of our own employees plus a few hundred on various contracts.

My career was growing at a stellar rate. Already pulling $150k per year in cash and benefits at the age of 29, the sky seemed like the limit.

But then I had an identity crisis. I felt sick to the stomach every time I looked in the mirror and thought about all the fake smiles I gave each day pretending to be someone I'm not. I felt a lot of guilt for being an ever more major player in what I felt was nothing more than an organized crime operation. I didn't like who I was and what I was becoming. So after a few months of questioning myself, seeing psychologists, and battling mild depression, I decided to pull the plug and get out.

Looking back it was the best decision I ever made. I'm making a lot less now than I was back then, but it's still plenty enough to support a wife, 4 kids, and still be free and enjoy most of the good things in life.

I haven't lost my power drive, though. If the world ever became fundamentally different, like during or after a nuclear war, say, then I could see myself getting back into the fray and trying once again to work my way to the top, only this time for a cause I can believe in.

So what's my point? I guess it's that having really big bucks in today's world is overrated. The really valuable stuff is having freedom, spending time with family, and being true to yourself. Those things don't cost a whole heck of a lot. If your income is already enough to have that, then I think it's best to focus your energies on other things besides getting rich.

What a story! You and I have more in common idealogically than you may think. I've never done anything in my life that I believe in more than being a professional gambler. Professional gamblers are modern day versions of Peter Fonda in "Easy Rider", fighting for our freedom from economic slavery. Take care of ones family and enjoy the little things in life (there's nothing bigger)

 

[Anti-liberal]

Daryl, that was a great post............. i see a lot of similarities in that and my current situation......

just scared to take the leap..........

The biggest risk you can take in life is to NOT pursue your dreams and the life that you want.

 

[SENDITIN]

How old are you Ice? You absolutely should be maxing out 401-k and IRA contributions if you're not already. Pretend it's a pay cut and you'll never miss it. I have found that to be the one thing people DO NOT do at an early enough age. I'm talking about starting Day 1 of your working career. And don't screw around with a zillion different investments...just buy an overall index fund or a diversified ETF and let it rip.

Gambling is risky enough...make sure whatever you are playing with is something you can afford to kiss goodbye. And certainly stay far away from options and futures...you will in all likelihood get your ass handed to you. Also don't bother with individual stocks unless you can devote the time which most people can't.

I have found doing a balance sheet monthly or at least quarterly gives you a good picture of your situation. Set some target goals to attain and track your progress.

 

[NorthernStar]

posted by Northern Star:


This is a good plan on the face of it, but presupposes that a) the person has a 401(k), b) that 401(k) and real estate tax codes won't negatively change within a 30-year timeframe, and that c) the value of the 401(k) doesn't go down. It's a "superior choice" as long as everything stays the same or gets better without a hitch, for three decades.



Leverage=debt

x amount of money, defined as the amount you budget for the task, and usually all you can afford, almost never ends up being enough to get a piece of real estate to cash flow.

The 33% return assumes that NNN income from the property is sufficient to service the debt. It also assumes that 33% is an actual liquid return.



Again, this spirals out to the outer periphery of a "perfect" investment environment where everything goes off without a hitch, costs are stable, taxes static and you can always find the buyer and seller you need to make your dreams come true. This is why I am so critical of real estate -- not because there's anything wrong with real estate per se but because if I applied your logic to any other sort of investment in the world, from websites to gold to options to Hummel figurines the listener would say, "Wow, that sure is a lot of variables. Sounds pretty risky." But with real estate it's somehow okay, just because it's real estate. People pretend (or are stupid enough to believe) that real estate can't go down in value, or fail to appreciate faster than inflation, or that tax advantages can't be yanked out from under you overnight (see also: 1986)


Phaedrus

You can only make decisions based on your knowledge of the present tax laws. They could change any of them at any time. Are you familiar with the tax law for a 1031 exchange? It is one of the biggest loop holes in the tax code. It is a license to steal.
<?xml:namespace prefix = o ns = "urn:schemas-microsoft-comfficeffice" /><o> </o>
If you want to compare real estate to some other investment. Assume you buy an investment property and put whatever amount down you want to make the property cash flow (break even) and have someone manage the property. Now you have no work other than finding a management company. Long term the remaining mortgage will be paid off, inflation will drive the rent up and it will become an income producer. The value of the property should go up in value. On top of that tax laws which are very very pro real estate. They are not making any more land that’s why it will continue to go up. One of the downsides is that it is not very liquid but you know that going into it. Just like the businesses you have bought, unless there is a buyer it is worthless (other than income minus expenses). .
<o> </o>
Have there been markets where real estate has crashed. Absolutely. Will it happen again, absolutely? Most of the crashes have been more a function of the economy. <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-comffice:smarttags" /><st1lace w:st="on"><st1:City w:st="on">Houston</st1:City></st1lace> after the oil boom. People lose their jobs and must sell and move to another city. When 1,000’s of people must do the same thing it will drive the price down. If you are buying in a city with a more diverse employment base like where I live in <st1:City w:st="on"><st1lace w:st="on">Minneapolis</st1lace></st1:City> it reduces that risk. Right now there has been a very flat real estate market and in my opinion a depreciation of values over the last 24 months. But compared to the gains the previous 5 years this is nothing.
<o> </o>
Let me give you an example of a property I bought in a small college town south of <st1:City w:st="on"><st1lace w:st="on">Minneapolis</st1lace></st1:City> five years ago. Cost $150,000. I put $15,000 down. It is a duplex with $1,500 a month in rent. It is always rent. I refinanced it after two years and pulled $20,000 out of the property. I now have zero dollars into plus cash in my pocket. My payment for principal taxes and insurance is $1,075 a month. I have someone manage the property. I let a builder use the garage to store material and other things in the garage and if I need a project done on that house or my personal house or other investment properties we in effect trade garage space for handy man duties. I have been to the property 3 times in5 years. The tax assessed value is $200,000; the appraised value 2 years ago was $218,000. So according to the appraised value I am up $68,000, I am cash flowing $425 a month minus any expenses, I get to depreciate the asset on my taxes now and I can in the future avoid taxes on the gain with a 1031 exchange. On top of it I have had a survey done and can split part of the land off into a new buildable parcel which would sell for about $75,000 and the value of the rental unit probably wouldn’t drop in value at all because the value is in the cash flow of the house not the land. All I can say is I wish I had more rental units. I am going to watch the real estate market because there are going to be some decent bargains in the near future. Just like stocks after the market crashed
<o> </o>
My wife worked for a major company and there stocked dropped from $90 to $30 because of some poor earning news. I had her transfer a chunk of her 401k and all future contributions go towards buying their stock. It is about 4 years later and it is over $125 a share. I don’t think a stock is worth $90 one day and a week later worth $30. Just like I don’t agree with the reverse. If something goes up to fast it will probably come down, back to $30, probably not but maybe somewhere in the middle.
<o> </o>
I don’t think real estate is over rated at all in fact I think it is one the things he should definitely invest in especially with the income he has. With his income he can use leverage on real estate. Not everyone has that capability.

 

[sean1]

Real estate in college towns is a phenominal deal... YOu either need the time to put up with crap getting broken or a management company.. (Hard to do with a few units)...

Real estate near professional schools (Law, med, biz, etc) is even better. 23-30 year olds break less shit than 19 year olds.

I'm looking around at things now... Look near Ohio State. Zip 43201. You can pick up places for $25-35000 that rent for over $500. When you get into the bottom priced stuff near colleges, rent almost never falls below $500... Buy one, rent it, pay bank for a few months, ask to buy 3 more, etc.. Once you have 10-15, give some kid free rent to collect checks, unclog toilets, fix stupid stuff, and mow lawns... IDeal if you can buy a whole building with like 10 units and one grass.

Sean

 

[GreenDoberman]

:banger: <TABLE class=tborder id=post3859193 cellSpacing=0 cellPadding=6 width="100%" align=center border=0><TBODY><TR vAlign=top><TD class=alt1 id=td_post_3859193 style="BORDER-RIGHT: #fdde82 1px solid"><TABLE cellSpacing=0 cellPadding=6 width="100%" border=0><TBODY><TR><TD class=alt2 style="BORDER-RIGHT: 1px inset; BORDER-TOP: 1px inset; BORDER-LEFT: 1px inset; BORDER-BOTTOM: 1px inset">Originally Posted by Darryl Parsons
Great thread!

Lots of very solid advice.

My story is more about trading money for freedom. I'm 39 years old now and have been a professional gambler for the last 8 years. Before that I was an HR director for a big tobacco company. I was responsible for the whole Eastern European region... 7 countries, 4 big manufacturing plants, and over 2000 of our own employees plus a few hundred on various contracts.

My career was growing at a stellar rate. Already pulling $150k per year in cash and benefits at the age of 29, the sky seemed like the limit.

But then I had an identity crisis. I felt sick to the stomach every time I looked in the mirror and thought about all the fake smiles I gave each day pretending to be someone I'm not. I felt a lot of guilt for being an ever more major player in what I felt was nothing more than an organized crime operation. I didn't like who I was and what I was becoming. So after a few months of questioning myself, seeing psychologists, and battling mild depression, I decided to pull the plug and get out.

Looking back it was the best decision I ever made. I'm making a lot less now than I was back then, but it's still plenty enough to support a wife, 4 kids, and still be free and enjoy most of the good things in life.

I haven't lost my power drive, though. If the world ever became fundamentally different, like during or after a nuclear war, say, then I could see myself getting back into the fray and trying once again to work my way to the top, only this time for a cause I can believe in.

So what's my point? I guess it's that having really big bucks in today's world is overrated. The really valuable stuff is having freedom, spending time with family, and being true to yourself. Those things don't cost a whole heck of a lot. If your income is already enough to have that, then I think it's best to focus your energies on other things besides getting rich.
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What a story! You and I have more in common idealogically than you may think. I've never done anything in my life that I believe in more than being a professional gambler. Professional gamblers are modern day versions of Peter Fonda in "Easy Rider", fighting for our freedom from economic slavery. Take care of ones family and enjoy the little things in life (there's nothing bigger)
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Daryl Parsons,
My hat goes off to you sir. Quite possibly one of the greatest posts on here.:aktion033 :banger:
I only hope I have the courage to make the same decisions you made when the time comes.