Maximizer

The 80/20 Principle in Real Estate Investing

by Brandon · 6 comments

What does the name “Pareto” mean to you?

Probably very little. However, the principle made famous by an Italian economist over 100 years ago has a huge impact on your investing techniques and wealth building ambitions.

“Pareto’s Principle,” also known as “the 80/20 Principle,” states that for many areas of life, 80% of the effects come from 20% of the causes. For example, Pareto noticed that 80% of the land was owned by 20% of the population and 80% of the peas in his garden were produced from 20% of the plants. You can see examples like this throughout nearly every field of study in our world, especially in business.  Often times, the ratio is even more staggering.

So what does this mean for a real estate investor?

Pareto’s Principle is useful in encouraging focus on productivity and results-driven business. As a real estate investor, this principle helps to find what areas of our business are really earning income and which areas are simply wasting time. Many of the activities that an investor performs on a daily basis are probably wasted time. By focusing on the 20% of the actions that are providing the most results, we can free up significant amounts of time to do the kind of things we want to do. This is key is beginning to “hack” real estate.

Several years ago I realized that most of my efforts were spent doing small maintenance jobs that seemed to take all day. By hiring a resident manager to take over the maintenance, I was able to gain 80% more time in my life – time that I now spend looking for deals, spending time with my wife, and blogging at RealEstateInYourTwenties.com.

Let’s look at a few more specific examples.

  • If you are trying to find leads for motivated homeowners looking to sell, what sort of action is getting you the most results? Are you spending most of your time putting up bandit signs when a simple Craigslist ad is driving most of your business?
  • If you are remodeling a home, what upgrades are actually contributing the most to the future value of that home?
  • If you are managing a small apartment building, what advertising methods are getting you the most calls?
  • Is 80% of your wealth being built by simple investing? Why are you wasting time with wholesaling deals?

What to do with Pareto?

Now that you have begun to think in these terms, its time to begin focusing on improving those areas of your business. If Craigslist is driving most of your leads – then focus your efforts on making your Craigslist ads even better. If new carpet will cause the most significant increase in value or speed of sale -get great looking carpet! Improve the things that matter and watch your investments take off.

I am not suggesting you quit all your other activities if they are not bringing you the most leads or income.   Often times, things that don’t seem to produce much income actually help in other ways. The important thing is to know what your efforts are producing – and prioritize based on that. Don’t waste time if you don’t need to.  The key is being aware of how you are spending your time.

It’s all about finding what works and maximizing those causes to explode your results. Your time is precious, and by looking for ways to increase your efficiency you can free up your time to do the kind of things you want to do. Only then are you truly living life on your terms, the goal of any real estate hacker.

P.S. If you want to learn more about the 80/20 Principle – check out Tim Ferriss’ book “The Four Hour Workweek”. While not a real estate book, the principles taught are invaluable to a real estate investor looking for more time to live to the fullest.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Don’t (Just) Invest for Retirement!

by Brandon · 0 comments

I recently had the honor of having John Fedro write the first of three posts here on RealEstateInYourTwenties.com.  If you haven’t checked out his site yet head over there!

While you are there, check out the article I wrote for him as well! I wrote a post on his blog titled “Don’t (Just) Invest For Retirement.”  Make sure you head over there to read my article!
(Click Here To Read It!)

 

Peace!

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Real Estate vs. Stocks: Part 2 – Average Returns for Average Investors

by Brandon · 7 comments

(This article is part two in a two-part series on stocks versus real estate)

Last time, I discussed the idea of the “hero stock” and why the idea of “just picking that one special stock” is absurd and dangerous to your money.

In an answer to this gamble, many financial advisers recommend a diversified (spread out) portfolio, using mutual funds to spread out risk over dozens or hundreds of large companies. This definitely spreads out the risk of losing all one’s money on a company that goes out of business.  The stock market on average over the past 40 years has provided an average return of around 10% per year. Stock salesmen love to point to this number and tell you that this return is better than anything you could get in real estate. Just give them all your money, plus their commissions, and they will provide for your future.

The problem is – with stocks and mutual funds, you are giving up the most important part of your ability to make money – your brain. You are completely dependent upon forces out of your control to make money. Yes, the stock market has traditionally provided a generally stable return, but this return is miniscule to what you could earn in real estate.  Are mutual funds better than nothing? Yes!  Anything is better than burying your money in the ground (or a checking account). An average return of 10% is better than losing money to inflation. However, average returns are for average investors.

By reading articles like this one – it is clear you are not a typical “bury in the ground” or average investor. You want more.  Real estate investing will give you more. Why? One word: leverage. Leverage is the ability to use borrowed money make you money. When you buy a stock, $20,000 lets you buy $20,000 worth of stock. With real estate, however, $20,000 will let you purchase $100,000 or more worth of property (or $500,000 if it is your personal home).

Lets look at an example.

You have $20,000 this year to invest. You want to decide between buying diversified stocks or real estate. Let’s look at both:

  1. $20,000 invested for 10 years and receiving an annual interest rate of 10% could be worth $54,140.86 – a gain of about $34,000. Not to bad. This equates to an average annual gain of almost 17%.
  2. You purchase a newer three-bedroom, two bathroom home in a family neighborhood for $100,000.  You put a down payment of $20,000 (the sellers pay closing costs). Total mortgage payment (on the resulting $80,000 at a 5% bank loan) is $430 per month. The home rents for $1200 per month.  After paying taxes, insurance, a maintenance guy to fix stuff when it breaks, and a other incidentals, you cashflow about $450 per month or $5400 per year. Putting this money back into the loan (not that you would have to, but to compare apples to apples from the stock scenario above), after ten years you will owe nothing on the loan.  Zip. Zero. Additionally, property in the US has appreciated at an average of 3% per year. So, you now own a property that is worth $135,000. Even taking out your initial investment and the cost it would take to sell, you have over $100,000 in equity, equating to a 50% return on investment – three times higher than that of the mutual funds. This 100,000 can now be used to invest in something bigger, better, and with more value.

At the risk of sounding too biased, there are drawbacks to real estate investing.  For one, the money is not liquid. This means that if you suddenly wanted to pull out all your money, it would take time.  Stocks are much easier to get in and out with.  Additionally, stocks do not require any extra leg work. You don’t need to drive by the stock, get phone calls from the stock, or evict a stock.  However, personally I could not invest in something that I couldn’t materially participate in. Perhaps its a lack of trust in others, but I want to have complete control over the destiny of my money. When I make or lose money, I want to make it or lose it by something I did or didn’t do.

This scenario is not a once in a lifetime deal or even a great deal. It is a very conservative look at investing. I believe in maximizing return by purchasing properties well below their value, adding tens of thousands of dollars in equity before even closing on the deal. In the house scenario above, I would have paid $60,000 for it instead, adding hundreds to monthly cashflow and tens of thousands in immediate equity. That is true real estate hacking.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

About Me: Captain Maximizer.

by Brandon · 2 comments

 

“Maximizer.”

 

It was the result of a five hour test I had taken to determine my greatest personality strength, so my boss could better “guide me into paths of increasingly productive work behavior”. Out of 50 or so strengths, I scored highest in being what the test described as “Maximizer”. My first thought involved spandex, a damsel in distress, and a ray-gun to fight crime. I can handle that. The truth, however, was not so glamorous.

As it turns out, a “maximizer” is simply a person who’s goal in life is to find the shortest distance between starting and ending, thus “maximizing” results with minimal work. In other words, I seek to be get as much as I can for as little effort as possible.

Accurate? You bet.

Flash back to 4th grade. My punishment from my parents for the crime I had committed was to “write sentences”. I’m sure most of you are familiar with this cruel and unusual form of punishment, but for those of you brought up by more civilized forms of punishments like beatings and public humiliation, “writing sentences” was inflicted to brainwash a simple phrase or sentence into the heads of children by writing the words over and over and over.

Like Bart Simpson on the chalkboard, I was forced to write thousands of sentences in a notebook, stating important promises like “I will not take off my pants in public” or “I will not shave a mohawk into my sister’s hair”. That is until my maximizer strength kicked in.

In a moment of genius and inspiration(or endless boredom), I took two pencils, taped them together side-by-side, and began writing two lines at a time. This worked so well I decided to see how many pencils I could tape together and still write. The answer?

24.

My “thousand” sentences turned into just over forty, and within minutes I was finished. I was on my way to maximizing my way through life. Throughout high school, college, and my beginning years in the corporate world, I instinctively found every shortcut, trick, and tip to get things done faster and with less effort. That’s when I discovered Real Estate, and began plotting the shortest path between the life I had and the life of freedom I wanted.

I am not rich by the worlds standards, I don’t drive a million dollar car, live in a million dollar house, or have a million in the bank (yet). But four years later, I now sleep-in in the morning when I desire. I vacation when I want and where I want. I spend my days working to better my life and the life of those around me, rather than a multinational corporation that exists for the benefit of the shareholders. I am living the life that I want to live. This blog, my friends, is dedicated to teaching you how to do the same, using real estate to fire your boss, fund your adventures, and secure your future.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.