ABOUT THE AUTHOR
PERSONAL EXPERIENCES: ----I have been investing in the real estate for the last 35 years and have lived the life of a rich person. I have lived in the best homes and they have appreciated in value when I sold these houses. Whatever I have paid in the shape of mortgage, interest, and insurance, I got it back as it appreciated so much in value.
In India while I was studying for my undergrad in Finance at Delhi University I started a private school at age of 20. I used to tutor high school students and make money to support myself . I decided to rent a place where I could hire other teachers and teach students. With the help of my parents I leased a building with an option to buy it from the Government at a very nominal rent to run my first school. Government at that time wanted to help business people so they leased that building for lot less then going rates. My first school became profitable in four months. I opened few more schools and they all were making little bit money. My parents and family joined me in managing those schools and we had close to five hundred students and forty people working. We are still running those schools and the real estate worth of those schools is close to few million dollars. Once I sell my share in those properties I have decided to give it to charity.
While I was running schools I had a friend who was an exporter of garments from India and was looking for someone to travel on his behalf to book orders for his export company in Europe. He agreed to pay my ticket to Europe and very little expenses for 15 days which were just enough to buy euro rail ticket as I had to move from city to city. I had to manage to stay at youth hostels, friends, relatives, or real inexpensive motels. After travelling Scandinavia, Germany, Belgium, Holland I ended up in London and stayed with my uncle for three months who found me an odd job with one of his friend which gave me some money to travel more. I got enough orders for export and my friend who had paid my trip to Europe was happy as he got some good contacts and made some money with those orders. I returned to India after six months as I was home sick and did not like Europe too much.
I met my wife Kusum who at that time was living in Canada. In October 1974 after getting married to my wife I decided to move to Canada. My wife Kusum had a teaching good paying job in those times. In Canada with no money in pocket I could not start my own business right away. We both saved $6000 by the end of 1975 and put a down payment of $3000 and bought three bed room house for $26000.00. Banks gave us a line of credit for $5000. In the year 1975 with that money I started a small clothing store in a very bad mall. However I was able to survive as Kusum had a good job and with one study income coming we were able to pay our bills and still save some money. As I had experience in garment export I started importing readymade garments from India, Pakistan and China. I was wholesaling this material to other stores. My company became very profitable in no time and I had close to five hundred thousand dollars of inventory and accounts receivable within two years. Clothing business had a very good cash flow.
Montreal had a big depression in the real estate market around 1978. I bought my first commercial building in 1978 in the poor area of midtown Montreal. The property had two shops on the ground floor and a rooming house on the top two floors and six one bedroom apartments on the back of the building, which were very old and needed renovation before leasing them. The guy who sold me the property was fed up with the rooming house which was not making money but rather losing money, and the apartments in the back were more of a nuisance because they were old and only three out of six were leased. It was winter and apartments which were empty they were not heated and some pipes had busted because of freezing. Few tenants also were not paying rents and landlord was not taking care of few small repairs which were needed. The stores were leased out at a very low rent, although their leases were expiring and the rents could be increased in the near future. The building was not making any money but somebody had to take care of the tenants' headaches. The landlord who owned the building was trying to do everything himself as he did not trust any one . As he had another retail business to run, he could not take care of the building. This landlord was also of the nature that he had to do everything himself so he was tired and as he could not do everything himself he wanted to sell the building and get out of the building.
This landlord sold me this building for $115,000 with the $25,000 down payment. I did not want to take out more than $25000.00 from my business to buy this building. The bank only gave $65,000 loan as the building did not have any revenue. Now where did I find another $25,000 plus closing costs to buy the building? I asked the landlord to give me a second mortgage for $27000 at 17% and I agreed to pay him back the money with interest after 3 years. If I did not pay him, I will lose my $25,000 which I had given him so he agreed to give me second mortgage and I became owner of the building.
As I had a very good cash flow from my clothing business so after buying the building within a year I renovated and converted rooming house into four studios and leased them for $600 a month each. I also renovated three apartments in the back building which were empty and leased them at $325 each. After 18 months when one of the store lease came for renewal I leased it for $1800.00 a month old rent was $1000.00 a month. After two years building had close to $72000.00 of gross rental with a net rental of close to $56000.00. Bank appraised the building for $55000.00 and lent me $420000.00.
Now I had close to $300000.00 after I had paid all of my debts. Over a period of next two years with this $300000.00 I bought eight run down commercial buildings. Most of these buildings were bought at less than half price as there was a recession in the real estate market. Because of depression in the real estate market most of these buildings had no rents coming from their commercials stores which were on the ground floor. I opened my own retail clothing stores in those buildings wherever I had an empty store. Some of my stores were making profits lot more in excess of my interest mortgage payments and some of them were making enough money to pay at least interest payments on buildings. Some of these stores I leased them wherever I was able to lease them to other people at lower then marking rents. I could afford to rent them at lower rents as I had bought these buildings at much lower price. Where ever it was necessary I also did some minor face lifting and renovation to those units in the building which were vacant so that they can look better and then it was easy to rent them.
My import business was doing extremely well. Within three years I had lot of cash flow from my buildings as they were more than 90% leased. As I had good cash flow from my clothing as well as real estate business banks were willing to lend close to 90% loan to the value of new appraisals on these renovated and leased buildings. Over a period of next five years I was able to raise close to $ 2 million of new money by borrowing against these buildings. I kept on buying more commercial buildings which were empty and needed new faces and tenants. I only bought these buildings from people who were distressed and were willing to sell them with my conditions. I kept on refinancing my existing buildings and buying new buildings and also started buying raw land with that money. Within 15 years I had over $30 million dollar of commercial properties, agricultural, residential and commercial lands and $10 million dollar of borrowing. Five million of this borrowing was done to buy and speculate on land.
My down fall and blunders:
I decided to make quick money. I had bought few lands and flipped them with as good profit very fast. Land buying was an easy business as we did not have to worry about renovating and leasing of properties and was a much easier business. But lands did not have any cash flow and banks did not want to lend or in some case lend only fifty percent to the value of purchase price. Interest rates on borrowing against these lands was close to three percent higher than the borrowing against commercial properties. Banks will also charge close to another three percent as closing costs when they were lending money against these lands. Banks have a bigger risk when they lend money against the land so they charge much heavy interest rates.
I started raising money and bought close to nine million dollar of lands. I over expanded very fast. I started selling my commercial income producing properties and started buying land thinking that I can sell them and make faster money. I did not study the areas well, There were no new jobs created in the area rather some jobs had moved out. There were hardly any new homes built . I had no experience in the land development. In some cases cities already had lot of land already developed and local politicians were friends with existing developers and did not want any new developed land. To develop land it is important to be friend with the cities and local politicians. If you don’t know and are not friends with local politicians and city officials then at any time when you will go to city for land developments then they will not let you develop land and will put all kind of restrictions. It is also very important to hire good engineers and professionals who specialize in developing land who already are working with the city and know the officials of different Governments like planning and zoning, environments etc. Without having a good team to work it can take years to develop land.
In Canada Government had increased prime rates to slow down the growth in economy and inflation. There was a big recession in the real estate and in general all over market had no money and because of lot of bankruptcies properties became empty and there was no buyers for land as demand had completely dried up and people were moving out of province because of political reasons. I kept on borrowing new money at fluctuating heavy interest rates which went up to 17 % when Government started increasing prime rates. When you borrow money on land banks also charge higher interest rates and they also charge heavy lending fees and closings costs. I also end up giving them our personal guarantees and cross collaterals on our other properties. Most of the banks don’t lend money on land as it does not have any cash flow. When the development stops for many years and there is no demand for land then prices of lands don’t go up and you still have to pay interest on your borrowing and taxes. So don’t borrow money and invest in land for speculative purposes if you are not absolute positive that development will continue plus you are ready to develop it right away. If you have your own money in savings which you don’t need right away so that if values of land don’t go up then you don’t have to pay interest and capital to the bank you can speculate on bank. Land does not need any management it can be very good for investment if you have extra money lying in low interest bearing savings account which you don’t need right away a new jobs come in your area where you have land.
Province of Quebec which is a French speaking province wanted to separate from rest of Canada so lot of English Canadians and English speaking population started moving out of Quebec. All the big company head offices had started moving out of Montreal and most of them they moved to Toronto and to Calgary where lot of new jobs were created in the oil drilling and Vancouver. Toronto, Vancouver, Calgary started booming as most of Quebec Head Offices moved to Toronto and other cities. No one was investing in Montreal. Lot of people came from Hong Kong when England was giving Hong Kong back to China as it was easy to get emigration in Quebec then rest of Canada. But most of these people from Hong Kong once they got their emigration they moved out of Quebec and left for Toronto or Vancouver. Quebec in Canada became the worst place to invest in the real estate. French Canadians had such a hating and separatist attitude that English people had very hard time in living in Quebec. French Canadian Government policies were not favorable for any new investments and even existing businesses were moving out. Land values had dropped and did not go up for next ten years. Rents dropped down between 1987 and 1997 and Government was broke so they heavily taxed people and property taxes went up by more than double in some cases. As there was no demand we ended up losing properties as we could not pay property taxes and State taxes on Capital to the Quebec which was a tax on borrowing.
I had land for 600 homes in Quebec .I realized that Quebec will not have new industries and high unemployment rates and there was no way to make any money in French dominated Quebec areas. Then in 1990 I decided to move to USA. I had never thought that I will lose everything in Quebec in the next coming years. I kept on paying interest and taxes and was not able to sell any land in Quebec. We lost most of our assets in Montreal like lot of our other friends in the next many years in Quebec.
One of my biggest mistake was that I sold most of my commercial good income producing properties which were in Montreal paid lot of capital gain taxes which in some cases took away more than 35% of profits and invested money in land in French dominated areas of Quebec where there was no growth and jobs were disappearing.
I came to retire in Florida, but I ended up working again. I had brought close to a million dollar to invest in Florida. I bought my own personal house from a bank. Contractor had borrowed money and had left this home unfinished. I bought the house close to $100000.less then the market value of homes in that area. I also bought few free standing commercial buildings as well as one run down shopping center. Free standing buildings were empty and bought them from people who were living out of town or in an auction. These were distressed properties and I opened my own floor covering stores in them. Within few years I was able to acquire few more commercial and industrial properties which were empty when I bought them and then I renovated them with a very small amount and leased them. Now most of commercial buildings we own either they are now leased out to other tenants or we have our own stores in them. But all these properties have a very good cash flow and have appreciated in value by more than three to six times in the period of fifteen years. We again have built back multi million dollars of equity in our real estate and businesses. In Quebec also prices of land has gone up and overall Canadian Economy is doing much better. Canadian Dollar has become very strong. I will soon starting subdividing those lands and at least get all my investment back with some profits. Remember basic principal is real estate always goes up in value it may take years but if you have holding capacity you will always make money
James------- met this new girl, fell in love with her, and they went on a pre-honeymoon trip, because they were thinking of getting married, so they decided before they get married, why not take a trip? The trip resulted in separation within 30 days after the trip. The reason was simple. James did not know how to manage his finances. As James did not have any money, he was a fresh graduate from UCF, very brilliant, both parents were supporting him while he was studying, and now, parents also did not have any money, plus he had finished his studies, so he had to stand on his own 2 feet and learn how to live. He did find a decent job. But as he did not know how to manage his finances, it put him behind many years as he lost his credit and could not borrow anymore. He had so much of old debt which he had taken while going to school, plus new debt of credit card payments finished his beautiful career because he kept on getting deeper in debt and eventually declared bankruptcy which means he had to work, work, work, and he could not make his money work for him for the next few years. Credit cards ruined his life. Credit cards should be only for the people who have money and who have the capacity to pay. A person who is making $40,000 gross and $32,000 net should be only allowed to borrow 5% of that, which is $1,600. There should be only one credit card and not 10 credit companies offering $5,000 to $10,000 each to a fresh high school graduate who hardly has any capacity to earn and forget about saving. Credit card companies make it easy to borrow.
Jon 19 ----- years old got out of high school and had started working on odd jobs. He belonged to a good educated family, but unfortunately he got into bad company at his school and started failing in his high school. So as soon as he got out of high school he started working because he did not have good grades and had no intention or willingness to go for further studies. He is 26 years now and during the last 5 years, he had a steady job in the furniture warehouse. He makes close to $10 an hour and brings home close to $310 net pay.
He likes to smoke and drink beer and have parties. He does not want to work more than 35 hours. He has bunch of friends who are drop out from high schools and have the same habits As he does not want to take any etc. responsibilities and does not want to move to the next level at his place of work. He was offered job of sales person but did not take it as it involved working on Sundays and doing overtime, He could have made double the money by working little bit harder and smarter and could have really progressed. His friend Ronny took it who had joined the company two years latter and is now Jon’s boss. Every Sunday Jon likes to go for fishing and getting drunk.
He is sharing his apartment with his friend. He has been continuously changing apartments as they don’t pay rent and landlord sues them and throws them out. He has been sued may be four times in the court house. After when he is thrown out of his house on the street and has no place to go sometimes he ends up with his parents who are old and have hardly any room for themselves to live in their tiny apartment. He becomes a burden on them instead of any help to them. They don’t like his coming back to stay with them as he Joan then sleeps on their sofa in the living room, smokes and brings a pack of cigarette and makes his parents life miserable. As he cannot bring his friends to his parents so as he can find another friend or landlord who lets him move in by paying one week rent he moves out again. He can easily pay his rent if he can plan his expenses, but unfortunately bear and party comes first before the rent. Lot of time electricity gets disconnected and he has to wait for few days up to his next pay claque and savings to pay those bills. He has a steady income but he does not know how to budget and has habits of spending money more then what he makes. He does not have any credit cards so there is no credit. He has no plan of improving his skills or getting better education. He lives day to day. His brother who is an attorney had given him an old car will also need replacement but Jon who is now 25 has not saved any money and once that car if it will need major repair will not be able to fix it. His brother has refused to lend him any more money, because when he borrows he promises to pay him back but he never does so his brother thinks Jon is very irresponsible and will never be able to stand on his feet.
Robert, 25----- had a GED diploma. His father was a handyman. Robert used to work with his dad since he was 15, and has been a floor installer for the last 5 years. He is very good at what he does. He has a truck and a car. He loves to smoke and go out for dating every night.
Juan:-----is an electrician, makes $25 an hour, but only works when he feels like it. He is very good at his work but he keeps changing jobs every few months. He goes on fishing trips every month for 5 to 10 days at a time. He loves to drink beer.
Frank and Ronny, both 25------ are twin brothers. They both moved from New York when their dad died in a car accident at the age of 22. They rented an apartment. They both work like a team and build kitchen cabinets. They make close to $450 each. They are living in a nice apartment building and love their pool. They pay close to $1,500 a month on rent.
David, 26--------, is a computer programmer.
Ramu -------- moved to the US from India in 1974 He went to school at night and worked during the day. After 2 years, he bought the duplex he lived in from his landlord, which he was sharing with a friend. By the age of 25, he had saved $9,000. His landlord, who was an elderly person, used to live on the ground floor and Ram would help him maintain the duplex. Ramu would cut the grass sometimes in the summer for free and the landlord liked him and treated him like family.
His rent was only $250 a month and it only went up by $50 in the next 5 years. Ramu got married at the age of 25. His wife was a nurse. His friend moved out of the apartment.
One day, the landlord invited Ramu over and told him that he was thinking of moving to Florida to be with his son and that he wanted to sell the duplex, and he offered it to Ramu for $90,000. Ramu did the math and told his landlord that he only had $9,000 in his savings and banks in those times needed at least 20% down payment which is $1,800 plus closing costs so he was short by $11,000. The landlord knew that Ramu was a smart and honest kid who knew how to manage his funds. He told Ramu that he will lend him the money to close the deal, but he will take a second mortgage on the home for a period of 3 years. He will only charge 7% interest and that will become due at the end when his mortgage is due which means at the end of 3 years he will pay him back the $11,000 loan money plus $2,310 interest. Ramu did the math on $72,000 which he was going to borrow from the bank. His interest and capital payment was going to be $400 a month. His taxes, which were roughly $1,800 a year would be $400 a month plus his maintenance would be $50 a month. His insurance would be $60 a month. So if he would rent out the top apartment where he was living for $300 a month, then he can easily pay his mortgage and other expenses because he was paying $300 rent to his landlord for his apartment.
He may run short of money here and there, but now because he was married and his wife was working, they had enough income to support these expenses, plus he realized that within 3 years they would have enough money to pay back the landlord. As a matter of fact they could pay him back within one year. So he negotiated another deal that within one year, if he pays back his landlord all the money that he owes from the date of closing that he will not be charged interest. The landlord agreed to the deal as his place was free and clear, so he took a second mortgage on the building and Ramu became the owner of the duplex in 30 days. Now, after signing the contract with the owner to buy the building, Ramu put a side outside to rent out the top portion of his duplex. He also looked in the neighborhood to find out what other people were charging for the same kind of facility. He was surprised that apartments were going for $400 and in some cases they were going as much as $450 a month if they were furnished and they all asked for the first and last months' rent. Apartments were very close to a university, so there was a demand from university students. This was a big duplex and had 3 bedrooms. Ramu decided to rent out these 3 rooms to individual students for $175 a room. The apartment had an old fridge and stove and washer and dryer, which the landlord was not going to take with him, so Ramu decided to buy the entire landlord's furniture, including the beds and the sofa for $2,000. Ramu told the landlord to increase the second mortgage from $11,000 to $13,000. The landlord was happy to get rid of his old things which he could not have taken with him. He could have made the same amount of money if he had sold them one by one. Ramu got a beautiful furnished apartment with window coverings, which he will have no problem renting out. He went out to the university and put up an ad on the bulletin board for leasing the rooms and in no time got responses from 3 good students who were majoring in medicine. It was their first year in college and they were all good friends. They gave Ramu post-dated checks for the month of June rent.
Ramu became a landlord at the age of 25. He came to this country from India at the age of 20 with a high school diploma and a year of college. He started working at a mattress store as an assistant manager and shipper. His job was to lift mattresses when the new shipment arrived in a trailer, and to put them in a customer's truck when they were sold. He was tall and skinny, but he was physically strong and did not mind lifting mattresses all day long. He always worked with a smile on his face. He went to school in the evening and was able to get a scholarship because he was brilliant in his studies. When the manager of the store quit, the owner decided to make him manager and he got a raise within 8 months and had 3 people working under him. He finished his undergraduate degree in 5 years. It took him longer to get his degree because he could not take too many credits as he was working during the day. Before he got his degree, he was a landlord also and was married. He doubled the sale in his store within a year because he was very nice to his customers. He trained his staff and motivated them to learn the business. His store became the best producer in his region. His company wanted to promote him to be the general manager of 10 stores but he refused to do that because he knew it will be too demanding and he won't be able to finish his studies and take care of his family and tenants.
After 2 months, when Ramu was a landlord, one of his neighbors approached him and asked if he could rent out his garage to him for storage and wood shop for $100 a month. Ramu walked through the garage with his neighbor and decided to rent it out to him. He had an old lawn mower which he did not need because he had hired a landscaping company to maintain his lawn for $25 a month for twice a month. He went to the Home Depot and bought an 8' X 8’ shed for $250 and took half a day to assemble it and in that he could store all his tools and he rented out his garage to his neighbor for $100 a month. Ramu was now getting $175x3=$525 from the duplex plus $100 from the garage--- a total of $625 a month. Ramu's total expenses were $660 a month and he was making $625 a month in rentals. He noticed that he was living for free within 3 months as his tenants were paying rent. Now, if he had done the same thing that he did with stairs he can put $475 of profits in his pocket. Ramu and his wife were making close to $3,500 a month. After taxes, they were bringing in $2,800, out of which they were saving $1,800 a month--- that was in 1978. They hardly went out to eat. They were both very fond of cooking, and like any other Indian, they were very fond of how good chicken curry tasted. They bought one old Lincoln car for $1,000. It was a really old model, but it ran like new and took them wherever they wanted to go. Ramu's wife used to work in the downtown area. As their duplex was close to the train stop, she always took the train to and from work, as she was used to it, and it was cheaper and faster and she never had to worry about parking. Groceries, in those days, only cost $240 a month and they could cook only the best food. Gas was only $0.99 a gallon and it only cost the $120 a month for gas and train tickets. Their electricity and water bills were $90 a month and $30 on fast food, $50 on a party where they will have a small get-together with friends; $50 on clothing, and $140 on other miscellaneous things.
Ramu also noticed that there were 6 other duplexes in the same neighborhood which had sale signs. It was a 30-year old neighborhood and had a hundred duplexes with a 3-mile radius of the university, and these places were usually rented by students. Ramu had a degree by now and was promoted to the managerial position of his company. He could have made $70,000 a year at some other place but he decided to stick with his old company for $35,000 because it was a more secure job. He agreed to give them 35 hours a week on an average but he had flexibility. Although he was working for this company, he was his own boss. One time the company opened a new store and he ended up working 55 hours so the company gave him a week off. Ramu will go around his neighborhood and call agents on different duplexes, and visit them after work for one hour.
He had found 2 more duplexes which he could buy on the same terms and conditions as the one he had now. One was a little in rough shape, but was $10,000 cheaper, another one was in much better condition but was $10,000 more. Ramu already had his duplex for 10 months and had saved another $15,000 in the bank. He had become good friends with his bank manager. He told the bank manager how he was living free and that he has degree in finance. He also told him that he had to pay back his landlord what he owed, which was due in 3 months. Banks always like to lend when they feel that their money is safe and the person has a regular job and a good credit. So the bank manager suggested that maybe he could give him a home equity line of credit which is at 7% and he should be able to give him close to $48,000 on his duplex. It will not cost him anything with the exception of the new appraisal fee which was $250 plus $200 in dock stamps. But he had to back his landlord's $13,200 once he gets that money. Once Ramu got $48,000 on his duplex Ramu paid back $13,200 to his landlord.
Now he was left with $34,800 plus $15,000 which he had saved, a total of $49,800 which he could put as a down payment on the duplexes he wanted to buy. Now, Ramu had so much money and was feeling rich. His wife suggested that maybe they should buy a new car which will only cost them $16,000. But Ramu did not agree to that. He first wanted to make money and then spend money. He wanted his money and leverage of money to work for him. Ramu was spending a lot of time on the weekends and evenings studying different homes which were on sale in the area. He also noticed that some new duplexes were built in the suburbs which were 15 miles further. They were beautiful but they were sold for $180,000 and were only leasing for $950 a unit. They were new but it did not make a sound investment. Ramu realized that if he bought one of the apartments and leased it to the tenants he will have to come up with $800 out of his pockets for his mortgage. Insurance and taxes were all double than what he was paying but rents were just a little bit more. The apartments were beautiful if you were going to live in them. But then there was no train going to them , so you will need another car which means an additional expense. In the meantime, while Ramu was looking, he had become good friends with some brokers who were working in that area. One broker brought him a deal in which one guy had 6 duplexes and he fall sick which he will like to sell in one shot, possibly for $90,000 each. This seller was an investor and had some other bigger interests and wanted to get out of the duplex rental business when he got sick. Ramu made him an offer on all of these units for $540,000 and he told the seller that he will put $40,000 down and get the financing from the bank. Whatever financing he can get from the bank, he will take it and the balance of whatever he will be missing, the seller will give him a second mortgage for a period of 3 years at 6%. The seller agreed to do that as he was a very rich man and as he noticed Ramu was a smart young man and had a smart wife and they both made good money and he did not feel that he will have a hard time getting the second mortgage. Ramu was able to get an 80% loan to the value of the apartments from his bank which means he needed $18,000 per apartment with $108,000 of total plus $13,500 for closing costs. He had $40,000 which he gave to the seller along with $94,500 from second mortgage which was close to $15,800 each on every apartment. Now Ramu had 12 new units, 10 of them were leased at $350 a month. As each duplex had 2 units, his total income was $700 from each duplex. His mortgage interest, insurance, and other expenses were just being covered by his rentals. He furnished the other 2 units and this time he leased each room for $200 each, and as soon as the leases expired he will convert them into student rentals. At the end of 3 years each duplex was bringing him close to $5,000 a month. Ramu had 7 duplexes with $3,500 a month rent coming up in his pocket.
Mitchell---------, who is single, 40 years old, has a degree in marketing, and is, making $20 an hour, is always complaining that he is not making enough money and cannot pay his bills. His problem is simple.
When he had joined me, he was in a debt of $43,000 from different credit card companies. I asked him, “How did you get into that credit card debt?” and he said, “It's a long story.
So I asked, “Tell me, what your long story is?”
“I just got divorced 6 months ago. Two years ago when I got married, I threw a big party, then went for our big honeymoon for 15 days, and then I bought another big fancy diamond ring for my wife, and so on. I had saved close to $28,000 when I got married so that is all gone, and now I am in debt for $43,000. Si I basically spent over $75,000 in the last 2 years on top of my household expenses.”
I asked him, “What were your household expenses?”
His reply came with a smile. “We paid $1,800 a month in rent for a big downtown condominium. We had 2 leased cars for $700 a mo nth. We bought our furniture, appliances, 3 TVs, fridge, stove, washer, dryer, dishwasher, and other miscellaneous items on Wells-Fargo credit cards which was another $900 a month. Insurance was another $700 a month. When our baby was born, we did not have medical insurance, so we were on a payment plan with the hospital otherwise collection agencies and insurance companies would be on our heads.”
Mitchell then explains that his wife was working for a Marketing company and selling advertising signs and also making close to $50,000 a year. “We both were bringing in close to $65,000 after taxes, which were not bad. But what happened after 11 months of marriage, she got pregnant, and then after 5 months, she could not work as she had to be in the car 7 hours a day showing billboards, so she quit her job. Now, with one job, I am behind in all my bills. The only alternative I have is to go bankrupt.”
I hear these stories all day every day. How our young generation who is given credit cards the moment they come out of college spend the money on nonsense. Somehow, credit card companies, car dealers, and a lot of these companies which give loans have your data and they know how much money you will be making when you will come out of college. They will lend you money so that you will be their slave all your life and work for them instead of working for yourself.
My employee Mitchell, instead of spending lavishly on the honeymoon should have put his savings in buying a starter house which would have cost him only 1/3 of what he is paying now on rent. He should have bought 2 two-year old cars with 1/3 of loan payments and insurance. He should have also bought some health insurance policy when he knew he was going to have a baby. They could have saved $40,000, which would have been a good cushion for 3 years if the wife could not work at all. You do not need 2 cars if you are staying home. Most of the people want 2 cars. Why do you need another car?
Your wife needs a car to do groceries? Why can't she wait until you got home? Most of the Europeans as well as the Asians don't have cars for each and every member of their families! Here, even if people don't need and cannot afford a car, they have to have a car, by borrowing more money and putting themselves in debt.
An average car depreciation, insurance, and fuel costs $600 a month if it is standing in front of your garage. If that money is saved, this is what your savings are going to be.
Johnny-------- who lived in Sanford, FL, had interests in raising horses and bought a 90-year old farm house which was on 5 acres of land in the year 1988 . He bought the house for $180,000 and gave the owner $8,000 and his gold Rolex watch which was worth $5,000 and the owner who knew Johnson's father sold the land and gave Johnson 5 years to pay. The only thing that Johnson had to pay was 6% interest per year. As one developer accumulated land on both sided of Johnson's property, he needed Johnson's land and he paid him $400,000 after 3 years.
Johnny made a profit of $220,000 and bought a big home for $7,00,000 in Heathrow fl. thinking that he could flip it immediately with a big profit.
The market went down and then stayed flat for 5 years so Johnson could not sell his house fast enough and did not have the money to pay mortgage payments at end . Unfortunately he lost his job after a year and could not get find another job for a period of 6 months. He did not have enough savings to support himself and the interest payments on the house.
After six months when he had bought the house he could have sold it for $650000. But he refused to sell it and take a loss thinking that he will be able to make money if he had kept it. If he had sold it that time he could have still saved his $140000 of his money which he had put as a down payment after deducting his carrying cost. Instead of doing that after 6 months he borrowed $50000 on his home equity line further sinking himself in debt.
After a year he had an offer of $585000. He still did not sell it. He could have still walked out with $40000 and saved his credit. After two years he could not sell his home even for the amount of mortgage he owned on the house. After two years bank had started foreclosure proceedings. He got an offer of $50000 below what he owed to the bank, he should have negotiated with the bank on a short sale and may be saved his credit, He kept on living in the house till the time court forced him to leave the house, Now he had a job but now he could not buy the house as he did not have any credit left.
Johnny should have bought another farm which was available 3 miles further down and had a small home for $300,000. If he had done that he did not have any mortgage to pay. He could have worked only two days a week and could have fun for the rest of his life. Sometimes people make one good move in their whole life time and have a very comfortable life all their life. Jim had bought that land and sold it to a developer for $900,000 in the year 2005. This developer took an option to buy this land for nine months with a small deposit from Jim bought and further subdivided land into a small residential subdivision of 35 houses and made $300000 in just dividing the land and sold the whole subdivision on paper to a developer.
James-------- who used to work in my IT department, a fresh graduate of UCF in the IT field, extremely intelligent, but did not know how to manage his finances. He spent thousands of dollars just to take a trip to Bahamas with his girlfriend. He had a few credit cards, so they spent one week in a 5-star hotel, paid $300 or so on dinners and they gambled in casinos thinking they can get their money back. I have seen my friend Robert making more than 4 times of what he used to make 5 years ago. They have a 10 times bigger house, from an old Cadillac Seville to a brand new 7 Series BMW, from cooking at home to fancier restaurants, cruise vacations, expensive jewelry, etc. Although we know their income has gone up by 4 times, their lifestyle has gone up by 10 times. Truth of the fact is that as income has gone higher, banks have given them higher credit lines. They have borrowed money to buy most of their things. They were more or less debt free five years ago. They had a very small house which they had bought 15 years ago, which they sold for $250,000 and put $150,000 of that money to buy a million dollar home and spent the balance to furnish it. They leased their new three BMW cars, and so on.
Before, we had seen this family going to church together every Sunday. Now the husband is traveling at least 15 days in a month. Before, the wife was at home. Now the wife is working also and the kids go to the babysitter and she picks them up when she comes back from work. The family, instead of saving money, decided to spend more than what they were making. Is this the new American Dream we have?
As we were friends, one day, my friend Robert started telling me that his house has gone up by $200,000 more than what he paid, he justified his buying a bigger home on mortgage than what he can afford.
Then in the year 2007, the real estate bubble burst. Prices of the houses went down instead of going up. Mr. Robert could not sell the house for even $500,000. He did not want to sell at that price, because he was losing money, but on the other hand, he was loaded with debt and every day, his load of debt was becoming bigger. After holding it for 2 years, he lost everything. Imagine if he had saved the money that he was making and had invested it in something that was income-producing, he could have had total financial independence.
Most Americans don't have any savings. They are living hand to mouth. A lot of people who had some savings as equity in the value of their homes also went ahead and borrowed money against the home equity lines and renovated their homes. They are now finding out a bigger debt load and it is hard to pay interest on their new debts. These kinds of debts that we raise make us slaves and we have to work all our lives to pay these debts.
Alexander and Nancy:----------bought his first home when he was 26 years old. He and his wife Nancy were both working. Alexander was finance major. He was dating Nancy for the last 3 years and finally last year they got married. They both came from simple middle class families and both their parents were living 15 miles from them and had their own homes. They were by no means rich but a moderate family. Alexander and Nancy both had saved close to $16,000. Nancy did not want to have children until the time they had their own house, so they decided to buy their first home for $75,000 in 1981. It was a 2-year old house in a good neighborhood. It took them 5 months to buy that home. Every weekend after church they would go and search for homes. Many times they were just very close to making an offer but they backed out as they were scared that they were overpaying for the home. Houses in that neighborhood had not gone up in value for the last 3 years. They had no intention of selling that house immediately but still they wanted a good deal as well as the home which they liked them also did not want a very old home because the both did not know how to change the light bulb even. Alexander was happy that he did not wait further in buying that home. Although the housing market was still weak, there was less and less supply of homes in that area. After a year and a half of buying that house, they had a little girl and they named her Julie. Nancy went back to work at her office after 3 months, and Alexander's or her parents would babysit Julie. Then the government decided to build an airport. This had been in plan for the last 8 years. The government had already bought the land, and all the engineering plans on the airport had been done. People who will be working on this multi-million dollar construction of the airport needed a place to live so the demand of homes really went up. All the land around the airport also doubled in value, so prices of existing homes in that area also skyrocketed. It took them 3 years to finish the airport. While the airport was being built, two big hotels as well as five small motels were also being built. Every small fast-food chain restaurant and small malls also sprouted up like mushrooms within a period of 3 years. The airport authority had started hiring people who will be working at the airport which was going to be opened in 3 months. Julie was now 3 ½ years old. Alexander's neighbor Robert decided to sell his house for a crazy price of $240,000. To his surprise he got an offer of $220,000. He counter-offered it back for $225,000 and told them he won't be able to move out in 90 days. He wanted to give himself 90 days to find another house. During the time he will stay he agreed to give the buyer $1,500 a month rental and he could leave anytime within a month's notice. In 30 days, the house was sold. Robert owed only $57,000 on his old home. So after paying his real estate agent, with whom he had negotiated 3% commission Alexender had $158,000 in his pocket., plus he had saved close to $60,000 in the last three years plus he put some money in his 401K plan. Now Robert could afford to pay close to $215,000 for his new house. Alexander and Nancy always knew their home was the best and safest investment they could do. Nancy was an accountant by profession, who always wanted to save taxes. She always used to tell people that we are all working to build some equity. But as soon as you make $1,000, Uncle Sam takes away $350 so you are left with only $650. Now, if you invest in your own house and do not sell it within 2 years, if you are married, you can have up to $500,000 tax free. So by selling their last home they made $158,000 of profits on which they did not have to pay any taxes because it was profit made on the sale of their personal home. If it was a regular income to save $158,000 they had to pay close to 30% in income taxes. It is amazing that their original down payment of $16,000 brought them $221,200 of profits in 5 years. Even after Alexander and Nancy bought their home, they were always interested in looking at the new developments and open homes around their area and inquiring about their prices and so on. They always knew because of the leverage and tax benefits, there was no better investment than buying a home... Now, it was the perfect time for them to move. They wanted to move to a better area where they had a better elementary school for their daughter. They did find another home in a big development which was very close to where Nancy worked but was 26 miles away from Alexander's place of work. I was only 10 miles away from their parents. Now they did want to use all their savings of $158,000 in their house, plus $60,000 of savings gave them $218,000 which they could put towards a down payment. They both decided to buy a real big house as they did not have time for cleaning and with one kid; it was okay to stay within 3,500 square feet of livable space. They were able to find an excellent deal on a house which was 2800 square feet and was in a very good school area. The elementary school was within a walking distance. The home went for $740,000 but it was in a very nice neighborhood... It needed new kitchen cabinets and flooring. Similar houses in this area were selling for $10,00,000. This house needed $50000. of TLC to look like a $10.00,000 home. As the owners of the house had moved out 3 months ago, it made the home look run down from outside curb appeal. Alexander decided to do repairs to the home. He bought it for $740,000 at 5% interest per year and paid 20% down payment. He hired most of sub contractors himself to keep his fixing costs low. He had 2 months to move to this new house. He was able to finish all his renovations in 45 days and moved his family to the new house... Alexander and Nancy both knew that Houses, on an average, go up by 10% in value if you are in the right area... Alexander and Nancy sold that house after 2 years for $1.2 million. Alexander had become the general manager of his export company. Nancy had become a partner in her CPA firm. Their income had doubled in the last 5 years. They were both making close to $320,000 a year. They bought a new condo in Manhattan for $1.8 million, which was sold for close to $2.5 million when real estate prices were inflated. At least twice a month they will go around and check values of the real estate. They had one principle that they will never buy any property if they could not buy it at 70cents to 80cents on the dollar, so more or less, they will make 20% profit at the time of buying. This needed a little bit of understanding of real estate and finding the best deal. However, they knew the secret of real estate, which is on an average, real estate goes up by 7% over a period of time, and if the prices of real estate have come down this is the best time to buy as these prices will go up in value again within five years.. On this gain they are not paying any income taxes as this was their own home and they never sold it before 2 years. They always looked at areas which had an upside potential. Within 10 years since they had bought their first property they had built equity of $1.5 million dollars in their real estate property plus they had used their property to live,.
Alexander and Nancy----- were now tired although they were making good money and had a good strategy on the real estate. Their taxes, insurance and mortgage interest and condo fees were still pretty high, plus they had a new baby and wanted to spend more time with him. So they decided to sell their condo for $2.7 million, they took their equity and moved back to the suburbs again in a $7500,000 home bought it all cash and invested the rest of the money in buying a shopping strip for $1.5 million with a good income which had a good cash flow of $150,000 a year. Now they had 3 kids. Nancy, at the age of 42, now was working part time from her home and giving her kids loving tender care. With the income from shopping center and their incomes. They had a beautiful family and comfortable life plus lot of money to send kids to good schools. They were smart to pull out their equity from house which had no income and they invested it in shopping center which had an excellent cash flow. Shopping center goes up in value and rental which means they will have good retirement money to live. Unfortunately lot of people don’t think that way once the y will keep on buying expensive homes and expensive cars and will sink themselves in debt. Husband and wife both will work 60 hours to pay their big expensive mortgages and will not have either kids or they will be sitting with baby sitters as parents have to work to pay for their lifestyles.
Robert--------- who was Alexander's close friend. Robert was senior to him at his office. He was living in a small condo in Manhattan with his wife when Alexander bought his first house. He was always scared to buy the loft in which he was living, which was $152,000 and worth $1.4 million after 10 years. Robert always thought that real estate in NY was too expensive and could not go higher than that. Robert is now paying $2,800 rent per month in a lousy loft and Alexander built more than $1.5 million of equity and is living in a nice place. Robert was always scared to buy real estate. He always thought it would go down. If he had invested in his own house and paid rent to himself, he could have easily at least owned his own apartment and built good equity. He was making more money than Alexander as far as his pay was concerned. The only difference was, he was a tenant and never understood how real estate always goes up in big cities and how leverage and inflation can help make money in real estate. You don’t have to pay taxes on real estate profits at his own house when you sell it at a profit. His friend Alexander also could deduct all his interest and few other expenses from his income taxes which means bigger savings.
Questions and answer between John and Ashok
Q: John: what do you think about borrowing , credit cards and leveraging:
A:Ashok Sometime people get into big debts first borrowing against their credit cards and then against their home equity line of credits. People use credit cards and home equity line of credits to live on. They pay their month to month expenses by credit cards. They end up getting lot of credit cards. They borrow from one and pay off old credit card. End result is one day comes when they reach their limits and credit cards get declined and there is no way to pay debts. As interests and penalties on credit cards are very high once you get trapped heavy into credit card debt and have exhausted your all equities including your home equity line to pay off non producing debts then only alternative left is to go bankrupt and start with a new slate.
On the other hand if your credit is good and you can borrow you have tremendous power to make money, as you can jump into opportunities and use your power of debt to acquire good stocks or real estate at a fire sale price. I know people who have borrowed from credit cards as well as against their home equity lines of credits to put a down payment against investment properties which they had an opportunity to buy at much lower market value now have excellent income producing properties as well as have built lot of equity. They borrowed money as a bridge financing for few months just to acquire the asset and then refinanced it at a much lower interest rates within months. While lot of homeowners are being foreclosed on their homes because they borrowed money on non income producing big personal homes which really their income levels could not afford. On the other hand people who invested in income producing houses or apartments assets make money when people are renting then buying.
Q:John: What do you think about getting a good job and staying with it and saving money in the money savings accounts because of these uncertain economy. Or you recommend investing in stock. AIG
A: Ashok Another type of bad financial advice tells us to get a safe job, save money, buy a big house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds OR REAL ESTATE. But according to the Census Bureau, in 1999 the average U.S. income was $49,244. And in 2006, the average income declined to $48,201. This means that U.S. workers haven't had a pay raise for seven years, Plus if you had kept your money in the last ten years in a bank in a term deposits for short periods you would have less money as inflation will eat up value of your money ,so leaving money in bank’s is not a good idea.
CHAPTER-5-------- BUBBLE BURST OF REAL ESTATE
1E) Savings is an umbrella when it rains.
HOW AND WHERE TO SPEND
CHANGE YOUR THINKING: Think SAVING, NOT spending!
Get rid of your debts to have Freedom and time to live
Save in 401k
2D) BUILDING EQUITY
3B)FINDING MONEY FOR YOUR HOUSE
Leveraging 3C)MAKE MONEY WITH OTHER PEOPLE'S MONEY)
BUYING A HOUSE WITHOUT ANY DOWN PAYMENT
5A) Recessions and bubble bursts: