October 1993
Vol 16 No 1
Is there some magic ingredient, some mystical force that creates good fortune for some and not for others? I believe there is. That's the bad news. The good news is that it can be captured and used by anyone who wants it. What is it? Where is it? Like riding a bicycle or swimming, it's really not all that mysterious once you understand it.
Can you remember your first attempt at bike riding? How could anyone expect to balance on those two tiny treads? Yet, once done, it never posed a problem for you again. The same holds for swimming. Until you'd done it once, you sank like a stone. Once you learned how to do it, you have to work to stay under water. In both instances, nothing new was added to the ingredients other than personal confidence in your own abilities.
That's the secret success ingredient: confidence in personal ability. Look around you. Those who seem the least successful also have the lowest self esteem and belief in themselves. They uniformly refuse to invest in themselves by putting in those long hours learning and practicing until they become expert in what they attempt to do. Instead, they try to lose themselves in the mind-robbing recreational opportunities with which all of us are continuously bombarded like television, sports, alcohol and drugs. In contrast, successful people universally seem to share positive traits that lead to success. These include goal setting, diligence, prudence, balance, highly developed work and study habits, thrift, dedication, commitment, tolerance for risk taking, unshatterable confidence bordering on arrogance. This month we'll look at some of these.
YOU NEVER EXCEED YOUR EXPECTATIONS OF YOURSELF . . .
Think back over your life. Can you find any exceptions to the above statement? Over your life thus far, isn't it true that when you accomplished something it was because you set out to do something, then did whatever it required to make it happen? In real life, there are few successes without some sense of purpose and clear objectives firmly entrenched in the heart and mind of those who are achievers. So we have to start with personal expectations – goals.
I was an Eagle Scout at age 14. It required that I study and learn to do many things which I would have never done had I not set out to be an Eagle Scout. The lessons I learned and the habits I formed in pursuit of that goal are still with me, serving me everyday. It wasn't easy to work on Scouting projects after delivering newspapers over a 12 mile rural route on my bicycle, but I wanted to achieve that award badly enough to do it. That's the prime ingredient for success: DESIRE. You have to want it so badly that you can almost taste it. You have to focus every erg of your energy, every I.Q. point of mental capacity, every moment of time you can wrest from each day in pursuit of your goals. You can see that it's crucial that you set your own goals in order to be able to dedicate so much of yourself to achieving them. Here are some rules from my WINNING book.
1. Develop a positive self image. To thine own self be true.
2. Don't let anyone else keep score in your ball game – neither family nor friends.
3. Be specific. Write out the WHAT, WHEN, WHERE, HOW and WHY's.
4. Don't reveal your goals to anyone except by your achievements.
5. Arrange sub-goals in logical sequence to help you reach the next step.
6. Budget the sources of time and money needed to reach each level.
7. Set priorities and identify sacrifices you'll sustain to achieve each step.
8. Don't let short term diversions side track your efforts.
9. Don't allow others to substitute their goals for your own.
10. As you surpass each step, reward yourself to motivate your start on the next step.
There's nothing revolutionary about these rules. They've worked in one form or another in the lives of everyone who's succeeded in meeting his/her objectives. And they'll work for you too if you really apply yourself in internalizing them. But, this is only the beginning. There's more to being an achiever than merely wanting to succeed and writing down the steps as objectives. You've got to learn the territory. If you expect to become rich and famous in the world of real estate and finance, you've got to learn the financial rules of the road. When you attempt to enter the financial arena, you'll quickly discover that it really is a jungle out there. Pursuit of money is the most competitive activity in the world. I'm constantly amazed at people who actually pay money to compete at golf, handball, shooting, bridge and chess. The financial competition that I encounter on a daily basis leaves me wrung out without actually seeking out other ways in which to vent my competitive juices. You've got to stay in training every day.
THE MONEY GAME IS THE MOST COMPETITIVE SPORT OF ALL
Wealth only belongs to the person who can keep it. Like a 'jump ball' in a basketball game, it's always in contention. You can let up for just a moment and lose the ball – and the game itself – unless you're vigilant. That's the bad news. The good news is that every day you'll be able to awake to a new game that will surpass all of those feeble recreational pursuits mentioned above together. There's an old saying that more people have died of boredom than ever died of stress. I hope it's true, because you'll experience a fair degree of stress in the money game. Better learn some more rules.
1. Your word, financial integrity and credit performance – and that of the people you transact business with – are crucial to your ultimate financial success.
2. Personal ethics and values are the foundations of viable agreements between parties.
3. When dividing up profits equally, take 49% and give away 51%. You'll always find partners eager to join you in new ventures. Take 51% just once and they'll disappear.
4. A reputation for prudence and thrift is easier to maintain the one for extravagance.
5. Winners don't envy other winners, rather, they're happy to help others succeed too.
6. Intelligent people find ways to cooperate, not compete, in order to prosper.
7. You alone are responsible for your success or failure. Don't look for scapegoats.
These rules are internal maxims oriented toward your own self rather than toward others. You've got to spend some time defining the ethical framework within which you expect to operate. A decade or so ago I sat down with a famous TV real estate tape salesman who also wrote a newsletter and conducted seminars. We were comparing our objectives. He wanted to make $1,000,000 per year. I wanted to stay in the newsletter and seminar business all my life. He's filed bankruptcy since then. Since then he's acquired a fresh corporate name and reputation, and has started over.
I expect he's still making his $1,000,000 per year. I'm also still doing what I set out to do. In one sense we're both meeting our goals, but our ethical playing fields are worlds apart. Ultimately, the satisfaction you enjoy in reaching your goals will depend upon how you attained them regardless of how much money or power you acquire. The loss of self respect unethical methods cause is often reflected in the personal lives of unethical moguls. Note the incidence of divorce and chemical abuse that prevails among those who've moved too far, too fast through unethical means. To go on:
1. If 'A' will steal from 'B', he'll steal from 'C', and from thee, and from me.
2. Trust everyone, but cut the cards. Document everything to avoid 'selective' memory.
3. All the lawyers in the world can't hold a bad deal together or tear a good deal apart.
4. Profit is measured in TIME, HEALTH, SECURITY, PERSONAL FREEDOM, SATISFACTION, LIFE STYLE, CHALLENGE, PROGRESS TOWARD GOALS and finally in MONEY, after taxes.
5. When investing, look down before you look up. Weigh risk of loss compared to profit.
6. Don't let anyone influence a decision unless they too lose when they're wrong.
7. Pay yourself first out of profits, next, pay others. If you can't, change businesses.
8. You can't buy a real map to a real gold mine at a profit. Who'd sell it?
9. Success rests on patience as much as on skill, talent, nerve, energy or money.
10. Opportunity is less a matter of geography than of attitude and perception.
There are business opportunities that can be operated without credit, but they are few and far between. The real estate market is credit-driven. When mortgage interest rates are high, real estate suffers. When they're low, real estate rebounds. Residential real estate is better than commercial real estate in good times and bad. Single family residences – including mobile homes – are better than multifamily residences whether they be condominiums, townhouses, zero lot line homes or duplexes. This is because the American dream still includes a personal residence on personally owned land. You'll notice that this is reflected in the comparative availability of mortgage loans between single family houses and single family condominiums, cooperative apartments or townhouses.
The credit cycle controls market opportunities for those who rely upon institutional financing. As a result, a would be estate builder with limited capital finds him/herself only able to buy when investor mortgage loans are available. This places him/her in the most competitive sector of the market, vying with other buyers to acquire properties that can be resold or held for a profit. Demand creates a sellers' market in which everyone is demanding cash for their property. Conversely, that same person will either have to wait for a favorable credit market at the time he/she sells or compete with other sellers for those few buyers able to find credit in a buyer's market.
I've seen this credit cycle trap engulf the unwary over many years as the market forces them to pay too much in a seller's market and receive too little in a buyer's market. There's always been a simple solution that comparatively few have the patience to employ. Only buy when the seller will carry the financing! When would that be, typically? When there is no institutional credit available in the market. This places the seller at a disadvantage, because he/she is now selling in a buyer's market, competing for a buyer by offering lower prices and more advantageous terms. The buyer in this market will see a turn-around much sooner, capturing his profit in the next seller's market in cash. That's how real estate fortunes are built safely and with limited risk.
Of course, there are always going to be those who can get institutional loans even when money is tight. I recently was approached by one of these 'smooth talkers' who'd learned how to manipulate lenders to a fare thee well. His apartment renovation project carried 3 separate mortgages plus 2 personal notes for a total of well over $2,000,000 and it still lacked $500,000 from being completed. Now, he'd run out of money to continue the work or even pay the interest on his multiple loans. Why? Because he failed to analyze the credit markets. There was no money left which he could borrow on his over leveraged property. Loans were coming due. All his work and effort were going to become the property of his lenders. His projections of profits were of little use to him without cash sales, the proceeds of which, were needed to satiate his voracious lenders. He just didn't understand the rules of finance. Nor did they. Here are some:
1. Anytime that interest costs more than after tax net income + growth, you go broke.
2. Inflation provides a buffer, allowing growth to pay interest on fixed rate loans.
3. Safe leverage includes no balloon payments, no personal guarantees, and self-liquidating loans that can be repaid with net, after tax proceeds and/or rents.
4. Getting around 'due on sale' clauses robs property of marketability.
5. Non-assumable loans cause a property to lose value in a tight credit market.
6. Loan terms control property values as much as income yields and utility.
7. Loan payments control net cash flow. Loan maturities can control ultimate profits.
8. Net yield measures rent on money; conversely, net after tax rent is yield on property.
9. Good and bad leases control property values just as good and bad loans do.
10. Equity is only an illusion on poorly leveraged property that can be foreclosed.
ULTIMATELY, ALL PROPERTIES ARE ONLY WORTH THEIR DISCOUNTED CASH FLOWS . . .
Other than for personal use, why does anyone buy real estate? Pride of ownership motivates some. The desire to prevent others from using property is apparently why government buys it. But most other property is bought for development, improvement and/or resale, or for investment income – which includes eventual resale. It's odd, among the investment community, how few comprehend this. I know one person who owns over a thousand individual properties. He continues to work 7 days a week acquiring more, even though he has no use for them whatsoever. I categorize these as personal use because he's treating the whole process as a sort of personal monopoly game played just for fun.
Many others continue to buy when they'd rather be doing something else. It hasn't occurred to them that, once the game is won, they can move their investments into free and clear passive investments – net leases, mortgage paper, REITs, Options, etc. and start to really enjoy life. If one is to keep one's eye firmly on those financial goals set so long ago, they must include a no-go point to recognize when they've been fully met. This can only be established by planning the point at which properties will be converted to income, then measuring the present value of future income streams.
With a little practice, modern calculators will calculate the precise present value of one or many future income streams IF YOU CAN ESTABLISH A DISCOUNT YIELD FACTOR, a viable time frame, the inflation adjusted income per period, the amortization per period of any underlying financing, and the ultimate selling price in constant dollars. I can't!I doubt if anyone else can either, regardless what they paid for their calculators and how many schools they've attended to learn how to operate them. All a calculator can do is to manipulate the GUESSES that are entered into it.
Even mortgage amortization and interest tables are accurate only if all the premises built into the algebraic formula that they're based on are adhered to. But one day of late payments, a bank holiday in which checks aren't credited to an account, an early payment, a late charge, or a day's delay in reinvesting loan proceeds at the same rate make all calculator computations inaccurate. There are some rules of thumb that will help you make investment decisions with greater probability of success than merely using a computer program. Here are some:
1. Negative cash flow on fixed loans amounts to higher real costs, greater risk, illiquidity for high leverage, inflation hedging and increased tax benefits.
2. Anytime that real property values aren't rising at a rate high enough to offset after-tax negative cash flows, management, maintenance and inflation, you're losing.
3. A balloon payment is just a deferred down payment, deferred negative cash flow, or both. Know where the funds are coming from to pay it off before you sign the note.
4. Don't confuse NET with GROSS income. Gross pays bills. Net pays you, afterwards.
5. Budgeting is critical. YOU control your costs. OTHERS control your profits.
6. Normally, cutting costs will increase cash flow more than increasing gross profits.
PERSONAL RULES OF THRIFT AND PRUDENCE CAN SAVE YOU A FORTUNE . . .
1. Live at a profit. Never consume all you produce. Reinvest and compound the surplus.
2. Invest in your own development, then in fundamental long term trends you understand.
3. The wealth we keep working for us is what counts, not what we've made, spent, or lost.
4. Don't sacrifice long term strategy for short term tactical advantage or speculation.
5. Employ others to DO things for you, not to THINK for you or to make decisions.
6. Nobody will care for your money more than you, so learn to manage it yourself.
7. Greed speaks louder than logic. If it sounds too good to be true, it probably is.
8. Wealth is first of all HEALTH, then TIME, then COMFORT, then SECURITY, then money.
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