When you put your money into a savings account, what are you actually doing? You are not putting it under your mattress because… That’s right, it makes no interest there. And it makes the bed lumpy. You hope to make some interest at the bank, and if it gets stolen, it’s insured. You are guaranteed a certain amount of interest. There are no ifs ands or buts, they will pay you. Ahhh, guarantees.
Here’s an interesting thought. What if you could be guaranteed work, you and all your family, for your entire working life? What if, in addition, you got your room and board free? What if you could walk to your work and didn’t need to spend hours at stoplights and in rush hour traffic or sitting on a bus next to some lady with too much perfume? What if health care was provided for free? How about schooling for elementary kids and child care for while you’re at work? What kind of expenses would you have? No housing, no food, no utilities, no child care, no vehicle maintenance, no gas, and since your children were guaranteed work, no need to send them to expensive colleges. If you are thinking to yourself, “WOW! Where do I sign up?” you have just volunteered for slavery. Why was slavery abolished? Inhumane treatment? or taking away the right to choose, the right to go, be and do what you want? People are treated inhumanely now, and they take it because they’re getting paid for it. The craving for security and guarantees makes people volunteer for slavery. The general rule then is: The more safety and guarantees you have, the less you make and the less freedom you have. So if you are putting your money into a bank because it’s safe, it’s guaranteed, and it’s handy, you will make very very little money.
We went over how your house is not an asset last time. It may appreciate in value over time, but it affects your cash flow in the negative direction, not positive. Likewise, your money also is not an asset if it is not bringing in more money. When you put your money into a bank, you’re looking for passive income. Income that does not require your time and effort. It’s like passive energy, the sun comes up, your solar panels are in place, you get energy. The wind blows, your windmills turn, you get energy. Think, then, of passive income the same way. You put it in the bank, the bank uses it, and they pay you money. You invest in a company, they make money, and pay you dividends. You invest in a city, they build their roads or schools, they pay you interest on your investment. In each of these cases, you are helping a company or a governmental entity improve and make money, and in return, they return your money and a little more. In the case of the bank, you’re not investing in the bank, you’re providing money to the bank to invest in someone else’s investment. It’s 2 steps removed, which is why you don’t make much interest.
The next level is investing in your own business. Let’s look at vending machines. You find a likely place to put your vending machine. You buy stuff to stock it, then you pay some kid to stock the machine at regular intervals, and collect the quarters and dollars with very little effort. It’s not quite the hands off investing as purely passive investment mentioned above. If you were to invest $5000 into a vending machine, including stocking, you could make $15-25 in a month. You’d pay the kid about $10, and your profit would be $5-15. That doesn’t sound so good does it. But the same $5000 in the bank would earn you about $2 in a month. If you have 2 vending machines, or 5, or 8… Check out the Small Business Administration website for small franchises you can get into.
The next step up is rents. You can rent equipment, services (they call it consulting fees), or housing for example. There are obviously initial costs that need to be addressed, but once you have the initial cost, you have developed an income stream that covers those costs. This means of passive income is not for the faint of heart. One woman had 2 apartments, a duplex and a house that she rented out. Unfortunately, she had mortgages on all of them, and her own house as well. She went through a dry spell where 3 of her units were empty, and one of those had suffered significant damage by the renter. She obviously retained the damage deposit, but it wasn’t enough to cover the costs of returning the unit to a rentable condition, and the renter was not likely to pay even if directed by the court. The best strategy is to charge enough rent to cover the mortgage payment plus a little more, contribute your own money toward paying down the mortgage as quickly as possible so that the money coming in is profit. You pay off the mortgage, then you make back your personal investment which you set aside to invest in another unit. If you put 1/2 down on a unit, your mortgage payment can be 15 years or less, and the rent you charge would be as if you were paying 10 years, so you’re actually speeding up the mortgage payment and you pay only 5-7 years. For instance: If you buy a $100,000 unit on a 15 year mortgage (3.92%) you’d pay about $750/month. If you charge $750/month, and you put in $250/month, your mortgage would be paid in 10 years. How long would it take to recover the $30,000 you’ve invested? 3 years. In 5 years you’d have $50,000. You put that down on another $100,000 property, you’d only have $500 payments to cover with your $750 rent. If you accelerate the payments, without putting in your own money, you will have it paid down in 5-7 years, and making pure profit the whole time. You escalate with the amount of deposit money you acquire, and get more units so you could go from owning 1 house to owning a strip mall.
The important thing about this is when you decide you want an item or a vacation or an opportunity, you don’t go to the bank for a loan then pay for it for 30 years, you go to the bank to get a loan for an asset which pays you for as long as you own it, and use the income from the asset to pay the loan and also bring in the money to get the item, trip or opportunity.
The Master, without question, on realestate for income is Robert Kiyosaki. He has several wonderful books on the subject and also does seminars.
*Note: If you look closely at the picture, you will note that all of the shops on the bridge hang out over the water. Why would anyone build like that? They only pay tax on the part of the building that is actually “on” the bridge. This is Ponte Vecchio in Florence, Italy.