Sunday 9 August 2015

3 WONDERFUL WORDS TO AN INVESTOR: DEBT, EXPENSES, AND LOSSES?

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Can Debt, Expenses, and Losses be Good?

Absolutely! Understanding the differences between good and bad debt, good and bad expenses, and good and bad losses is what separates investors from people who gamble their money away. Now, I've given credit to others before in my posts and acknowledged that most of what I present is not original, even if presented in my own way. This post in particular is not original in any way, shape, or form. I was recently reading a book by Robert Kiyosaki titled "Rich Dad's Guide to Investing" and was struck with the truth of a few paragraphs he wrote on these differences.

Good Debt

If you don't know the difference between good and bad debt this is vital information in a nutshell: Bad debt is dangerous because a turn in the economy or market can put you in a place where you not only lose your investment, but are now in the hole. An example is purchasing a property that doesn't cash flow. If an investment doesn't cash flow and you lose your job or your life or your ability to work for any reason, the bank will foreclose on your property as soon as you stop making payments. I am excited about each and every investment that I own because I know that if I die, or lose the ability to work due to an accident or anything else, my investments will continue to pay money to my family as long as they live. Again, the key is cash flow. Good debt increases my ability to make money. If the housing market appreciates at an average of 3% per year for the next 30 years, by investment grows by much more than that because (again, only if I am cash flowing each month) I can receive around 80% of the money needed for the property from the bank in the form of debt. 80% debt allows my money to grow at a rate of 15% each year if the average appreciation is 3% for the property. To make all these numbers very simple: I purchase a 100k property and put down 20k (the bank lends me 80k). The property is worth 103k after the first year which gives me 3k on my original investment of 20k (15%). There are two important factors here:

1. Cash flow each and every month to protect my investment
2. Long term focus to smooth out the peaks and dips of a market

Good Expenses

I love certain expenses when I invest! One example of a fantastic expense is hiring the services of an expensive investment lawyer or accountant who is worth each and every penny. Why do I get excited about these expenses? Because I learn so much when I spend time with these professionals. I go into each meeting prepared with a ton of questions I want to ask and make use of every minute I have with these people. If there is a new tax law that helps me keep more money they will know about this and help me understand it as well. I can focus my time and energy on investing and spend a few hours each year with these people who supercharge my investments and money management. A good accountant or lawyer will cost a lot of money, but make me so much more than that by helping me structure my investments in ways that can save me tens or even hundreds of thousands of dollars over just a few years!

Good Losses

While I don't often come across ideas for good losses, they do in fact exist. I will provide the example that I help my partners understand each time I meet with someone new who wants to invest with me. Depreciation is a loss that puts more money into my pocket. What I choose to do with that money is fundamentally important, but the fact that realizing depreciation losses on a property puts money into my pocket today is important to understand because it can be a very, very good thing and make an enormous difference on how much my net worth increases over the next few years. Some accountants will discourage people from realizing these losses. It is important to understand when realizing these losses is a good thing and when it is a bad thing. I'll give examples:

1. If you are going to sell your property in a few years, then it may hurt you rather than help you to save this money in taxes today.

2. If you are using the money saved in taxes to purchase a new truck or big screen TV that will lose much of its value within months of the purchase, then I would strongly discourage realizing these depreciated gains

3. If, however, you are planning on keeping a property for a decent amount of time (the actual amount of time will be different depending on how much you make on your invested money that you have gained as well as your long term plans) AND you plan to reinvest the money into an asset that pays out more than taxes will hurt you.... then depreciation can make very profitable sense (pun intended). If I save $5,000 in taxes this year and use that money to invest at even a very limited rate of the 15% example above (where I purchase a property with debt), that money will double in value just over 6 years' time. If you add in the cash flow amount, the other tax savings, and the principle pay down the rate of return jumps by quite a bit again.

Summary

Be careful about the words you hear often because they tend to take on specific connotations. For example, debt, expenses, and losses can be terrifying words to most people on this planet when they think of their investments. Savvy investors realize that there is more to the puzzle than simply one view of these three words. Like many people in Canada, it terrifies me to think about government debt, mutual fund expenses, or the loss of half my investments in a large stock market crash. Unlike many people in Canada I have been blessed to learn that debt, expenses, and losses can be fantastic for me long term if I equip myself with the knowledge and team I need to make my money work hard for me rather than spinning my tires working hard for my money.



Here's to your future of risk-averse investing!

If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html