Real Estate Investment

Real estate investment is one of the safest investment. It is also the most popular investment option for most people. It requires huge capital to own an asset, and there are bank mortgage loans available that you can use to finance your purchase.

Image courtesy of Anoop Krishnan
at FreeDigitalPhotos.net

This makes it possible for most of us to become a real estate investor. 

It is also one of the hardest investment strategy. It requires lot of hard work to generate a net positive cash flow from your investment. Unlike stock and gold investment where you can buy the asset and forget about it for considerable amount of time for the asset to grow in value, you cannot do the same for real estate investment. Don't get me wrong, I am not saying it is bad investment in anyway. In fact it is really a great investment if you have the time, energy and passion to do the hard work. Most people glorify real estate investment, but ignore the expenses involved. I am going to do both here. So lets get started. 

In addition to hard work, there are lots of expenses to account for, not to just take care of the asset, but also to maintain your ownership even after you paid off your mortgage loan, and fully own your asset.  Let's quickly go over the expenses. Let's start with the expense that is right in front of us, it's right there in the name - real estate. The word real comes from the Spanish word 'real' - the royal (or king), and the 'estate' refers to the land or property.  In other words, everything belongs to king or in modern days The Government. So if you want to own any property, you need to pay what is called the property tax, not just at the time of purchase, but every month in order to maintain the ownership of the property. 

Now you must be wondering, how much you have to pay as property tax ?. Good question, it is usually between 1% and 1.5% of the market value of the property. To make things simpler, let's average the property tax to be 1.25%, this results in property tax of $12.50 per year, or $1.04 per month for every $1000 dollars. Let's put this in perspective, for the real estate investment worth $250,000, you have to pay $3125 per year, or $260 per month. For Californian friends living in the Bay Area, the real estate property lingers around 1+ million dollars, this translates to a property tax of $12,500 per year, or $1041 per month for every 1 million dollars. 

Next expense is the interest payment on your mortgage loan. In US, we are at a historical low rate when compared to other countries. A typical 30 year fixed mortgage loan rate ranges from 3% - 5%. Let's average to 4% APR(Annual Percentage Rate), this results in a payment of $40 per year, or $3.33 per month for every $1000 dollars of the mortgage loan. For a $200,000 mortgage loan, interest payment is $8000 per year, or $666.66 per month.

The next inevitable expense is home insurance. Typically the cost ranges between $300 and $1200 per year. Average home insurance cost for a single family home is around $750 per year.

Next major expense is towards home maintenance. It is a wide open category, but it starts with garden service, occasional plumbing or electrical issues to be taken care etc.,. For a single family independent house, the cost averages around $200 per month, or $2400 per year. 

In the case of a condo or a town house, there is no need for garden service, but it is replaced with HOA fees also called as Home Owners Association fees.  The fees depends on the community and the services offered, typically ranges between $100 and $500 per month. Let's average it to be $300 per month, or $3600 per year. HOA’s are criticized excessively for their restrictive rules and regulations on how the home owners conduct themselves and use their property. HOA is legally binding contract, and any violation of their rules and regulations will get you in trouble, so please be aware. 

Now these are the expenses that you need to pay for just owning the real estate asset. Then there is an optional management fees - If you are someone like me who prefer to hire a management company to find and service your tenants, then this will free you up from all the hard work related to servicing your tenants request. The fees usually ranges from 6% - 10% of your monthly rent, the amount is negotiable. So let's average it to be at 7% of the monthly rent for our calculation. 

Now in order to have a positive cash flow from your investment, your monthly rent should be able to cover all the above expenses and leave additional money for your savings. If you have a net positive cash flow then it is truly considered an asset, otherwise the same property becomes a liability for you to maintain. Yes it is true that you are building up your equity as you pay off the loans, but it is important to maintain a positive cash flow at all times in order to grow your investment portfolio.

Ways to Invest in Real Estate:

There are many ways to invest in real estate. The two popular ones are, direct ownership of real estate property, and the other way is to investing in REIT trust. Each has its own advantages and disadvantages in investing.

Direct Ownership : Investing in physical real estate asset can be very expensive. You need large amount of money as down payment, plus all other expenses related to owning a real estate property. The only way you can make money of this investment is by renting out this property. Now the rent amount is usually driven by the market value in neighborhood area. The prevailing market rental rate will give a good idea about your rental income even before you buy that property. Now the next question is, is it a good investment ? Most people don't think about it, but that does not mean that is the right approach. 

I use P/E ratio to determine the worthiness of the investment. Before going any further, lets understand what is P/E ratio. It is one of the most popular metric to evaluate the worthiness of a stock in the world of stock investment. P stands for purchase amount, and E stands for earnings(earnings per year). For example, let's say the real estate property you own was purchased for $240,000, and you are ready to rent it for $2000 per month. Then your P/E ratio is 10 (240,000/24,000 = 10). There is no magic number to determine the best P/E, but generally the lesser the P/E number, the more attractive is the investment.   Most real estate properties has a P/E ratio between 10 and 20. Evaluate your comfort level before proceeding with the real estate investment. 

I love P/E ratio mainly because it gives me information about how long does it take the cash flow to pay off the underlying asset. In our example scenario, P/E ratio tells me the cash flow generated by the asset pays itself off in ten years time. Now that is a good indicator to determine the attractiveness of an investment. This is true for any cash flow generating investment. 

Real estate is secure but expensive asset to hold. The reason I say it as expensive is because, even after assuming you will be renting the asset for a long time without any major gap, there are considerable amount of expenses needs to be taken care.  You will be responsible for expenses such as property tax, dwelling insurance, home maintenance such as repairs, garden service, etc. so please consider all expenses before coming to realistic conclusion on the asset investment. 

Investing in REIT : Investing in REIT takes away all the hard work and associated expenses out of the investment. There are different types of REIT investments. To know more about this investment, check out my blog about REIT.  This type of investment is similar to stock investment, so you need to know lot more about the business, its revenue/expenses, profitability, and the growth strategy before you consider investing in any REIT trust. Now that you are familiar with P/E ratio, that can be a good start but that alone is not good enough. You really need to look their past performance (ideally at least 20 year chart), and the financial numbers closely. You should also consider the dividend amount and dividend yield associated with the investment.

Note:
Dividend: It is the money( dollar amount) paid directly to the shareholders from the profit earned by the business. The payments are made at regular intervals, typically quarterly(in some cases monthly).

Dividend Yield(%): Annual dividend amount expressed as a percentage of current share price.

Investors mainly invest in REIT for three main reason, 1) investors looking for a hassle free investment and high cash flow 2) invest in real estate assets and/or mortgage loans without the hassle of any overhead expenses such as property tax, maintenance, insurance and dealing with renters issue. 3) last but not least, it is a liquid asset. It can be sold in the market place and you can get your money back almost immediately.

Benefits of Owning a Real Estate Investment:

Use of leverage:  The use of leverage is what attracts the most investors to real estate investment. Let's say you are interested in buying a real estate asset that has a P/E potential of 10.  You know it's a great investment, but you don't have enough money to buy it.  That's when you use debt by taking a mortgage loan against your property. This way you will shell out at a maximum of only 20% of the total amount towards the down payment, and you can own your cash flow producing asset in full. This is the beauty of leverage. The cash flow from the investment will pay off the remaining mortgage amount in 10 years. After paying off the mortgage, this investment will become a cash cow for the rest of your life.

Asset appreciation:  In most places, real estate property keep raising over a period of time. That is because the population is increasing, and there is only finite number of places to live. So as the demand increase, the price of the underlying real estate property also increases. This situation will also increase the rent which in turn increases your cash flow.  The beauty of this investment is the appreciation of the asset value. For every 10 or 20 years, depending on the market, this asset class doubles in value. You don't have to do any work for the asset to increase in value. When you think about it, in 10 or 20 years,  this asset not only pays off its debt by itself, but also doubles its value while maintaining a steady and gradual increase in cash flow every month for the rest of your life, and that's priceless.

Tax benefits: income from your rental considered passive income, and therefore this income is not subjected to self employment tax. This is a major tax advantage.(note: in U.S., self employment tax refers to social security and Medicare taxes). Moreover the government allows to depreciate your property value from the rental income, thereby reducing your tax liability on your rental income. 

Repairs, interest payment, taxes, travel mileage, asset depreciation are some of the tax benefits of owning a real estate property.

Cash flow: cash flow from rentals are steady. They rarely fluctuate based on market conditions, and provides a consistent cash flow year after year to its landlord.  This is one of the main reason people get attracted into real estate investment. You can reinvest the money from the cash flow to buy more assets in the future, and the cycle continues for ever. Remember, all  you need is at a maximum of 20% of the asset value as down payment to acquire your next rental property.  

Growth potential: there is tremendous growth opportunities when it comes to real estate investment, but it is going to be slow and steady growth. It requires lot of patience and financial discipline to grow and prosper. Like any investment, there will be up and down period. Make sure your asset is truly an asset and not a liability. When you have a positive cash flow then it is truly an asset, when you have a negative cash flow then the same asset becomes a liability. It's not a bad thing, you just need to find a way to become a positive cash flow. Growth comes with time and effort. If you can be discipline about it, you can see a tremendous growth in not just your investment, but also to an investor within you.

Have fun:  this is very important, have fun building your assets. Learn to enjoy every aspect of your investment - cash flow, mortgage rate, property tax, maintenance, taxes, garden service, ROI(Return On Investment), appreciation, etc., If you closely look at it, everything boils down to some numbers. Every number is telling you something. This is not just data, but information about your asset. The important part is to learn to look at the numbers with its context to know and understand the story behind it. All other aspects are just noise. Reduce the surrounding noise, and listen to what matters to you the most. If you can do so, even a wind blow will be a tune to your ears. Have fun, and enjoy investing.

Gold Investment 2.0

Traditionally people tend to believe that gold is the best and safest investment of all investments. While there is some truth to it, it is not completely true. 

Image courtesy of ponsulak at FreeDigitalPhotos.net.

This belief system has been passed over generations, and so it became one of the safest investment that people tend to hold for ever. It is more of an emotional investment than a financial investment. We know from historical data that the gold price goes up in value over a period of time, and was grown exponentially in last two decade. It should also be noted that Gold value is inversely proportional to paper currency such as the U S dollar. When the value of US dollar goes up, the value of gold goes down, and vice versa. It is true with any currency, but the valuation of Gold in terms of US dollar gets global attention because of its status as world's dominant reserve currency.

Stock market is driven by mass human emotion. Any fear and uncertainty in the economy will pull the money out of the stock market, and push it to safer investment such as gold. With gold becoming a commodity that can be traded online, it is becoming more like a world's currency. Supply and demand of Gold in the world market decides its ultimate market value. Gold in its pure form is indestructible. It does not rust, corrode and cannot be destroyed by fire. Gold can neither be created nor destroyed, it can only be changed from one form to another. 

Gold as a currency does fluctuate, but does not lose its value. Unlike a paper currency with the value printed on it, gold has an intrinsic value. To begin with, It is not paper, it is physical gold and a precious metal that will always carry a decent value in the market. In this regard, it is for sure be considered a safest investment. Is it a great investment? The answer is NO. 

Units: 1 Kg(Kilogram) = 35.274 oz(Ounce)  1 oz(Ounce)= 28.3495 g(Gram)
Chart from http://goldprice.org

In today's value, 1kilo of gold costs around $37,538. This is lot of money, and there are no financial service available to take a loan if you do not have enough money to buy this asset. Moreover if you can buy this asset today, then you need to find a safe deposit box to store it. There is an additional cost just to store it. Now instead of buying physical gold, what if you decided to buy a gold producing company ?

Physical Gold vs Gold Stock

Gold producing company is similar to any other business that are listed in the stock exchange. The only difference here is, the product produced is Gold. In any other businesses, the new product holds a higher value, but the price goes down in value as time goes on. After certain period, the product will be discontinued either because there is no demand for it, or it is not relevant anymore. It is not the case with Gold producing company. Historical data on gold price shows that gold price keep increasing in value as time goes on. Like any other commodity, the price fluctuates in the short run, but gold has a price advantage when invested in long term. There are good companies and not so good companies. The operational efficiency and the management of the business clearly differentiates between the good and the not so good ones. Invest in a company that has good management and high operational efficiency, and you are on your way to a great investment. 

GoldCorp Stock Quote:GG - 1 Share cost $15.88 - 2363 Shares cost $37,524
I kilo gold cost $37,538

For example, Let's take Goldcorp Inc. It is one of the largest gold producer in the world. At the time of writing this article, the company stock trades at $15.88 per share. On the other hand, the gold price is also down to $37,538 per Kilogram. For the amount of 1 kilogram of gold you can own 37,538/15.88 = 2363 shares of Goldcorp company. The company has a dividend yield of 3.78%, which translates to a cash payment of $0.05 per share every month. In dollar amount, the cash flow is $118.15 paid to its investors in the form of dividend every month, and there is no need for any storage cost. Since this is a Canadian company, there is a 15% tax withholding which translates to a deduction of $17.72 from the dividend amount every month. For a person living in US, You can avoid this tax by investing in a U.S. based company.  To check the real time value of the stock, check out this link - GG

Pls. note: Stock investment is riskier investment than investing in physical gold. In our example scenario, a dollar increase or decease in stock value will result in gain or loss of $2363 respectively. 

Let's say in next ten years the gold value doubles, this will result in more than doubling of both the stock value and the dividend yield paid out to investors every month. At the end of tenth year, you should have doubled your investment while still holding the asset in the form of stocks. In addition, you will have a consistent cash flow of the profit distributed in the form of dividend. The dollar value adds up to a considerable  amount as years goes on. You can liquidate the asset at anytime and get your money almost immediately. As an investor you also have the option to reinvest the dividend amount on the same company, increasing your ownership stake with the business. This will further increase the dividend payment as time goes on. 

Now let's consider the situation where the gold price remained the same for the next ten years, this will result in the stock value and the dividend to remain the same for the next ten years. Even in this situation, you still will not lose money, and will have significant amount in hand in the form of the dividend at the end of tenth year. Usually big producers buy out small competitors and consolidate the operations in order to reduce the cost involved in extracting the gold, thereby increasing the operational efficiency. This will lead to more cash in hand as they go up gobbling more companies while still maintaining a decent cash flow every month.

Gold vs Currency

When we start talking about Gold, we definitely need to talk about the world reserve currency. The worlds reserve currency has a significant influence on gold valuation and vice versa.

U.S. Dollar: U S dollar is the worlds largest and dominant reserve currency. It is powered by the economic powerhouse of the United States of America. U.S. GDP estimated to be close to $18 trillion as of 2015 - It is world's largest national economy. Due to the sheer size of the economy, the stock market and the US dollar is subjected to highs and lows, when pushed further the economy turns into boom and bust. This has major impact in the valuation of the U.S. dollar.

Euro: Euro is the worlds second largest reserve currency. It is euro zone's official currency consisting of 19 out of 28 member countries. There are some fundamental weakness associated with this currency. Euro provided an alternate to the dominant US currency, but the formation of euro was more of an emotional decision than an intellectual decision. This conclusion was based on two main reason. First reason, It is hard to comprehend why any country would give up their right to print money, and the power to influence and control their currency. Second reason, I am saddened to see the way euro zone is handling Greece financial crisis. I agree that Greece did not handle their finance responsibly, but these kind of situation is bound to happen to any country during its lifetime. The talk about Greece exit is ridiculous. If Greece exits, who is next ? Looking at the economic data of the member state, it could be Spain ?. These kind of situation undermines the stability of the currency. Greece will do just fine with or without Euro in the long run, what happens in the short-run is anybody's guess. Freedom of movement within eurozone is great, but common currency not a good idea. The euro currency is vulnerable to the economic condition of the euro zone member states, and that makes it unsustainable in the long run.

Gold: Gold is the unofficial world's currency. It has been like this for thousands of years. If you want a comparison, then Gold can be compared to modern day stock exchange indices.  Both tend to go in opposite direction under similar circumstance.  Fear and uncertainty in world economy increases the demand for gold, and thereby increase the value of the gold assets, whereas the same circumstance pushes people to withdraw money from the stock market, lowering the value of stock indices and in some cases causing stock market exchange to crash. Gold has been the safest investment for a long time, and will remain so in the future. 

Gold has a distinct advantage when compared to any other investment assets. Mainly because, the moment you own it, it belongs to you. Unlike real estate, where you still have to pay the property tax even after you own the asset in full, You really own it in full when it comes to Gold asset. You can store your gold asset in a safe deposit box, or under ground or inside your mattress. It does  not matter what you do with it. You own a piece of asset that will not lose its value and its shine for ever. The reason it is not the best investment is because it does not have utility value when compared to other assets. For example, real estate asset serve the community with the much needed housing service, while still maintaining a steady cash flow to its investors in the form of rent. Stock investment serves the community in building and expanding businesses to create goods and services, and supports livelihood, while still maintaining a steady cash flow to its investors in the form dividends.  In the case of Gold, the asset is not working and if you are long term investor who don't have any plan to sell it, then you are not going to see a dime from this asset.

In addition to financial value, gold carries an emotional value. So it is hard to beat any other investment when the investors are deeply emotional involved with this asset. It requires a great deal of emotional strength, and logical thinking to see this investment as a logical asset instead of an emotional asset. Gold price is going through some rough times recently. That is mainly because of two main reason, The financial crisis of 2007-2008 caused lot of uncertainty in modern day banking system.  It is due to this crisis, people around the globe were scared about their financial future and economic condition. This caused safe assets such as Gold to sky rocket to new heights. When the economy started to improve and stabilize, the gold value started to come down to its expected market value.  Descent in gold value within a short period of time panicked investors, and that caused further destabilization in gold prices. It is getting stabilized now to new market value.  The other reason why gold price is hovering around 1180 per oz is because of the US dollar strength. 

Currently the US dollar is getting more expensive which turn put pressure on gold price to go down. Due to this, gold miners are struggling to keep up with their profit margin, most companies are trying ways to reduce the operation expense and be more effective in their cost in mining the gold. This is good and bad for gold producers. It is bad because, companies that has higher cost to produce gold will either collapse or be forced to sell to bigger rivals if gold value further goes down. The good part is, consolidation is good for this industry. During good times, there are lot of gold producing companies flooded the market which are inefficient in their operation. These companies are flying high for a pretty long time, and the situation like this will force them to evaluate their operation efficiency and get serious about return on their investment.  

Advantages of Investing in Physical Gold:

Protects your savings - Investment in Gold protect savings from currency devaluations. In does not matter where you live, compare the value of the gold against your local currency ten years ago vs the current value. You will see the value of the gold is gone up considerably. That is mainly because the devaluation of the currency over a period of time.

Gold is Precious - It is a precious metal, and carries an intrinsic value. It is a metal that has great demand in manufacturing items such as jewelry to electronics equipment. Unlike paper currency, Gold will never lose its value. In the case of paper currency the value depends on various factors, key factors include the economic strength of the country and the purchase power by its people.  

Advantage in Gold Valuation - Gold valuation is solely based on supply and demand in the world market. Gold cannot be created, it has to be extracted from the mines. It is precious metal, and the demand is always high as it is considered a safe asset. It is due to this situation, it is subjected to higher prices in the world market.

Emotional Asset - For most people, money is an emotional thing. In order to protect the money from inflation, people tend to lock in their money in safe assets such as Gold. It does not have an economical value in the society, it does not have an utility value that can generate cash, but it brings in an emotional strength to its investors. This makes Gold a priceless asset.

Disadvantages of Investing in Physical Gold:

No cash flow - Unlike other asset classes, investment in physical gold does not generate any cash. This is one of the reason why some of the investors stay away from investing in gold.

No financing or leverage available -  There are no bank loans that you can use to leverage your financial investment when it comes to gold investment. Requires liquid cash to invest in gold.

No tax advantages - There is absolutely no tax benefits in investing in Gold. 

Not a liquid asset - Gold in any form - Bars, coins or jewellery cannot be converted into cash immediately.  Require some effort to take it to the seller and convert it into cash.

Requires safety deposit box  - Gold in large quantities requires a secure place to store. It is not safe or secure place to store such a large amount of gold at home. Usually it is better to store it in a bank's safety deposit box. 

REIT - Real Estate Investment Trust

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Real Estate Investment Trust also known as REITs were created in US when president Eisenhower signed into law the REIT act. The purpose of the law is to give an opportunity for common investors to invest in large scale diversified portfolio of money making real estate asset by buying and selling securities from a publicly traded market. Since then, more countries around the world cleared way in investing in global real estate securities paving way for individual investors to invest in large scale commercial and residential real estate securities.

Buying and selling REIT securities is one of the best way an individual investor can safely invest in real estate, and expect a decent return on their investment.

Let's say you have $25,000 in cash and you are interested in investing in real estate. It is not possible to buy a real estate property for that money and expect a decent return on your investment in the form of rent. Moreover it is not safe for an individual investor to loan money to an unknown home owner who requires a home mortgage loan, and expect an income from the interest earned on the loaned money. This is were REITs come into play. Real Estate Investment Trust is an investment security that buys and sells its stock in major stock exchange. They invest in real estate properties and make money through interest earned from mortgage loans and through rent earned from the real estate properties. These are known as publicly traded REITs. This provides an opportunity for individual investors to earn a share of income through ownership of commercial and residential real estate properties and mortgage loans. The income producing real estate properties include apartments, home mortgages, shopping malls, office building, resorts, golf courses, storage facilities etc.,

For a company to qualify as REIT, it must have most of its investment in real estate, and must distribute at-least 90% of its income  to shareholders in the form of dividends. This results in higher dividend yield to the shareholders ensuring a good cash flow and a decent return on their investment. Since most of the taxable income is returned to shareholders directly, the dividend is subject to higher(ordinary income tax) tax rates. REIT shares are bought and sold on major stock exchanges. In contrast, buying and selling real estate property directly involves higher expenses, property tax liabilities and great deal of effort.

In general, there are three types of REITs. mREIT or Mortgage REIT, eREIT or Equity REIT, and hybrid REITs.

eREIT - Equity based REIT primarily invest their money by owning real estate properties. The primary source of income comes from rents generated by the real estate assets. As years go on, the rent and the property values goes up, resulting in higher dividend and higher stock value. This is one of the safest and the popular choice of investment.

mREIT - Mortgage based REIT invest their money by owning real estate mortgages. They loan money to real estate investors in the form of mortgage loans. They also purchase existing home mortgage loans and mortgage based stock investments. The primary source of income comes from interest earned by these mortgage loans.  Mortgage based REIT has a higher dividend pay than the equity based REIT.  Mortgage REITs are highly volatile and subject to high fluctuation due to interest rate changes, whereas equity based REITs have a stable growth and less volatility. Due to its high yield dividend, the investment pays itself off to the investor in few years. Even though these trusts seems attractive because of higher dividend yield, it carries higher risk because of the exposure to interest rate. If the interest rate goes up, the value of the mortgage REIT goes down. Best time to invest is during recession time, because that's when the interest rate is expected to go down, and spread-rate (net interest margin) between their income from their mortgage asset and the cost from their borrowed money widens,  resulting in higher profits.

Hybrid REIT invest in a mix of above both strategies. Income gets generated though mortgage interest and real estate rents.

REITs Advantages:

1. High dividend - It is a great source of cash flow for investors focused on high yield dividends.
2. REITs are liquid assets - The assets can be bought and sold in the public stock exchange without affecting the asset price. You can sell your shares online, and get your money back immediately.
3. Diversified real estate portfolio  - Money invested in REITs by the investors like you allows the trust to purchase more real estate properties than an individual investor would be able to buy on their own.
4. Hassle free Investment - Provides investment access to real estate assets without the overhead of property taxes, management fees and legal issues.
5. Asset Appreciation - REIT equity assets appreciate in value over time.

REITs Disadvantages :

1. Not qualified for tax breaks - Most of the REIT dividends are not qualified for tax breaks, so they are taxed at ordinary income rate.
2. Dependent on real estate market - When the real estate market goes down, the asset value goes down. This will reduce the share value of the stock.
3. Dependent on occupancy rate: Less renters will lead to decrease in occupancy rates and that leads to lesser revenues. This will get reflected in the dividend payout.
4. Stock Fluctuations: The shares are subjected to fluctuations caused by short term traders.
5. Interest rate risk: Increase in interest rate will hurt the dividend payout for mortgage based REIT.

How To Get Rich ?

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Before going any further, I would like to disclose that I am not rich, or to be more accurate - not rich yet. I am a richer person than I used to be, but I am definitely not rich or financially independent yet. It is a work in progress, and I certainly and sincerely feel that sharing this information to everyone will help others better their lives. If information you read here energizes you, questions your understanding, and challenges your thought process, then by all means please consume this information. Otherwise you can ignore this article. Either way, I would like to thank you for your time and effort.

Most people wanted to get rich, but don’t know how to get rich. There are many ways to get rich. Each and every way requires lot of hardwork, passion, technical expertise and dedication.  Starting a business is the fastest way to get rich in a short period of time. Investment is another way to get rich, but takes time and money. Having a good paying job is another way to get rich, it just happens to be the hardest and most expensive way to get rich. Getting lucky by winning a lottery, or by inheriting wealth is another way to get rich, but it is also the most common way to lose lot of money in a short duration. 

Here are the few steps to get you rich:

Increase Your Income:

Wealth creation should be easy, but it requires patience, time and the right mindset or knowledge. Some say money is the root of all evils, others say poverty is the root of all evils. Do not get  into who said what, and who is right. When you get to experience life with and without money, you will know for sure that life with money is lot better than life without money. Life needs money, and the need starts with your food, cloths, shelter, education, and the list goes on. If you do not have enough money, you will face hardship in life. It is even harder when someone have to go through this hardship with their family. If you are suffering, it means you are doing something wrong. Remember hardship is not a bad thing, as long as you can find your way out. It is a human condition, it is  the reason we change and adapt to new things. It is key to our evolution. It is life’s way of saying to change your course. 

Time is more expensive than money. You can earn money, spend it and you can earn more money, but it is not the case with your time. Time is precious, you can start from there. The more time you got, the more money you can make. If you can bring in more people to work for your cause, then you accumulate more money in a short duration. There are other ways to build bigger wealth, and one other way is by attracting financial Investment. Investment is a way to attract other people money to work for your cause in building your wealth. Generating new income sources requires time, money and knowledge. What do you like to have the most? If you can have all three of them, then you are on your way to accumulate unlimited amount of wealth. If you have time and knowledge, but not enough money then you can become an investor.  With time on your side, you can convert the investment into unimaginable source of income.  If you have time and money, and do not have knowledge then you will end up losing both. So be careful what you wish for, because it can happen.

Save, Save and Save money:

Saving money is one of the hardest thing to do if it is not part of your habit. It requires lot of self discipline in order to save money. It does not matter how old are you, it is always a good thing to start saving money. If you are not a saver, then start with saving 10% of your income. You can increase the percentage when you are able to save more money, but start with 10%. If you are not able to save at least 10% of your income, then find ways to increase your income. If you are a working person, try to switch jobs or get a promotion to increase your income. I will never suggest anyone to take up a second job to increase their income. Money is important, but health is more important than money. There are many ways to save money. Just being cautious in spending your money, you can save lot of money. If you are renting, find ways to reduce the rent. If you have a mortgage, try ways to reduce the monthly payment. If you eat out a lot, then try to reduce it, this will improve your health and your account balance. Avoid expensive addiction such as smoke and drinks. Never ever have a credit card loans, and try to avoid car loan. If possible, consider buying preowned car instead of brand new car. Do not compromise your life style, try to get the same comfort at a reduced price. For example, you can get the same service but for a reduced price if you can talk to your cable company, mobile company, internet service provider, your phone company, home security service and the list goes on. Pay all your bills on time, and be a responsible citizen. If the service is good, continue your service with the same company. Most good business knows how to treat their loyal customers. You will feel good, you will get better service everywhere and it will improve your credit rating as well. Consider your saving as your first expense, and make it a habit.

Reinvest Your Savings:

Reinvesting your savings is a big step in creating more wealth. There are many ways to reinvest the savings to grow your asset. You can start building wealth by opening  high yield saving account, investing in real estate, investing in real estate investment trust(REIT) security, investing in bonds, gold assets,  stock investment etc.,. In the case of stock investment, this is a classic case of money making more money. There are pros and cons in all the investment strategies. If you know what you are doing, then it will get lot easier. Understand and educate yourself on how it works, then the world of investment opportunity opens up for you. Flipping real estate properties looks good from the outside, but taking into the consideration the  taxes and risk involved, it is better to stay away from it. Similarly in stock investment, you can either be a trader buying and selling stocks for a short duration, or be an investor and invest your money in the long term. Similar to flipping real estate, shot term trading activity results in higher risks and higher taxes. Considering the reward you get after taxes, it is not worth the effort. If you are interested in real estate properties, but do not have enough money to buy real estate property, then you can consider REIT. It is a type of business that sells stocks on a public stock market exchanges that invest in real estate either through owning the real estate properties, or mortgage loans. They make money from the interest earned from the loans, and by rents generated by the underlying asset. These are stocks you can buy and sell directly in the stock market.  Moreover by law, these firms are required to distribute 90% of their income to their shareholders in the form of dividend.  You get the benefit of owning the real estate properties without the overhead of property tax, and that’s big deal.

Create Wealth:  

By being a creator, each and everyone of us are creating wealth. Whether we know it or not , we are creating stuff all the time, some are tangible and others are intangible assets. Just providing some kind of service to others alone is a multi trillion dollar industry. In most cases we are working for others in creating wealth. This is part of the reason we do not see the impact of our work. Opening a business and convincing others to work for you is the fastest way to accumulate wealth. A team of people working on a common goal can produce something that no single person would be possible to create even in the wildest dream. Most people work for a business to make the business create more wealth, but the ownership of the business is owned by entrepreneurs and investors. Investors use their money to work for them, and Entrepreneurs convince other people to work for them to accomplish their vision and goal. It is two different strategy to amass more wealth.

Business has a lot of tax advantages when compared to common people. One of the most obvious one is, business pays taxes on the money left over after it has paid all its expenses, where as working people pay taxes first, and then spend it for their expenses on the remaining left over money.  You can get rich by working in your day job as well. There are lot of pretty high paying jobs out there which can make you feel rich, but to stay rich is all together a different game. Getting rich through your day job is one of the expensive way to become rich, considering the taxes you have to pay on your income. It is not recommended mainly because of high taxes, and less incentives to keep your hard earned money.  Most of the top level management in multi national companies are paid pretty well by calling themselves visionaries and leaders, but in-fact they are just highly paid employees. 

Learn to Take Decision:

Learning to take a decision is key to get you rich. It is a three step process, and they are as follows:

Step 1: Take a decision.

             First and the most tough part is to take a decision. To begin with, next time when you are looking at the restaurant menu, make a decision and select your menu item without getting help. It can be easy for some, can be tough for others, and be downright terrifying to few. I am not kidding and I have been in all the situation before, and yes we are still talking about selecting a menu item. So next time when you are looking at a restaurant menu, try to evaluate the situation, the pros and cons of your selection, and go with it, understand it is one of the toughest step in the whole process. Most people avoid taking a decision, or postpone decision making process as much as possible to the extend where the decision is either taken by the circumstance they are in or by someone else on behalf of them. What they don’t understand is, they are missing an opportunity to grow, and also missed an opportunity to understand the impact of their decision. Not taking a decision is a decision by itself. By not taking a decision, you are allowing someone else or the circumstance to take the decision for you. It may or may not be favorable to you, but it was your decision to take that step. 

Step 2: Take the right decision.

Taking the right decision is as important as learning to take decision in the first place. Sure, everyone will have their share of bad decision in the beginning, thats not important. What is important is, learning from your mistakes and also from other people mistakes in order to get better at taking the right decision. It is not easy to begin with, but it gets better and better every time you practice taking the right decision. In some cases, there are no right and wrong decision, and when it boils down to selecting your choices, your selection will come to you naturally.

Step 3: Take the right decision at the right time.

Every decision is bounded by time. You can stretch out only to some extent, after sometime the circumstance changes. Consider every situation that demands a decision comes with an expiry time. If you don’t make it, then the situation will force a decision that may or may not be favorable to you.  I am not saying it is easy in any way, it requires lot of logical and emotional thinking, evaluate a list of available options,  understand the data in hand and process it into useful information that you can use, weigh the possible outcome - risk vs reward of your decision, and also come up with a back up plan when something goes wrong. I know it is hard, I never said it was easy. Nevertheless you should know to take a decision on time.

Think Like a Rich Person:

To think like a rich person is not about how much money you can spend, it is about how much you can earn it. Most people knows too many ways to spend their money, but cannot find more than one or two ways to earn it.  What ever you do, think big. There are many ways to get rich - Starting a business, writing a book, investing in stock market, investing in real estate etc., Take risk and find new opportunity, if you don’t see an opportunity, then create it. Don’t look into your past success or failures, always look in the future. Keep learning in specific areas and be an expert, focus on earning instead of spending. Last but not the least, instead of thinking about life after death, think about your life when you are still alive. 

Why You Should Get Rich ?

Live Your Life On Your Terms

Being alive is not the same as living your life. Our time on this beautiful earth is more important than money. But if you do not have enough money to sustain your life, then you will be forced to spend your time for money. Every life is precious, our time on this earth is priceless, but for others there is a price for our time. It does not matter who you are and what you do. You can be a carpenter, architect or CEO of a multi-national company, everyone has a price tag. We spend our time to earn money to sustain our life and support our family. I am not saying it is bad, all I am saying is that this is not living your life. You should get rich to live your life, enlighten and educate others along the way to your destiny.

Financial Independence

The biggest advantage of financial independence is that it will take you out from the life's trapped rat race. You will begin to live your life for the first time. It forces you to think different. Financial independence means different to different people. My definition of financial independence is, if you can have a source of income that takes care of all your financial needs, plus you have 30-40% left for your savings/investments without you working for it, then you can be considered truly  financially independent. The source of income can be royalties, cash flow from your stock investment, real estate investments, etc., It is important for everyone to know that there are minimum requirement/needs to sustain our life. Financial independence will secure this for the rest of your life for you and your family. 

Be A Creator

Humans are wired to search and grow into infinite. This need pushes us to create wonderful things that will enhance our everyday life. The only way you will be comfortable with your own being is by being a creator. Some say healthy competition is good, it should be noted that there are plenty of unhealthy competition around our life and the sad part is most people accept it is as part of life. Sure, competition is important for our survival, but it is not going to solve your problem to become independent of your insecurities and lead your way to financial independence. Competition is just a short term solution for a long term problem. Don't be a competitor, it lessens your ability to be creative and fight for a finite resource that will not satisfy your needs. By being competitor, you are going against your own power and potential to reach your goal.

Wake Up Your Inner Intelligence

Every human is capable to get rich. All you have to do is to realize the potential that exists within you. You don't have to be an accountant or mathematician to become financial expert. Whether you know it or not, everyone has an income statement and expense statement. Your primary bank account statement is a good example for your income statement, and your credit card statement is a good example for your expense statement (Assuming you put all your expenses in one credit card). Similarly everyone got to have an asset and a liability statement. If you are not rich enough to have one, just start writing up your own asset statement and a liability statement. Now the most important and tricky part is, understanding this raw data and translating this to useful information in order to grow your wealth.

Human  Rights

Poverty is like a disease and it can be eradicated. Poverty violates basic human rights.  Being born as poor is not a mistake, but to die as poor is definitely a mistake.

The Infinite Rule

The universe is expanding and there are no boundaries to it. It is ever expanding and is infinite.  The same applies to getting rich. There is no limit on how much you can get rich. Nature forces us to think beyond and visualize the infinite within all of us. We are trying to contain  the infinite fire within us using the tools we created. The shear act of thinking lets you the glimpse of infinite, where as the knowledge limits our progress. Knowledge is power, as long as it grows and expands, and the day it stops, it is time to look beyond.

Money Power

Money has power, whether you love it or hate it. Money cannot create life, but it can save lives. There are certain things in life that are priceless, but for everything else there is money. People who don't like money are usually the ones who work much harder to earn it.  It is true that power comes with responsibilities. If you misuse the power of money, then you will end up in big trouble, but if you harness the power of money for good use, it can do wonders. You can either follow the money, or you can make money follow you. Be a source of creation, and the money will follow you.

Be A Giver

Don't get me wrong, I am not talking about charity, or giving up your hard earned money for free. What I mean is, you have to spend money in order to earn more money. What goes around, comes around. In the case of money, when it comes back at you, it usually comes in multiples.  If your intentions are correct, you will prosper the society and people lives around you.  When it comes to money, are you emotional or logical ? You have to train to see it as logical instead of emotional for you to get rich.

Be Grateful

Being born as human is a gift by itself. We are not the strongest, fastest or scariest life on earth, but we are the most intelligent species in this universe. Intelligence is a double edge sword, it can be used to kill or create. You choose how to use it, and your karma(your action) will decide your destiny. Our body is a miracle, the way we think and react is even bigger miracle.  We should embrace and appreciate this life during its life time - and that's to me is priceless.

Have Fun

What ever you do, don't forget to have fun. It is true that you don't have control over your birth and death, but you have full control over your life between them. Everyone is born to be rich, only few realizes it and the rest is lost in the noise of everyday life. You should get rich to live your life, and you have a responsibility to educate others to get rich as well. The fun is in the journey of life, and not in the destination. It is like everyone wishes to go to heaven, but nobody is ready to die first. So have fun, enjoy your ride and wish you all success.

Top 10 Benefits of Stock Market Investment

1 - Incremental Investment Strategy

There is no minimum amount required to enter the stock market. Anybody with whatever money they got can start investing right away in the stock market. You can pump in new money, or reinvest the dividend money in order to grow your investment.  The amount of money you make is directly proportional to the time invested in the stock market. Longer you stay with the stock market, the higher your growth potential.

2 - Money Making More Money

This is a classic case of money making more money. The more money you put to work, the more money gets earned. There are lot of blue chip stocks that has a great growth potential, and shares its profits to the investors every quarter in the form of dividends. Stock value goes up during good times and goes down during bad times.

3 - No Limit to Rewards

There is no limit on how high the stock can go.  As long as the fundamentals are correct, the stock will keep raising up in value. This is applicable to both growth stock and dividend stock. When it comes to growth stock,  the value appreciates more rapidly than the dividend stock, but dividend stock has an advantage to bring in cash flow from your investment. The cash-flow when effectively reinvested can grow even bigger investment in the long run.

4 - Liquidity

The biggest advantage of holding the assets in the form of stock is that it can be liquidated pretty easily. Often takes only a couple of mouse clicks to convert huge investment into cash, and vice versa.

5 - Tax Benefits

There are no tax liabilities just owning stock investment. Let me clarify, you need to pay taxes on dividends and other cash flow you receive from your investment, but there are no taxes for just owning the stock. There are no maintenance cost, no property tax to be paid etc., Cash you receive in the form of dividends can have tax benefits as well. Qualified dividends are subjected to lower taxes than the non-qualified dividends.

6 - Improves Emotional Intelligence

In most cases, it is like swimming against the waves. It is tough mentally and physically when the easiest thing to do is go with the flow, and follow the crowd. If you are a serious investor and would like to be in the market in the long run, you know that you should not follow the crowd. It takes great deal of emotional strength to buy stock when everyone is selling, and sell the stocks when everyone is buying. Emotional outcomes are not logical, and so every ten years the market crashes for no logical reason. This is logical time for the new investors to get in. The stock market is neither your friend nor enemy. It is a reflection of the economic condition of the country. It is a system created and maintained by humans. So it has the strength and weakness of a human being.  You are better of using your emotion to think instead of thinking with your emotion.

7 - Cashflow

Dividend paying stocks provides a healthy cash flow for the investors. Dividend money is a portion of a Company’s earnings approved by board of directors to be distributed to the shareholders. Dividends are usually issued as cash payments either quarterly or on a monthly basis. Adding more stocks to your portfolio increases the cash flow from your stock investment. If planned and executed carefully, this can be a way to financial independence for long term investors.

8 - Power of Compound Interest

Power of compounding directly proportional to the duration of the investment. The key to the power of compounding is the snowball effect that happens when dividends and capital gains accumulate over a period of time to make your money grow faster and faster as the years go on.

9 - Beat Inflation

The best way to beat the inflation is to invest in stock market. Historically, stocks have averaged an annual return of over 10% which is much higher than the average inflation rate of 3.2%.

10 - Powered by Main Street

Wall street is not the enemy of main street. In fact, wall street depends on the prosperity of the main street. Wall street focus is on generating money, using money to make more money and globalize business and employment opportunity in order to save money, whereas Main street creates livelihoods, provides employment opportunity needs in the society and advances the human interest. It is the heart and soul of capitalism. Without the main street, wall street is like your shiny mobile phone without the software.

Top 10 Stock Investment Mistakes

1 - Buy High, Sell Low

This is one of the common investing mistake even the so called professionals make stock in market. For most people it is hard to resist the temptation to ignore the stock when it is at all time high, or when it is at its 52 week high. Buying stocks at high price and selling when it falls is justified emotionally, but does not make sense logically. There is a potential loss of 10 -50% of the capital money due to this mistake. So wise up when you make your next investment.

2 - Going After Popular Stock

Going after the popular stocks is one of the biggest investment mistakes. Popular stocks includes stocks that are new IPO stocks, speculative stocks, big social media stock without any  strong advertising revenue etc., These are sure ways to lose your money in a short period of time.

3 - Focus only on Short Term Growth

Traders usually focus on the short term growth, but a professional investors focus on their long term investment. In most cases, investors have a more stable growth combined with the force of the power of compounding make them better than short term traders. The saying, Slow and steady wins the race is so true when it comes to long term investors.

4 - Not Understanding Taxes

Stock owned for less than a year is considered short term investment, and more than a year is considered long term investment. Profits made by selling short term stocks are subjected to higher taxes than profits made by selling long term investment. Non qualified dividends are subjected to higher taxes than qualified dividends. Understanding tax consequences on your stock market activities is very important in building your wealth. 

5 - Emotionally Attached Stocks

Getting emotionally attached to a stock is not a good idea. Emotion by itself is good and important. You should know how to use your emotion to think, and not think with your emotion. 

6 - One Big Purchase

Volume purchase of stocks leads to a big swing between profit and loss in the short term, and loss of opportunity to lower the cost of investment in the long term. You can avoid unnecessary roller coaster of your emotion by not getting into the habit of buying lot of stocks at any point of time, instead spread the purchase over a reasonable period of time.

7 - Reacting to Day to Day News

Reacting to day to day news increases the trading activity. This will only make money to the brokerage firm, and nothing to your cause for building your wealth. Not all data is information. Some are informational and educational, and others are opinions and noise surrounding the news. Train to ignore the noise and avoid reacting to every news about the stock market.

8 -  No Plan

Having no plan is worse than having a bad plan. To begin with, just having a plan about your goal, growth trajectory  and a exit strategy stabilizes your mental strength and your emotional intelligence. This  provides an opportunity to improve the plans based on the situation and the circumstance of your beings over an extended period of time thereby testing out the plan at good and bad times. Having a plan reduces the possibility of losing money during panic times and increases a healthy profit during good times. Exit strategy is very important even when you don't have any plans to execute it. My advice to you is, have a plan.

9 - Not Questioning Assumptions

Assumption can lead us in any direction. A valid assumption can improve the confidence level in taking an educated pick of long term investment, whereas a wrong assumption can lead to loss of capital and self worth. Always question your assumption and validate your assumption at all times.

10 - Follow the Crowd

Following the crowd is the easiest way to lose lot of money in a short duration of time. In most cases going against the crowd can save you lot of money and help you grow your investment aggressively. There are no short cuts to wealth generation. Do not follow the crowd. The loss is not just your money, but to your identity as well.