Risk, continued

We have talked about risk; we know it is unavoidable and that you must
manage your risk. We only want to take calculated risks. We want to
measure every investment to make sure we know what we are doing
without losing our core motivation. The risks I take, come hell or high
water, will not stop me from obtaining my freedom. Period! No matter
what. Risk is unavoidable and I will manage it and so will you. You will
learn how to manage it yourself. What you tell yourself and what you
believe yourself to be, will always be. When you tell yourself, “I’m going
to do this; I’m going to move forward no matter what,” you will.

Let me give you an example that’s rather amusing. My wife comes from a
very traditional family. Before our engagement she suggested that I talk to
her father and ask him for permission to marry her. My reaction was,
“Wow. That would be nice. It would make her mom and dad proud that we
would seek their permission.” After we made arrangements to speak, I sat
down with them and my future wife and talked to her father and mother. It
turned out to be a two-hour discussion about why we shouldn’t get
married; why we should wait... and why we should do this and why we
should to that. After a while, I’d had enough. I’m a very determined
person, and when I decide I’m going to do something, I do it. You can be
the same way.

There is no reason why you need to be wishy-washy; move forward –
make your decisions and follow through. I made the decision to marry this
beautiful woman and no one would stop me. We were going to start a
family and live happily ever after. I looked my father-in-law square in the
eyes and said, “You know, we’ve been talking for a couple hours.” I was
very nice about it, but I said, “We’re getting married whether you like it or
not. I’m here out of respect for your daughter.” That was the end of the
discussion. He did not talk to me for an entire month. I dealt with the
consequences, but I was not going to allow a silly barrier like that stop me.
They thought they knew what was best for me and my wife when we knew
what we wanted to do. I was not going to allow them to get in the way of
our happiness.

It’s the same with risk. Many people let risk talk them out of investing.
When you set up your own barriers – when you create your own obstacles
to overcome – ask yourself why you do that. If you’ve decided to be
happy, well then be happy (darn it), and move forward. If you’ve decided
to invest, to create freedom for yourself and wealth, simply do it! Other
people do it all the time, why can’t you? You are no less special than
anyone else. You can do it, and that’s something you need to remember.
Risk in unavoidable, but can and must be managed; we supply you with
the right tools to effectively manage it. That’s what we do and that’s why
we are here.

INVESTMENTS AND RISKS

To end the week we are going to break this topic into two, easy to digest, parts.
Today and tomorrow's topic will cover the risks involved with investing.

Risk is another key element with any investment. Why? Risk is
unavoidable. You are always going to have some type of risk in your life...
in general, and certainly when you are investing in property. There are two
things you should understand in order to manage risk:
1. Risk is unavoidable.
2. Risk must be managed.
I say “must be managed” because risk is unavoidable; there is risk in
everything you do.
Now that we’ve identified the two things that go with risk (it’s unavoidable
and must be managed), how do we manage risk? It comes down to
personality strengths and weaknesses.
Looking at your personality will tell you how to manage your risk. What
do I mean by personality? Let me give you this example... Think back to
when you were a kid at the public swimming pool and it was the first timeyou were going to jump off the high dive. As you were going up the ladder,
did you see a bunch of people jumping off the diving board and you yelled
out, “Hey, that looks fun.” Were you the type of person who got all excited
at the bottom and then went up and the higher you got, you became scared?
Then suddenly you were at the top and were clinging onto those little
handrails as you looked over the side. You started crying and you climbed
back down... or even worse, you were paralyzed and started crying and
your mom had to come get you.
Were you that kind of person? Or were you the kind of person who
watched other people jump off the high dive? Then you figured out how it
was done and you climbed up and jumped. Or you may have been the type
who screamed, “Yeah!” as you climbed the ladder, ran, and jumped off the
board, diving straight into the water as you screeched “Geronimo!” Bam,
you did it. It would not have mattered if there had been water in the pool
or not; it could have been solid concrete. You were jumping because
someone obviously put a diving board there for a reason. Are you that kind
of person, or are you the second type of person; the calculating guy who
watched carefully and then jumped in?
Personality strengths and weaknesses tell you a lot about your core
personality. As you think back on how you reacted to this situation as a
child, ask yourself if your behavior was rational or irrational. In my
example, being scared of the high dive was rational as a child; as an adult,
you know it is irrational. How many of you were scared to ride a bike for
the first time and never wanted to ride it again after falling? I have several
friends that it took years to learn how to ride a bike while everyone else,
including myself, was off and riding. We were in the dirt playing around
and riding all over the neighborhood while the other kids did not want to
do it because they were frightened. Is that rational or irrational?
That’s what you need to ask yourself: is the risk that I am taking rational
or irrational? Am I the type who is going to be paralyzed? Am I going to
talk myself out of investing? Am I going to find every excuse under the
sun not to act, to do nothing... including not investing in property? If this
investment is wrong, I’m sunk. (That’s rational! That’s obvious; it’s
quantifiable; just stay away from it.) But don’t use petty excuses to talk
yourself out of investing; just stop using excuses.
However, if you are the type of person to run and jump off the diving board
– you have a high degree of risk tolerance – you need to be very careful.
I’m that type of person; I’m the type of person who will do something
regardless of what is at the bottom. That’s a recognizable problem. To
counteract this, I have established checks and balances for myself to make
sure I’m okay and that I’m going to be safe, because my personality
strength is that I’m okay with risk and weakness.

We will continue with this topic tomorrow.

What type of investor are you?

Most people do not understand the importance of determining what type
of investor they are. It is one of the most important concepts you should learn; your profile will govern how you invest your time, energy, and money from now and into the future.
To help establish your profile, examine your aspirations, which are based
on how you answer the following questions. (No one but you will know
your answers, so be honest with yourself.)

• Why are you doing what you’re doing?
• Why did you take the risk?
• Why did you spend the money?
• What are you going to do with it?

I ask this question at seminars all the time: “Why are you doing this?” The
typical response is, “I want more money.”
There’s a reason why you are doing this... why you are sitting there reading
this, and spending your time learning how to become a real estate investor. Why are you doing what you are doing?

I would like to share a story with you. When I was a young boy my father
worked extremely hard; combined with many long hours, we did not see
him very often. There was a time when we lived in Boise, Idaho, and his
job was in Salt Lake City, Utah, where he worked six days a week, 12-hour
days. On weekends he would make the six-hour drive home to Boise. He
would sleep in his car on the way so that he would be able to spend all day
Sunday with us. He did this every week for two solid years. I recall that as
a little kid (I was only six) that I really respected my dad for that. I
remember thinking: “That’s amazing that my dad would make that
sacrifice.” I recall another time when I was older and in high school, I was
on the high school wrestling team. I had wrestling practice and a meet
every week; my father usually missed them because of his work. He had
to make sure we had food, shelter, water, and an education. It’s my guess
that many of you sitting and watching me are thinking, “Yeah, I had to
miss my daughter’s ballerina recital just last week and that killed me
inside.”

I shared my father’s story with you because I need to make this perfectly
clear: achieving your financial goals will be tough. Any investor who has
been investing for a while will tell you that you’ll always go through tough
times. No matter what you do, there will be something that is tough for you
to deal with and overcome. You will experience rough times that will seem
almost impossible to get through.

If money is the only motivation you have, it will leave you empty. But if
you have deeper motivations – like freedom, time to be with your family...
all those things that mean more than just money – they will help make you
successful. These motivators will force you to wake up in the morning
earlier than ever before; they will help you work later than you’ve ever
worked before; they will help you work harder and be more effective than
ever. That’s why understanding yourself, understanding why you are doing
what you’re doing and being honest with yourself, are the most important
things you can gain from this learning.

The "Money" Box

Let’s talk about one more thing in The Box; let’s talk about lending. I call
it the “Money Box”. Here’s another thing that people don’t understand,
and it’s a true fact everywhere: The Money Box is made up of lots of
different traditional and non-traditional lending institutions, such as banks,
seller financing, private money, and people’s own money. The Money Box
provides us with an understanding of types of lending institutions that
thrive in a given market. Knowing that information can tell you what’s
going on in the market and how to structure your strategy.
For example, we are currently in a credit crisis (2008). Thus, the banks’
guidelines have become extremely stringent and they have scaled back
their lending practices. According to the Money Box, since the banks are
scaling back, another institution within The Box will step up and make
money available. Seller financing, for instance, may become more
available, or private money; or buyers may bring a larger amount of money
for the down payment. You need to understand that there are never holes
in The Box; someone or some institution will always be there to make
money available. The market always wants to meet equilibrium.
To give you an example of this, in the 1980’s, seller financing was very
popular. Why? Some people needed to get rid of their homes. Interest rates
were too high for buyers and it was difficult for them to qualify, so seller
financing came in and filled the gap. In a credit crisis like the one now
(2008), the banks have scaled back their creative loan programs. Hence,
other people and/or institutions are filling in the gaps and providing money
to borrowers. In a credit crisis, seller financing and private money are
usually the first entities to lend money. Personal cash usually takes a little
longer to come in.
As far as strategy goes, the Money Box helps you determine that if banks
are being tight, and you don’t want to bring in personal cash, you ought to
look at seller financing or private money. There’s always a way to get
financing in any market; it doesn’t matter what the market is doing. If
banks are taking the vast majority, then use banks because their interest
rates may be more attractive than other financing options. And if banks are
scaling back, use other financing means.

The Box Simplifies economic laws.

Now let me provide you with an example of how The Box can simplify the
economic laws. The Box can be used to understand rental versus
ownership in the market; I call this the “Housing Box”.
The Housing Box represents the fact that people always want to have a
roof over their heads. In the Housing Box, people can only get a roof over
their heads in one of two ways:
1. Ownership
2. Renting
Obviously there is the homeless population; but generally speaking,
people either own their houses or rent them.
As we focus on ownership and renting, realize that no matter what happens
to you in your life, you have a choice: you can either own your home,
condo, etc., or simply rent – that’s it! After that there’s nowhere else to go.
That, in essence, is what the Housing Box consists of. The wonderful thing
about the Housing Box is that no one can go outside of it.
Why is the Housing Box important to understand? In boom time, when
salaries are going up and people are buying a lot of houses, ownership
takes over.
You’ll see property ownership take a bigger space of The Box and renting
will take a smaller space of The Box. What this means is that you’ll have
a soft rental market, yet a strong sales market. In other words, it will be a
seller’s market. But, since nobody is going outside The Box, renters will be
moving over to the ownership pile – it’s a good time for people to start
owning property.
Now what does this scenario tell you about the strategy you should follow
as an investor? It is a great time to sell; it’s a great time to flip houses. Buy
multiple properties, fix them up, and sell them. Another way to look at it
is to assume that there are many houses in foreclosure (like in the 2008
market when this manual was produced). If people are being kicked out of
their houses, they’ve got to go somewhere for housing, so they can either
own or they can rent... period! There is nowhere else to go. Consequently,
the rental market will start to take over.
You will see the shifts; supply and demand is basically all we’re talking
about. The Box is never going to change. No one goes outside The Box. So
when you see foreclosures out there, you now know where the market is
going. You should know that in the Housing Box when there are a lot of
foreclosures, renting will take over ownership. Therefore, there’s going to
be more demand for renters. Where there’s a higher demand for renting,
the price of rental properties goes up.
In this case, renting takes a bigger space of The Box and ownerships takes
a smaller space. So it tells you where to put your money (rental properties).
It tells you what strategy to get into, and that is key. Again, The Box helps
us understand simple economic laws; economic principles that will help us
decide what strategy we should move into.