I know that the route to becoming financially independent is not simple.  If it was, everyone would strive for it!

In order to become an investor, I need some capital.  It is possible to invest with nothing down, but such deals take a lot of skill to negotiate.  It is my view that these skills become developed as you learn to invest.  That means for the beginning investor it is quite difficult to find zero down deals – whether using Paper Assets or Real Estate.

I have mentioned my musical instrument business here before.  I basically buy old instruments, have them repaired, and sell them on at a higher price.  Typically the margins are very high.  For example, last week I spent $150 on a Yamaha saxophone.  It needs about $100 of work and is currently in the music shop awaiting repairs.  Once the repairs have been completed the instrument will sell for $950 at the store.  The store gets 20% commission ($190) and the $100 for repairs.  That leaves me with $660 and a profit of $510.  Not a bad return on $150!  It should also be sold by the end of September.  So it is a pretty good investment.

However I wonder if this really counts as an investment.  For sure it beats any of the interest rates around.  The returns are also pretty consistent.  The instruments do increase in value once they have been repaired.  BUT, I still feel like a trader.  At the end of the day I am buying something at one price, adding value to it, then selling it on for profit.  That is what a trader does.  If I do not go and buy more instruments, I cannot generate more money.  In other words, this is not a passive income!

Under Robert Kiyosaki’s definition, the instruments are not an asset.  They do not put money in my pocket every month.  The money comes to me once the instrument sells, but it does not generate income up until that time.

So where do I go from here?

My current plan is to continue buying the instruments, then consigning them at the store.  That way I only need to spend time buying them, not repairing or selling them.  The funds I receive from this I can re-invest or save.  After a few years I will have a $10-20,000 to invest in assets that produce passive income.  I expect to do this through real estate partnerships.  In the meantime I will keep trading.  I will also look for other items I can trade…I really would prefer to trade items that have a higher profit per sale.  It is all well and good tripling my money on flutes, clarinets and saxophones, but at the end of the day a typical sale generates $100-$250.  What if my profit in a sale was closer to $1000.  Or could I find something to trade on a regular basis that would earn me $3000 in profit?

The greater the profit I can make, the sooner I can begin investing properly!!!

The ABC’s of Real Estate Investing is a book written by Ken McElroy as part of the Rich Dad series.  Ken is an official Rich Dad advisor, and has done multiple joint deals with Robert Kiyosaki (famed author of Rich Dad, Poor Dad).  Ken has made multiple millions of dollars through his real estate deals.

When I first began reading the book I did not realize that it would be focusing on multifamily (apartment) buildings as rental properties.  However as I read through the book I certainly began to see the advantages of this type of Real Estate.  If I just purchased 1 of the sort of buildings that Ken suggests, I could become financially independent!

In the first chapter, Ken dispels some of the common myths associated with Real Estate Investing.  He clearly explains :

• You don’t have to be wealthy already to begin investing in Real Estate
• You don’t necessarily have to start with small deals – you can jump right in to big deals, and you may actually find it is easier to secure financing!
• You don’t need to be a highly confident person
• You don’t already need contact in the business – they are easy to make
• You don’t need to be a Real Estate expert to get started

Ken then explains why goal-setting is so important.  The basic premise is that you need to have a focus.  The goal should be quite specific, for example,

“I am going to purchase a 4-plex or 6-plex in the next year that will generate a minimum of $4000 per year in cashflow. The property will be located in [insert neighbourhood] or [insert another neighbourhood] in [insert name of city]“.

In The ABC’s of Real Estate Investing, Ken further explains the process of due diligence.  In other words how to examine a property deal to see if it is actually going to be a good investment or not.  This section of the book is very detailed and contains some excellent advice.  Here you get an insight into the process that Ken McElroy uses to choose properties.  Given that his property deals over the last 10 years have an ROI (Return On Investment) of at least 40%, I consider this to be very valuable information!

Elsewhere in the book Ken reveals that the asking price of a property is almost irrelevant!  Rather the value of a property is derived from its Net Operating Income (NOI).  To calculate the NOI you need to know all the expenses related to the property, and all the income received from rent.  When this is multiplied by the capitalization rate for the neighbourhood, you have calculated the true value of the property.  In many cases this will not be as close to the asking price as the seller would like, but having performed your due diligence you should be able to show the seller why you came up with the figures you did and negotiate accordingly.

Final words…

This book is quite different from the Weekend Millionaire’s Real Estate Investing Program because it advocates the purchase of multifamily buildings (i.e. apartment complexes).  This is the area of Real Estate in which Ken McElroy has been tremendously successful.  As a result, some of the advice he gives is the opposite to Mike Summey & Roger Dawson in their book.  For example in the Weekend Millionaire’s series, the authors encourage you to stay away from multifamily Real Estate until you have been successfully managing 4 or more single family homes.  Ken McElroy promotes jumping right in to the multifamily scene!

I don’t think that either approach is wrong – it really depends on what your goals are.  There is certainly more leverage available in apartment buildings, but they can also lose you millions of dollars if you do not perform your due diligence correctly.  If you were to follow the process outlined in The ABC’s of Real Estate Investing, then you should be able to get off to as good start!