Continuing where I left off last time…
While I had an intense burning desire to start up my own entrepreneurial venture, I literally had no idea where to begin or even what my business was going to be about.
However, I did have a general idea of how I wanted my business to operate. From reading Rich Dad, Poor Dad
I started off by doing a lot of research and learning. Let me show you a bit of my analysis:
Real Estate Investing
Real estate investing accomplishes this by purchasing rental properties. The main idea behind real estate investing is to purchase a property below market value, make it habitable, then rent it out for a price that at a minimum will cover your mortgage payment + other miscellaneous expenses (ie. Property taxes, insurance etc…). Even if you rent your dwelling for only the minimum payments, rising property values, tax savings, and the fact that you will eventually pay off this mortgage in full means that this investment will able to generate a pretty high income over the course of its lifetime, which can run up to 20-30 years.
However, as you may have noticed, there are certain barriers to overcome in this model
Real Estate Barriers:
- Finding Good Investment Property. The first step to buying an income generating rental property is to find the right property. Property values fluctuate by region, demographic, and are heavily influenced by local economies. A lack of knowledge about the local real estate industry means there’s high risk involved for the newbie.
- High Cost of Entry. I know a lot of banks are willing to offer very favorable loan conditions to the first time home buyer, but call me old fashioned because I absolutely hate debt and want as little of it as possible. If I purchase a house, I want to put a minimum of 10% down, but would much rather put 20%. This will significantly lower your overall mortgage payments and also help you get more favorable interest rates.
- Think Very Long Term. Investments are all long term, but real estate is serious business. Under the current recession, home prices will probably not return to 2008 levels for at least 5-10 years. This means you may not see a return on your investment for a pretty long time. Be prepared for this. And most definitely do not invest money that you might need within a 1-5 year period. Real estate is not a very liquid investment – putting money in is easy, but taking it back out early can be difficult and costly.
- Rental Location. Just take a look through the rental ads, and you’ll see that most locations are not exactly in the best areas of the neighborhood. That’s just how the market works because most of the upper-middle class population will prefer to buy rather than rent. If you are purchasing a good income generating rental property, you will most likely be spending some time in unsavory parts of the city.
- Tenants, Repairs Etc. Depending on your rental location, you will have to deal with the entire gamut of tenants and “special” personalities. Some tenants will be great, pay rent on time every month, and never complain, but the majority will not. Depending on your location and tenant demographic, you may also have a high turnover ratio. Constant remodeling and repairs mean adding costs to your wallet and time.
Stock Market Investing
My alternative was to invest in the stock market. Historically, stocks have provided a very steady return on people’s money. I know this hasn’t been the case for people this past year, but as a youngish person in his mid twenties, I honestly can’t ask for a better situation.
Stock Market Investing Pros/Cons:
- Stock prices are were at significantly depressed levels, and as a young person with 30+ years of investing life ahead of me, pretty much any stock will provide a reasonable appreciation over time.
- Low Entry Cost. With so many discount brokerages available, the entry cost is completely negligible.
- Money is Liquid. Having money in a stock account also means that you can liquidate it any time. If I need this money for some emergency, I can have access to it at any time.
- Extreme Volatility. While we’re technically not in a recession anymore, the stock market is still extremely volatile. It’s hard to gauge day to day where the market will fluctuate and there will be days where extreme dips will make you very sad.
- Not Very Passive. Returns will be the safest if you purchase an index ETF, but in the world of investing, safe = tiny returns. If you are seeking the big bucks, you’ll need to invest in individual stocks, and the learning process is not passive at all. You will spend significant amounts of time to keep up with news updates and this really defeats the purpose of passive income generation.
- Long Term. To take advantage of compound interest means you leave your money in stock for a long period of time. While the money is always going to be liquid and available, there’s a psychological aspect involved where you won’t want to take the money out if big gains are being made.
In the end I decided against real estate investing, and if you haven’t already noticed, I do partake in quite a bit of stock market investing. But when all is said and done, I learned that no matter how well thought out your passive income strategy is, there comes a point when you what you need is to increase your cashflow.
I’m going out lay out my big business idea in the next post, so make sure you check back tomorrow!
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