Thursday, February 23, 2006

The advice I'm about to give is for the bold. Frightened little bunnies who are afraid of wealth should read no further.

1) There's a pot of gold at the end of every rainbow and we're all living on rainbow street. Buy as much house as you can. Don't settle for a $300,000 house when a bank will lend you a million. But the timid out there will say "but I can't afford to buy a house that expensive." Pal, you can't afford not to. Let's employ my favorite friend, the calculator. Let's say you buy a $300K house and I buy a $1 million house. Assuming the standard 20% yearly appreciation rule, after 5 years you'll have roughly $450K in profit (assuming you do not leverage this perpetual cash machine to produce even more wealth). However, I will have made roughly $1.5 million in profit. As even the most jaded, bitter renter can see, the $1 million dollar home has produced over 3 times as much wealth in only 5 years. Imagine how much better off I'll be in 10 years.

B - There are no "bad" neighborhoods in California. The so-called bad neighborhoods in California (places like Compton, Oakland, East Palo Alto) have been some of the most profitable homes in real estate history. Today you can not buy a home in these places for under $300,000 and often times these "violent palaces" run over half a million or more. Even today, after the large run up in prices, these homes are still profitable for the investor with foresight. Let's say you buy a home in the coveted neighborhood of Compton for $300,000. As the numbers above show after 5 years of 20% increases you'll have $450K in profit. Let's say you get robbed twice a year, average cost of $5K per robbery, and stabbed or shot every 2 1/2 years costing you $50K in lost wages/hospital bills. $450,000 - 2*5*5,000-2*50,000 = $300,000 PROFIT. I don't know about you but I will take the occasional shiv in the back for $300K every 5 years.

Note: I left out family members being murdered because with proper insurance there should be no net loss for this event. In fact, it could be an equity building opportunity if your loved one had large amounts of insurance.

And don't forget, in addition to that treasured Compton address you get the much sought after Compton schools, governance, and community. You can't put a price on that California lifestyle.

III. Don't worry, be happy. Don't worry about the terms of your home loan. Only focus in on the payment. We in the west are no longer squirreling away money like some deranged rodent. No my friend, we are in the cash flow management business (just like how we no longer produce anything in this country, we outsource it all and manage the world). Who cares if the loan is neg am, interest only, or fixed. If the payment works, bank it. You can use the guaranteed appreciation to take care of all the details of how you'll pay the money back. Still doubting? Ask yourself, does a raindrop worry about how to steer the river? No, it sits back and enjoys the ride. Well, there is a river of money flowing right now. You can either let it flow to you or sit by on the banks and watch it pass on by. The choice is yours.

Four: Become the master of your domain. Become one of the highly trained real estate professionals that are profiting mightily from this new paradigm. Like the previous example let's look at 2 different people. Both are recent high school graduates. One decided to attend an Ivy League school for 4 years to get a degree in one of those outdated majors like engineering or one of the sciences. After graduation they attend grad school for 5 years and get their Ph.D. And now after 9 years of hard, menial, drudgery, what do they get as their reward? A job paying $50-60,000, if they are lucky. By the time this "genius" pays off their student loans they'll be 40 years old. 22 years of eating ramen and riding your bike to work might make some drugged out hippy happy but for us real Americans we want $$$. Now let's look at his friend. He decides college is for suckers. He works as a mortgage broker and part time real estate agent. He earns $100-200K a year. By the time Harvard boy has graduated our wise mortgage broker will have a BMW, 2 houses, and a sail boat. And he did all this without wasting his time with books or filling his brain with useless knowledge. He is a producer of wealth while the self-absorbed academic is a parasite on society. What would you rather be, a producer or a parasite?