#3 Millionaire Wealth Principle - Understand the 4 types of money: Income, Profit, Flow, Equity
You have to understand how money works if you want money to work for you
The Four Types of Money -Income -Profit -Flow -Equity
Income - the most common goal but least important -It is your effort put in to produce the most taxed type of $ -Income is important @ the beginning - get into the game, have something to sustain you
Profit - something you receive when the co. is doing well & you’re not involved; what’s left after the bills, payroll & expenses are paid, & flow has been put to work -Other ppl earning income - you get the residual -Systems must be in place to accomplish -Many investors take profit way before they should, it should go to reinvesting & paying bills
Flow - the secret to success - the right things get paid in the right order -You have to know what your bills are & have enough to cover them -Track it - if you don’t do this well, you don’t have control of the $ & the $ won’t work out -You can get lucky once but you have to be able to reproduce results, by learning the process, you eliminate luck & have consistency
SPREADSHEETS Are A Big Part Of Business Because You
-Need to know how to read the numbers, know what you’re looking at, what expenses will be, what income will be -Keep an eye on the flow, make sure $ is coming in & going out in the right channels -Flow sometimes dictates your job - red light, green light - there are times when you have to not “do something” -RE investors have to understand flow very well before they can scale -There are chunks of $ floating around @ any given time - costs associated with appraisals, closing, transactions, maintenance & repairs on the portfolio, maintenance, repairs & maj renovations on new acquisitions, vacancy costs, rent increases that can cause vacancy, unforeseen delays to closings that cost $ -You can’t spend $ on marketing before you close the deal, closings get pushed back - any delays mean you have to wait to start next stage. Don’t raise capital until you have the deal; once you have the deal, don’t take $ until you’ve closed. Tempting to say “oh, we close next week” so you take the $ but now you’re paying interest on it & then closing gets delayed. Line everything up - when you get confirmation on the closing, have the closing attorney transfer the funds -Three pillars of biz - Capital, Deals, Labor; typically 2 of them are driving your biz & 1 is always the weak link -Sometimes you fix it, it becomes stronger than the other 2, but usually it will eventually become your weak spot again -Sometimes you have the deal & labor lined up but no $; sometimes you have $ & labor lined up but no deal, sometimes you have the $ & the deal lined up but no labor -You know what you can do based on where your numbers are
Equity is the most important in any biz - what your co. is actually worth -- the diff between the cost of running your biz & what you can sell it for -In RE, it’s easy to track - I can sell it for x & I owe y -In other bizs - how much profit your co. is making (working without you) -Bizs' are sold based on 3 years of value (usually), e.g. - biz making $100k a year would sell for $300k; $300k = $1M = $1M biz; $1M a year = $3M co. -The equity in most bizs is in RE -RE investors have the biggest asset others are looking to accumulate equity -You can use equity to pay yourself, refinance, take a little $, roll the rest back into the co. - but better to use it to build the co. -If you have $100k in equity, you don’t borrow $100k -If you have RE & sell the property - it’s to get into better quality assets - this is the only reason you sell in RE -Pyramiding - sell 1 to buy 2 or advance the class of the asset, e.g. sell a 2 family in bad neighborhood for 2 family in good neighborhood -You can change location, type of property, just by using equity -Equity is raised by raising the value of the co. (+ing income, -ing expenses) & by acquiring other co.'s or properties -Banks don’t care what you’re making if you have lots of equity -If your credit isn’t clean, it’s because you took a debt that you didn’t pay, no one is going to lend to someone who doesn’t pay their debts -RE is a debt-based biz
Equity is your retirement/exit plan - but also your leverage - how you get more flow into the co. -There are generally 2 different mindsets: some ppl are after cash flow, some after appreciation (the increase in value of an asset [equity]) -Ultimate strategy = have cash flow & understand that equity is the long-term play -What you are looking for - profit, flow, equity - dictates what you will do/focus on
Book of the Week
E-myth Real Estate Investor by Michael Gerber & Than Meryll
There is an order for starting financially:
- Get bills paid for the month
- Create stable income to pay for housing and basic necessities
- Create side hustle/start a business
- Assemble a team to grow the business
-Poor ppl save for a rainy day, rich ppl save to buy assets
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