Mon Mar 11, 2013 2:54 pm MST

Levels of Wealth

There are many levels of wealth and often they are thought of in terms of dollars, but perhaps they are better thought of in terms of mindset. 

  Ultimately, the focus of one's mind is different at each level of wealth accumulation or lack thereof.  The dollars and cents may not matter as much as how one is strategically positioned or networked and how their focus is directed.  Here are some basic parameters for each level.

Level One - The Dole

    The first level is mostly focused on what can be received through the welfare of others.  Whether it is the government and taxpayers, a charity, friends and family or any combination of these.  There is not much thought of earning income and often it is penalized anyway so there is not much incentive either.  Net worth usually remains near zero in this level.  In order to move to the next level a major shift in mindset will need to be achieved where the inidividual can believe that they can work for a living and even weather the initial negative penalties to get to the next level.  This is often a very hard shift and usually only a few with the original character to attempt this change will be able to move ahead.

Level Two - The Worker

    The second level is the worker and they often work very hard.  Perhaps even two or three jobs just meet the bills.  They are commonly "paycheck to paycheck" and will need to check the bank account often to see whether or not to pay a bill on time or save it until more money comes in to the account.  Sometimes credit cards are used and often carry a balance with high interest rates that will continually keep a lid on any temporary savings.  Many extras get neglected or passed by since there often is not enough money to handle them including health related or general home or car maintenance.  If any big bills come in they will be difficult to handle and may require payroll advances or loans.  They often even opt out of benefits from normal savings such as 401k with company matches.  Net worth usually remains near zero in this level as savings are very hard to build.  To get to the next level requires some technical budgeting and a mindset shift to start thinking about savings and how to get a budget that will allow for a percentage of unknowns and still provide a positive monthly cash flow.  Initially this can seem difficult but it often does not require as much of change in standard of living as one might think.  Focus on those costs that are the highest and alleviate those first.  These may require some hard or even drastic choices such as living in another house that can cut payments down.  Finding a vehicle that can be paid for in cash or with low payments to avoid high interest rates.  Insurance and many of the other known monthly high percentage consumers of the budget will need to be the focus of cost cutting.  Income generation is also good but at this level the main objective is cost management and allocating those gains to savings first before other desired expeneses.  This will lead to the next level of savings.

Level Three - The Saver

    The third level is no longer a "paycheck to paycheck" worker.  They still work but do not need to check the bank account to see if there is enough money to cover the bills.  The monthly budget is set up to provide a solid positive monthly cashflow and continues to accelerate as income goes up gradually.  Net worth usually remains low but has a slow steady increase.   401k plans are utilized and even matched.  Additional savings vehicles may be used such as IRAs, Roth IRAs, Roth 401k, 403b, etc.  The individual believes in saving money but often does not think of enhancing its potential or elevating investment resources.   The next level requires a mindset change that initially will challenge the risk tolerance of the individual.  Ironically, the greater risk is not pursuing a higher invesment potential because a saver is subject to the hidden taxes to their wealth just as everyone else is including inflation, devalution of currency and many of the other invisible taxes to stored wealth.  If a conservative saver is increasing networth by 3% per year and inflation and other taxes are silently consuming at an average rate of 4% per year, the saver is not actually saving anything but just holding steady.

Level Four - The Middle Class

    The fourth level is usually associated with higher income earners in the standard definition of middle class.  They have a decent amount of income which affords an healthy positive cash flow per month and they are able to spend disposable income on their desires.  Net worth is moderate and can even be high in some cases but fluctuates and can often swing heavily on market events.  Level four income earners do save and will even dabble in attempts to increase investment potentials on their money by buying stocks, mutual funds, real estate and other investment vehicles.  There can be speculation and this can lead to higher risk investments and usually due a belief that they can be recovered from in time with a high income earning occupation.  Sometimes individuals will even hire financial advisors that will take up to 2% of their wealth with no added benefit other than to provide emotional counselling when a financial matter comes up or markets swing.  In order to move to the next level, the mindset change will need to focus on capital preservation by fully maximizing the potential of saved money, lowering risk and adhering to the original lessons of the lower levels which involved smart budgeting.  The higher income occupation may not always be around of may not always be of interest especially in later years.  It would be nice to have passive investments with high returns and lower risk eventually.  This will require discipline to maximize invesments even though it seems like there is a lot of money to work with.

Level Five - The Investor

    The fifth level is the savvy investor.  The previous two levels are also investors as they are using many of the same investment vehicles, however the fifth level is highly maximizing them for capital preservation, growth and high yields with lower risk.  Net worth usually remains high to very high and grows quickly often with double digit percentage gains per year.  The majority of all assets are providing yields consistently.  Very little money sits on the sidelines as it is quickly put to work.  The mindset is not as much on consumption as the previous level.  Advanced strategies include combinations with business and starting businesses or partnerships that can be used to provide goods and services while allowing significant tax deductions to maintain capital.  Other people's money is often used at this level for leverage, however it is usually limited to personally guaranteed loans or partner capital.   Some networked capital may be available.  The transition to the next level will require a mindset that taps in to this much larger network with strong alliances to potential big money capital or power sources.

Level Six - The Dealer

    The sixth level is the dealer.  It could also be considered the highly networked individual who has already acheived a great deal of wealth or posiition of power.  This can vary greatly and perhaps there is even a level beyond this including politicians and other highly influential people who pull the strings.  Net worth usually is very high and sometimes extreme.  Money is easy to come by and the mindset is changed to a networked mind where they no longer have to make it on a technical mindset such as the previous levels.  Deals can be be made to provide great sums of money or residual income for ages with accelerated growth.    Even technical minds here can excel using yield spreads where they in control of a great sum of other people's money.  Some examples include bankers that make 4% to 6% on hundred of millions of dollars that is not even their own money.  In fact, it can be money generated from government computers or the federal reserve.

Mon Dec 19, 2011 7:50 am MST

Home Flip Rehab

Step 1: Demolition: Rip Out All Old Cabinets and Countertops, Demo Everything

  • Demo kitchen: remove all cabinets, countertops, appliances, walls etc, collapse cabinets, and crush cabinets, saves space in dumpster
  • Demo baths: save tub and surround if possible, re-glaze it, saves labor, comes with warranty, $150 to replace
  • Remove all old fixtures, sinks, toilets, showers, walls, etc, demo tile in bathroom, usually take the tile off without demo’ing the walls, then skim and patch the walls
  • Take out all trash, order dumpster, put all trash in garage until dumpster arrives
  • Baseboards: keep trim and paint if possible, especially in older houses, adds character
  • All doors off, habitat for humanity will take old doors and frames
  • Save what you can:
    • Windows: Almost always replace windows
    • Siding: Usually keep old siding and paint
    • Garage doors: 50/50 save them and use
    • Hardwood floors: refinish

Make a list of what you are keeping, tear out everything else.

Step 2: Repair and Replace Utilities, Electrical and Plumbing Check Outlets, Electrical Panels and Repair Test All Utilities

  • Water lines
  • Plumbing: get water on and then run the lines, make sure the water is working, check drains, cheap for materials, work is a pain the butt
  • Copper: has to be perfect but its solid, has to be sodered with gas and flames, most expensive, will add some value to your house, worth it in a higher end home
  • PVC: has some bend in it, plastic, anyone can learn to glue, like a maze, less expensive, 1/2 to 3/4 of the cost of copper
  • PEX: bendable PVC, comes in loops of piping, Encrimper: Tool, water line, ring on it, comes in rolls, red blue, cold hot, drain line and more expensive, 3-4 inch, supply, tie offs, tie offs 1/2 inch
  • Drain: 1 1/2 inch to 4 inch
  • Water lines are less: 1/2 inch or ¾, comes out of tank
  • Hire plumber: $50 an hour or less is good for a plumber, $60 -$75 an hour more expensive side
  • Electrical

Test each outlet and check all breakers to see if they are tripping or not working. They may need changed out. Label each breaker in panel and see which breakers are running each room and label each breaker in the panel. Once all breakers are on, make sure all outlets are hot and they work. Go into the wall, see if outlets is bad, make sure wire coming in to the wall is hot. Check for main break in wall. Check for wires that are not connected.

  • Electrical panel: $100, comes with a few breakers
  • Breakers: to fill the box, cheapest breakers are $4, higher amp breakers are $8, $100 for an additional 15 breakers, on 3/4 of our houses we put new panel in, Bad Brands = Federal Pacific
  • LABOR install panel and breakers = $150
  • Re-wire a whole house = $2,000 – $3,000

OR - HIRE AN ELECTRICIAN: $30 an hour on low end, $50 an hour is the going rate, pay for their time and materials at cost, $60 -$75 an hour is high end.

Step 3: Repairs Walls, Prepare For Paint, Mud, Skim, Scrape Sand, Patch, Tape

This step could take 2 days or 8 weeks depending on the house and extent of the work.

It's now time to put everything back together. Including patching and fixing walls, repairs and replace drywall, patch nail holes in walls, repair any drywall from the demo / electrical and plumbing fixes, want to do drywall, especially in the kitchen.

  • PATCH: Mostly time and labor, materials are cheap
  • SKIM: mud with a fat knife, watch out for texturing
  • Cracks: fix and skim and patch

Do not want to do too much paneling: paint white, paint a wall color, prime it white, sticks to shiny paneling

Bathrooms: Always keep it white

This can be frustrating step, lots of patching and mud and tape.

DRYWALL FINISHER!!!! $500 for whole house for texturing and final drywall.

Step 4: Paint – Get Painter in the House, Get Everyone Else out Of the House, Bedrooms, Garage, Living Room, Beds, Baths, Sunroom Step 4: PAINT: DOORS, KITCHENS, BATHS (takes 1 – 2 weeks)

NOTE: Start kitchens and baths, if electrical is all done you are ready to put it back together

Paint the entire house first, you don’t want to get paint on floors and cabinetss. It's hard to work around guys who are painting - some contractors like to paint the entire house in 2-3 days and some guys don’t mind working in one room while you are working on another.

Doors are re-installed and painted: contractors can paint the doors and all the trim, paint trim prior to install in the garage – easier / quicker

  • PAINT LABOR: 1500 sq ft = $1500, $1 a ft just for labor
  • PAINT MATERIALS: 2000-2500 sq ft, $2500

Step 5: Install: Reinstallation Of Everything, Lights, Cabinets, Countertops, Flooring, Appliances, and Finish Work.

House is painted, plumbing and electrical is done, doors are installed, get windows in before paint, order, windows, vents, outlet covers replaced, fix outlets, kitchen and bath install

  • Kitchens, $100 a cabinet, basic oak, Ready To Assemble (RTA) cabinets, standard, sounds cheap but it’s not, Ready to assemble, 30 inch cabinets, more expensive houses, 42′ cabinets, all the way to the ceiling
  • Cabinets and countertops: material = laminate Formica, full kitchen = 4 pieces, $60 each, $250 for full kitchen, pre-made, home depot OR Lowes, Coriean, less than $50 a sq ft, fake granite, granite = 50 – $80 a ft, special, $40 a foot
  • Backsplash: $4 – $8, 4 inch tiles, by sq ft, medium priced, sink cut out of countertops and installed
  • Hook up plumbing. Make sure it works
  • Flooring: ceramic tile, $1.5 a ft +, 12 x 12 tiles OR 18 x 18, $1.70 a tile, LOWES, stick vinyl tiles, 1 – $1.20, per ft, look for discounted tiles, usually not as nice looking
  • Appliances: go in last when it’s ready to stage in final week of rehab, stainless steel, look for scratch and dent on craigslist
  • Baths: new tub, do this along with plumbing in week 2. Drywall in bathroom after tub in week 2.

Step 6: Finish Work: Double Check All Holes Are Patched, and Painted, Landscaping, Vacuum, Staging,


  • Flooring, do this last b/c you are walking on it, carpet
  • Appliances
  • Pressure washing, gutters, replacing gutters, can do at any time depending on weather
  • Roof
  • Landscaping, $1,000 total, $200 on plants, $100- $150 on mulch, plus labor
  • Windows: depending on how fast they are shipped
  • MISC week: final touches
  • Staging the house

STEP 7: PROPERTY LAUNCH: staging, vacuum, pictures, MLS, prepare for property launch, prepare marketing, property launches are always on Sundays from 2-4

Thu Sep 24, 2009 11:28 am MST

Internal Rate of Return in Real Estate Analysis


Internal rate of return (IRR) is one of the rate of return measurements more widely used during a real estate analysis for good reason: The aspect of time value of money associated with internal rate of return considers that the timing of receipts from the investment property can be as important as the amount received.

Unlike some other popular returns used by investors to analyze the performance and profitability of rental income properties that don't account for the time value of money such as capitalization rate and cash on cash, IRR does.

As a result, internal rate of return is generally more popular amongst real estate investors than other rates of return because it calculates for time value of money and provides a linkage between present value (PV) and future (FV) of any benefit stream.

The idea is straightforward.

Because a dollar in the hand today is preferable to one a year or five years from now, real estate investors want to take into account both the timing and the scale of cash flows generated by the income-producing property to determine what that rental income stream is worth today. Internal rate of return reveals the rate at which future cash flows must be discounted to equal the amount of investment exactly.

How IRR Works

Internal rate of return reveals in mathematical terms what a real estate investor's initial cash investment will yield based on an expected stream of future cash flows discounted to equal today's dollars, not tomorrow's dollars.

Consider this.

When you make a real estate investment, you are investing cash in order to receive a series of future annual cash flows resulting from rental income plus a tidy profit when you sell the property.

The challenge for real estate investors, then, is to discover what rate of return the investor's initial equity will make based upon those periodic future cash flows at the same time it considers the number of time periods (years) under consideration in the holding period.

The internal rate of return model meets that challenge by creating a single discount rate whereby all future cash flows can be discounted until they equal the investor's initial investment.

How to Calculate

Calculating IRR manually is not practical because the calculation involves tedious mathematical solutions that take a lot time. Even the most skilled investment real estate specialist will typically use a financial calculator or real estate investment software program to compute it.

So we'll ignore the formula (you can find it online if you really care to know it) and instead consider what it signifies.

Say you have $100,000 to invest in a rental income property and plan to hold it for five years. During those years, you plan on receiving five annual cash flows and then an additional amount from the sale of the property (also known as reversion). When you find the unique rate of return that discounts the sum of all those future cash flows until it equals your initial investment, you will have the internal rate of return.

In other words, it shows you what your cash investment will yield for those cash flow projections based upon today's value of the dollar, or as if those cash flows were collected today rather then in the future.

Of course, no single element of a real estate analysis should determine an investment decision to the exclusion of other factors and measurements. But internal rate of return can help guide your purchasing decision so plan to use it.

One final thought. If you are serious about real estate investing, then it is highly recommended that you invest in a real estate investment software solution. In this case, you not only will get a wide range of essential returns that includes IRR, but also benefit from all real estate analysis features that quality investment software provides.

Wed Sep 23, 2009 3:07 pm MST

Investment Decisions for Real Estate Investors

Real Estate Investors

The investment decision real estate investors make as to whether or not to purchase a rental property ultimately requires serious number crunching that measures the property's financial performance.

But even prudent calculations without first collecting some raw data related to the market (to shape an offer) and then about the property itself (once an offer is written) will not guarantee that the investor is making the most prudent investment decision.

In this article, we'll briefly discuss both the market and property data investors must consider before and during the investment process.

The Market Data

Before a real estate investor can decide on how much to offer for a rental property, he or she must understand as much as possible about the conditions of the real estate market surrounding the property in order to structure a meaningful offer.

We recommend that investors survey and collect data on at least these three market indicators.

1) Comparable Sales Conducting a survey to see what other similar income properties have recently sold for is a proven way to evaluate whether a seller's asking price is in line with realistic property value. Keep the sold comparables as recent as possible (perhaps within the past six months to one year) and the properties themselves as comparable as possible. You want to look at rental properties similar in usage, location, size, and condition to the rental property you are considering. Real estate agents are generally prepared to do this for you, or you can conduct your own survey by researching the public records at local tax assessor's office or making a call to several real estate appraisers.

2) Rental Rates and Expenses Conducting a survey to see what tenants are willing to pay for space and owners are obliged to pay for operating expenses in the surrounding area for similar kinds of rental property is also valuable information. Just be sure that the rents you survey reflect similar unit configurations such as number of bedrooms and baths, size, and so on as well as property location, condition, and amenities. It would be misleading to think that the subject property (say, an apartment complex in a C location in poor condition) will generate the same rents as a recently remodeled apartment complex in an A or B location for instance.

3) Capitalization Rates Knowing what the typical capitalization rate is for a particular kind of property inside a market area is very helpful. By knowing at what cap rates other similar rental properties have been selling for gives you a hint on how to structure an offer. If you aren't aware of what a cap rate is, or how to calculate it, you should find out because cap rates are one of the more important returns used in real estate investing; a qualified broker with knowledge about real estate investing or various resources online should provide the answers you require.

The Property Data

Once you have an acceptable offer, it is then incumbent upon you to be sure that the numbers used to make the subject property's cash flow calculations are truthful and correct. Remember, real estate investors purchase an investment property's cash flow (or income stream). We recommend that you validate the accuracy of at least these elements during your due diligence; obtain from the seller or in some cases indirectly from other sources.

1) Leases and Rental Agreements - You become subject to the terms of the leases and rental agreements if you do buy the property, so examine tenant agreements closely. What do they say about rental rates, renewal options, and termination? How long does each lease run? Do they agree with the seller's representation of the property's income? You must be able to count on the current figures to make forecasts about the rental property's future performance.

2) Property Tax Bill - By looking at the property's tax bill, you can confirm the accuracy of this expense. You might even uncover whether some sort of tax abatement granted to the current owner that might expire or not apply to you as the new owner, or maybe some other tax issue that could impact you negatively.

3) Utility Bills - At least spot-check what the owner has been paying for gas, electric, water and sewer. Most utility companies will give you usage information if you call, and the information can be a useful way to discover discrepancies in the operating expenses presented you for the property.

4) Maintenance Records - Look for how much and where the owner has been spending money to maintain the property. Normal wear and tear can be expected, but repetitively having to replace broken windows, for example, can be an indication of tenant or neighborhood problems.

5) Seller's Schedule E Tax Return - This information is helpful because you see the income and expenses the seller has been reporting to the IRS about the property. It's quite unlikely that an owner will claim too much income or too little expense on a tax return, so this can be an illuminating source of information. Just be sure to include a request to see the Schedule E in your offer because most owner's are reluctant to provide it unless it's been made part of the offer.

Okay, now re-create your real estate analysis using the data you discover at odds with your original number crunching, and there you have it.