Golden Rules of Financial Safety

Some of the best advice is timeless. Here’re some nuggets of wisdom from the late Harry Browne.

  • Your career provides your wealth
  • Don’t assume you can replace your wealth
  • Recognise the difference between investing and speculating & speculate only with money you can afford to lose
  • No one can predict the future
  • No one can move you in and and of investments consistently with precise and profitable timing
  • No trading system will work as well in the future as it did in the past
  • Don’t use leverage
  • Don’t let anyone make your decisions
  • Don’t ever do anything you don’t understand
  • Don’t depend on any one investment, institution or person for your safety
  • Create a bulletproof portfolio for protection
  • Keep some assets outside the country in which you live
  • Beware of tax-avoidance schemes
  • When in doubt, err on the side of safety

These topics are covered in the timeless classic – Fail-safe Investing, probably the best $10 you’ll spend on personal finance and investing!

Understanding Real Estate Market Cycles and How To Invest Based On Your Own Research

A lot of people have been asking me how I do my research for places to invest in. Here’s my attempt to explain the process.

It started when I sold my home and was wondering where to invest the proceeds. I moved into a condo that had previously been a rental so I didn’t need any of the money to buy a primary residence. I thought that California was overpriced and I definitely wanted to invest out of state.

I spent a lot of time and money reading books and proprietary reports about market cycles, its causes and effects. One great book is Bruce Norris’s California Countdown. I found out the periodically the California market experiences a rapid run-up in pricing, then it crashes, stagnates, and then rises again. As housing becomes less and less affordable, people start to migrate to neighboring states.

How do you know people are starting to migrate out of your city witout waiting for the 2008 census? You can see these trends through the Unofficial Migration Indicator at Check out the cost of a one-way rental for any given city and any other city. Let’s consider the cost of renting a small truck between San Diego, CA and Phoenix, AZ. It cost $225 to rent to from San Diego to Phoenix but only $101 to bring it back! This means that there are probably twice as many people moving out of San Diego and into Phoenix than the other way around. This is basic supply and demand. So you want to make sure that the price is constant both ways or in your favor.

You can also check out population and job growth trends at a variety of different websites, but don’t always assume the given data is correct. You can get data at cities chambers of commerce sites or by google searches.
here are some useful links:
US Census Bureau
Milken Institute

I also found out that whenever prices in neighboring states start to rise, California property prices have started to peak . This is because at the top of the cycle Californians can’t afford to live here anymore and they start moving out of California and into places where housing is more affordable. Eventually as these places begin to rise and CA prices begin to drop, the lure of California becomes irrestible and the cycle starts all over again. Accordingly, there are states that
1) follow an opposite cycle from Calfornia [contrarian states]
2) follow a similar cycle to California
3) states that do nothing or do their own thing.

Contrarian states are states like Arizona, Oregon, Utah, Colorado,etc
Similar states are Connecticut, Florida, Maryland, Nevada, New Hampshire, etc
Limited movement states are Alaska, Arkansas, Idaho,Indiana, the Carolinas and Dakotas, Ohio,etc.

Each state behaves differently so don’t take this as gospel. Do your due diligence.

Look at prospective states or cities and find out how they’ve done historically. I looked at several states before I settled on Utah.
AZ – already too much appreciation in the residential market. I had missed the boat. vacancies are sky-high. commercial still seems good.
TX – It really hasn’t done anything exciting in the past 25 yrs. its a safe place to park money. plus the 3% property tax kills your cashflow.
NM – its looks like a safe place to park your money. a few people I know used to live there and said the local government was not pro-biz.
FL – too late to the party. plus 2% property tax. i had bought 2 pre-construction houses there in early 2004, but the builder had gone under, so I basically lost out on several months of appreciation.
WA – mainly looked at seattle since i went there in july 2004. local economy not
diverse enough for my liking. only 2 main biz – starbucks and microsoft. although the projected job growth is there, the salaries still seem low compared to the house prices/rents.
NY – looked at upstate new york. property tax is over 5%. job growth and population growth are both negative. good cashflow but i’ll wait for the indicators to turn before venturing into this territory.
UT – finally something i like! Positive job and population growth. The market was been flat for several years and had just started to perk up. saw 6.5% avg appreciation state-wide last year – that made front page news!!! govenor is pro-biz (he would be, he’s the son of a billionaire!). SLC is land locked. There’s limited land, always a good sign. Saint George is a hot market too. Also, Utah follows an opposite cycle from california. During the last cycle between 1993 and 1997, Utah saw a 64% appreciation, while California saw only 3%. Between 1999 and 2004, while Southern California saw a 125% gain, Utah saw less than 5%.

In 2003 Utah was 49th in the country in terms of appreciation, beating only Texas. However in 2004, it jumped to the 36th spot. Between 2001 and 2003, Utah saw 21 months of zero or negative job growth, which is why prices didn’t boom in a low interest rate period. 6 months ago, it was 2nd in the nation in terms of job growth (3.7%) lagging only behind Nevada. Since the beginning of 2005, the unemployment rate has been lower than the national average.

Utah also has the nation’s highest birth rates and life expectancy. Over the next 25 years, its estimated that the population will grow between 58 and 75% making it the 5th fastest growing state.

At this point I stopped looking for places to invest and started looking for deals and a team. [feel free to email me for contacts and I’ll hook you up with them]. I also tied up with local builders and developers. I booked several pre-construction homes there and have already closed on 5 of them. I just bought another lot there next to Lake Utah with a build-out time of 12 months. Some of them have gone up 10-20% since the time i’ve booked them.

It definitely pays to do your own research!

How I Started Investing In Real Estate

In September 2000 i caught the flu and while I was probably well enough to go to work, I decided to take a week off and relax. I spent a whole week sitting in Barnes and Nobles reading all sorts of business and investing books.

That week I read the Rich Dad Poor Dad and it got me thinking about how to achieve financial independence. At the time I was fresh from being slaughtered in the stock market crash, had $3k in savings, $25k car loan and $8.5k on credit cards. [luckily the credit card APR was 0% for life]. But I was getting married in a few months and didn’t really do anything about it.

A month after I got married, I realized that if I was ever to buy any real estate in the San Diego market I needed to get in quickly, before it escalated beyond my reach. I got an FHA loan for where I only had to put down 3%. along with some closing costs I needed 6k and i needed 4k to pay off some off one of the credit cards. I borrowed the 6k from a close friend and my wife’s aunt. Luckily I was able to pay them off within 4 months from my tax refund.

In October 2001 I lost my job directly due to the attacks on the World Trade Center. I was unemployed for 4 months and it sucked! I vowed I’d start working on becoming financially free. In Feb 2002 I finally found a job and revisited the Rich Dad books. Kiyosaki makes a great story but he’s low on ideas for actual implementation. I then spent the next several months reading probably a hundred books on investing. It was at this time I learnt about real estate investing and the power of leverage. I joined the local real estate investment club and I’ve been going somewhat regularly ever since. In August 2002, I refinanced my condo and pulled out $20k to pay off my remaining car loan and credit card debt. It cost me around $3.5k to refinance but I’ve been debt free ever since!

I spent the next several months looking at deals. I found a few stellar deals and not having enough money to pull it off myself, I tried to rope in my friends. But nothing worked out. I just didn’t have the power to convince them. Long story short, I decided to go my own way. I bought another condo in the same complex where I lived in July 2003. it was a full $100k more than the first one I bought 2 years earlier, but i was pretty sure that it would still go up another $55k in the next 12 months. I bought it 100% financed with 4.5k in closing costs. I rented it out and I was $100 negative per month. actually only $50, if you consider i rented it out 2 weeks before i had a payment due.

Six months later i bought a small rental house in Victorville, California. I rented it out under the section 8 program. The government paid $629 of the rent. the tenant was supposed to pay another $389 but he only paid every 2nd or 3rd month. My payments were only $550 so I was still cashflowing.

In July 2004 I sold my original condo for twice what i originally paid for it and moved into the rental close by. Now i had so much money, I didnt know what to do. I definitely didnt want to buy anything else in CA. So I did a lot of research about real estate market cycles and correlations between CA prices and prices in other states. I found there was a correlation but thats enough data for another post. Anyway I decided that I was going to invest in Salt Lake City, Utah. Based on my study of historical price trends, I predicted that SLC was going to experience a boom in the housing prices and they would jump atleast 50% over the next 4 years. Incidentally this optimism wasn’t shared by anyone else, including the agents I worked with in Utah!. It’s always good to be the first person in an a good investment.

In November I both 2 houses for around $215k including closing costs. I decided to do Lease-Options so i could get better cashflow. Over the next several months I booked several more, some of which have already closed. Seeing the way the markets jumped this year, I’ve decided against doing anymore lease-options. One of the tenants is currently exercising his option after only 4 months!!!

In July 2005 I sold the rental condo that I moved into, for $70k over what i paid for it after living in it for 12 months. I’m actually renting it back from the buyer and she’s actually negative several hundred dollars every month. thank god i’m not in the business of subsidizing my tenants!

In august 2005 i also sold the house in Victoville netting around 75K in profit. its part of a 1031 exchange which i’m using to buy 2 more homes in Salt Lake City.

In July I booked 5 homes in Boise, Idaho in partnership with my friends. I get 50% of the profit but the downpayment is coming out of my Corporate pension plan while my friends are using their credit for the rest. They’ve gone up 50-60k since then and they still haven’t been built out. We plan to flip at closing. lets see how that works out.

So thats the story so far. send me your comments about how you guys started.