Financial Planning – Not Just Investments – Part 1

FInancial Planning, who needs it? Many say my bank or stock broker is doing it for me. Is that enough? What should be included in your financial plan? Everything!

Having a clear focus on your financial goals is often an important place to start but few really have any idea of what they want financially in life. And even if they did, until they can see actual projections of how expensive a good lifestyle in the future will be, it’s impossible to formulate a savings strategy. With this in mind, consider developing you current financial plan complete with projections.

Begin with first collecting and organizing important data. You will need cash and investment account statements, pay stubs, income tax returns, employee benefits statements, insurance documents, estate planning documents and a well-thought out budget. Once you have collected all of this data, you can begin building your current financial plan.

Developing your financial position is the easiest place to start. If you have ever looked at a corporate annual report, think about how it is structured. In the beginning, smiling faces talk about what a wonderful year they had and detail all of their successes. Next might come the challenges that are ahead and a discussion about how the company will proceed to overcome these challenges. Finally comes the supporting materials – the financial statements. While the financial statements come last in the presentation, the accomplishments, challenges and action plan could not have been discussed until a current position has been established. Think of yourself or your family as a business and move forward accordingly.

Start with the balance sheet. The balance sheet lists all of your assets and liabilities. Assets include all of your bank accounts investment accounts, cash value insurance policies, real estate holdings, business entities such as partnerships; and personal property such as your home, car, boat, furniture, art, jewelry and anything else of value. Think about everything that you own that has a value and list it. Liabilities include your loans, credit card debts, car loan, mortgage and so forth. When you subtract the liabilities from your assets, what remains is your net worth.

Next, compile your cash flows. List all of your incomes. Include not just your salary but interest, dividends, rents and so forth. A good place to find this information easily is on your recent income tax return. Use your tax statement to reconcile the income generating assets on your balance sheet. If they don’t match up, you might have made a mistake. Add all your incomes together for the year and take away the expenses that you listed on your budget sheet. What is left is either a surplus or deficit. If you have a surplus, then you should have some idle cash sitting around in your back pocket or under your mattress. No? Don’t have a surplus? Well then, either you saved it or you spent it on items that you could not classify in your budget. Review your budget again and try to learn where the money went.

Make a list of your financial assumptions. Start with the balance sheet. Assign each asset class with a growth rate. Cash assets might grow at 0% to 2%, investment assets might grow at 3% to 8% (don’t include dividend distributions). Your home might grow at 3% to 5%. Be sure that your assumptions are rational. The same goes for your income and expenses. Determine how much your income will increase each year and in what year you will retire. List your assumptions about social security. Will you even receive it? If so, at what rate will it increase each year. Look at your expenses. How will inflation impact them in the future? Be sure to look at the historical inflation rate. While inflation based on government figures may be low now, most of us are certain that our expenses are growing at more than 2% per year. Be realistic. Bad assumptions will doom your plan. Finally, determine your life expectancy. Chances are that you may live to 90 or 95. Perhaps longer. Look at your family history to pick a good age. Don’t be too conservative. There is nothing worse than outliving your income.

With all your assumptions in place, you can now project your asset values and income statement out to your life expectancy. With these statements in hand, you can now realistically begin preparing your annual report. In you had a plan in place last year, you can gauge how well you have done from last year until now. You should be able to look at last year’s plan and see if your net worth has increased as you projected that it would. If it hasn’t, you’ll be able to identify what went wrong. It will either be that you didn’t earn what you thought you would, you spent more than you projected, or your assets didn’t perform as well as you predicted. With this information in hand, it’s easy to figure out a strategy to get back on track.

Developing your financial position is just the first part in your comprehensive financial plan. Income taxes, insurance, retirement planning, education planning, investment planning and estate planning are other elements you will want to include. As you can see, developing your comprehensive plan can take a lot of time and energy but in the end, will be well worth the effort.

If you choose to hire a fee-only financial planner to do the work, planning fees can range anywhere from $1,000 to $20,000 or even more if you go with a big name firm. For those who would prefer to try to do it on their own, there is a free resource that you can use. Visit Free Financial Planning Advice to see how to build your own plan. Whether you pay someone to do your plan or invest your own time to build it, the benefits you gain are sure to give you peace of mind.

Learning Real Estate Investing in DC, MD, VA, and Dallas – All You Need To Do Is Follow The System!

It is inevitable that if you go outside of the system, there will be SERIOUS turbulence in your business. If you were given guidelines to go by, and you decided that you wanted to add a little extra, chances are you shot yourself in the foot. Stay within the guidelines and do not buck the system. This will always hold true. Anyone that thought there business was different or anyone who thought their employees were different, can tell you that a system is nothing to ignore. There was a reason it was put in place and systems generally have a proven track record of success before they are used by many.

So there is a system of investing that is very simple, but somehow people decide to put a little twist on it and they end up with not so good deals. Check out the formula here: “We generally offer between 65 and 80 percent of the market value less repairs. Market value is determined by the average of the properties sold in your subdivision, with the same specs, that have sold in the last 180 days.” I am very unsure WHY investors ask whether a property valued at $___ and listed at $____ is a good deal. The system is in the formula.

Unless you have personal goals that prompt you to make decisions that would otherwise be considered careless investing, stick to the formula. You may ask, “When do I offer 65% less repairs?” Offer 65% as a cash purchase. If the seller wants the loan out of their name and they want a cash deal or new financing then 65% less repairs is the maximum you would pay for that property. AND NOT 70% of the listing price, 65% of the value determined by a comparative market analysis aka CMA or comps. Between 66% and 80%, offers should be made leaving the existing financing in place. We like to call these “subject to” purchases because they are transactions subject to the existing financing. “Is this an assumable mortgage?” Absolutely not. Assuming a mortgage originated after 1979 is illegal. When you purchase a property “subject to” existing financing you are simply taking over the payments. As the investor, you are taking title to the property but the loan (trade line) stays in the seller’s name. The maximum offer “subject to” would be 80% of market value less repairs.

Stay within this system and deals you will see very quickly whether to pursue or walk away from a deal.

Pre-Closing Steps to Create a Great Residential Investment

An investor can easily step back after placing a project under contract and feel that until closing that there is little or nothing to do. Unfortunately, this is a critical mistake. Nothing could be further from the truth. Investors have to look beyond the closing activity and focus on their reports, market studies, and other information to develop plans, budgets, capital improvements, schedules, staffing and service additions to boost earnings, reduce costs, and otherwise secure the investment.

Sometimes thousands of dollars per month can be cut with a program of leak repairs.

Developing plans to place units on individual meters can net $30 to $60 per unit in additional profitability.

Examining the current management’s operation and developing techniques to add value that converts to higher rents or higher occupancy can net huge results. In one case I’ve seen effective occupancy was 84%. By changing office hours effective occupancy increased 10% and increased the property value by more than 50% because of the marginal effect on profits.

Creating plans to accelerate changes to the property to reposition or to turn over underpaying residents can create huge increases in revenue, profitability and value. Couple this with a plan to sell the property quickly after taking over and very large gains can be netted to the investors in a very short period of time.

In another instance the property had several undeveloped unoccupied plots. Keeping these off the note actually increases the value of the property because in general value is based upon profitability for the rented units. In turn, the buyer can turn around and potentially sell plots to achieve an immediate gain.

Ideas like these are found by walking through the historical expenses, old utility statements, the appraisal, the engineering report and surveys. Next, you should examine the properties zoning and see what opportunities this may offer.

The thorough buyer will spend days investigating competing properties management and marketing. Often times, there are differences that can be exploited for real gains.

Finally, traffic studies should be reviewed and frontage compared. If a property can be acquired with strong traffic seeking signage permits often can creates significant revenue for investors.

In short, the pre-closing period is an opportunity to examine your asset and with imagination, dedication, study, and intense review profits can be increased, risks can be reduced, plans to make early gains developed and the general asset value heightened to the advantage of you and your investors. Good luck and great investing!