How To Become A Real Estate Mogul (Stage 4)
BOOM... we've made it to our last blog post in our 4 part series on becoming a real estate mogul. If you need to catch up...
- Stage #1 - Closing Your First “No Money Down” Real Estate Deal Stage
- Stage #2 - Ramping Up, Building Out Systems, And Firing YourselfStage
- Stage #3 - Doing Fewer, Bigger, Better Deals
According to Wikipedia, a Mogul is defined as "an important or powerful person who has achieved wealth and prominence in a particular industry". As a real estate educator, I believe that each one of us must evolve through 4 stages to achieve mogul status. Creating an empire doesn't happen by accident and it will take the right education, the right relationships, and purposeful action on your part to achieve your dreams. In a moment I am going to cover the fourth and final stage (Becoming A Tax-Adverse, Passive Real Estate Investor). In this stage we transition from being "active" investors, to allowing our money to "go to work for us". But before I do, I want to share my theory on how real estate investors evolve and let's see if you can guess where you currently are, and visualize how much further you have to go in order to become a real estate mogul!
Maslow's 4 Stages Of Learning Theory
In 1940 famed Psychologist Abraham Maslow (famous for his Hierarchy of Needs Pyramid), theorized a concept he called the 4 Stages of Competence. The theory looked like this:To keep it simple, basically what Maslow was theorizing was once we realize that we need to learn a new skill, we transition from Unconscious and Incompetent to Conscious but still Incompetent. We know that we don't know or understand something, and that bothers us enough to do something about it. As we learn and practice, we transition to Conscious and Competent (we now know how to do something which takes a lot of effort), and eventually become so good at the skill that we master it and become Unconscious and Competent.
Think of driving a car... half the time you are daydreaming and just end up at your destination... but because you have mastered the skill of "driving", you can unconsciously do it well.
I like the direction Maslow was going, but think it is missing a few important phases every investor goes through when evolving into a real estate mogul!
The Evolution Of A Real Estate Mogul
I believe we all start off LOST... completely unaware of the major benefits being a real estate investor can give us. We don't know what we don't know, and are unconsciously incompetent. Then something happens in our lives that ignites an interest in investing and we become a BEGINNER. Although we are inept, we are now aware that we don't know how to invest in real estate. Curiosity drives us to learn more, but at the moment we are confused and overwhelmed by all the new information we are starting to take on. At this point we are Consciously incompetent.
It is during this phase we start buying courses, taking classes and attending events/seminars.
As we enter the STUDENT phase, we begin to know, but are extremely self conscious of our abilities. Frazzled we slowly move forward, but have no real world experience, systems, or team to support our new business. Learning truly begins in this phase.
The "student" phase can be quick (if you have the right education), or take years. This is the main phase where most new investors FAIL and quit because they invest in the wrong educational courses, and with the wrong educators.
SIDE NOTE - Being a good educator is hard work. Think back to when you were a young kid in grade school. I bet you can only remember the name of 1 (maybe 2) teachers that truly made an impact on your life. The rest are just distant memories. For me it was Mr. Safranski in the 2nd grade. He was the first teacher to notice my boredom and started challenging me. He worked diligently with my parents to stimulate my creativity. I used to come home and cry because he was "mean". However, because of his mentorship, I grew up "thinking outside the box", which helped tremendously in school and with my real estate career. I bring this up because your choice of an educational provider is just as important as your choice to learn how to invest in real estate!
As our educational phase comes to an end (it really never does, I'm talking about the phase where we build our framework), we venture out into the real world and begin applying our new skills. This is the PRACTITIONER phase where we continue to develop through awkwardly doing deals. We know enough to be dangerous, and our systems and team are starting to support our business goals. During this phase we are consciously competent and only time, actively doing a lot of deals, and surrounding ourselves with the "right" people will we advance to the EXPERT phase.
This is my favorite stage to witness my mentor students achieve because in the EXPERT phase, we finally feel comfortable with our skills. Our proven systems and hand-picked power team help us easily do as many deals as we want to do. Our marketing is on auto-pilot and we are branded as the local area expert. We can easily maximize profits by using multiple investing strategies, and minimize taxes by strategically investing in the right assets. Our confidence comes from experience, and through our relationships we can foresee market shifts coming and plan accordingly. In this phase, our knowledge is finally rooted.
So how does one transcend from being an "EXPERT" to being a real estate "MOGUL"?
Stage #4 - Becoming A Tax-Adverse, Passive Real Estate Investor
Did you know that according to recently released 2010 tax data, the top 1% of income earners (people earning $369,691 or more) paid over 37% of the overall taxes in America. The top 5% of earners (everyone making $161,579 or more) paid 59% of all taxes in America. And with the fiscal cliff still not resolved (yes congress is actually considering getting rid of the Mortgage Interest deduction), your tax burden as a successful entrepreneur can be "through the roof" if you don't proactively do something about it.
So here is my suggestion to adding a “tax-free” strategy to your investing arsenal...
Step #1 -Set yourself up with a self-directed IRA (I suggest a ROTH 401k or a ROTH IRA). This will allow you to invest in any investment not expressly prohibited by law (Life Insurance Contracts and Collectibles). That means you can invest in Real Estate, Deeds of Trust, Real Estate Options, Lease Options, "Subject To" Real Estate, Unsecured Notes, Limited Liability Companies, Tax Lien certificates, Foreclosure Property, Stocks, Bonds, Race Horses, Factored Invoices, and Oil/Gas Interests just to name a few. Currently you can “seed” your self-directed ROTH IRA with $5,000 a year, and $17,000 for a ROTH 401k (go here to see the max limits --> http://www.irs.gov/Retirement-Plans/Retirement-Pla...).
Once you have your IRA set up, you can begin “cherry picking” out the money-makers and buy it “For The Benefit Of Your IRA”. As long as you adhere to all the rules of the IRA (and avoid Unrelated Business Income otherwise known as UBI) you can earn your profits “tax-free”. You can even wholesale real estate inside of your IRA by having your IRA put up the earnest money, then when you assign the contract... your assignment fee goes back into your IRA!
SIDE NOTE: Once you “seed” your IRA, you can actually partner your IRA with someone else’s that has enough money to fund the deal. I have done this numerous times to get my IRA going and eventually I had enough money in there to do the deals on my own! For example, when I did my first deal inside my self-directed IRA (which only had $5,000 at the time) I found the deal (a little $38,000 4/2 in West Phoenix). I had my IRA put up $4,000 and had a partners IRA put up the rest (including $17,000 for rehab). We seller financed the property after it was repaired for $112,000 with $12,000 down (approximately 9% interest on the $100,000 note which was amortized over 30 years, with a balloon in 7). Over the 7 years, my IRA will grow by approximately $30,000 and my partner will get the rest of the profits.
Step #2 - Get yourself set up with an IRA-Owned LLC or Trust. There are many benefits to having your IRA own an LLC or Trust which include Privacy, Speed, Asset Protection, and Convenience. By having “checkbook control”, an experienced investor can (in some circumstances) manage their own IRA-Owned Entity without compensation. This allows you to keep your funds at a local bank and by-pass the need to have your custodian “sign off” and release the money.
SIDE NOTE: You need to proceed with caution when investing your IRA funds into an Entity that you own or control. Understanding the in’s and out’s of investing in real estate using your IRA should be taken seriously, and if done correctly, you can avoid paying taxes on your profit forever!!!! If this is something that you are interested in learning more about I would get to know Dyches Boddiford. His website is www.Assets101.com and he holds classes throughout the year on the subject of IRA owned LLC’s, Trusts, and Asset Protection. He is a very bright guy and I took his class when I was first starting to learn about IRA investing. Plus, a lot of high level investors attend his workshops so the networking is perfect to find IRA partners to help you fund your first couple of deals!
Growing Your IRA, Amassing Real Wealth, And Becoming A Real Estate Mogul
So I am hoping that by now you have seen a method to my madness. First you need to master the art of quick turning real estate. Then perfect your business systems and hire the right team members so you can ramp up, and work less. Next do bigger deals by rehabbing the best leads for HUGE paydays. And finally, cherry pick out the “keepers”, buy them inside your IRA, fix them up, and seller finance them so you can earn a nice yield on your money. Your overall goal as a real estate mogul is to transition from being a real estate investor... to being a yield investor. Yield is defined as the rate of return on an investment expressed as a percent. When you buy a property inside your IRA, fix it up, and seller finance it, you are essentially becoming the bank and earning a yield on your money. You don’t have to fix toilets, or deal with tenants. Your money is working and earning you a return while you're out living the good life. Eventually you will become so good at “transactional engineering” and “negotiating", that you will unconsciously be competent in everything that you do. Through all your real estate investing knowledge and expertise, you will easily create cash now, cash flow, and cash later... and that’s how you transition from being an EXPERT to a REAL ESTATE MOGUL!!!
Well, that concludes our 4 part series on becoming a real estate mogul. I hope you enjoyed the blog posts and I look forward to hearing your comments.
Until next time,