Buying and Selling Local Rental Properties

“If you fall, pick something up while you’re down there.” – New England proverb

It seems to me that there are two big secrets in making rental real estate work for you. One has to do with the old “location/location/location” axiom. The other is about the condition of the property you buy.

Let’s start with some rules, keeping in mind that rules are made to be followed until you understand the principles behind them.

1. Buy properties in your local area.

To be a successful investor, you have to know what you are doing. And if you have been living where you are living for any number of years, you already have more knowledge about local real estate than you think. You already have a clear idea of the good neighborhoods, the not-so-good ones, and the ones you need to stay out of. You may have developed a feeling for the up-and-comers. By staying in your local area, you give yourself the chance to really know the market. And this is the most important factor in limiting your risk and increasing your chances for profits.

2. Invest in good or up-and-coming properties.

I can tell you from experience that the old saying about the three rules of real estate being “location, location, location” is true. But there are two kinds of good locations: those that are already established as good and those that are on their way to becoming good. You can make good money with both.

Here’s how …

* In good neighborhoods, buy the least-expensive property you can find. That way, any money you spend fixing it up (if you fix it up wisely) will bring you double or triple your invested dollars. When you buy a poor piece of property in a good neighborhood, you get the benefit of the neighborhood to lift your selling price once the property looks acceptable. Of course, it’s not easy to get the least-expensive piece of property in such a good neighborhood cheap. Most of the time, the property owner realizes what’s going on. But with really dilapidated homes, and sometimes with owner-sold properties, you can get a real bargain.

A quick example: A couple of months ago, I brought a 1,200-square-foot, two-bedroom apartment in my hometown for $62,000 and rented it out for $1,000 a month. That’s a very good deal, even after considering the three grand I spent fixing it up.

* In up-and-coming neighborhoods, buy properties in clusters — either by yourself or with a consortium of buyers. That way, when you all renovate, you will upgrade the look of the area you are in — and this will bring up prices, sometimes even more than you’d guess.

* Whenever possible, buy newer, solid structures. There’s nothing worse than managing a rundown building. The tenants complain. They are reluctant to pay the rent. They treat you like a crook. It’s bad. Be extra careful about the critical and costly things. Don’t buy any property that has major problems — a bad roof, rotten plumbing, or burned-out electrical. The cost will eat up any profit you can make.

* Develop a network of reliable contractors: a plumber, an electrician, an A/C guy, a painter, a landscaper, and — most important — an inexpensive handyman.

As in so many businesses, real estate is all about buying right. If you get a property for a good price and don’t over-invest in fixing it up, you’ll be 95% certain to do well in the long run.

My own very general guideline on buying rental properties is never to buy a property if the total cost (sales price plus fix-up expenses) exceeds nine times the rent. Usually, I try to do — and do — better than that, though that’s not easy in good and up-and-coming markets, where there is a lot of sophisticated competition vying for limited properties.

Say, for example, you found a building that could be bought for $90,000. And say it would require $10,000 to bring it up to where you want it. (Where you want it is in a condition that will enable you to get a decent rent and keep your tenants from complaining because things are breaking all the time.) That’s $100,000 total.

In such a situation, following my rules, you’d want your total monthly rents to be $11,000 or more.

Say you could get $11,500. Here’s how it would look, from an investment perspective, if you paid for everything in cash: Your total investment would be $100,000, and your net cash flow, after paying property taxes (say $1,000 a year) and upkeep (say $1,500 a year), would be $9,000. That’s a 9% return on your money.

That’s a pretty good deal if you believe, as I do, that real estate is safer than stocks.

But that’s not the whole story. If you buy right and in the right location, you’ll get a very significant appreciation in the property value. This can vary widely. Historically, it’s about 4% to 5% — which would give you a total cash return of about 13% to 14%.

But that’s just the average. If you know what you are doing, you can do much better than that. A rental property I bought three years ago for $195,000 just sold for $395,000. My return on investment (ROI) was astronomical.

If you finance rental property, the ROI is sometimes even better. In a future SYTSF, I’ll tell you more about that.

But I think you understand the point. Owning rental properties — if you own good ones (which means better tenants and fewer complaints) — can be a very manageable way to make a lot of extra money on the side, while you are working for someone else or running your own business.

Of all the things I’ve done “on the side,” rental real estate has definitely been among the very best.

Piece by piece, I put together what has turned out to be a very nice collection of properties. Their rental fees have been good, and, because I never quit my day job, I’ve been able to use those rents not only to pay down my mortgages but also to buy other properties.

It has been a painless experience for the most part. And a profitable one. In what seems (in retrospect) like no time at all, I’ve acquired enough income from my real-estate rental property to retire on. That is — if I believe in retiring.

If you want to get going, you’ll need a lot more information than I’ve given you here. Fortunately, there are reams of advice about real estate at your local library and online. While you learning, go out and get to know your local market. Saturday mornings, take a walk or bike ride. Start looking at those ubiquitous home-sale catalogs. Talk to a few brokers.

Don’t buy anything this weekend. Just look around and get familiar with the your local market. Take your time. Have some fun. Acquiring a good feeling for local property values is one of those skills that only experience can teach you.$

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Five Good Reasons to Own a “Vacation” Home

“Home is where the heart is and hence a movable feast.” – Angela Carter

There are at least five good reasons to buy a second home:

1. It can become your future retirement home. Buy it now and have it paid off in today’s cheap dollars. Years from now, when your friends and neighbors are struggling to buy a shack, you’ll have a dream home, completely upgraded, decorated, and paid for.

2. It is a great way to increase your wealth. For most Americans, the house they buy turns out to be their biggest asset when it comes time to assess their wealth. If your main house might someday make you worth, say, $500,000 …why not buy another one and make yourself a millionaire? (This is especially possible if you can have the cost of the second home covered by rentals.)

3. It can be a special gathering place for friends and relatives and provide a second sense of “where I belong” to your children. Second homes that are regularly used for vacations and holidays provide a unique and valuable contribution to the spiritual wealth of any family.

4. Passive real-estate ownership can help diversify your portfolio, increase your overall ROI (especially if you are a conservative investor like me), and provide a comforting level of financial security (something that is obviously needed given today’s market fluctuations).

5. If you buy right and manage it right, a second home can provide you with years and years of additional income.

These are the biggest and most obvious benefits. There are others too. My future home in Panama will give me an ongoing sense of relief from the daily pressures of business. If things ever get to be “too much,” I know I will be able to hop on a plane and, in a few short hours, be sipping rum cocktails on my patio overlooking the Pacific Ocean. This will be a psychological reward that benefits me almost every day of my life — even if I never have to “use” it that way.

It is also a place where I will be able got practice my Spanish and go to festivals, colorful parades and parties that I could never experience in the United States. My Panamanian home will offer me an entry into a second culture — and give me a chance to enjoy it in a way I could never do as a tourist.

It’s good to know too that the value of this home will be appreciating tax-free and out of the sight of virtually everyone.

Another advantage — the mortgage interest you pay when you finance the purchase of a second home is tax-deductible, provided that the property qualifies as a personal residence. You can deduct up to a combined total of $1 million in mortgage interest on your primary and second homes. A property is considered a personal residence if you use it more than 14 days a year.

Now … here’s what you need to know before you start looking for your second home:

* It may be more difficult to get a mortgage on a second home. And if you do, be prepared to pay more in points and a higher interest rate.

* Your second home needs to be maintained. This can get expensive. When you figure out the cost/income balance sheet, be sure to allow enough for maintenance. * Insurance can be more expensive too, especially if the home is not occupied for much of the year.

* Finally, you may grow tired of the second location but feel compelled to use it.

All these problems can be overcome if you observe these rules:

* Buy value. Select a home that is underpriced relative to the market. That way, if you should decide at some time in the future that you don’t want it you will be able to sell it quickly.

* Consider renting out the home for part of the year. Make sure it is the right size and in the right location to provide good and steady rental income. So long as you can get positive cash flow out of it, it will be a good investment for you.

* Be conservative. Resist the urge to overbuy. When it comes to a vacation home, keep in mind that you won’t be using it very much and therefore won’t need very much room — probably no more than two bedrooms. Get just enough so that the rental income you can get for it will exceed your expenses.

* Buy the most desirable location (from a vacationer’s point of view). To get a steady income from your second home, be sure the location is attractive to vacation renters. Renting a vacation home on a weekly basis is usually the most productive way of generating income.$

[Do you know how Facebook and Google became the most powerful companies in the world?

It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

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They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

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4 Steps to Get Rich

A reader wrote recently to say that although he’s “learned a lot from Seven Years to Seven Figures,” he feels that most of the advice is perfect for him. Why? Because he is 47 and has a net worth of only $25,000.

He is not interested in long-term saving strategies. “I don’t want a million dollars when I’m 70,” he says. “I want it now.”

He believes that many of the wealth-building strategies I recommend are for people like him.

“What’s the average person to do?” he asks. “He makes $27 per hour with no chance for overtime. He has debts. He needs a new car. He can’t invest in real estate. And he doesn’t write a newsletter with 100,000 subscribers that earns millions every year.”

Since I started writing this blog, I’ve gotten a number of emails like this. This tells me two things: I'm hitting a nerve by telling the truth, and there are lots of SYTSF readers who have few financial resources and are worried about the future.

If you have had some of the same thoughts or feelings, this message is for you.

You are middle-aged. Your net worth is meager. Your income is barely sufficient to meet expenses, and those expenses are going up. Instead of getting stronger, the economy seems to be teetering on the edge of collapse.

So should you give up your dream of retiring comfortably one day? Should you accept the prospect of living in a shabby apartment and subsisting on ramen noodles? Should you grow bitter? Should you curse big government and big banking and big business for putting you in this situation?

Or should you take responsibility for your future well-being?

That last question was, of course, rhetorical. Yet when I hear comments such as “What’s the average person to do?” I wonder if people understand that they have options.

You certainly don’t have any choice about how our government is going to spend your tax money. And you may not have a choice about whether the company you work for is going to be in business next year. But you can choose how you respond to your current financial worries.

I believe—no, I am sure—that anyone who has modest intelligence and a positive attitude can become financially independent in seven years or less if he or she is willing to work smart and hard.

But I also understand that when you are halfway through your life and barely making ends meet, it seems like the only chance to become financially secure is to win the lottery (either an actual lottery or the stock market equivalent).

If you feel that way, you are wrong. You are not wealthy now, not by a long shot. But you do not have to give up on is your dream of becoming wealthy.

It will take time and patience. You may have to change some of the thoughts and feelings you have about wealth. And you will certainly have to make changes in what you are doing, for what you have been doing has brought you to where you are.

Your path to financial independence begins with four simple steps.

1. First, accept the fact that you are solely and completely responsible for your current financial situation.

Before you react defensively, read that sentence again. I didn’t say you are the cause of your situation. I said you are responsible for it.

By taking responsibility for your current situation—even if it was “not your fault”—you assume responsibility for your financial future. That is a good thing. Hoping for someone, something, or some event to fix your problems is futile and foolish. Time, precious time, ticks on as you sit and wait.

The sooner you accept the reality that you are going to be your own salvation, the sooner your fortune will start to change.

The first and most important benefit is that you will shed the anger and frustration you have been carrying around for so many years. And then gradually, as you apply your new thinking to taking action, you will begin to feel the opposite of anger and frustration. You will begin to feel financially powerful.

The feeling that you have the capacity to create wealth is the single most important tool in your wealth-building kit.

2. Second, set realistic expectations.

I can’t tell you how many times I’ve heard people scoff at the idea of making 8% or 12% returns. They tell me returns like those are “boring.” They want stocks that double and triple, they say, because that’s “the only way to acquire wealth.” 

10-to-1 returns do happen. But they rarely happen in the stock market. Your chances of building a fortune by seeking out 10-baggers (as we call them) is about the same as playing the lottery.

Know this: 8-12% is a high rate of return. If you get an 8% return, you’ll double your money every nine years. If you get a 12% return, you’ll do it in six years. You can get very rich by doubling your money every six years.

Think of it this way: Warren Buffett—the most successful investor of all time and the third-richest person on the planet—has averaged 19.8% on his investments over his entire career. Expecting to make returns that are five times what the greatest investor has made is just plain foolish.

3. The third thing you must do is to understand how wealth builders really create wealth.

The public today has been deceived on this important point by reading stories about individuals who invested every cent they had in a business idea that exploded into a billion-dollar bonanza. These are great, inspiring stories. But they are not normal. For every person who got rich this way, there are 999 who went broke doing the same thing.

I’m not diminishing these men and women. They were brilliant and shrewd. But they were also rare exceptions. Using them as models is like a kid deciding he’s going to get rich by becoming the next Tiger Woods or Michael Jordan.

4. Your fourth step to financial independence is to recognize that your net investible income (the amount of cash you have after spending and saving) is the single most important factor in determining how quickly you will become wealthy.

I will venture to say that you have never heard any other investment advisor say this. But it needs to be said. You simply cannot get wealthy by investing unless you invest enough money.

This leads us to being open to real estate and entrepreneurship. It also leads us to strategies for spending less of the income you earn on the things you are paying for now. I write about programs for each of these strategies. One of them—which I call the Golden Buckets—will give you a clear breakdown of how to spend less, save more, and invest wisely.

One more point I want to make here: The journey to millions of dollars is earned $100 at a time.

Many people I speak to, when I talk about extra income opportunities, tell me that they are interested only in opportunities with the potential to bring them tens of thousands or hundreds of thousands of extra dollars per month. This is the same kind of foolishness I hear from people who are interested only in stocks that could maybe/possibly/perhaps give them a 100% return on their money.

To find an extra $10,000 to invest this year, you don’t need to come up with a $10,000 idea. It’s easier and smarter to come up with several $100 ideas and then repeat them over and over again.

If you are not yet wealthy and are worried that you will never be able to achieve financial independence, take heart. I’ll give you dozens of ways to develop real wealth—even if you are 47 years old and making $27 per hour.

The world of wealth is governed by universal dynamics—supply, demand, wealth, greed, etc. These dynamics are as old as civilization. Winning the wealth-building game is about recognizing and exploiting those dynamics, not denying them.

My job here is to highlight those dynamics on a weekly and monthly basis and then help you make smart, enriching decisions—the sort of decisions that have made men and women wealthy for thousands of years.

It’s not fun to realize, in the middle years of your life, that you haven’t acquired the wealth you want. But the good news is that you can begin to change your fortunes today by taking the four steps I just told you to take. And you can take all four of those steps in the next hour—if you simply open your mind to them.

Let me be a bit more specific:

• Accept responsibility for your future. Refuse to complain, criticize, or condemn. If you want us to help you achieve your goals, trust in and follow our advice. Stop doubting it. Stop denying it. Have faith.

• Give up the foolish notion that you must get rich “now.” Be happy to earn 8-12% on your stock market investments. Realize that if you make 8% to 12%, you will be ahead of 99% of your fellow investors. Embrace the huge impact this will have on your wealth over time.

• Begin to allocate your income according to the Golden Buckets system. With every paycheck you get, first cover your necessary expenses (bills, mortgage, etc.). Then put some money toward saving and some money toward investing. Then and only then—after you have “paid yourself”—do you add to your “spending” account.

• Stop complaining about making “only $27” per hour. That’s more than a lot of people make. Be grateful you earn that much. Commit to add to that with a second income. Make an honest count of the number of hours each month you devote to television and other non-productive activities. Devote those hours to wealth building instead. Cast aside the comfortable shoes of victimization. Put on the working boots of a financial hero.

If you are willing to do that, I can help you succeed. I am fully committed to giving my readers more valuable and realistic wealth-building advice than any other investment blog. I have the experience and the know-how to do it. I will deliver if you do.

Before I end this essay, I want to address two more things my 47-year-old correspondent said. And I am going to speak directly to him:

You are only 47, not 87. You have plenty more years to increase your income and grow your net worth. Don’t assume that all is lost when you have a wonderful life ahead of you, a life that can be rich in so many ways.

Everybody in your situation has the same choice: You can complain about it or you can dedicate yourself to changing it. I can show you how.

You have what you need to get your gravy train moving. But you are the engineer. Nobody can do it but you.$

[Do you know how Facebook and Google became the most powerful companies in the world?
It’s NOT helping you share pics of last night’s dinner...
It’s NOT searching for drunken cat videos…

And it’s DEFINITELY NOT about free Gmail accounts.
 

The simple truth is Facebook and Google SELL TRAFFIC.

They SELL TRAFFIC to business owners, and that advertising revenue alone has turned them into billion dollar companies.
 

Traffic is the most valuable commodity on the internet, and that will never change.
 

This is why using the Traffic Authority business system is the ultimate way to make extra income in your business…
 

Click here to watch the video and start your own premium traffic business today!]

5 Ways to Get Rich Without Stocks

In my ongoing effort to shock you with contrarian (and sometimes counterintuitive) truths about building wealth, I give you this little nugget to chew on today:

You cannot become wealthy by investing in the stock and bond market.

(Please keep this on the down low. If my colleagues in the financial services industry knew I said that, they would have me tarred and feathered!)

The financial services industry—and by that I include brokerages, private bankers, and insurance agents, as well as investment newspapers, magazines, newsletters, and Internet publications—is a huge multibillion-dollar business based on hard work, clever thinking, and sophisticated algorithms. But also on one teensy-weensy lie.

The lie is that you can grow wealthy through investing in stocks and bonds.

It’s not a big, black lie. There is plenty of evidence that strategic stock investing can provide returns that exceed investment costs (brokerage fees, management fees, subscription fees, etc.) and even produce positive returns after inflation.

But to do that, you need time. More time than you probably have. Today I’ll explain how you can become wealthy when you don’t have a lot of time.

Let’s say you have $50,000 to invest. And let’s say you invested it according to a really good investment strategy. And let’s assume that things go well. And by well I mean that you make, on average, 10%. If you had started on January 1, 2015, by December 31, 2024, your $50,000 would have increased to $129,687.

That’s not bad. But it hardly makes you wealthy. So let’s say you were willing to extend your investment horizon to 20 years. Beginning at the same time with the same $50,000, you would have $336,375 on December 31, 2034.

That’s better, but it’s still a far cry from making you wealthy. So let’s push the investment horizon to 30 years. By December 31, 2044, you would have $872,470.

If you made 10% on that $872,470 nest egg, you’d have a yearly income of $87,200. After taxes, you’d take home about $65,000 per year. That’s okay, but it’s hardly wealthy. And that’s after investing for 30 years!

Most of the people reading my blog don’t have 30 years to wait. Based on what I know about my readership, I’d say my readers’ average wait period is 10-15 years.

So what’s a middle-aged (or older) wealth seeker to do? You can start by deconstructing the little lie. Building wealth involves much more than just investing in stocks and bonds.

Most rich people get that way by consistently doing the following five things:

1. They understand and manage their debt. They don’t let debt manage them.

2. They are not self-indulgent spenders, but aggressive savers, far outpacing their peers.

3. They invest in stocks and bonds with discipline. But they don’t expect stocks and bonds to make them wealthy.

4. Their primary focus is on increasing their active income. Usually, this comes from a business they know inside and out.

5. They invest in real estate and other “outside Wall Street” opportunities.

As you can see, investing in stocks and bonds is only one of five strategies you must follow to become rich.

In fact—most of the rich guys I know spend little or no time investing in stocks and bonds.

Don’t get me wrong. I’m not saying that investing in stocks and bonds has no value. It is essential. But it was not and will never be my core strategy for accumulating wealth.

It is certainly possible to become wealthy through stocks and bonds. But you have to devote 40-plus hours per week to it. And you have to be very disciplined. And you have to do it for a long, long time.

If you don’t have that time, you have to take another course. And the entire reason for my writing "Seven Years to Seven Figures" is to help you supplement your stock and bond investing by putting into play the strategies that will help you to become wealthy.

If you want to get wealthy in fewer than 30 years, you should pay attention. Devote a couple of hours per week to managing your stock and bond investments and spend the rest of your working time on the other wealth building strategies listed above.

You may be thinking, “I don’t need to be told to limit my spending or manage my debt. I already know how to do that.”

My response to that: Do you?

Or you may be thinking, “I already lost money in real estate. I have no interest in doing that.” My response: If you lost money, it is because you did exactly the wrong thing. Real estate investing, if you do it the right way, is the easiest way to build wealth. That is why most self-made billionaires have large real estate portfolios.

Or perhaps you don’t like my idea that you must—must—increase your income. Most people reading Seven Years to Seven Figures have been working hard for 30 or more years to raise families and put their children through school. They want to stop working for income. They want to quit their jobs and invest in stocks and bonds. They want to take it easy.

Giving up your active income is the single biggest financial mistake you can make. Your active income is essential to building your wealth. If you want to retire someday and don’t have at least $250,000 put aside for that purpose, you need more income.

The good news is that there are all sorts of ways to do that. Just as there are all sorts of clever ways to manage your debt, get more value out of your spending, and ratchet up your savings.$

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Jean Chatzky on Financial Tips for Caregivers | AARP

11 Money Tips for Older Adults

WHEN MONEY MATURES

Getting older isn’t all bad. If you’ve accumulated wealth over your working years, it can be the time to enjoy all of that hard work. But financial stresses often arise, including budgeting concerns, income limitations and even fraud. These tips will help older adults ensure their cash lasts as long as they do.

BUDGET CAREFULLY

During retirement, income tends to be lower than it was in the prime earning years, and that means older adults need to look for ways to limit expenses to make their nest eggs last. One key is to track living expenses to make sure you don’t burn through savings too fast.

DON’T BE TOO GENEROUS

When grown children are struggling with their own financial lives, it can be tempting to open up your bank account to them. The problem with this approach is that it can stress your finances and lead to family tension. It’s important to make protecting your money a priority, even while trying to help your children.

PLAN WITH YOUR PARTNER

Even if you’ve been married to your spouse for years, it’s possible that you have different visions of how to spend your retirement years. Couples often do not talk about financial goals. Discuss each other's dreams and goals and start planning for it.

MAKE SURE YOUR BANK IS ON YOUR SIDE

Some banks cater to older clients more than others, with perks such as using larger print in communication, meeting outside of the bank and speaking clearly without being condescending. Asking about your bank’s age-friendly policies before you need them can help ensure you don’t get frustrated with its policies later.

PUT FRAUD SAFEGUARDS IN PLACE

Older adults are at a greater risk for financial fraud, but there are ways to reduce that risk. Family members can be alerted to large withdrawals from accounts, debit cards can be programmed to only work in certain locations and names and numbers can be placed on “do not call” lists.

PREPARE FOR COGNITIVE DECLINE

When it comes to managing money, signs of cognitive decline tend to show up in one’s 60s and 70s. It can become harder to manage bills, calculate tips and make change. Sometimes adult children or others can help prevent bigger problems, like falling behind on bills, by noticing those red flags and stepping in to help.

KEEP LEARNING

While cognitive decline is real, other research suggests that older adults with higher levels of financial literacy are more likely to have higher wealth levels. Understanding concepts of investment risk and the stock market is associated with the ability to build and preserve wealth.

PROTECT YOUR DIGITAL ASSETS

If you’re active on social media or have an extensive digital library or music or books, you’ll want to consider how to pass on those digital assets when you die. You can include your wishes in your will, pick someone to share account information with and restrict your privacy settings now so you’re not oversharing personal details with strangers.

GET MONEY HELP FROM YOUR ADULT CHILDREN.

Adult children can often play a useful role in helping their parents manage money as they age. It’s important to enlist the support of children before experiencing a crisis or cognitive decline, so they know the basics of where to find account information if they need to. Talking through plans and wishes, and even writing out an overview of how you want to manage money as you age, can also help.

CONSIDER LAUNCHING A BUSINESS

Starting a business in midlife or later can add to your income in retirement as well as bring a measure of professional and creative satisfaction even after you leave your day job. Author Lynne Strang, who opted for self-employment at midlife herself, found a huge growth in the amount of support available to older entrepreneurs, including at AARP and the Small Business Administration.

TEACH YOUR GRANDCHILDREN ABOUT MONEY

Grandparents can play a significant role in teaching grandchildren about the value of a dollar. A 2014 survey from TIAA-CREF found that many young people say they are open to talking about finances with their grandparents, but only a small percentage actually have those conversations. Still, most grandchildren say their grandparents do influence their financial habits.$

[Ed. Note: Ray's personal team will create 10 six-figure earners before the year is over. Our system walks you through the process of growing your profitable online business using a proven online business model. Ray shows you exactly what he did to grow his six-figure business. To find out more about Empower Network, go here.]

How to Invest Like a Multimillionaire

Okay. You want to be a super-successful investor. I get it.

You are already living on a fixed income. Or you are nearing retirement and worrying about whether you’ll be able to kick back and earn a passive living from your investments. I know how you feel.

But here’s the thing. The secret to lifelong financial security is this: Never give up your active income. Keep a controlling stake in your business or start a side business that will pay you dividends till the day you die. That is the only serious financial security you can ever have. There is nothing you can do passively that compares to it.

But no more on that subject in this essay — I know how middle-aged investors think. They don’t want to be told they have to keep working. They’ve been working their whole lives. They want easy solutions. Big returns. And they don’t want to make all the tough decisions themselves, like they’d have to do with a business.

In short, they want a guru. I’m not a guru, but I do know about the technicalities of investing.  I have done very well with my investments these last 20 years. So today I’m going to tell you most of the important things I know. What you are about to read are “truths” I’ve discovered from my experience.

I might not be able to give you everything you really want — triple-figure returns guaranteed. But I’ll give you the next best thing: the system that kept me out of every major financial collapse in my lifetime and made me very wealthy without spending four to eight hours a day studying the markets.

One thing I bring to the table is long-term perspective. I said I’ve been investing for 20 years. That’s true. My first investment, a speculative bid on a Chicago condo, was in 1996. I lost all my capital and more. And it changed me. I became very skeptical of going after huge returns. That is why I never got suckered into all the bubbles that have taken place since then.

Another thing I bring to the table is a long-term perspective. I’ve been an insider in the investment advisory business for about as long as I’ve been investing. I've learned from a lot of the top gurus. I know how they make money when they make money. And I know how they hide their losses when they lose, which is often.

Today, I’m going to give you the straight dope on how I invest. It’s all about not being an idiot. It’s all about sticking to the basics. It’s not difficult. In fact, it’s easy.

If this doesn’t sound like too much braggadocio to you, read on.

Successful investing has three elements:

1. How much you have to invest

2. How long you keep it invested

3. The rate of return you can get

All other things being equal, the more money you have to invest, the easier it is to get rich.

It’s also much easier if you have time on your side. It’s easier, for example, for an 18-year-old with $5,000 in his bank account to acquire a multimillion-dollar fortune than it is for a 65-year-old with $1 million in net assets. When you have more time, you can take less risk and let the miracle of compound interest work in your favor.

If you are young, I recommend the book Automatic Wealth for Grads. It provides a blueprint for wealth that anybody, and I mean anybody, can follow. But you aren’t 18, are you? You don’t have that much time. And that is where the third element of successful investing — rate of return — comes into play.

You’ve done the arithmetic and you realize that the only possible way for you to acquire any sort of respectable retirement fund is to get triple-digit returns on your investments.

But let me tell you something about triple-digit returns. They happen. They happen all the time. But they don’t happen to me all the time. And they probably won’t happen to you. Triple-digit returns are like eagles in golf. There are hundreds, if not thousands, of eagles every day around the world. But even the best golfers don’t experience them very often.

Making money in the markets is much like golf: every time you tee off you should be looking to shoot below par (i.e., above market), but to be a great player you can’t  try for a hole-in-one on every par three or try to get one in two on every par five. You need to play the game strategically because you know that odds are the eagles will not come that often.

My investment strategy has always been based on the fact that I know I am not destined to get triple-digit returns with any frequency. Still, I’ve done very well.

So how much do you have to invest? $10 million? $1 million? $100,000? $10,000?

If you have $10 million, you don’t need to worry about triple-digit returns. You can achieve financial independence by making 5 percent on your money. The secret to successful investing when you have that kind of dough is to restrain your greed and curtail your expenses. You can live like a billionaire for about $100,000 a year. $10 million at 5 percent gives you an income of $500,000 a year — way more than you need.

If you have a million to invest, you need more than 5 percent. If you buy my $100,000 figure (and in a future essay, I’ll show you how that can be done), you will need to get a 10 percent rate of return. That’s not so difficult. I know many investment advisory services that consistently deliver 10+ percent returns to their readers.

If you have less than a million to invest, you have a challenge. You need to get high returns on your money. By high, I mean 15 percent, 25 percent, and the occasional triple-bagger.

But high returns usually mean high risk. And high-risk investing — for most individual investors — means the possibility of losing most or all of your money.

All the investment research I’ve ever read has proven that if you invest exclusively in high-return/high-risk investments, you will eventually go broke.

Can you deal with that? If not, you need to have a secondary supplemental income from an active interest in a business. But I told you I wouldn’t talk about that today. Today, my job is to show you how to make above-average market returns on the measly money you have saved for your retirement.

But to do that, I have to define the word “save.”

The Difference Between Saving and Investing

Most people think of saving and investing as synonymous. That is a big mistake.

Investing is what you do to grow your wealth. Saving is what you do to preserve it.

I have always divided my assets into the following four categories:

• Private property (homes, art, other valuables)

• Active investments (businesses I own or control)

• Passive investments (stocks, bonds, etc.)

• Savings (stored, safe wealth)

Private property can have significant financial value, but since you are using it (and want to continue to use it while you are living), it cannot be considered an investment.

Active investments, as I’ve pointed out, are great investments so long as you stay active with them.

Passive investments are the things you normally think about when you talk about investing. But passive investment is risky. You don’t want to take a risk with your savings. That’s why I don’t consider passive investing to be a form of saving.

Savings is the money you put aside every year after you’ve bought the private property you want and have made the investments you want. Saving is what you want to keep.

In the past, I have put my savings into four vehicles: cash, bonds, rental real estate, and commodities.

But these days, I think that bonds are very risky. I still invest in them, but I don’t consider them to be savings. Cash gives me near zero return, so keeping money in cash is no longer an option since inflation will cause it to diminish — just the thing I don’t want to happen to my savings. I got out of rental real estate about five years ago when it was obvious I couldn’t get a safe return on my money. I’m back into it now, but cautiously.

But rental real estate is not a passive investment. It is active. The only way you can assure a good return is to own and manage your properties carefully. In that regard, it’s like running a business. It’s not as difficult as most businesses, but it’s still very hands-on.

As I said, if you have less than a million dollars to invest, you have to be willing to take some risk to make the kind of returns you need to enjoy a decent retirement.

So, where should you put your money?

Getting Your 15 Percent to 25 Percent and Occasional Triple-Bagger

It’s not easy to get 15 percent to 25 percent on passive investments. Studies show that it’s nearly impossible. But I know guys who have done it. And I’ve been watching them do it for decades. They have secrets — little tricks of the trade — that I can share with you.

First, and most important, they don’t keep all their eggs in one basket. They diversify.

I have always favored that approach. And because I didn’t want to be bothered looking at individual stocks, the money I had in the stock market was invested in index funds. But today, I don’t think that makes sense. The stock market has been overvalued and now is in correction mode. If I had all my stock money in index funds, I’d take that big hit with them.

I still believe in diversifying. But now I think it makes more sense to do it by finding sectors and individual stocks that seem likely to outperform the market. That means I’m going to have to get “active” with my passive investments.

Having a bird’s eye view of the investment advisory business, it is clear to me that some advisors have been doing very well. And some of them did well even in 2008 and the beginning of 2009, when everyone was getting killed. I have studied and researched many of these people. So I will be picking and choosing from their recommendations.

But I don’t intend to simply pick a few gurus with great performance records and blindly do what they tell me. I will educate myself on their investment ideas and strategies and use that knowledge to make decisions that match my temperament and my financial objectives.

You have to be in charge of your own portfolio. And part of being on charge of your portfolio is not to let your emotions get in your way.

Greed and fear are two of the emotions I’m talking about. Greed will make you buy bad stocks, simply because you are convinced their prices will go up. Fear will prevent you from buying good stocks because you are scared of the market or a market sector or something else.

Insecurity is another one. Insecurity makes it difficult for an investor to admit that he was wrong about a stock he put his money into. Not admitting you were wrong means not selling a bad stock when it’s going down. Many investors never sell their stocks, even when they are left with pennies on the dollar. A healthy attitude is one that says, “Although I invested in a particular stock in good faith, I’ll never know enough about the stock or the market to be 100 percent right all of the time. When the market causes the price of one of my stocks to come down, that is just its way of telling me that I didn’t have all the facts.”

How to Make Smart Investment Decisions

I’ve always followed a simple rule: Before putting money in a passive investment, I apply the same criteria that I apply to buying a business:

• I never buy a business I don’t understand.

• I never buy a business whose management seems the least bit shifty to me. If I have doubts, I stay away.

• I never buy a business that isn’t making money unless I can clearly see how it could make money if I added something to it that I have.

What’s Interesting Right Now

Since realizing that I have to get “active” with my passive investments, I’ve been keeping an eye on the predictions pundits are making for various market sectors. Much of it seems just plain dumb to me. But some of it I find very convincing. For example:

• Natural gas demand is set to increase significantly, and select companies will profit handsomely.

• The world’s population continues to increase, along with the demand for agricultural products. The standard of living in developing nations is rising and that will push food prices even higher. There will be plenty of opportunities to profit by investing in raw food commodities and the fertilizer producers.

• I stopped investing in gold when it hit $1,000 an ounce. (I got in around $350.) But there is a great deal of solid evidence that suggests that gold could surpass its average annual gain of 16 percent over the last decade.

• Commodity prices will head higher because of increasing demand and the prospect of higher inflation.

• I have always liked investing in businesses that appeal to Baby Boomers. Baby boomers have been driving the U.S. markets since the early 1950s. I don’t see any reason for this to change until they (we) are dead.

• Healthcare. (See my thoughts on Baby Boomers.

These are trends I believe in. As a businessman, I’ve made all of my big money getting into trends as they are taking off and then getting out when they are clearly overvalued. If you look at the miserable history of professional trend investors, you’d think this was a crazy strategy to pursue. But most of these guys lost money because they got in too late or stayed too long. I don’t think that is at all necessary if you are prudent (i.e., if you are a chicken investor.)$

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