INVESTING STRATEGIES That Work Every Time: REAL ESTATE A Step-By-Step Guide to Making Your Money Grow J A M E S S K I N N E R M A R K V I C T O R H A N S E N R O I C E K R U E G E R
Investing Strategies That Work Every Time: Real Estate A Step-By-Step Guide to Making Your Money Grow James Skinner, Mark Victor Hansen, and Roice Krueger shows you what the best investors know how to use time-proven strategies to multiply your wealth in real estate, stocks, private equity, and running your own business. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 1
The Authors JAMES SKINNER is the founder of two global financial groups that manage billions of dollars of assets. He is also recognized as one of the world s foremost business thinkers and appears regularly on Japanese television. MARK VICTOR HANSEN is the co-creator of the Chicken Soup for the Soul empire and is the best-selling nonfiction author of all time. His goal is to make the planet work for all humanity! ROICE KRUEGER co-founded Franklin Covey, the world s largest training company, and has supervised consulting projects for 80 percent of the Fortune 500. NOTE: Ideas That Can Change Your Life is a collaboration of three of the world s most amazing authors, speakers, and thinkers. The first person I may refer to any of the authors. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 2
Foreword There are many, many ways that we can invest in the world. We live in a phenomenal time in human history when there are literally thousands of investment vehicles available to us. Many of them are confusing and hard to understand. We want to get back to some of the basic investment strategies that have been proven over time, location, and destination to work again and again for many people who may not be spending 100 percent of their time trying to understand investing. The secret to investment success is the consistent application of time-proven strategies, not the use of complex, hard-to-understand investment vehicles created by investment bankers out to take your money! When most of us invest, we do not have the leisure of spending 24 hours investing and doing nothing else. But we still have to have investing strategies that work. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 3
If you look at the world as a whole, most people make their money by doing what? They do it by working. They have a job and earn money. But even if you are working for a living, you still need to invest that money to grow it, because if you want to master wealth, you need to be able to create, grow, and protect your wealth. The mastery of wealth requires you to create, grow, and protect your wealth. wealth. Investment is the primary means of growing your Investment is the primary means of expanding your wealth! Through investment, you are going to turn your money into something bigger than it was before. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 4
looks at four categories of investments, four questions to ask anyone who asks for your money, and five vital lessons we ve learned about business. All of them have been shown to work consistently over time, and you can use them to increase your own wealth. This book will show you proven strategies for investing in Real Estate. James Skinner, Mark Victor Hansen, Roice Krueger 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 5
Investment 1: Real Estate What is it that creates value in the economy? Scarcity. This is an important idea for you to understand. Resources are valuable in proportion to their scarcity. We are not inclined to pay a lot of money for things that are abundant. Now the interesting thing about real estate, which is the first area of investment that you need to master, is that there is not a whole lot of real estate being created each year. Some places create a little bit by filling in coastal areas and so forth, but it does not amount to a lot of new land overall. There is not a lot of new real estate being created each year. Real estate is scarce and therefore valuable. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 6
Now the first thing you need to understand about real estate is this: Real estate is only scarce in relation to the population. The value of real estate is a reflection of the population that wants to make use of that real estate! I grew up in the state of Oregon. When I was living in Oregon, there were less than two million people in an area the size of the main island of Japan. I want you to contemplate that for a moment. You could go to the national forest, 30 minutes away from my house. They had 11 million acres without a single human being. Land was plentiful and inexpensive because it was not scarce in relation to the size of the population. Then I moved to Tokyo. Now nobody knows the population of Tokyo. People ask me what the population for Tokyo is, and I ask in return, What time of day? The land in Tokyo is so scarce that people can t afford to live there. So, every morning we have something on the order 20 million people who flow in 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 7
like the tide. Then at night they all flow back out. A sea of humanity flows in and out all the time. When I was living in central Tokyo, the Ginza area was the most expensive real estate on earth because it was extremely rare in relation to the population and the shoppers who were willing to spend huge amounts of money buying anything that was being sold there because of the prestige of the address. You have a different price point for selling in Ginza than in any other place. That drove up the price of real estate. Strategy 1: Buy Land in the Path of Expansion So, the first proven strategy of investing in real estate is to find a city, a town, a village, whatever it may be, that is growing and expanding rapidly in population. If the population is growing and the land is not, what is going to happen with the price of land? The price of the land is going to go up. So, look for a city that is expanding. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 8
Then what you do is go outside the city in the path of expansion and buy land there. Buy land in the growth path of an expanding city! This is the greatest real estate investment strategy of all time. It is also the simplest one and most consistent at producing value, because cities have this tremendous propensity to continue growing. When I was growing up in Portland, Oregon, there were 365,000 people. There are now over a million. The city has grown. The nearby towns of Gresham and Beaverton used to be small, and the surrounding countryside mainly empty fields. You could buy land there for nothing. Gresham is now the fourth-largest city in Oregon. There is a city in China called Shanghai. Just outside the city there used to be endless rice fields in a place called Pudong. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 9
Pudong is now the location of the Grand Hyatt Hotel, the tallest building in the city, along with the Pudong International Airport! How many of you wished that ten years ago you had gone out and bought a lot of rice paddies in Pudong? Everybody knew that Shanghai was growing. Everybody knew that the population was expanding consistently every year. All you had to do is go out of the city and buy yourself a rice paddy. It would be the Grand Hyatt Hotel today. Now, some of you say, How do I know the path of expansion? You know it because ten years before everyone else knows it, the city planners have to publicly say, We are building the roads here; we are putting in the infrastructure, the electricity, and there is going to be a fire department. All that is a given, but nobody looks at what the city planners are saying. If you want it easy, just call up the city planner and say, Can I take you to breakfast, lunch, or dinner? Are we growing to the north, the south, the east, or the west? Where are the 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 10
pockets that are going to grow and why? Why are we going that direction? Is there enough water there? This is a long-term strategy because you now have to wait for the city to actually grow. When the city grows, you re sitting on a big piece of vacant land right in the middle of town. Now, the thing I like about vacant land, in a longterm strategy, is that the holding cost is very low. The other thing I like about land in a strategy such as this is that a lot of professional investors don t buy vacant land because you don t get any rent. So, there is a holding cost. You do have to pay the taxes on it. Maybe keep it safe so that nobody gets hurt there. But the holding cost is very low. A lot of professional investors miss this opportunity because they re trying to get a rent income on their real estate. But if you are able to hold on, what happens is that all of a sudden you have a big consolidated piece of land 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 11
and somebody wants to build a shopping center on it. Now you can say, I want five percent of the rents forever. Let me give you an example now in Asia. Are there new beaches being made in Southeast Asia, or is the number of beaches limited? Would it be useful for you to go out and purchase beaches? Would that be a good investment? It is just a matter of time. That is the time element. You just have to watch the patterns of how things grow. I live in a town called Springville. There was only one way to grow, because Springville was up against a mountain and had fields out to the west. It was obvious. Anybody could figure out that it was going to go west. It can t grow up the hill. It is going to go west. So, Wal- Mart came in and bought a piece of property that a person had bought at $100,000. Wal-Mart paid $1 million. Would you like to make a $900,000 profit on $100,000? This is a strategy that will pay off in the long term. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 12
Strategy 2: Purchase Problems You Can Solve The second strategy that has been consistently proven to work in real estate is to purchase property that has a problem you know you can solve. The first time my friend Robert Kiyosaki ever did a successful real estate investment was in my hometown of Portland, Oregon. Downtown in Portland, we had a building on a prime piece of property. The building had a concrete face on it. It had cracks in the concrete, so it didn t look very attractive and the rent they were getting was not very high. Robert bought the building. He went down to the home improvement store, bought some filler, and filled up the cracks. He bought some paint. He painted the front of the building and then sold it. How complicated is it? 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 13
There is an entire industry doing this in the United States. It goes on and on. People pay thousands of dollars to be taught this principle of flipping. Buy a little home that is kind of broken down. Leverage your money as you do that. Go fix it up and turn it around and sell it for a profit. How simple can it be? Remember, there are a lot of different problems you can solve. There may be an apartment building that has low occupancy. If you know a way that you can get tenants to come into the building, then that is a problem that you can solve. It can be a physical problem, an occupancy problem, a loan problem. A friend of mine named Matt bought a ten-unit building that could not maintain full occupancy. He got it for 50 percent off. So, let s say that it was worth $200,000; he got it for $100,000. He walked around the neighborhood and asked other renters, Would you like to move? What is it that 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 14
you d like to have that you can t get? They said, Well, I have a cat or I have a dog and they won t let us live with it. The unit Matt bought had a swimming pool in the back that was cracked. He filled the swimming pool with sand and made it the world s biggest kitty litter box and said that you can only live here if you have a cat. Well, everybody who had a cat went to live in the apartment building with the world s biggest kitty litter box! Matt had somebody clean it every day. The apartments had 100 percent occupancy, and the rental price went up tenfold because he specialized in one, two, three, or four cats. With enough creativity you can solve any problem and make a fortune doing it! Strategy 3: Buy Real Estate at a Bargain You ask, Why is it that you can buy bargain real estate? 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 15
The fact is that cash is king. Probably the most important thing my mother ever taught me is that if you have the cash, you are king. One golden rule is Whoever has the gold makes the rules. Cash is king. Whoever has the gold makes the rules! For example, say there is an individual who owns a number of pieces of real estate. They also run a business that is going to go bankrupt unless they get some cash. They may sell some of their real estate in a big hurry at a very deep discount. There are a lot of bargain distress sales. You have cases of divorce where the couple has been ordered by the court to sell the property and split the proceeds and they have to sell it now. In most cases, you have 90 days. So, you have three months to find a buyer. Guess what? On the 90th day, when they haven t found a buyer, you can buy it for whatever you want because by court order they had to have sold it by then. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 16
So, you can look for tremendous bargains where the seller needs to get out quick. One of the greatest bargains in history concerned a man who was going through a divorce. The court said he had to sell off all his assets and split the proceeds with his wife. He decided that he was really going to get back at his wife, so he sold all of his assets for a dollar. He gave his wife 50 cents and walked away. Spiteful behavior will make you money every time. If you study people who become millionaires, one of their defining characteristics is they know the value of things. You want to be the person who knows the value of things. You ll know when you are purchasing something at a bargain price. When you purchase something at a true bargain price, you have made money on the first day. Know the value of things! 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 17
Real estate is a subject about which you need to educate yourself. It is not something that you just do. So you study, you understand real estate, and see what transactions are happening. You watch what businesses are coming and going. You go out and watch the farmers. You talk to them about their property value. You understand the markets. As you do that, you will start gaining insights and will find that the opportunity comes to you, because you will be prepared with your knowledge. When the opportunity comes, you will be able to act on it. You can be in the path of development so you can purchase there and build there. You can solve a problem. Or you can look for those bargains. I want to show you that if you are creative in the investment space, you can make tremendous amounts of money and do things that nobody has ever thought of before. I have a client in Japan who created a model for getting real estate for free! 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 18
Has that ever happened, by the way? I grew up in a country where it happened all the time. We had a thing called the Homestead Act of 1862. The Homestead Act said that if you went out and staked out 160 acres and built a single-family dwelling on it and plowed a field, the land would become yours. How cool is that? It s called freedom. Now the descendants of those people are sitting on 40-acre farms that might be in the middle of Tulsa, Oklahoma; and you can sell 40 acres of downtown Tulsa real estate for a lot of money. Is there more than one way of getting real estate for free, yes or no? Yes. Back to my client in Japan. Now, all the Japanese banks had a very big problem. The very big problem was that they had lots and lots of bad debt. What bad debt means is that somebody borrowed money and they are now not paying it back. You can see how for a banker that could be a big problem. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 19
Somebody has borrowed the money and is now not paying it back. When the bank loaned all this money, they received collateral in the form of real estate. They have now foreclosed on the real estate, but they still hold the value of the real estate on the books from an accounting perspective as bad debt. So, my client went to the banks and said, This is what I will do. That big apartment building over there, I will take it off your hands. They say, How much will you give us for it? it. He said, I am not going to give you anything for WHAT! No, he said, You are going to give it to me. In exchange, I will start making payments on the loan 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 20
tomorrow. I will assume the loan that the other person had. Maybe the loan was halfway paid. All your bad debt will become good debt. That is fantastic for the bank! If the bank asked him to personally guarantee the loan he would say, You ve got to be kidding. You already have a guarantor of the loan, and it isn t doing you any good. You have the guy who guaranteed the last loan and, by law, he still owes you the money. Nothing has changed. You don t need a new guarantor; you need someone to pay the loan. The worst thing that would happen to you is that I don t pay the loan and you get the building back. Meanwhile all the payments I have made make you look like a hero in the boardroom for turning your bad debt into good debt. They gave him building after building! 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 21
And remember, it did not cost him one cent in upfront cash! He would then rent out the buildings and use the rent to pay the loan. He made tens of millions of dollars in a matter of months. If you go to enough banks, you will find a bank with a problem. They are going to be quiet about it; they are not going to say, We are losing money and going down, and we have a lot of headaches. You have to be gentle about it, but once you get in with the bank or the bankers, you can have as much real estate as you want for free worldwide. Another friend of mine just took hundreds and hundreds of acres in New Zealand. The point that I want to emphasize is that it is possible to purchase lots of real estate at a bargain price. With a little bit of creativity you can generate some real leverage. 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 22
I took $1 million that I made selling a house that I bought at a bargain and used the money to purchase 230 tax lien certificates in Phoenix, Arizona. Tax lien certificates are issued by the government as a way of collecting taxes that have not been paid. In essence you are loaning money to a taxpayer who is behind in their payments. Now if the person pays the taxes, the government guarantees you a 16 percent return on your money! If they don t pay, you end up with the property! I buy a tax lien in the third year, meaning that the property is about to go into foreclosure. Maybe a couple is going through a messy divorce and are not paying their taxes. Or, maybe a childless husband and wife both died, the house didn t go anywhere, and the bank is not paying attention. So, I am taking ownership of a $4.5 million house that I paid $15,000 for in tax liens! 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 23
If I asked if anyone wanted to buy it from me for $1 million and it still has $4.5 million in value, do you think I d have any trouble selling it? Remember, you have to solve a problem. I am solving a problem for the tax department, and as a result I get the property at a bargain. Look for ways to purchase real estate from sellers in distress! These are the three proven strategies for successful real estate investing: 1. Buy land in the path of expansion. 2. Purchase problems you can solve. 3. Buy real estate at a bargain. Make a plan. Work your plan. And may all of your investments prosper! 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 24
With best wishes, James Skinner, Mark Victor Hansen, Roice Krueger 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 25