Dear Dave,
I’m 38, and after looking and waiting for years, I think I’ve found a rental property scenario I like. My plan is to take $30,000 out of my retirement account, and use it as a down payment on a property. My loan payment would be $1,400 a month, but I could easily rent the place for $1,800 a month. What are your thoughts?
Colin Dear Colin,
No offense, but I can tell you’ve never been a landlord before. Bringing in nearly $1,800 a month, while paying out $1,400 may seem like a nice place to be. But you’ve left one very important factor out of your equation—risk. Rental properties just sit there empty sometimes. And this happens to all rental properties. You’ll also have repairs to contend with, renters who don’t pay and other expenses. See what I’m saying? You won’t be able to count on an easy $400 in your pocket every month.
Now, I love real estate. I understand the excitement and allure. But what you’re really saying is you want to cash out part of your retirement, get hit with a penalty and take on debt, all to buy an investment property. This is not a good plan.
My advice is to save up, and pay cash for one small, decent rental property to see if the landlord game is really for you.
— Dave Dear Dave,
Do you have any advice for sticking with your goals and New Year’s resolutions? I always have great things in mind to shoot for in December, but then they always seem to fall by the wayside before spring.
Rae Dear Rae, Believe it or not, setting goals and making them happen iseasierthanmostpeople think. You just need to keep a few guidelines in mind at the beginning of the process.
The first guideline is to be specific. What do you want to achieve? And be super specific when you answer that question. Things like “eat healthier” or “read more” are too vague. Instead, try something like “cut eating out to twice a week” or “read for at least 30 minutes every night before bed.” Also, look out for any roadblocks that could keep you from reaching your goal, and make a plan to knock them out of the way.
Number two, make your goals measurable. A goal like “lose weight” has no target attached to it. But “lose 20 pounds” has a clear finish line. You can also break your goal setting into bite-size chunks. Give yourself daily, weekly and monthly steps to take. Focus on those, and when you accomplish one, tackle the next.
Three,setatimelimit.You needa finish line, sotake your goal, create a plan and break it all the way down into daily activities. Then, give yourself a deadline. You might say, “I want to lose 25 pounds by December 31, 2025.” To lose those25poundsbyyourdeadline, figure out things like how many times you need to work out each week and how many calories to eat in a day.
Number four, make sure the goals are yours. Trying to achieve someone else’s goals for your life never works. Why? Because working hard is hard work. You won’t have the drive to stick with it if it’s something you aren’t not passionate about.
Finally, set your goals down in writing. Something special happens when you write down specific goals. Seeing them plainly in front of you hammers it home in a way nothing else will. There’s a reason God said, “Write the vision, and make it plain,” in Habakkuk 2:2 (KJV). Get those goals down on paper, along with all the steps it’ll take to make them happen.
And hey, don’t beat yourself up if you get a little off track, Rae. Keep your chin up and your eyes on the prize. As long as you stay focused on the end goal and keep taking steps—even small ones in the right direction—you’ll eventually turn those goals into reality!
— Dave
Dear Dave,
It’s always been a dream of mine to buy and own a business. A few weeks ago, I was approached with an opportunity that could make thisdreamcometrue.Howdo I know if what I’m being offered is a good deal and if I’m ready for something like this?
Lee Dear Lee,
Buying a business can either be one of the greatest purchases of your life, or one of the biggest mistakes you’ve made. And I’m going to do my best to keep you from making a mistake.
I want you to think seriously about a few things and keep some questions in mind. Then, at the end, if you still think buying is a good idea by the end of this article, you might be in business.
Imagine waking up on a Monday morning one year from now. Are you still enthusiastic about this line of work? Your vocation needs to be a vacation. Otherwise, running a business is too much work. If you’re only in it for the money, you’re setting yourself up for failure, because there isn’t enough money in the world to make you work as hard as you’ll have to work running a small business.
Think about spending some time around the business. Sit in there for a week to see how it operates, and learn all the ins and outs. Then, if you’re truly invested and passionate about this new business opportunity, move on to mynextquestion—what’sthe business worth?
A business is only worth the income it creates. It doesn’t matter if it’s in a really great location, or if it’s a well-known brand name. Those things have no value if they’re not creating income, so figure out the net profit of this business.
Notice that I said net profit, not just sales. When determining the business’s worth, you need to focus on all three areas—gross revenue, expenses and the profit it generates as a result. Become an expert on the business’s financial performance. Ask to see their past three years of financial statements, so you know what you’d be getting yourself into. Once you’ve done that, ask what you’ll makeonyourmoney.Youcan make about 12% with a good mutual fund, so if you’re going to take the risk of buying a small business, you’ll want to make at least 20% on it.
Another number to look at is the book value. If you collected all the receivables, and you sold all the equipment and the inventory and closed the business, what would you have in your pocket? That’s the book value. If the business currently has $40,000 in inventory, $30,000 worth of equipment and $30,000 in receivables, the book value of that business is worth $100,000. Somewhere in between net profit and book value is a fair price. If the net profit of this business is $60,000 and they’re asking $185,000 for it, then that’s a pretty good buy. But you need to really get into their books and make sure their numbers are real.
And even if you’re great with numbers, it’s a good idea to find a financial expert to help you through this process. It’s an extra set of eyes to review and verify all the documents and give you an unbiased opinion on the deal.
Next, what are the costs of running the business? As you’re researching what the business is worth, you’ll come across the costs of keeping the business running while you’re researching what the business is worth. But your homework doesn’t stop there.
Take time to really examine the business and understand everything that goes along with keeping it afloat. This includes employee payroll and benefits, insurance, taxes, contracts, inventory, leases, cash flow—and anything else that helps run the business. Take time to think about the future, too. Do you want to keep the business where it’s at, or grow it? What are your five-year goals for this business? Are there any expenses you may need to factor in to get there?
Finally, what’s included? When buying a business, you need to find out exactly what’s included in the asking price. How are they deciding the value of their business? Does the price include current inventory? Office equipment? Furniture? Get a list of everything that’s included from the seller and what kind of condition it’s in. And don’t just take their word for it. Go check out their stuff yourself. It’s also important to know all the baggage that might be included in this buy. Are there any debts or liens involved? You don’t want to buy a business only to find outyouboughtsomeoneelse’s problems.
One of the best benefits of buying an established business is that customers are included. The business should come with at least something of a reputation (hopefully a good one) and customers already in place. But be aware, many sellers will try to exaggerate how much their reputation and customer base are worth in finding their selling price. That’s why studying their books and knowing their customer satisfaction is so important.
So, how’re you feeling about things now, Lee?
— Dave Dear Dave,
My wife and I have been married for two years, and we both have good jobs. Together, webringhomearound $190,000 combined. We also have $100,000 in a savings account, and no debt except for our mortgage. A couple of weeks ago, I was contacted about an opportunity to take a job in commercial real estate in my hometown. To be honest, this kind of work has been a dream of mine for several years. The problem is my wife is upset by the idea of moving. She says it’s because she doesn’t want to be even furtherawayfromherfamily, but it seems like something else is bothering her. Do you have any advice?
Freddie Dear Freddie,
Anytime you’re in a relationship and something like this happens, it’s a little like making a sale in that you’ve got to dig out the real reason for the objection. It could very well be that she doesn’t want to be further away from her family, and that’s natural—to an extent. But like you said, there could be other factors involved.
There might be something in your past that bothers her, or something she doesn’t want you to revisit. There may even be feelings of discomfort with your family for things that have happened or been said. It could also be the insecurity that goes along with a move, a new home and a new job. I don’t know how far away you’re talking about moving, but it could also be she’s worried about leaving her job.
Fromarelationshipstandpoint, you two each need to lay your cards on the table and be honest with each other. Open up, and really talk about it. Otherwise, it’s going to become a sore spot and cause even more problems. Part of marriage is making compromises. Sometimes compromises must be made by one, or both, people in order to do what’s best for the relationship in the present and in the long run.
It could be that you just need an impartial referee. Would you both be willing to attend a few sessions with a good pastor or marriage counselor together? Talking to either one doesn’t mean your marriage is on the rocks, but sometimes a compassionate and objective third party can help dig down below the surface to uncover issues and help find a reasonable solution to problems.
I hope this helps. God bless you both, Freddie.
— Dave