I often get asked by friends and clients on how to get started on the road towards financial freedom. I would like to share with you the most basic wealth principle in finance for which those who surely understand the concept, understand its significance in making money. That is….Leverage.
Leverage allows you to build more wealth than you could ever achieve alone by utilizing resources that extend beyond your own, thereby removing any restrictions by your personal limitations. Simply meaning, using something to your maximum advantage.
We can use leverage in the following ways:
Leveraging Finances
Essentially, using borrowed capital for an investments and expecting the profits made to be greater than the interest payable. People use leverage money so that they are not limited by their current resources when making an investment.
In finance, companies maintain a the ratio of capital to debt value of its common stock at 70:30. Hence, they leverage their 70% capital with a debt of 30%. In Forex trade, traders leverage their capital for trade at ratios of 1:500 for instance, meaning for every dollar invested, they borrow up-to 500 times that investment.
Time being the most valuable commodity, its makes sense to leverage it to get the most out of it. Time is money and as such we leverage time, by employing other peoples time so that we are not limited to 24 hours a day in work. Companies leverage employees time to maximize on investments made by the principle.
Leveraging Knowledge
We use the knowledge and expertise of others to accomplish that which we want to accomplish. As such, we put into use others peoples talent, expertise and experience so that we can utilize greater knowledge than we can possess.
When it comes to personal finance, my clients leverage my own expertise and experience, to achieve that which they desire in life. Bottom-line, leveraging knowledge its merely taking advantage of something to the maximum.
Model your life to take advantage of the resources around you. If you are not using leverage, then you are working harder than you should to earn less than you deserve – which will not make you wealthy in the end. For every amount you earn, you could potentially be earning up-to 10 times or even more using the power of leverage.
So do not blindly stumble through life doing what 95% of the population is doing. You can model successful people who are already where you want to be and the use information at your disposal such as this article to take advantage of various shortcuts to your financial destiny.
Personal financial planning blueprint to help you organize, protect and plan your financial future.
I had an interesting interaction a couple of weeks ago, with a very wise man who has been doing financial planning for many years. He works with both local and international clients. It was a 90 min packed conversation and each time I was awed by the amount of wisdom oozing out of him.So let me share a snip bit of that conversation in the form of this infographic. He said that building wealth is like building a house, there are some things that are absolutely necessary such as protection. Income protection in the form of life insurance, health insurance, and critical illness insurance, future wealth – retirement wealth planning and investing. Also, there is building wealth – over and above wealth accrued from basic paper assets and superannuation. The house held up assets – stocks, bonds, and other paper assets.
Financial Planning – Building A Financial House
Having financial protection provides a great sense of freedom and ensures that the financial house remains standing despite any shocks. Here is how:
Financial decisions are among the most important life-shaping decisions. They have lasting impressions that can shape an entire family for generations.
How to Get Started
Before you even think about building wealth, you need to build an emergency fund. You can best achieve this by investing in stocks and mutual funds as soon as possible to lay down the groundwork. From here, you can start looking to other forms of protection i.e. insurance.
Finding ways to set-up your financial foundation has always been on the biggest obstacles for many. Here are three strategies you can use to get you there:
Pay yourself first – get into the habit of setting aside funds before you start spending it. This way you will not be tempted to dig into the amount that would otherwise have been saved.
Secure spending leaks – identify and track your spending, and do away with unnecessary spending and any unaccounted for. You can use a financial planning software to get you started. Most banks nowadays have apps that are quite useful.
Save all ‘extra’ cash – get all extra money that may come your way into your savings.
Where to Save Your Money
When you are ready to save your money, look for a place with the following things:
Profitability – Your money needs to earn you a profit not stagnate. Invest your money in a place where you can earn a good interest.
Security – the idea is to preserve your money hence safety.Capital preservations are about protecting your money from the risk of depreciation experience by inflation.
Accessibility – accessible but not too accessible. This way you won’t be tempted to dip into it but also have access in the event of anything.
Bottom Line
Building a financial house isn’t as technical as most people make it out to be. You just need a lot of patience and some discipline.
Meanwhile, You can click on the following links to read more about financial planning and achieving financial prosperity:
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
In Dec 2007/ Jan 2008, my siblings and I took a gruelling backpacking adventure across eastern and southern Africa. The most intense and demanding experience I have ever undertaken. What felt like a punishment at first departure, travelling through countries like Tanzania, Zambia, Zimbabwe (brief entry), South Africa, Botswana and Namibia with a lot of uncertainty, insecurity and palm greasing- the lessons I learned from this encounter I have come to treasure years later in life, business and minting money.
I will share some of these lessons with you today –
A Journey of a Thousand Miles Begins with a Single Step
Approximately 6883.8 Miles, 30 days
The idea of backpacking down south all started with the goal of getting to Cape Town and back within our December holiday break on road exploring Africa. With this goal alone, we built a plan around it.
Lessons Learned
Much like in money and business, setting goals is crucial for a successful journey to success.
Dig the Well First Before You Are Thirsty – Seth Godin
Even before we could get full consent from our parents to embark on this potentially dangerous and taxing journey, we had to satisfy their minds with a great plan – filling every gap, and question, paying attention to every nook and cranny and hopefully, giving them the peace of mind that we would get back safely.
It took us two months to plan the 30-day trip, set dates, buy/book tickets and prepare accommodations for our stopovers. Having a thorough plan was crucial for the success of the trip but nothing quite prepared us for the actual situation on the ground.
On our way back home, we got to Tunduma (Tanzania- Zambia Border) and we had no transport as the road network and bus schedules in this town were not easily available. This made it difficult for us to plan our trip meticulously. You had to be there to know the real situation on the ground. Hence, we were forced blindly travel to the border town and try our luck. We found no transport and we literally had to start walking towards the next town as we had come to learn that the border town was a very unsafe place to be. Luckily or should I say, unfortunately, on our way we found a road accident along a steep narrow hill blocking both sides of the road. It had just started drizzling and being remote, the situation could not be resolved quickly so passengers decided to exchange vehicles. By God’s grace, we fell into luck and got transported to the next town.
Lesson Learned
Planning can save you a lot as you walk along your journey, be it in life, business or financial planning. With a plan, fewer problems crop up and contingencies can be put in place to handle any foreseen problems. But, when it comes to unexpected problems, learning to deal in the moment and follow through is important. Goals provide tunnel vision but accompanied with a plan, it puts into perspective the bigger picture providing flexibility and enabling you to bear any difficulties.
Because Answers Only Exist to Questions…
We learned the value of seeking advice from the people around us, from the people who have been there before us and from the people who live in those places. You will discover things you never knew and learn things you could never imagine and even get out of problems you could not foresee. Being stuck at Tunduma was the toughest part of our Journey as in that border town there lived people with hopes of getting down south for a better life and future. Being Kenyans, with South African Visas placed us in a dangerous situation as theft of passports and harm to travellers is not tall common in this border town.
All kinds of people approached us and blending and being courageous in our ways in was crucial. There were no hiding spots (no good hotels), and no one to trust as word got around that we were four young Kenyans. Good Samaritans warned us of our potential danger and offered us help for whatever we needed. Those were the longest 24 hours of my life. At a time life that I learned that life in general is a daring adventure and without courage being alive becomes even more painful to bear.
Lesson Learned
It never hurts to ask.
Gratitude Turns What We Have Into Enough
The most difficult aspect of backpacking for most women like me is travelling with little to nothing. Surviving with very few clothes, money and stuff for the entire duration of the journey. The more you carry, the larger the burden. Travelling light and selecting what is necessary was the hardest part of all.
Lesson Learned
Budgets are merely tools used to achieve goals. Additionally, learning to distinguish between wants and needs is the first step to it tall. When everything boils down to Food, Clothing and Shelter – and during those moments you find yourself unable to distinguish between a want and a need you will end up not accomplishing anything.
Balancing Your Money is the Key to Having Enough ― Elizabeth Warren
With everything in place, the success of the entire trip hinged on adhering to this plan. We had to be very disciplined about how to go about our business while on this trip. Not spending more or less than we should for the entire trip was important to keep everything on track.
It Was Not Raining When Noah Built The Ark – Howard Ruff
As we embarked on this trip, there were instances we could not foresee what could happen and it those moments we really wanted to turn back but there was no way. How would we explain it to our parents? Things were hard but we had to shoulder on and find a way out of any conundrum we found ourselves in.
There was a time we shares these sentiments when we got marooned at the Tanzania-Zambia border – Tunduma on our way down south, we could not go back into Tanzania neither could we go forward into Zambia. The only transport to and fro was the bus we came in – which we could not board because the border patrol officers did not want to issue us with a transit stamp – reasons: we did not give the $400 bribe money ($100 for each of us) and we looked very young to be travelling alone. They searched for other reasons to prohibit us from entry but could not find any – we had complied to the fullest with all immigration laws of each country we intended to travel to.
So apparently palm greasing at Tunduma was quite common even with the large posters hanging everywhere notifying all that ‘this is a corruption-free zone’, but because these officials did not out rightly ask for the money. We just got hints of what was the norm at the office – we had the money but we decided to play ignorant, I mean we were very young and pure – so why not? Eventually, after 6 hours of waiting and pleading, we got a sit down with the head of the post who granted us entry within just 5 minutes. Thankfully, the bus had not left yet.
Lesson Learned
In Personal Finance it’s the same. You have to be prepared for any emergency by having emergency savings and insurance as the basic foundation for building wealth. Failure to do so, it can threaten the success of the entire plan.
Not Everyone has Your Best Interests In Mind
I learnt this the hard way back then. The feeling of having criminals circling your life a vulture circling a carcass out in the open. This is a lesson I am still learning today. Losing ‘friends’ and having ‘friends’. Strangers feel closer than those that pretend to be ‘friends’. Being alone in foreign land will teach you this, but that is just the basics. Being betrayed by someone even closer is much much more painful and nothing quite prepares you for this.
As the sunset in the Kalahari Desert, we got stopped by enforcement, screaming asking us to step outside. As we produced our identification cards, sniffer dogs did their job sniffing out illegal contraband. Back then there were rumours that smugglers would place these things in your luggage secretly and request for it later. Therefore, we had to take care of our luggage every step of the way. We travelled light, learned how to protect ourselves and followed through to avoid such things from happening.
Lesson Learned
It is the same with personal finance – always read the fine print of every agreement and always ask questions until you understand everything.
Close-up view of a gold bar with shallow depth of field.
History is littered with cases of investment frauds that have changed everything.
I keep hearing stories of how people have lost millions in investment deals that at first seemed genuine but turned fraudulent. When it comes to making investment decisions, one needs to be wise about it. I too, once upon a time fell for some of these fraudsters. The most important thing that I got out of that experience is learning from my mistakes.
Therefore, it is essential for investors to not only educate and familiarize themselves with basic financial skills and investments but also characteristics of fraud. This way, when the red flags come up, you will be able to recognize them and avoid being a victim. As such, you use your education and knowledge as your best defense against becoming a victim of investment fraud.
Investment fraud is multi-faceted and here are some of the most famous scams out there:
# 1 Ponzi Schemes
Also known as pyramid schemes, was named after Charles Ponzi. A swindler from the 1920’s who infamously promised investors 50% return in 45 days. He made $20 million through his scheme in the 1920’s where both banks and individual investors fell for his scheming ways. How much money do you think $20 million is worth today?
Red Flags: The hallmarks and identifying characteristics of Ponzi Schemes are:
High returns with little or no risk
Provide overly consistent returns
Have unregistered investments and have unlicensed sellers
Have very secretive and complex strategies
Have issues with paperwork and experience difficulty receiving payments.
Note: All Ponzi schemes collapse.
Due Diligence: Make sure a 3rd party custodian authors the statements.
#2 Pyramid Schemes
Pyramid Schemes usually promise very high returns to lure investors. They use money from newer investors to pay off previous investors thereby adding credibility to the fraud. Older investors then provide testimonies that convince skeptical investors. This further fuels the growth of the pyramid. Please note that little to no actual investing ever takes place, and the fraud blows up when regulators or insufficient numbers of new investor enter to pay off existing investors. Thereby, initiating a collapse.
Note: All pyramid schemes collapse. Pyramid scheme still exist in hush-hush corners of our society. So beware.
Red Flags: The hallmarks are identifying characteristics of Pyramid Schemes are:
High returns with little or no risk
No genuine product or service is sold
Promises of high returns in a short time period
Easy money/passive income
No demonstrated revenue from retail sales
Complex commission structure.
#3 Advanced Free Fraud
Advance fee frauds ask for upfront payment before the deal can go through. This upfront payment may be described as a fee, tax, commission or incidental expenses that will be refunded later.
For instance:
The famous Nigerian scams for helping a high-net-worth Nigerians move money out of the country.
Receiving a bargain shipment of commodities that will never arrive.
An offer for an interest-free loan from an offshore bank with an advanced application fee.
The list is endless, but the mode of operation is for you to pay an upfront payment for something that you will expect to receive later. Don’t be too trusting. A healthy dose of skepticism will always go a long way to save you later.
Due Diligence: If someone calls you about an investment that sounds too good to be true, run!
#4 Affinity Fraud
Most famous case of Affinity Fraud was by James Lewis a Financial Advisory Consultant. He cheated out $311 million from investors over a period of 20 years. He relied on referrals from clients to gain investors with the promise of high returns. He supposedly used investors money for trading foreign currency, purchasing luxury automobiles and expensive jewelry.
Anatomy of affinity fraud:
♦ Targets members of identifiable groups i.e. elderly, religious or ethnic communities with the fraudsters involved in the scam often are or pretending to be members of the group as well.
♦ They gain respect through enlisting respected leaders from the group to spread the word about the scheme, convincing them it is a legitimate and worthwhile as such the leaders (victims) promote the very thing they are victims of.
♦ These scams exploit the trust and friendship that exists in groups of people built through the tight-knit structure of many groups as such outsiders will rarely know about the scam.
♦ Affinity scams exploit trust and friendship within various groups.
♦ Take the form of Ponzi schemes or pyramid schemes system.
♦ Victims more often than not, always try to work things out among themselves rather than take legal action or report the matter to the necessary authorities.
Due Diligence: Make sure a respected 3rd party custodian is delivering the statements.
#5 High Yield Investment Programs
The high yield investment programs are unregistered investments and typically run by unlicensed individuals – and more often than not turn out to be fraudulent.
The hallmarks of High Yield Investment Programs:
♦ Claim that the privileged class has secret access to highly lucrative investments that a mere commoner s like us normally don’t invest in.
♦ Promise incredible returns at little to no risk to the investor.
♦ Promise annual (or monthly, weekly or even daily) returns of 30% or higher with access to the worlds elite bank portfolios -“prime banks”.
My Rule of Thumb: Avoid all forms of unconventional, high-yielding debt issued through non-verifiable sources. Especially one that claims to give ‘privileged access’. Any investment that promises anything higher than the current market rate of return, should raise a red flag.
#6 Internet and Social Media Fraud
Criminals are also very quick to adopt new technology and among the sea of legit businesses, larks criminals. The internet is no exception. They use social media, spam email, online investor newsletters, online bulletin boards and chat rooms to solicit interest from unsuspecting investors. Due to the fact that these offerings are made online, it is difficult to know whether or not they are legitimate, registered or licensed to conduct such business. Many of these frauds are not unique to the interest and range from “pump and dump” schemes to promises of “guaranteed returns,” from “High Yield Investment Programs” to affinity fraud. So be careful.
The key to avoiding investment fraud on social media sites or elsewhere on the Internet is to be an educated investor and add a dose of skepticism.
#7 Pump and Dump Schemes
The scam is market manipulation through pump and dump scheme. The most famous case of a pump and dump scheme was by Jordan Belfort (of Stratton Oakmon a pump-and-dump firm in the 90s). The goal here is to drive up the price of stocks. Belfort and his partners at the firm would cash out causing the stock to plummet in value. Sound familiar in the local context?
How it works: To drive up stock demand, they would pump in large amounts of cash into a particular stock. Then they would get brokers to call unsuspecting people to buy this particular stock which is most likely not performing in such a manner that would warrant such attention.
#8 Precious Metals Fraud
There are many ways that you can get ripped off investing in precious metals and gems. The most common of them is selling poor grade precious metals or purchasing a product that you have never seen. They will claim that it is kept somewhere for safekeeping and much more. Anytime these precious metals are offered at below market value, you should be very very skeptical.
Homework – The Investment Litmus Test (How to Avoid it)
After reading and learning about investment fraud, here is your take home. For every investment you intend to make, make sure it passes this basic tests threshold:
1. Only deal with Registered and Licensed Firms
Capital Markets Authority regulated, domestic securities and dealers have a lower risk of investment fraud than their unregulated and offshore counterparts.
Note: lower risk, not completely free from risk.
Therefore, never drop your guard against fraud even with regulated securities as there are still cases of broker fraud and institutionalized investment fraud. Being regulated simply means that the risk is lower due to higher regulation but, unfortunately, fraud still exists regardless of regulation.
2. Be Aware of the Fraud ‘Warnings Signs’
As the markets keep changing, and investor keep burning their fingers trying to earn some money in the market. Investment fraud also keeps changing its form over time – as we learn so do they. Fraudsters will attempt to sell the fraud by appealing to your personal desires for easy riches (there is not such thing as easy riches) and use their craft of deceit to separate you from your hard-earned money.
A lot of successful and very financially intelligent people fall prey to investment frauds because the persuasion tactics used are tailored to their individual psychology profile. However, I’d like to believe that there is always that gut feeling that all is not well. Listen to your gut! The following are the most common warning signs of investment fraud:
• Unrealistic Returns – Unrealistic rates of return are a biggest red flag to investment fraud. An investment that offers a higher-than-market rate of return and little to no risk are almost always fraudulent.
• Guaranteed High Returns – Most often than not, investment firms will hardly offer a guarantee for your investments – even banks don’t. Therefore, when someone approaches with offers of a guaranteed high return on investments, then red flags should be popping as that investment is likely a scam.
• Pressure to Borrow – If your adviser pressures you to borrow money to invest with them, then that should be the greatest warning sign. Fraudsters will often recommend that you borrow to invest.
• Inside Information – Another flag involves exclusivity, especially where the information you are being offered is “confidential” or “inside information”. They will claim to offer access to the worlds elite. Why it is a fraud? Registered firms are required to file public information, so there would be no reason to keep any details about the investment secret from the investors.
• High-Pressure Sales Tactics – When the financial adviser uses high-pressure sales tactics to solicit funds from you. You should be warned that the investment is most likely a scam. A legitimate opportunity should provide you with enough time to do your research and review any information needed to make an informed decision.
3. Cheques Should be Payable to Registered Firms, Not Individuals or Other Companies
Only hand over money to registered firms, not to advisers or other business entity – this is a red flag something is not right.
4. Be Skeptical & Seek to Understand Everything
Always adopt a healthy dose of skepticism and do your research – Ask Questions, Verify, and Just Say No.This will serve as your first line of defense against investment fraud. Make sure you conduct your due diligence to uncover the less obvious cases of investment fraud before you ever lose your money.
Should it pass these tests, then I think you may be a bit safe. But, remember there is also institutionalized fraud so nothing is solid.
If it is anything to go by, historically speaking more people than we would like to admit get away with swindling money from innocent people. It is with the same effort, you too should safeguard yourself from being tricked by these cunning creatures called con-men.
Have you ever been a victim of investment fraud? We would love to hear your stories. Please feel free to comment below and let us know what tricks people have pulled on you in the past.
Otherwise, Happy Investing!
You can click on the following links to read more on fraud and financial planning:
Real estate investing can be quite easy if you start simply.
Do you have a big dream and small savings? Looking to invest in real estate? I have identified five ways in which you can invest in real estate with your small savings and achieve your big dream. Real estate is the best source of passive income around. If done well, could support you for the rest of your life as you glob-trot or do whatever tickles your fancy.
From my experience, and what I have learned over the years, here are three 3 ways you can invest in real estate without a lot of money.
This could be just you and a couple of friends coming together to purchase real estate for the purpose of earning an income from it. There is an African proverb that says that “If you want to go fast, go alone. If you want to go far, go together”.
Important Data You Will Need! Find out how many members you will need and how much contribution each member will make. Before that, ensure that all your goals and interests align before engaging in any purchase formulated into an investment plan.
2. Leveraging Real Estate
Leveraging is basically borrowing money to increase the potential return on investment. The potential for large gains is tied to leverage and low-cost financing.
When I talk about leverage, I mean this – Consider a real estate property on Kiambu Road valued at KES 12.5M (three-bedroom apartment), with a requirement of 20% down payment i.e KES 2.5 M. The buyer could use this relatively small percentage of 20% (i.e. KES 2.5M) of his own money to gain control over the asset. He can do so by making a purchase with a majority of the money being provided by a lending institution.
Why does this make sense?
Let’s compare the gains, to the gains from an un-leveraged purchase as we seek to highlight the value of leverage. Please note this works best for properties you seek to rent out and earn additional cash inflows from.
Scenarios & Assumptions:
Δ Assume that this property value appreciates at 6% (year-on-year growth rate, 2014 estimates), and the borrower’s net worth would grow to KES 13.25 M in just 12 months.
Δ Also assume the same borrower bought a house of KES 2.5M, with the same appreciation rate of 6%. His new net worth would increase only by KES 150,000 over the course of 12 months as opposed to KES 750,000M on a leveraged purchase of much more expensive property. The KES 600,000 difference demonstrates the potential net worth increase provided through the employment of leverage.
Note: Some serious investors start out using leverage mainly to purchase rental properties. As such use cash flows from these properties to pay down the debt. The investors may opt to sell the property after four to seven years from when they purchase it to realize equity gains.
The financial structure is as follows:
Scenario 1: 100% Cash Purchase
House Value: KES 12,500,000, Sale Value: KES 16,727,820, Annual Rental Income: KES 900,000 (7.2% yield- usually ranges between 5-10% on real estate)
Revenue & Expenses,
Kes ‘000
Purchase
Year 1
Year 2
Year 3
Year 4
Year 5
Rental Income
–
900
900
900
900
900
Interest Payments
–
–
–
–
–
–
Debt Principal Payment
–
–
–
–
–
–
Purchase or Sale of Property
(12,500)
–
–
–
–
16,728
Net Cash Flow
(12,500)
900
900
900
900
17,628
Returns Multiplier: 1.7 x , Internal Rate of Return: 12.5%
This is an okay scenario and a 12.5% internal rate of return is not something to sneeze on or disregard. It is typical for real estate deals to yield such returns if you give 100% cash to buy an asset and then sell it at a moderately higher price in 5 years or so.
Be sure to factor in and readjust inflation as well.
Scenario 2: 20% Cash Payment
Cash Payment: KES 2,500,000 (20%) , Debt Payment: KES 10,000,000 (80%), Debt Interest Rate: 15% (my own estimated average), Debt Principal Repayment: KES 874,743 (per year)
Revenue & Expenses
Purchase
Year 1
Year 2
Year 3
Year 4
Year 5
Rental Income
–
900,000
900,000
900,000
900,000
900,000
Interest Payments
–
(736,726)
(736,726)
(736,726)
(736,726)
(736,726)
Debt Principal Payment
–
(138,017)
(138,017)
(138,017)
(138,017)
(138,017)
Purchase or Sale of Property
(2,500,000)
–
–
–
–
5,884,020
Net Cash Flow
(2,500,000)
25,257
25,257
25,257
25,257
5,909,277
Returns Multiplier: 2.4 x, Internal Rate of Return (IRR): 19.4%
A decrease in the initial investment makes a very big difference in leveraged investments. The yearly cash outflows in terms of interest and debt principal payments reduce our cash ligature but we reduce our cash inflows by KES 874,743. Also, keep in mind that KES 12,500,000 is much bigger than KES 874,743. On the sale of the property, we still sell the property at 16,727,820 but must pay our outstanding debt of 10,843,800 at year 5.
The Returns Multiplier and the IRR increased becauseof reducing the purchase price. There is a disproportionate effect on the entire transaction as money today is worth more than money tomorrow.
Important Data You Will Need! When it comes to identifying a property that would leverage well, you will need to conceptualize how much rent you will need to collect relative to the property rent i.e. the gross rent multiplier. Find out the rate at which the bank is willing to provide you with the mortgage and the mortgage interest relief you will expect to receive to compute accordingly. Additionally, consider all costs involved in purchase which are not included in my scenarios before estimating your return.
A word of advice: Following the rules of major investors, always seek a higher IRR than 20%. This means more rental income growth, a better selling price, better terms of debt or a combination of all those.
Warning!
Just as with most investments, leveraging also comes with a degree of risk. Hence it should be used prudently. As much it can work in your favor, leverage can also work against you so be warned.
⊗ Given the previous example of a KES 12.5M property purchase, if the value of the property does not appreciate then leverage will work against you. As the property value depreciates with time so does the equity value. You need to be very very careful as this may be a very likely scenario as many Kenyan properties are over prices and buyers only realize at the point of resale.
⊗ Under a leveraged scenario, a decline in value will wipe out any gains expected to be made at the end of the investment period. This leaves you dealing with losses rather than profit. This goes as well for rental income.
⊗ Also under the full payment scenario, if the same borrower chooses to buy the lesser costing property of KES 2.5M and the property does not appreciate in value, the buyer would lose KES 150,000 in the first year. This depends on the rate at which the value is decreasing.
Some tips on how to screen real estate properties for Leveraging:
• Steady Income: Seek rental property that has the potential to garner a steady but increasing rental income with an appropriate gross rental multiplier.
• Market Maturity: Seek to purchase a property that is in a mature market with proper infrastructure for ease of renting and also reselling.
• Low Capital Expenditure Requirements: Seek a rental property that has minimal repairs and structural problems with will not cost you much to fix.
3. Land Options Trading
Said to be a revolutionary product that essentially allows an investor to pay a fee (at a fraction of the sale value) to the seller, compelling the seller to hold a parcel of land that they wish to buy at a locked price for a fixed duration of time. If at the time of expiry of the contract the seller has not fulfilled their option to buy, they can transfer their rights to a third party at an even higher price before expiry. There are numerous advantages to these kinds of agreements, which are essentially strictly defined terms and properties such as low-risk exposure and higher returns and much much more as land is such a lucrative business in Kenya.
4. Real Estate Investment Groups
Essentially are like small mutual funds for rental properties which offer you a chance to own rental property, but do not want the hassle of being a landlord then they make a great solution to this problem. They buy or build real estate properties such as apartment blocks and then allow investors to buy them through the company as such joining the group/club. In Kenya, a single investor can own a fraction, of one, or multiple units (self-contained living space), but the company operating the investment group collectively manages all the units. The management takes care of maintenance, advertising vacant units, and interviewing tenants. In exchange for this management, the company takes a percentage of the monthly rent.
5. Real Estate Investment Trust (REIT)
These are publicly-traded instruments on the Nairobi Stock Exchange as initially listed by Stanlib last year. They are essentially created when a corporation (or trust) uses investors’ money to purchase and operate income properties. Before investing in this fairly easy option, make sure you do your research on the performance of these instruments.
Bottom Line
We have looked at many options that you may use to venture into investing in real estate in Kenya. However, just like with every other investment, real estate investing also comes with its own fair share of risk. Therefore, make sure that you make careful choices weighing all the costs and benefits of your actions before diving in.
Happy Investing!
Meanwhile, You can click on the following links to read more about real estate investing.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
Just like in every other endeavor out there, there is always a right way and wrong way of doing things. I am a firm believer of doing things right…always, otherwise why do it at all and burn your fingers while you are at it?
I have managed to identify the most common real estate investing traps/mistakes that most people fall for and how you should avoid them:
#Mistake 1: Failing to Plan is Planning to Fail
Generally, a lot of people fail to plan their personal financing and this behavior transferred when making investment decisions. Particularly purchasing real estate without knowing why… only that you got a great deal for it and thus treating it as a transaction similar to buying a great part of shoe and not an investment. Some of the common pitfalls you might find as a result of not planning well are:
• Running out of Cash -the worst thing that could happen, rendering your property uninhabitable and hence no income. Running out of cash can happen for one or two reasons underestimating current and future expenses on the property in terms of repair cost or other government related expenses.
•Miscalculating estimates – Underestimating the repair costs involved and choosing below standard contractors. In order to avoid cost overruns and poor standards of work it is wise to budget for repair costs and seek advise from experts when choosing to buy a rental property so that, on purchase you are well aware of the costs, make wiser and more informed decisions.
• Choosing the wrong real estate strategy – this is detrimental to your financial future and success. Since there is no perfect strategy of venturing into real estate, planning enables you to identify the various strategy that suits your unique strengths, your short-term needs, and your long-term goals.
#Mistake 3: Playing a Lone Ranger
When venturing into real estate investing, it would be wise to build a ‘team’ of go-to people that you can trust and have build a relationship with to offer you great advice and can do great work for you. You can simply have a one real estate agent, a great valuer, an inspector, a great lawyer and a good lending institution.
#Mistake 4: Misjudging the Value
Misjudging the value could lead you to paying too much for a property that is not even worth that much. Therefore, it is best to always do your homework before purchasing any property. Analyse every aspect of the asset – location, market price, resale value and expected rental income. But, above and beyond that, just as you do with any other investment and educate yourself on all matters relating to real estate investments.
#Mistake 6: Performing Due Diligence
Property analysis is the basic due diligence that must be performed in order to prevent you from draining your resources into a property just because it is said that it will appreciate in value. Other things you must do well:
a. Obtain a very good professional third party property inspection i.e contractors and seek the opinion of value and rental comps
b. Cross check your repair estimates (please see mistake #1 above)
c. Evaluate the location and local ordinances
d. Enlist the services of a lawyer to avoid some very common pitfalls to property purchasing in Kenya.
Without playing your part well as an investor, i.e. cross check and double check any assumptions made with regards to any investment, could potentially leave you drained both financially and emotionally upon realizing that your get-rich-quick scheme fell flat on its face.
#Mistake 5: Bad Financing
This can be the biggest mistake you can ever make and could make you lose money or even be on the verge of bankruptcy. Some of the things to avoid are:
1. High interest rates and/or floating interest rates – knowing our local financing institutions, you have to be very very careful about these things. Always seek out the best deal possible and nature goo relationships with various financing institutions. Since they are more than happy to take your money, make sure you get the best deal possible.
2. High Monthly Payments – do not tie yourself to high payments that you are not sure you can pay.
3. Balloon Due & Long Moratorium Periods – paying large sums of money at certain intervals of the mortgage or seeking very long moratoriums for no reason is risky business as interest keeps accruing daily.
4. Personal Recourse i.e. giving the bank the right to collect on default is risking yourself too much. As such you personally guarantee the loan with your other assets and/or future earnings.
Try as much as possible to gain a mortgage that at least saves you from these mistakes. That is one that has reasonable interest rates, comfortably fixed payment terms with amortizing payments, and no balloons and unnecessary moratorium periods. Unfortunately, you cannot escape personal recourse, so while you are at it, get the best deal possible.
#Mistake 7: Not Learning From Your Mistakes
You have many mistakes to avoid in life. However, I think the biggest and most important one is making the mistake of not learning from your own mistakes. Learning from your own mistakes and those others. Otherwise, all this would be for nothing.
Always seek advise and continuously learn. But, I hope these 7 mistakes help you continue moving forward at whatever pace you find most comfortable for yourself.
Many of us are anxiously waiting in preparation for the EU Referendum to be held on June 23rd, 2016 – waiting to see what possibilities and opportunities will come with it. Currency markets are unsettled and are responding frantically to the the fresh poll results being released in anticipation of the D-day with Speculators busy trying to anticipate the outcome.
If you have not been following these events, this is what is likely to happen in the coming weeks and months.
[vc_custom_heading text=”FACTS: Since Brexit Announcement Market Response” font_container=”tag:h3|text_align:left” use_theme_fonts=”yes”]
♣ In the last month, the Sterling Pound has risen from €1.26 nearly peaking at €1.32, only to later drop to €1.25 against the euro.
♣ UK stock market has gone on a free fall this last few weeks but was previously steadily rising since the announcement of the Brexit – FTSE index of Britain’s top 100 companies risen from 5500 on 11 February to now hovering at 6096 only to drop to 5924 last week.
♣Many UK investors are taking the cautionary route opting for lower-risk investments, pointing to the uncertainties triggered by the EU referendum as their reason.
[vc_round_chart type=”doughnut” style=”custom” stroke_width=”2″ values=”%5B%7B%22title%22%3A%2251.4%25%20Exports%20to%20the%20EU%22%2C%22value%22%3A%2251.4%25%22%2C%22color%22%3A%22blue%22%2C%22custom_color%22%3A%22%23002e5b%22%7D%2C%7B%22title%22%3A%226.6%25%20Imports%20from%20the%20EU%22%2C%22value%22%3A%226.6%25%22%2C%22color%22%3A%22pink%22%2C%22custom_color%22%3A%22%23fde428%22%7D%5D” title=”Britain’s Import & Exports to the EU (2014)”]
♠ The Sterling Pound will decline on Brexit mainly against the dollar, as the exit will be seen as damaging to the Euro as well. The Treasury’s worst case scenario forecasts is a 15pc drop in value for the pound.
♠ “Brexit threatens to cause ‘severe global damage'”, warns IMF
♠ JLL research showed that both international and domestic UK based property companies think that Brexit will lead to job losses and head office closures, particularly in the capital.
♠ According to an analyst at Goldman Sachs, the Sterling will fall by 20pc while stock markets are likely to slide up to 30pc.
♠ The UK stock market is said to be dominated by very large international companies whose performance is not closely linked to domestic UK issues.
Results as at 15th June, 2016 with a 6/4 odd of a leave vote
In order to not lose out on this volatility, many are asking: When should I buy and how do I minimize the likelihood of missing out on a better rate?
Markets do not like uncertainty as there are real risks involved, but with uncertainty, market volatility leads to real opportunities as well. Therefore, what are the real risks and opportunities? One Exit, these are some of the opportunities likely to crop-up.
1. Impact on Paper Assets
Bonds, savings and pensions held in Sterling may shrink in light of a Brexit. A Brexit is likely to cause a fall in the sterling pound placing at risk investments made in the UK in Sterling.
Moving forward, it would be wise to wait and see what happens for two reasons:
a. There are some speculations of an interest rate hike in the event of exit if your planning to invest in Sterling paper assets.
b. Investment ratings may be reassigned to a negative outlook due to the likely shift in the economic landscape in the short-term that may possibility dampened export to the EU playing a big role in investors decision making confidence.
2. Real Estate Market Investors
On Brexit, property prices within the UK will fall as a result of the Sterling fall and cause a jolt in the commercial and residential property sector, according to the international real estate group. Due to the current high property values within the UK, investors are eagerly waiting with large cash reserves to react to this ‘price correction’ on exit. Therefore, it would be a good time to buy on exit.
3. Stock Market Movement
On exit, for some time a lot may change in the business landscape as Government and Private Sector stakeholders seek to renegotiate trade agreements and have normalcy again with the EU. However, with a remain, the Sterling gain would damage any foreign earnings made by UK Companies and losses would be realized by UK International holders of International equities and funds.
Therefore, many investors at a time like this tend to favor proven businesses that can handle crisis hence it would be wise to always look for companies that thrive in the face of market turmoil. There is a lot that could happen but what is for sure is that a leave or stay vote could leave the UK Equity market polarized as there would be gainers and losers with either decision.
When all the money is made on speculation what will be the future of the UK. Brexit bounce would be followed by a period of uncertainty as the Government and Private Sector Organizations renegotiate trade agreements and even if they remain, things will remain challenging.
My board of wisdom, my favorites words of wisdom that keep me going each day and re-accessing my self. What sort of person am I? What sort of person would I like to be? How can I be better? Kinder? Wiser?
These quotes gave me strength years ago when I embarked on my journey and I am sharing them with you. So I thought, since they were very useful to me – I hope they will be useful to you as well and perhaps give you the wisdom to go on about your personal finances.
1. The Holy Bible by God
“Oh, the joys of those who do not follow the advice of the wicked, or stand around with sinners, or join in with mockers. But they delight in the law of the lord, meditating on it day and night. They are like trees planted along the riverbank, bearing fruit each season. Their leaves never wither, and they prosper in all they do.”
While this verse does not talk about money per-se, but I believe it captures the essence of all there is. There is so much to be learned from the Bible – it is a power house of wisdom not just stories.
It is a clear indication of where we should all be going for our financial counsel.
2. Henry Ford
“If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability”.
At the university we learnt a lot about Henry Ford and his business philosophies on production. He is the founder of Ford Motor Company. This quote may well have embodied all that Henry Ford learned through his experience as an industrialist and all the knowledge he had amassed as a result. A man who spent years improving his craft and took risks to succeed, to him perhaps the only thing he could bank on was his knowledge, experience and ability.
3. Johann Wolfgang von Goethe
“Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time”.
Probably I might say, I like the man more, he is German writer and statesman with an interesting perspective on things.
For instance he famously said this about the society at his time that “We do not have to visit a madhouse to find disordered minds; our planet is the mental institution of the universe” or “Whatever you can do or dream you can, begin it. Boldness has genius, power, and magic in it”.
I just love the way his mind worked.
4. Norman Vincent Peale
“Empty pockets never held anyone back. Only empty heads and empty hearts can do that”.
Norman V. Peale lived on the positive side of life something that a lot of people do not have. So when I want to do something but I find myself lacking in one way or another, I always remember this quote. Because in life, there are battles we must face but to win these battles we must win the battle over the mind first.
5. P.T Barnum
“Money is good for nothing unless you know the value of it by experience”.
There is an old adage that money is entrusted to those who take care of it. Remember the Parable of the Three Servants in Matthew 25:14-30 – Please read it if you have not. Amazing lessons can be learned from this.
Jack Ma, CEO of Alibaba is someone I truly look up to. He famously once said when asked what money meant to him as wealthy person that “I believe when you have $1 million, that’s your money – when you have $20 million, you start to have a problem. When you have $1 billion, that’s not your money, that’s the trust society gave you. They believe you can manage the money better than the government and others.”
Bill Gates once said that “If you are born poor, it’s not your mistake. But if you die poor, it’s your mistake.” It brings in the question of time, how are we spending our time. Successful people expect luck will find them, and it usually does. With a heart full of expectation they prepare. I guess there is a lot of truth in the old saying that luck and preparation always meet opportunity.
Here are 10 simple habitudes that will cost you nothing. Sprinkle them over your life to supercharge your financial success and perhaps set you up for massive wealth.
Habit 1: Successful Wealth Builders Set Goals to Visualize
…“I thought a goal was a broad objective, but the wealthy said a wish is not a goal.” – Thomas Corley
Successful Wealth Builders write down their goals, plans, visions, and dreams on a regular basis beforehand in order to be able to tackle the challenges that await them in achieving them. They break down their goals into small tasks into daily to-do-lists because to be wealthy you need to know what needs to be done and stay focused on the tasks at hand. Most successful people set themselves up for success by preparing all the time that includes investing wisely and setting aside an emergency fund.
…“If you buy things you don’t need, you will soon sell things you need.” – Warren Buffett
Successful Wealth Builders spend differently and are not disillusioned by pig paychecks which for poor wealth builders translates to more spending.
So while the rest of the non-wealthy folks splurge additional income upgrading to the latest cars, phones and other luxury items, Warren Buffet still lives in a home he bought in 1958 for $31,500 valued at approximately $260,000 today with inflation and all that. This is a man who spent $12 billion in 2010 to purchase a railway.
How much did you last invest?
Mark Zuckerberg worth $35.7 billion, drives a $30,000 hatchback Volkswagen GI. What do you drive? What is your net worth?
Most of us would be like, “If I were worth at least $1 billion not even $20 billion or $35.7 billion, my family would own, at the very least, two luxury cars.” I hear you.
I am not saying that you should live in a Manyatta and walk to work every day. All am saying is that just like the Successful Wealth Builders have practiced and perfected the habit of identifying the essential and what is a luxury – learning to practice moderation in all things. Remember, at the end of the day they indulge well within their means.
Habit 3: Successful Wealth Builders Take Smart Calculated Risks
…“Risk comes from not knowing what you are doing.” – Warren Buffett
Understandably it is not easy to take up a new investment in a business venture but if you want in, then taking leaps of faith is part of the game. This does not mean that you just risk it all and hope to win over the house, you must take calculated smart risks with contingency plans in place just in case things do not they way you want i.e. diversify your risks and reduce your overall risk exposure by spreading out your investments across various sectors and industries. Then you can potentially take advantage of multiple sources of growth and protect yourself from financial ruin if one of your investments takes a nose dive.
Habit 4: Successful Wealth Builders Live in the Future
…“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett
Always strive for a better tomorrow because today may feel horrible, tomorrow maybe even worse but the day after tomorrow may be great – only because you did something about it today. Successful Wealth Builders realize are not fortune tellers to know what will happen in the future, but they realize that the best way to predict the future is to is to create it today – goes an old saying. Bill Gates had a vision about Microsoft and so did Steve Jobs and they brought the future here with us today.
Habit 5: Successful Wealth Builders Read Daily for Self Improvement
…“Reading is to the mind what exercise is to the body.” – Joseph Addison
Successful Wealth Builders use their personal time to build themselves either by reading for 30 minutes or more every day as books are a wealth of knowledge untapped or breaking a sweat in physical activity to keep fit. For instance, Bill Gates spends his time reading non-fiction books. If you use your downtime to better your future self, you’ll not only have fun, you’ll see your personal success soar not just your financial situation.
So get off your high horse and stop binge-watching Keeping up with the Kardashians and realize that being wealthy means a serious attitude adjustment – hard work, sacrifice and a lot of small daily battles to win. Stop dreaming that with the little your doing now you can make it, you got to strive to do better and be better each day.
Bottom Line
Always remember that motivation is what gets you started but, habit is what keeps you moving as “Habits are like snowflakes – they build up, and then you have an avalanche of success.” – Thomas Corley
Happy Becoming!
Meanwhile, You can click on the following links to read more on building wealth:
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
Young african american mother playing with her baby girl
Almost all, if not all people with a lot of money have financial plans and it is also a common assumption that financial plans are only for the rich. However, financial plans have proven to also benefit people at all income levels and even used to move income brackets.
Why You Need A Financial Plan
So why not have your own financial plan? Here are the 7 main reasons why I think it is necessary to develop a plan and stick to it.
Helps You Determine Your Financial Goals
A financial planner will start off by asking you what your financial goals are – its mainly a plan for your story and purpose. It enables you to plan for every stage of your life and live out the best version of your life at every stage of life. “A goal without a plan is just a wish,” – Antoine De Saint-Exupery, so stop wishing and get planning.
[bctt tweet=”A Financial Plan enables you to plan every stage of your life & live out the best version.” username=”beyondsixzeros”]
Ensures You Save Enough
After quickly jotting down your financial goals, the financial planner will look to see how you can get there – how much to save, what types of investments to make. It is at this point that a financial planner does a cost-benefit analysis to see whether your goals are realistic given your current financial standing. Most people have more financial goals than financial resources. But, do not be discouraged because usually the only problem is the time-factor not the goal itself. Usually goals like mortgage, retirement, children education or paying debt, usually take years to accomplish – so the sooner you start, the better off you will be.
Helps Determine Your Investment Allocation
Your financial plan will prevent you from making any financial mistakes when deciding what sort of investments to make. For instance, you got a loan from a bank at 18% interest rate, and your fixed deposit at the same bank is 5% – does that seem like a wise investment to you when its barely raking anything near 5%.
Your financial plan enables you to see the big picture, the flaws and also help you maximize your investments – which can easily be fixed. It is important to note that, most successful people have been making very smart financial decisions all their life – so the sooner you start making wise decisions, the sooner you get to where you want to be.
[bctt tweet=”The time-factor is usually the only hindrance to achieving your financial goals – start early. ” username=”beyondsixzeros”]
Helps You Measure Your Progress
Life milestones need to be set within your goals and investments made to meet those milestones. Progress checks are necessary to ensure that you are well on your way to meeting these goals in a timely manner. For instance, investing in your children college fund to mature at the time they are likely to join university is extremely important. Also, ensuring you save a certain amount at the end of each year to meet that milestone is a measurable outcome.
Helps You Identify Risks
One important aspect of a financial plan is looking at risk capacity. Accessing how much risk you can accommodate or what sort of dangers you are likely to face down the road is an important part of planning. Financial plans can help you identify those risks and plan accordingly. For instance, imagine taking a mortgage without a proper plan as to how you intend to contribute towards its payment and wind up being a slave to the bank while your family takes a backseat in fear of losing your home. “The wealth which enslaves the owner isn’t wealth” – African Proverb.
Helps you Build Wealth
Real Wealth. On knowing what your net worth is, it is easy to know what to build or add to your wealth portfolio to increase your net worth. Do not wait until it’s too late to start planning – life is too short to not plan.
[bctt tweet=”A financial plan enables you to see the big picture, the flaws and helps you maximize. ” username=”beyondsixzeros”]
Helps You Live More Confidently and Comfortably
Being on top of your financial situation enables you to live more comfortably and confidently knowing that you are covered. Your life is more in control and things are on track, a great way to reduce stress in your life.
Bottom Line
What are some of the other benefits of financial planning? We’d love to get your thoughts – feel free to leave a comment below.
Happy Planning!
Meanwhile, You can click on the following links to read more financial planning and building wealth:
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
