THE RICH INVENT MONEY

In 1989, I used to jog through a lovely neighborhood in Portland,

Oregon. It was a suburb that had little gingerbread houses. They

were small and cute. I almost expected to see Little Red Riding Hood

skipping down the sidewalk on her way to Granny’s.

There were “For Sale” signs everywhere. The timber market was

terrible, the stock market had just crashed, and the economy was

depressed. On one street, I noticed a for-sale sign that was up longer

than most. It looked old. Jogging past it one day, I ran into the

owner, who looked troubled.

“What are you asking for your house?” I asked.

The owner turned and smiled weakly. “Make me an offer,” he said.

“It’s been for sale for over a year. Nobody even comes by anymore to

look at it.”

“I’ll look,” I said, and I bought the house a half hour later for

$20,000 less than his asking price.

It was a cute little two-bedroom home, with gingerbread trim on

all the windows. It was light blue with gray accents and had been built

in 1930. Inside there was a beautiful rock fireplace, as well as two tiny

bedrooms. It was a perfect rental house.

I gave the owner $5,000 down for a $45,000 house that was really

worth $65,000, except that no one wanted to buy it. The owner moved

out in a week, happy to be free, and my first tenant moved in, a local

college professor. After the mortgage, expenses, and management fees were paid, I put a little less than $40 in my pocket at the end of each

month. Hardly exciting.

A year later, the depressed Oregon real estate market had begun

to pick up. California investors, flush with money from their still

booming real estate market, were moving north and buying up Oregon

and Washington. I sold that little house for $95,000 to a young

couple from California who thought it was a bargain. My capital

gains of approximately $40,000 were placed into a 1031 tax-deferred

exchange, and I went shopping for a place to put my money. In about

a month, I found a 12-unit apartment house right next to the Intel

plant in Beaverton, Oregon. The owners lived in Germany, had no idea

what the place was worth, and again,

just wanted to get out of it. I offered

$275,000 for a $450,000 building.

They agreed to $300,000. I bought it

and held it for two years. Utilizing the

same 1031-exchange process, we sold

the building for $495,000 and bought a

30-unit apartment building in Phoenix,

Arizona. We had moved to Phoenix by then to get out of the rain, and

needed to sell anyway. Like the former Oregon market, the real estate

market in Phoenix was depressed. The price of the 30-unit apartment

building in Phoenix was $875,000, with $225,000 down. The cash

flow from the 30 units was a little over $5,000 a month.

The Arizona market began moving up and, a few years later, a

Colorado investor offered us $1.2 million for the property.

The point of this example is how a small amount can grow into

a large amount. Again, it is a matter of understanding financial

statements, investment strategies, a sense of the market, and the laws.

If people are not versed in these subjects, then obviously they must

follow standard dogma, which is to play it safe, diversify, and only

invest in secure investments. The problem with “secure” investments is

that they are often sanitized, that is, made so safe that the gains are less.

The problem with

“secure” investments

is that they are often

sanitized, that is,

made so safe that the

gains are less.

Most large brokerage houses will not touch speculative transactions

in order to protect themselves and their clients. And that is a wise policy.

The really hot deals are not offered to people who are novices. Often,

the best deals that make the rich even richer are reserved for those who

understand the game. It is technically illegal to offer speculative deals to

someone who is considered not sophisticated, but of course it happens.

The more sophisticated I get, the more opportunities come my way.

Another case for developing your financial intelligence over a

lifetime is simply that more opportunities are presented to you. And

the greater your financial intelligence, the easier it is to tell whether

a deal is good. It’s your intelligence that can spot a bad deal, or make

a bad deal good. The more I learn—and there is a lot to learn—the

more money I make simply because I gain experience and wisdom as

the years go on. I have friends who are playing it safe, working hard at

their profession, and failing to gain financial wisdom, which does take

time to develop.

My overall philosophy is to plant seeds inside my asset column

That is my formula. I start small and plant seeds. Some grow; some

don’t. Inside our real estate corporation, we have property worth several

million dollars. It is our own REIT, or real estate investment trust.

The point I’m making is that most of those millions started out

as little $5,000 to $10,000 investments. All of those down payments

were fortunate to catch a fast-rising market and increase tax-free. We

traded in and out several times over a number of years.

We also own a stock portfolio, surrounded by a corporation that

Kim and I call our “personal mutual fund.” We have friends who deal

specifically with investors like us who have extra money each month

to invest. We buy high-risk, speculative private companies that are

just about to go public on a stock exchange in the United States or

Canada. An example of how fast gains can be made are 100,000 shares

purchased for 25 cents each before the company goes public. Six

months later, the company is listed, and the 100,000 shares now are

worth $2 each. If the company is well managed, the price keeps going

up, and the stock may go to $20 or more per share. There are years

when our $25,000 has gone to a million in less than a year.