

### The Black Book

### of Alternative Investment Strategies

12 Little-known Ways to Invest Outside the Stock Market

Sean Erlenbeck & David S. Risi

Copyright 2014 by Investor Advisory Network, LLC

Smashwords Edition

All rights reserved. No part of this book may be reproduced or used in any manner whatsoever, except in the case of brief quotations embodied in critical articles or reviews, without the express written permission of the Investor Advisory Network, LLC. For more information write to Investor Advisory Network, LLC, 14855 Van Dyke #444, Plainfield, IL 60544 or visit us at www.investoradvisorynetwork.com.

### DISCLAIMER

This e-book is for informational purposes only, and is not intended as legal, accounting or investment advice. The information in this e-book is for your general use; it is not advice and should not be considered as such. It should not be taken as legal or investment advice or in the place of legal or investment advice. This publication and the accompanying materials are designed to provide general information in regard to the subject matter covered in it. It is provided with the understanding that the Investor Advisory Network, LLC is not engaged in rendering legal, accounting, investment or other professionals' opinions. If legal advice or other expert assistance is required, the service of a competent, qualified professional should be sought. We do not represent, warrant, undertake or guarantee: that the information in this e-book is correct, accurate, complete or not misleading; that the use of the guidance in this e-book will lead to any particular outcome or result; or, in particular, that by using the guidance in the e-book you will increase your cash flow, profits or otherwise experience monetary gain. Investor Advisory Network, LLC will not be liable to you in respect of any losses arising out of any event or events beyond our reasonable control. We will not be liable to you in respect of any business losses, including, without limitation, loss of or damage to profits, income, revenue, use, production, anticipated savings, business, contracts, commercial opportunities or goodwill.

Reproduction or translation of any part of the information contained herein, in any form or by any means, without the written permission of Investor Advisory Network, LLC is unlawful.

Table of Contents

[FOREWORD BY ROBERT A. WIEDEMER  
Contributor: Robert A. Wiedemer, Managing Partner, Absolute Investment Management](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_003.html#c1)

[CHAPTER 1: A NOTE FROM SEAN ERLENBECK  
Sean Erlenbeck, Co-Founder, Investor Advisory Network](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_004.html#c2)

[CHAPTER 2: A NOTE FROM DAVE RISI  
Dave Risi, Co-Founder, Investment Advisory Network](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_005.html#c3)

[CHAPTER 3: SELF-MANAGED IRA: TAKING CHARGE OF YOUR RETIREMENT  
Contributor: Easy IRA Solutions](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_006.html#c4)

[CHAPTER 4: STRUCTURED TO WIN: HOW TO MAKE MORE AND KEEP MORE OF YOUR INCOME FOR YOURSELF AND YOUR FAMILY TO ENJOY FOREVER  
Contributor: Drew Miles, Esq., President, Pathfinder Business Strategies](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_007.html#c5)

[CHAPTER 5: WHAT YOU NEED TO KNOW BEFORE INVESTING IN GOLD AND SILVER  
Contributor: Doyle Shuler, Gold Silver Alliance](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_008.html#c6)

[CHAPTER 6: INVESTING IN OIL & GAS: AMERICA'S NEW GROWTH ENGINE  
Contributor: Chris Faulkner, President & CEO, Breitling Energy Corporation](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_009.html#c7)

[CHAPTER 7: RESERVE CAPITAL STRATEGY: THE #1 STRATEGY OF THE WEALTHIEST FAMILIES IN AMERICA  
Contributor: Sean Briscombe, CLA, CMPS, Senior Consultant & Wealth Strategist, National Institute of Financial Education](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_010.html#c8)

[CHAPTER 8: THE ASSET OF THE CENTURY  
Contributor: Samuel T. Prentice, Barefoot Retirement](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_011.html#c9)

[CHAPTER 9: INTRODUCTION TO FOREX TRADING  
Contributor: Joshua A. Bevan, Managing Director, BlackBox Alpha](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_013.html#c10)

[CHAPTER 10: THE MOBILE HOME PARK INDUSTRY AS AN INVESTMENT VEHICLE  
Contributor: Frank Rolfe, Vice-President, MHP Funds](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_015.html#c11)

[CHAPTER 11: INVESTING IN SELF STORAGE UNITS  
Contributor: Scott Meyers, Owner & President, Alcatraz Storage](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_016.html#c12)

[CHAPTER 12: THE POWER OF CASH FLOW INVESTING  
Contributor: Jeremy Roll, Roll Investment Group & FIBI  
Contributor: David Coe, Founder, Freedom Growth](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_017.html#c13)

[CHAPTER 13: WEALTH THE RIGHT WAY  
Contributors: JP Newman and Adrian Lufschanowski, Owners & Operators, Thrive, FP](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_018.html#c14)

[CHAPTER 14: CREATE AND PROTECT WEALTH WITH REAL ESTATE  
Contributor: Jeff Ballard](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_019.html#c15)

[CHAPTER 15: "NO MATTER WHAT IT TAKES" STRATEGY FOR REAL ESTATE SUCCESS  
Contributor: Peter Vekselman, Real Estate Investing Coach](tmp_f986a02a1ec51710b88968528dc75145_0AeXKm.ch.fixed.fc.tidied.stylehacked.xfixed_split_020.html#c16)

End Notes

# Foreword by Robert A. Wiedemer

Stocks will always go up over time. At least that's what just about every stockbroker and financial analyst will tell you. Ignore the valleys, because the peaks will always be higher.

It was good advice—for about 20 years. Between 1980 and 2000, picking stocks was easy. A broker could pick a portfolio of stocks by throwing darts and probably earn 10 to 15 percent returns every year. No wonder "expert" analysts rated 95 percent of stocks a "buy." It was a great time to be a Wall Street broker.

But consider this: when adjusted for inflation, the Dow in early 2014 is more or less where it was in 2000. In the last 14 years, stocks have essentially gone nowhere. In fact, if you look at the chart below, you'll see that—when adjusted for inflation— _nearly all the growth in the stock market in the last 65 years came between 1980 and 2000_. In the other 45 years, stocks have barely grown at all.

Still, you might argue, there's something to be said for keeping your money current - better for an investment to keep up with inflation than to be losing value. That's true; but consider how precarious even the stock market's modest gains are. The U.S. Federal Reserve is currently pumping $75 billion dollars every month into the economy in order to boost activity in the stock market. That's $900 billion a year. You would think with all that stimulus, the stock market would be soaring.

Stocks will always go up over time, we are told. But the 1980s and '90s were not normal. Adjusted for inflation, stocks have gone nowhere since 2000.

But that's because we're still recovering from the 2008 financial crisis, you might say. First of all, the financial crisis was more than five years ago now. Aren't you a little tired of waiting for this so-called "recovery" to make its way into your portfolio?

Secondly, and more importantly, back up a few years from the 2008 crash and what do you see? Another crash we had to "recover" from. That time it was the "Internet bubble," the bubble no one saw coming until it was too late, the bubble that would never happen again. Sound familiar?

Now let's take a look at the facts on the ground in 2014. The Fed has created a massive dollar bubble, quadrupling the money supply in six years. The national debt is exploding, now over $17 trillion in early 2014 and still accumulating by more than a half-trillion dollars each year. The stock market appears to be increasingly divorced from reality, with nearly 30 percent price gains for the S&P 500 in 2013 in spite of single-digit earnings growth. It's easy to understand why there is growing concern that stock prices are reaching unsustainable levels, and that another crash might not be too far off.

You may share that concern and you may not. Either way, if my investment is only keeping pace with inflation over a 14-year period, I expect a lot less risk than that.

Wait a second. If stocks in general aren't growing much, then the key is just to pick the right stocks, right? Well, yes and no. It's true that some stocks do better than others. It's great to invest in a Coca-Cola or McDonald's in the early days and watch it take off. However, when stock prices drop, they tend to drop across the board. If you have a diversified portfolio of stocks—as most stock owners do—your portfolio will tend to go up and down with the stock market in general.

The key is not just diversity among stocks, but diversity among _asset classes_. That doesn't just mean stocks and bonds, either, but a whole assortment of investment options. There are assets that may perform well even when stocks and bonds are suffering. However, they may not be obvious to an investor whose experience is limited to ticker symbols and Treasury Direct.

While inflation (and the rising interest rates that come with it) is poison to stocks and bonds, for example, it is favorable for precious metals like gold and silver. This is an important consideration when the Federal Reserve is expanding the money supply by almost $1 trillion every year. If the U.S. dollar falls in value, it has heavy implications for energy commodities and foreign exchange. How can you take advantage of that if you are only investing in U.S. stocks and bonds?

This book will hopefully help you overcome this problem. While it might feel safe to stick with traditional investments, the last decade or so should make it very clear that the stock market isn't safer than any other kind of investment, and is even more risky than some. Alternative investments will be very important. The days of earning double-digit returns every year with little or no effort are over. It's time for investors to get educated, take control of their financial future, and not be fooled by Wall Street "experts" who keep feeding them the same old, tired line from the 1980s and '90s.

No investment is risk-free. With the help of this book and a little diligence, though, you can learn to manage risk and reap rewards while other investors blindly ride the stock market roller coaster -wherever it takes them.

Contributor: Robert A. Wiedemer, Managing Partner, Absolute Investment Management

_Author of New York Times and Wall Street Journal Bestseller_ _Aftershock_ _and Wall Street Journal Bestseller_ _Aftershock Investor_

www.aftershockpublishing.com

www.absolute-im.com

# Chapter 1: A Note from Sean Erlenbeck

This is what your financial planner never told you about investing, and the shockingly simple wealth strategies that guarantee you'll get a fair return on your money... without increasing your risk.

In 2010 just after the market crashed due to an unstable housing market, I met Dave. At first we were business associates. He was selling safety software and I was a safety manager for a general contractor just outside of Chicago, Illinois.

At that time my soon-to-be good friend and business partner asked me, "Are you investing in silver?" I asked, "Why?" He replied "After what happened with the Stock Market I am getting out and investing in other assets, like gold and silver". He mentioned that the price of gold and silver would be on the rise and that I should invest as insurance against the devaluation of the dollar.

Of course I thought his doomsday mentality was exactly that - a paranoid person who was obviously distraught by the recent market crash. I mean, the Stock Market always goes up over time, right? I decided that I would keep my money right where it was, in the Stock Market. I felt good about my financial position. I was doing everything my Financial Planner told me to do. As a matter of fact, my guy said that I was one of the few investors that really understood that no matter what, the market always goes up. I was contributing to my 401k at the max rate; I had ROTH IRAs in both my wife's and my accounts. I started a 529 savings plan for my son as soon as he was born. Heck! I even had a Pension Plan with the union in which I was vested. I had it all figured out. Or did I?

Fast forward two years... In 2012, I was just starting to recover the losses I suffered in the Stock Market. The DOW was approaching 13k and I needed to get up to pre-2008 levels of 14k before I would break even. At this point, it dawned upon me that I had been waiting FIVE years to make ZERO interest from my traditional investments.

After realizing this, I asked my now-good-friend Dave during a business conference what he was doing with his finances. He showed me a website called the Elevation Group (EVG). I didn't know it yet but this would change life as I knew it. The Elevation Group is a website that introduces ways to invest your money other than the Stock Market.

When I returned home I immediately needed to find out more about the Elevation Group. For the first time in my life, the education I was getting made absolute sense to me. I didn't feel like I was just handing over my money to a Financial Planner and hoping they'd make me a killing in the stock market, but rather I was educating myself and gaining confidence to go out on my own and invest for myself in areas I had thought were reserved only for the rich.

Financial freedom was a new word for me and I was determined to make it my credo!

At this time I was ready to make some moves. EVG offered one educational video for each investment strategy, so I started to contact the businesses that offered the type of investments in which I was interested.

The first was a company that specialized in Infinite Banking, a concept made famous by R. Nelson Nash. This particular investment strategy made me very nervous as there were a lot of uncertainties and a heck of a lot of other companies that were doing the same thing but using different insurance policies. In the end, I did not invest in this concept as I felt I did not receive enough education from my source to stick my hard-earned money into. I did, however, think it was an intriguing strategy that needed to be explored further.

I then moved to the next strategy that I felt would benefit me: converting my traditional IRA and ROTH IRAs to a Self-Directed ROTH IRA. This strategy allows an IRA to invest in tangible assets such as gold and silver or Real Estate. Again, I was given one source and that source did it one way.

Further education on this subject led me to the fact that there are two way to accomplish this. One is to have an LLC own the IRA, commonly called a "checkbook" IRA. The other is to have a custodian manage the IRA, with you being the owner. I decided to go with the custodian as I did not wish to further complicate my life by creating entities, which I'd never done. Later I ended up transferring all my assets to a "checkbook or LLC" style. The reason why will be revealed further in this eBook.

My last investment was gold and silver. It's a pretty simple process, but I have to admit I was very nervous doing it the first time. (Wouldn't it be great to read reviews and people's experiences that have done like investments, first? This will be a major area for subscribers to our website as our membership grows and we start receiving feedback from our members.)

So, what did I do with all of the money I had in my IRA?

Before I established my Self-Directed IRA, I contacted my Financial Planner and asked if I could buy physical gold and silver. I was told I could not. If I wanted to invest in metals I would have to purchase Exchange-Traded Funds (ETFs), such as SLV or GLD. Well, if you remember, it took me FIVE years to make my money back in the Stock Market and I wanted out. Buying ETFs was not an option for me.

I then asked if I could invest in Real Estate. My Financial Planner told me sure; we have dozens of REITS for you to choose from. REITS (Real Estate Investment Trust) is another STOCK in the STOCK MARKET. Again, I wanted to invest in real physical assets. Metal ETFs and REITS are not backed by the real asset; they are certificates, much like the dollar, saying you have the right to sell for a value. However, if that value tanks (think Stock Market), you are out of that value.

This is the reason I had to leave my Financial Planner and convert my IRA monies to a Self-Directed format. The conversion process to a Self-Directed IRA would now allow me to invest in just about any asset class I wished. This was the reason I did it! The real beauty about this conversion is just how easy it is to execute. Sure there was paperwork but in the end I, not a financial planner, had control of my money.

After purchasing some gold and silver, I decided to invest in Real Estate - the real, tangible kind. I was well on my way to investing all my retirement money in real assets. All was right in the world for me.

I had a company all lined up, through the educational websites I joined, in which to invest. I contacted this company that did mostly Hard Money lending and soon figured out that they were only taking a minimum investment of 50k for a non-equity position and 100k for an equity position. I had the 50k but did not want to spend such a large percentage of my current holdings so I held off and thought about it for a couple of weeks. This was the beginning of my problems. I wasn't rich. I didn't have the cash to be spending $50,000.00 on one investment. Perhaps I made a mistake.

During this time a new educational video was released on my pay site. Low and behold, it was a question and answer format and the guest was the Hard Money lending company with which I was trying to do business. I immediately marked the date that it would be live and sat down to almost two hours of great investment education.

Towards the end of the session, the owners of the company made a very disturbing announcement. They were now only able to take a minimum investment of $100k! This was quite a blow for my plans. Not only did I not have $50k, but now I needed more? Herein lay Problem #2. I was dead in the water, holding a large chunk of my retirement nest-egg with nowhere to invest. I would never find an investment company that was willing to take my seemingly paltry offerings. Plus, I didn't know anybody else other than those suggested by my investment site. I paid for this education but was left literally holding my money with nowhere to invest it.

Dave, my buddy, had run into a problem with the very same company but had a completely different problem. He had the money but was on a waiting list to invest it! There were so many investors watching the same video that the investment company didn't have a fund to invest in. That was Problem #3.

Now both of us were stuck holding the bag-o-cash, literally. Luckily, Dave had other resources that were looking for investors in Real Estate.

This is when the light went on! Dave and I could find investors for exactly the kind of investments that we wanted to invest in, at just about any dollar amount. It was the ah-ha! moment. We needed a network of investors that knew other companies that are willing to invest with us.

However, finding these investments is hard work and consumes a lot of time and energy. I was lucky; I had a good friend who already knew some good people with whom I felt comfortable investing. If I didn't I would of had to spend an incredible amount of time searching on the Internet, calling contacts and networking at local meetings and national conferences. I would then need to compile a list of potential investments and proceed on to the vetting process.

It is important to me to know the people with whom I am investing or at least know someone who has invested, as I'm sure you do, too. I like my money and the thought of giving it to some Ponzi-scheming thief is absolutely gut wrenching.

Again, I saw an opportunity to help people that are looking for other ways to invest their hard-earned money without feeling like they are getting into some sort of rip-off. We all want to make an honest buck.

The solution was to create a website called the _Investor Advisory Network (IAN)_ that contains lists of responsible alternative investment contacts, individually graded through our network of customer reviews. These reviews will be generated from real people that will basically vouch for that company so you feel comfortable investing your money.

Back to that ah-ha! moment, right?

Let me recap what my driving factors were for creating this website:

1. High buy-in minimums prevented me from investing.

2. Demand could not meet supply, even if I had the money.

3. Education was too vague.

4. The Stock Market was proving unreliable and I didn't want my entire nest-egg in it.

5. I felt like my Financial Planner was just running me through the paces.

6. I wanted to be in control.

We are offering independence from financial planners, and the self-reliance that you have the knowledge and education to invest yourself. Convenience will be our motto; you will be able to find a company in an area that interests you.

We are selling self-sufficiency for one's wealth and retirement goals through private investing opportunities that can be easily researched through vendor-led video instruction, verified by a user-generated rating system and perused by the click of a button.

We decided to do all of this leg-work for you. We will provide a list of companies for you to invest with. You will be able to sort our list of advisors by investment amount, investment category and much more.

We will also try to make it as comfortable as possible by doing as much of the vetting process as we can.

Most of our advisors will have educational videos, pod-casts or material to read within their company profile on our site, not to mention a contact name and number if you prefer the old way.

On top of it all, we are going to build a solid community that can recommend investment strategies as well as critique any current companies in which we invest. Any customer that engages with one of our advisors will be able to submit a review, good or bad. This information will be available to our subscription customers.

Sound good?

By now you are probably asking yourself, "Why would I want to invest in the strategies listed on the Investor Advisory Network?" Well, the answer is simple. Dave or I do not claim to be an investment guru in any of the strategies mentioned in this e-book. What we are claiming is that we will seek out the most honest, trustworthy and team-minded individuals, companies, syndicates and groups that we can find and bring them to you.

These folks will be the ones to educate you on the particular strategy in which they are experts. You will be able to find it in one place - on IAN, the Investor Advisory Network.

www.investoradvisorynetwork.com

As the site grows we will develop a community of well-seasoned veterans like you will soon be, that will bring us, the NETWORK, new strategies, a larger base of the same strategy or perhaps educational materials.

Dave and I are literally giving away this e-book for the price we are asking. The amount of educational information we have given you today would be well worth 100x the cost if you were to sign up for individual classes.

Dave and I hope to see you at the site - learning, contributing and above all, earning!

Thank you for listening.

Sean Erlenbeck, Co-Founder, Investor Advisory Network

# Chapter 2: A Note from Dave Risi

I have always been a bit of a skeptic when it comes to investing in stocks and bonds. They go up and down in price with little to no controls or ways to influence to my returns. Additionally, paying a Financial Planner 2% of my account each year regardless of the returns always rubbed me the wrong way. You never know if they are looking out for your best interests or just pushing you into the funds/stocks where they make the most commission.

After years of moving my money from broker to broker and losing 30% in the crash of 2007, I decided to take matters in my own hands. I started reading everything I could get my hands on. One of the first books I read, which was a HUGE wake-up call for me, was _Aftershock_ by Robert A. Wiedemer. The book educated me on the economy, bubbles, the Fed and how best to protect my savings and family from financial ruin.

After discussing the book with several friends of mine, one of them recommended _Rich Dad Poor Dad,_ written by Robert Kiyosaki. This single, simple-to-read book changed my life forever. It was as if I was seeing the world through a completely different set of lenses.

These two books ignited a fire in me that I have never felt before. It created a passion for taking control of my own life, investing and wealth strategy. Before becoming educated, I didn't even know what a "wealth strategy" was!

The first step was to evaluate my tax strategy. My previous accountant's famous line was, "You just have to pay more in taxes if you make more money". I hated hearing that, but lived with it for ten years. All of that was about to change. I found an accountant that "got it". He understood the tax code and huge benefits that is available to business owners and investors. He saved me $8,000 in taxes in our first 30-minute conversation! That would have saved me $80,000 over the past ten years! It kills me to think about it even to this day.

I went back to my old accountant and told him the correct statement should have been, "You just have to get a better tax strategy if you make more money." I then fired him.

Next, I was off to tackle gold and silver. I am not a "gold bug", but I wanted to have some gold and silver as a hedge against inflation, and more importantly to be able to take care of my family if there was hyperinflation or a currency crash.

This was a number of years ago, before there was a lot of information available on how to buy and store precious metals. I spent countless hours online and talking with their brokers and they confused the hell out of me. They all quoted different spot prices and had their own gimmicks on why their prices were the best, but there were huge ranges in the prices. Should I just use the cheapest dealer? What about shipping or storage? Should I buy "Junk" silver, bars, Silver Eagles, or numismatics? What do I do when I want to sell the metals?

After becoming quite frustrated with all of the sales pitches and feeling I was not receiving good, usable information, I decided to try to find someone local that would be willing to educate me about it all. This is how I met Marc. He was the owner of a local coin shop who had over 30 years of experience in buying and selling precious metals. He couldn't have been any nicer. We met at his shop at 10:00 am on a Tuesday since it was slow at that time. He spent nearly two hours showing me his shop (he was very proud of the business he built) and gave me an education on precious metals that far exceeded my expectations. I was amazed by the level of ignorance I had - seriously! To this day I always wonder how much people really know before they buy gold and silver. If you are looking to buy precious metals, ask yourself the following:

Why am buying it?

What is the goal?

Do I buy it with my IRA, after tax money, both?

How will I store it?

How/when do I sell it?

Please do not just jump in and start buying. Our chapter on Gold and Silver covers a lot of these questions.

The last item that I considered to be my foundation was to move my 401K to a Self-Directed IRA. There are several methods for Self-Directed plans, and they all have their pros and cons. I chose to work with EasyIRA on this and they helped make the process a lot simpler and quicker than I had expected.

Now I don't recommend this for everyone, but I actually rolled over my and my wife's 401K into a Roth IRA. When you convert a pretax plan like a 401K to an after-tax plan like a Roth, all of the money rolled over was considered salary for that tax year - ouch! It was a large nut to crack, but now that it is converted, this money will continue to grow and will be withdrawn tax-free.

Prior to making this conversion, I consulted with my new tax guy and we put together tax-saving strategies that saved me a lot of money that I would have had to pay in taxes if I didn't have the plan.

With my solid foundation and money in my IRA accounts, I was ready to jump in and start investing in alternative investments. I felt paralyzed and afraid to take the first step. Who can I trust? How do I know which investment is best? How do I manage it all?

I then discovered the key to successful investing: NETWORKING. Getting to know experts and mentors in the types of investments you are looking to invest in is the single, most important factor in the level of success you will have. Why make the same mistakes others make when starting to invest? Go to the experts and have them educate and guide you.

Like many of you, I joined a couple membership sites and newsletters. The information they provided was beneficial, but there was only one person for each of their types of investments. This led me to the same questions - can I trust them? Are they the best at what they do? Why aren't there options for me - why limit myself to just one "expert" to invest with? I decided to take matters into my own hands, meet other "experts" and give myself some options.

I have been fortunate to meet a lot of quality investors and mentors. They have steered me away from several real estate investments that would have been disasters. In fact, several of the companies I was considering investing in have been sued or are out of business! I soon found out that regardless of the type of investment, there are snakes out there looking to rob you of your hard-earned money. You need to arm yourself with a good team to assess your strategy and each investment thoroughly before jumping in.

Why do most people consider it normal and low-risk to willingly give your life savings over to a stranger to manage with little to no input, while taking control and investing in real, hard assets with proven strategies is considered crazy and high-risk? Now that I am educated, this is hard to understand.

I have been told my whole life that saving your money in a 401K and letting the "experts" take care of it was the best and safest method for saving for retirement. They seem to have left out the last part ...and retire poor.

I was watching the original _Matrix_ movie with my son last week when Morpheus spoke the now famous line: "You take the blue pill, the story ends; you wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes". Well, I clearly took the red pill.

I am very passionate about taking control of my future with alternative investment strategies. I enjoy educating my friends about the whole other world available to help them build their wealth and improve their quality of life.

When I first met Sean, he was skeptical about alternative investments and was content with staying with his "guy". This is a personal decision and I never questioned his (or others') decisions when it comes to investing. I just told him I was here if he wanted to learn more about alternative investments.

After a year and seeing the fees he was paying versus his returns, Sean came to me again with an open mind and the rest is history. He asked me a ton (okay, two tons) of questions. He was well-educated and understood more about investing than most people. When we discussed the amount of time I took to get educated, the amount of resources I used and the number of investors I have networked with to make me comfortable to invest, we both said there has to be a more efficient way for others to get educated and network enough to build their team.

What if we took the best advisors/companies and brought them into a single website built to provide the latest information on each alternative investment strategy? Additionally, wouldn't it be great to see how other investors would rate them and even provide detailed reviews of their services?

Well, we have started building just that. We call it the _Investor Advisory Network (IAN)_ , for which Sean has provided a nice overview in his introduction.

One of the biggest lessons I have learned from years of investment education and meeting hundreds of investors is that you need to find what works for YOU. No two personalities are the same - nor should investment strategies be. What works for one person might be a horrible path for you. The goal of IAN is to provide you with the knowledge and tools to develop your own strategy, invest wisely and take control of your wealth plan.

When thinking about writing this book, we wanted to stay true to our goal of offering our members unedited, unfettered content from some of the top Advisors. Hence, we only provided minor grammatical edits to the content in this book. As you will see, the author of each chapter has their own writing style. Some use a lot of graphics and some use none. Some use a lot of bolding, underlines and italisize - and others don't. We wanted to bring the "raw" content from our Advisors. Additionally, several of the chapters cover similar topics. When learning about investments strategies, we feel it is important to get multiple viewpoints or methods and decide what will work best for you.

We hope you enjoy it!

Dave Risi, Co-Founder, Investment Advisory Network

# Chapter 3: Self-Managed IRA: Taking Charge of Your Retirement

We don't have to look hard to see a problem with our retirement planning, with our IRA and 401(k) investments. It has taken nearly five years for the market to come back to pre-2008 levels. The Traditional IRA and 401(k) gives you the option to invest in various combinations of stocks, bonds, and mutual funds. They'd like you to believe this is investment diversification, but it's just a veneer - these are all part of the same investment class.

Unlocking your Traditional IRA or rolling over your old 401(k) into a Self-Managed IRA can open up a bevy of opportunities to maximize your retirement potential by allowing you to participate in the strategies that are not only currently producing substantial returns, but can be safer than traditional retirement investing.

The Alternative

We're all tired of the volatility and uncertainty that comes with stocks, so wouldn't it be nice to invest in some other things as well?

This is what our clients are most excited about - having the ability to diversify investments among other asset classes.

It has been said, "It's not what you know, but who you know". That might have been okay for the 80's when sharp-dressed yuppies were telling us they had the inside track on the next best thing. In fact, in those times you could almost throw a dart at a good pick. It seemed like everything and everyone was a winner. Today, it's important not only what you know but also who you know to get ahead.

It's the Markets that Matter

Most investment advice you read is focused on picking stocks. However, the data shows that picking stocks doesn't actually have much of an impact on performance, as long as you make reasonable choices. What really matters is what markets you pick, not what stocks you choose.

In an 1986 study, _Determinants of Portfolio Performance_ , the authors examined the quarterly performance of pension funds and found that how these funds were invested among different markets accounted for 94 percent of their performance, leaving just 2 percent left over for when (market timing) and 4 percent for what (security selection). In other words, the pension's "asset allocation" decisions were the key to its returns.

A smart asset allocation plan is to create a diversified portfolio. That way, if part of your portfolio hits a rough patch, the other part may perform well. For this reason, it's important to make sure your different assets are truly different.

Hard Assets

Hard Assets are investments with intrinsic value with an excellent inflation hedge. In general, hard assets are negatively correlated to both stocks and bonds. In other words, when stocks and bonds decline, hard assets (commodities) tend to appreciate. In addition, during periods of high inflation equities and bonds do poorly.

Example -

20% total return over 11 years from 1970 to 1981 for the S&P 500 VS (during the same period)

1,100% increase in oil prices

550% increase in western Canada farmland prices

1177% increase in gold

With the average cost of a home in 1970 to 2008 skyrocketing from $23,600 to $245,000 (938%)

Unlocking your IRA and 401(k) with a Self-Managed IRA

The first thing you need to understand is that there is very little difference between the Self-Managed IRA and the Traditional IRA. The only difference is who manages the investments and what can be invested. With a Traditional IRA from your typical, traditional firm, you're restricted to a select subset of investments that the IRS actually allows. You may have a choice of a few mutual funds (usually those managed by the firm that holds your account), government bonds or low-rate CDs.

If you want to enjoy a better-than-average return and control over your own investments, then unlocking your retirement with a Self-Managed IRA and investing in non-traditional hard assets might be something in which to learn more.

You may say to yourself, "That sounds great, but it can't be that easy, right? You can't go out and invest in just anything." That is true, but you might be surprised just what you can invest in. Just because your custodian only offers a small amount of choices, make no mistake; that is not the law. According to the IRS' Publication 590 (dealing with IRAs) the only investments that are prohibited include artwork, stamps, rugs, antiques, and gems. All other investments are allowed, including: (Traditional) stocks, bonds, mutual funds, (non-traditional) real estate, mortgages, private placements, or even Precious Metals.

To help you wrap your head around this, just think about anything you might make money on if you invest in it, (excluding the prohibited transactions stated above) and understand that the traditional firms and custodians imposed their own unnecessary restrictions. These restrictions benefit them by only offering what is advantageous to them, not necessary what benefits you.

How it all works

This is not a grey area or a tax loop-hole. This is not something that was dreamed up by some attorney to take advantage of some ancient, forgotten tax code. This is a real and legal option, an incredible structured investment tool by attorneys that allow you to use tax-deferred or even tax-free IRA money to invest with, nothing less.

What is the secret that these savvy investors know? It's a little section of the IRS code titled Code 4975. What is revealed is that in which you and all the other owners of IRA structures are allowed to invest. That is an astounding 5 trillion dollars' worth of IRA money!

Actually, there isn't a long list of what is allowed; instead there is a very short list of what is disallowed. The IRS code _"doesn't tell you what you can invest in. It tells you what you can't invest in."_ (San Francisco Chronicle)

Here are some examples of investments that an IRA is allowed to invest of which you might not be aware:

• Residential Real Estate Receivables

• Commercial Real Estate Stocks, Bonds, Mutual Funds, Raw Land

• Deeds/Mortgages Options

• Mortgage Pools Currency

• Private Notes and Loans Futures

• Private Placements Commercial Paper

• Limited Liability Companies (LLC) Tax Certificates

• Limited Partnerships (LPs) Foreclosure Property

Many individuals have asked their broker about alternative investments and have been told that it cannot be done. What they are not being told is that they can make their investment; they just can't do it with their current brokerage firm.

See, what the IRS has published on their website about the restrictions aren't of their own making, but of your own broker's. "Finally, IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option." (www.irs.gov))

What is disallowed?

The more you research this subject, the more you will find that the IRS allows an open field of flexibility with Individual Retirement Accounts and in fact, it's not the IRS that frowns upon truly Self-Directed IRAs, it's the investment firms that want to keep control of your money. After all, with a Self-Managed IRA, it's you who is making the greater returns, not them. The most common question has always been, "Can I invest in real estate with my IRA?" The answer of course is, **Yes**.

_"Real estate has always been permitted in IRAs, but few people seemed to know about this option - until the stock market began to decline. Financial Institutions, meanwhile, had little incentive to recommend something other than stocks, bonds or mutual funds."_ (New York Times)

So what can't you do? Congress States the restrictions to an IRA in IRC Section 408: An IRA cannot invest in life insurance contracts or collectibles defined below:

• Any work of art, any metal or gem

• Any alcoholic beverage, any rug or antique

• Any stamp or coin

There are some exceptions to coins such as bullion, gold, silver and platinum coins. I.R.S. Publication 590, Individual Retirement Accounts, page 33, states "Investment in Collectibles, Exception"

"Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion."

This expanded menu of permissible precious metals investments was granted by the following code in the Taxpayer Relief Act of 1997:

SEC. 304. CERTAIN BULLION NOT TREATED AS COLLECTIBLES. (a) In General.—Paragraph (3) of section 408(m) (relating to exception for certain coins) is amended to read as follows:

(3) Exception for certain coins and bullion.—For purposes of this subsection, the term `collectible' shall not include:

(A) any coin which is—

(i) a gold coin described in paragraph (7), (8), (9), or (10) of section 5112(a) of title 31, United States Code, Sec. 5112. Denominations, specifications, and design of coins.

(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold. (One-Ounce American Eagle GOLD Coin)

(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold. (1/2-Ounce American Eagle Gold Coin)

(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold. (One-Quarter Ounce American Eagle Gold Coin)

(10) A five dollar gold coin that is 16.5 millimeters in diameter, weighs 3.393 grams, and contains one-tenth troy ounce of fine gold. (1/10-Ounce American Eagle Gold Coin)

(ii) a silver coin described in section 5112(e) of title 31, United States Code, (One-Ounce American Eagle SILVER Coin)

(iii) a platinum coin described in section 5112(k) of title 31, United States Code, (One-Ounce American Eagle PLATINUM Coin) or

(iv) a coin issued under the laws of any State, or

(B) any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness that a contract market (as described in section 7 of the Commodity Exchange Act, 7 U.S.C. 7) requires for metals which may be delivered in satisfaction of a regulated futures contract, (100-Ounce and 1000-Ounce Bullion Bars) if such bullion is in the physical possession of a trustee described under subsection (a) of this section."

(b) Effective Date.—The amendment made by this section shall apply to taxable years beginning after December 31, 1997.

IRA prohibited transactions are listed in IRC Section 4975; prohibited transactions are any direct or indirect:

(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

(B) lending of money or other extension of credit between a plan and a disqualified person;

(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

A disqualified person is the IRA participant, a spouse of the participant, ascendants of the participant (mother/father), descendants of the participant (daughter/son), spouses of the participant's descendants (son/daughter's spouse) and fiduciaries of the plan (custodian/trustee, Self-Managed IRA Manager).

What does all that mean in plain English? It is prohibited by the IRS for a disqualified person to personally purchase an asset from, or sell their personal asset to, an IRA. It is prohibited by the IRS for a disqualified person to extend credit to the IRA or take an extension of credit from the IRA (loan to the plan or borrow from the plan).

It is prohibited by the IRS for a disqualified person to extend goods, services or facilities to the IRA or use the assets of the IRA for their own benefit.

It is prohibited by the IRS for any fiduciary to deal with the income or assets of the IRA for their own benefit or have receipt for consideration where they were involved in a transaction with the plan.

The government gives IRAs a tax advantage for a reason. They don't want individuals circumventing that reason and still receiving the tax advantage. There are some exemptions to these prohibited transactions as well but they must be handled very carefully.

Self-Managed IRA

Even though the Traditional IRA is similar to the Self-Managed IRA, there are some differences when it comes to setting them up. Typically setting up a Traditional IRA is easy. The Traditional IRA is managed by the custodian, so all the structures have long been created. As the name states - Self-Managed IRA - you need to be set up as the manager of the IRA.

Here is how the structure is laid out.

Technically you are not the owner of the IRA; you are the manager and the beneficiary. A custodian is needed to be the holder of the IRA but you, as the manager, direct the investments and benefit from the returns.

1. Your retirement account is moved to a self-directed custodian who allows alternative investment vehicles that can pass their compliance procedures and withstand IRS scrutiny.

2. Our legal team creates a customized entity (usually in the form of a LLC) and submits it to the custodian as a private placement. (This is not an ordinary LLC. We stress the fact that you use a professional to create this structure otherwise your IRA may become disqualified, taxed and penalized).

3. You open a business checking account for this entity.

4. You submit an investment authorization form to the custodian instructing them to fund your new bank account via check or wire.

After you complete the simple step by EIS easy process, you will have absolute control over this new structure and can direct your retirement funds into any investment you choose (keeping in mind that you still need to abide by IRS rules). Not only do you have the flexibility of cash which allows you to make a wide range of investments including the securities you are familiar with, but also solid asset protection.

Why use a LLC?

There are others utilizing C corp. and 401k structures and there are some uses for these but as a standard investment structure these invariably incur taxes. Some companies find these easier for them to structure. But why pay the taxes if you don't have to?

The owner of the LLC is the IRA

A Limited Liability Company is a company that has the option to be taxed as a partnership. This is beneficial because the LLC won't pay any taxes on gains, and instead it will be the owner of the LLC who is liable for any taxes just as if they earned the money themselves. Because the owner of the LLC is your IRA, there are no taxes unless you are running a business that is unrelated to the purpose of an IRA (making investments a business), using debt financing or taking a distribution from your IRA.

Asset Protection

Another benefit to having a LLC is the asset protection. LLCs have the protection of a corporation, therefore you or your IRA won't be liable for the LLCs debts and it is very difficult and cumbersome to penetrate the integrity of the structure.

Let's say you are involved in a lawsuit that is not ruling in your favor and attacking your Self-Managed IRA. An attorney would have to work extra hard to penetrate your IRA and two, the LLC within your IRA. Even if someone won in a lawsuit against you and got a charging order for your Self-Managed IRA, all they would be entitled to is the distributions from the LLC.

If you, the manager of the LLC, didn't make any distributions (which you don't have to until you are 70 1/2 years old), not only would the person holding the charging order not receive any money, they would also pay taxes on the gains made in the LLC because it is a flow-through structure.

What if you received $100K a year in your Self-Managed IRA? That would spike the tax bracket of any individual holding a charging order against your IRA. So they pay the taxes for that year but can't receive any money.

That's real asset protection.

Case Law

After little research, most advisors will accept the fact that you can make alternative investments such as real estate, metals, private placements, in your IRA, but the concept of a Self-Managed IRA may be hard to accept.

However, the Self-Managed IRA concept isn't frowned upon, risky or even new. The case law that proves the strong integrity of the Self-Managed IRA concept is **Swanson v. Commissioner**.

James Swanson owned a majority of shares in a U.S. Corporation and his three children owned the remainder of the U.S. Corporation. Swanson formed a new Domestic International Sale"S" corporation (DISC) where he was the director of the company and the members were Swanson's IRA and the IRAs of his three children, each owning 25% of the DISC.

The company arranged commissions on foreign sales for the U.S. Corporation, making the normally taxed income of the DISC now tax-deferred through the IRAs.

The IRS initially challenged this based on the conception that he had violated IRC Section 4975 because Swanson dealt with the assets of the plan in his own interest. The IRS, realizing they weren't justified in their allegations, tried to withdrawal their case. By this time Swanson had suffered extensive legal fees and demanded the IRS to compensate him for his trouble. The IRS, of course, refused to pay Swanson for his legal fees. Therefore Swanson was forced to escalate his demands to the Tax Court.

The tax court came to two conclusions:

1. Swanson's Self-Managed IRA structure was not illegal.

2. The IRS had to pay Swanson a reasonable amount of his legal fees.

There have been a number of decisive rulings, statements and opinions by the Department of Labor, IRS and Tax court all in favor of the Self-Managed concept; this is just one of them.

Why not just use a custodian?

Most individuals will put money aside for a tax deduction or benefits at work. Because the money is managed by a traditional Custodian, Administrator or Brokerage firm and the only interaction by the individual is looking at an annual statement, this type of account is in no way Self-Managed. Millions of Americans have spent their whole life saving for retirement just to realize once they turn 65 and are ready to retire, they ended up losing money.

Almost all custodians only handle the typical IRAs

• An individual puts money aside for retirement savings with a Custodian, Administrator or Brokerage firm that empowers the individual to make investments that are allowable by the custodian's compliance department.

• In most cases the individual can trade stocks, bonds and mutual funds from a select inventory under the Custodian, Administrator or Broker.

• Depending on the type of IRA the individual has structured, gains can be realized tax-deferred or tax-exempt.

• Contribution limits vary depending on age, employment status and adjusted gross income. Some individuals have found their way to the Self-Directed IRA custodian.

The reason we call ours the Self-Managed IRA is the fact that custodians are advertising a self-directed IRA but offering very little flexibility, making it difficult to really enjoy the opportunity that is afforded with a Self-Managed IRA.

If the account is held by one of these flexible Self-Directed IRA custodians, the individual is empowered to purchase non-traditional assets titled in the custodian's name for the benefit of the individual.

The extent of bureaucracy necessary is at the custodian's discretion and is always paid for out of the IRA. Custodians who offer this type of plan have a fee for everything. Below is a small list of fees and certain bureaucracy you can expect.

Fees, Fees, Fees:

1. Annual Asset Charge

2. Invoicing

3. Annual Appraisals

4. Application Fees

5. Wire Fees

6. Certified Mail

7. Cashier's Check

8. RMD Calculation

9. Opinion Letters

10. Exit fees

Red Tape:

1. Forms to approve and direct investments

2. Forms for investors to sign

3. Forms to wire funds

4. Forms to allow custodian rights

5. Waiting for custodian to cut a check

6. Unnecessary Mortgage Reviews

7. Investments

8. Limitations

The list goes on. This is what you are missing when you deal directly with a custodian:

The Self-Managed IRA

• An individual puts money aside for retirement savings under a special legal structure specifically set up to **limit custodial restrictions, red tape and fees.**

• The individual opens an IRA account with a specific custodian.

• A Limited Liability Company is structured in compliance with IRS rules and regulations to be owned by the IRA and managed by the IRA participant.

• Depending on the type of IRA the individual has structured, gains can be realized tax-deferred or tax-exempt.

• Contribution limits vary depending on age, employment status and adjusted gross income.

• A Self-Managed IRA is only restricted to the rules of the IRS and arms of federal and state government, not by a company that is in business to manage your funds.

It is that simple. Don't break the simple rules of the law, and you have nothing to worry about. With a Self-Managed IRA you can expect:

Limitless Investment Option

• Here are just a few possibilities:

o Stocks, Tax Liens and deeds

o Real Estate Purchase Notes

o Unsecured/Secured Notes

o Lease Options

o Wholesale

o LLCs acquiring real estate

o Mobile Homes

o Vacation Rentals

o Raw Land

o Bonds Options

o Precious Metals

o No Red Tape

o Checkbook Control

o Use Leverage

o Low annual custodial fee ($115 per year)

Use your expertise, Buy what you want.

Grow your retirement, not theirs!

Real World Examples

Below are a couple examples of what Self-Managed IRA structures can do. Both show good examples of investment potential. One is a very simple but a highly effective way that we have shown our clients to safely, and with a great results, use their Self-Managed IRA to maximize their investment nest egg. The other is a very exciting option for those who have real estate opportunities and have a Traditional IRA but would like to build up their nest egg with TAX-FREE dollars vs. tax-deferred.

**Simple IRA Real Estate Investment Example** (Some details have been changed for the anonymity of investors and the varied returns.)

Mary doesn't know the real estate business but she knows that real estate has always consistently out-performed stocks and bonds. Mary, through her association with the Investment Advisory Network, found a safe, high-return real estate investment that she was comfortable with. Mary set up a Self-Managed IRA and loaned a local real estate development company 25,000 tax-deferred dollars.

The deal was safe, secured with real property and was returning 20% annually. A substantial increase from what she was getting from her custodial IRA. The real estate deal looked like this:

• 25,000 loan

• 12 months

• 20%

• First lien holder (If anything should happen, she is paid first.)

• The real estate property is fully insured (If anything should happen, she would get her original $25,000 plus any realized gains.)

• No repair worries, no collecting rent from tenets.

Because of Austin's growing real estate economy, Mary's investment returned in less than 8 months. Because of what Mary learned and her experience with the developer, Mary took the builder's offer of rolling it over for an annualized 28% return.

Mary calculated that if she re-invests her original $25,000 investment for ten years, she will have earned over $222,000. If she would contribute her maximum $5,500 a year into her IRA and re-invest, she would have over $428,000 in her retirement.

Tax-deferred IRA to Leverage Your Roth IRA

As we review the following scenario, imagine that this partnership is not between Bob and Steve, but between your current Traditional IRA and a newly created Self-Managed Roth IRA. This is a great way to really build up your nest egg, tax-free not just tax-deferred.

Bob and Steve are forming a partnership. Bob buys houses at foreclosure sales for 5% to 25% market value and sells them for 50%-75% market value. Steve only puts up the expenses it takes to fix up the houses. Steve doesn't want to take the risk of losing his money. Bob is confident of the returns and is willing to take extra risks for the lion's share of the profits. Steve is guaranteed his money back + 15% before Bob sees any profits. Bob buys a property at a public foreclosure for $10k. He needs $15k to fix it up where it will be appraised at $75k. Bob sells the property to an investor for $40k. Steve takes home $17,250.00, making a pre-tax profit of $ 2,250.00. Bob takes home $22,750.00, making a pre-tax profit of $12,750.00.

The highlights of this deal are:

1. Steve puts up more money. (The Traditional IRA)

2. Bob received more money. (The Roth IRA)

Bob and Steve are both happy to do this all day long, multiple times a year. Bob takes the risk, and the bulk of the profit, while Steve minimizes his risk and is happy with his return. People make these types of partnerships all the time.

So can your Traditional and new Roth! Imagine now your Self-Managed IRA was created with a large amount of tax-deferred money (Traditional IRA) and a little amount of tax-exempt money (Roth IRA), uniquely structured to fund your tax-free Roth IRA. This type of structure with disproportionate allocations is industry-standard in the real estate investment world. The justifiable reasoning behind this partnership is that the Roth IRA takes all the risk and gets nothing if the deal goes south. The Traditional IRA is first lien holder; it's guaranteed its return first.

For taking all the risk, the Roth IRA is justified to receive the lion's share of the gains.

FAQ:

1. _Can an individual contribute to a Traditional IRA if he or she has other retirement plans?_

Yes, individuals can contribute to a Traditional IRA whether or not they are covered by another retirement plan. However, they may not be able to deduct all of their contributions if they or their spouses are covered by an employer-sponsored retirement plan. (Note that contributions to a Roth IRA are not deductible and income limits apply.) See Publication 590 for further information.

2. _Can I partner with my spouse's IRA or another disqualified person within the LLC?_

Yes, in Swanson vs. Commissioner, Swanson's IRA was partnered with the IRAs of his three children and Swanson was the director of the company (Swanson won the case). However, if you are going to make your LLC owned by multiple members (whether they are disqualified or not), the Self-Managed IRA will become disqualified for any additional IRA capitalization, as where an LLC owned 100% by one IRA becomes a part of the IRA and you are allowed to make annual contributions to the entity.

3. _What is the difference between buying real estate or any other investment for me or for my Self-Managed IRA?_

When you make an investment with your Self-Managed IRA you will want to make sure that the asset is titled in the name of your entity. Make sure all the expenses come from the Self-Managed IRA and all the revenue flows to the Self-Managed IRA. Also, you will always want to make decisions in the best interest of the Self-Managed IRA because once you become manager of your IRA, you become a fiduciary.

4. _Can my Self-Managed IRA purchase an interest in a Subchapter "S" corporation?_

No. According to IRS Letter Ruling 199929029, April 27, 1999, IRAs are not qualified as investors in Subchapter "S" corporations.

5. _Why haven't I heard about this before?_

Since The Employee Retirement Income Security Act (ERISA) was passed in 1974, the big lobbyists for IRAs were banks and investment firms. Since then there has been a common misconception that IRAs are only allowed to be invested in stocks, bonds, mutual funds, annuities and CDs. Nothing could be farther from the truth. The main reason you might not have heard of this type of retirement plan is that none of these traditional custodians have an incentive to allow you to make your own investment decisions outside of stocks, bonds, mutual funds, annuities and CDs. Since the downfall of the stock market in 2000 it has been individuals who have taken the initiative and built a market for "truly" Self-Managed IRAs.

6. _What types of Retirement Accounts can be structured as a Self-Managed IRA?_

As a rule of thumb, you want to make sure that your retirement plan can be rolled over or transferred to another custodian before moving forward in getting a Self-Managed IRA. Once you have established that you are eligible, most types of retirement plans can be converted into a Self-Managed IRA. Following is a list of the most popular.

a) Traditional IRA

b) Keogh

c) Roth IRA

d) 401(k)

e) SEP IRA

f) 403(b)

7. _How do I ensure my money will be safe?_

Before your money is deposited in a local FDIC insured bank account of your choice, it will be moved to a registered Trust Company or Bank. To be a registered Trust Company or Bank the institution must meet stringent state and federal requirements and have adequate reserves. Your funds will be kept in a separate account for your benefit for a short period of time (a couple days) before the funds are transferred into a LLC checking account. Even if the Trust Company or Bank goes out of business, your money will always be in your possession and the LLC can be registered as an in-kind transfer to another custodian.

8. _My broker, CPA and attorney tell me this is illegal or frowned upon by the IRS?_

Your broker will naturally show skepticism when they realize that you will have to move your funds outside of their management. I have heard every excuse in the book from brokers:

a) "If you set this up your IRA will be taxed." (Not true, the funds are transferred from custodian to custodian ensuring that the IRA is still qualified and there are no taxes due on the conversion)

b) "This company will run off with your money." (Not true, most companies that structure a Self-Managed IRA will never even have access to your funds but make their money by charging a set-up fee anywhere between $2,000-$5,000. Once again, the funds are transferred to a Trust Company or Bank. The likelihood that your life savings will be stolen is the likelihood that your local bank will steal it.)

c) "Why would you invest in real estate with an IRA when the gains would normally be taxed at capital gains tax but in an IRA they will eventually be taxed as regular income tax?" (This argument is pretty much stating that you shouldn't have an IRA altogether because stocks, bonds and mutual funds will be taxed as capital gains outside of an IRA as well.)

The idea behind IRAs is that when you retire and start taking distributions your mortgage is paid for, you aren't in debt and you need less money to live on, putting you in a lower tax bracket. (Roth IRAs aren't taxed at all when you take distributions). Most everything your broker will tell you is an attempt to keep your assets under their management and this becomes more and more obvious the more they talk.

Your CPA is in business to file taxes. Your local attorney doesn't specialize in Self-Managed IRAs. These professionals usually won't want to take the time and effort to study the tax code in depth and give you a straight forward answer for free. To blow you off you might be told, "That is illegal" or "Technically you can but it is frowned upon," or "This is a loop hole and the laws will change." If you are told this is illegal simply ask your professional where "exactly" that is stated in the tax code. They won't find it. Ask them where it is stated that you can buy securities; they won't find that either. To tell you that this type of structure is frowned upon by the IRS or any other government is completely wrong.

Nowhere is it ever indicated that the government doesn't want you managing your own retirement account, and in fact there have been private letter rulings that allow individuals to take advantage of their IRA without incurring penalties. To say that this is a loop hole in the law may sound like it makes sense but isn't true. Also, unless the professionals telling you this are senators or high level officials, I wouldn't listen to their opinion on how the laws will change. Once again, the tax code has always granted these abilities, but the big brokerage firms have a vested interest in controlling your money and distributing the profits into their pockets, not yours.

9. _Can I purchase an asset that I currently own?_

No. This is a prohibited transaction. If this is something you really want to do you might get a private letter ruling from the Department of Labor allowing you to make this investment. Private letter rulings can be very costly and may not be approved.

10. _What if I need to borrow money to buy real estate?_

Because you cannot extend credit to your IRA, and your IRA cannot be used as security, it makes borrowing money a little more difficult; however, for us this isn't a big problem. As long as you get a loan that doesn't take recourse against you or your IRA, you aren't making a prohibited transaction. What most individuals do is use a property owned by the Self-Managed IRA as collateral. As long as the Loan-To-Value, or LTV, meets the right requirements, most banks will loan money to the Self-Managed IRA. A good Self-Managed IRA advisor will have relationships in place to help you facilitate this transaction.

11. _Can I work on a property owned by my IRA?_

Some outfits may consider this to be sweat equity and prohibited. The code doesn't mention anything about sweat equity but does state that you cannot directly or indirectly extend credit to your IRA. You are allowed to day trade stocks with your IRA, so why wouldn't you be allowed to swing hammers in a property owned by your IRA? Unfortunately the code doesn't define "credit", leaving this question to be one of those grey areas. In the case Swanson vs. Commissioner, as Swanson was the only sales person for his entity, this was never challenged.

12. _Do I need to ask permission to make an investment?_

No. You are the manager of your Self-Managed IRA and all decisions are made by you. When you want to make an investment, you write a check, use your debit card, wire funds, etc. All contracts can be signed by you. If you want to hire another decision-maker you can also do that. You will need to report to the custodian on an annual basis. Most custodians don't have any formal documents to make this reporting. A simple letter will suffice; we recommend keeping a balance sheet for your entity and sending that to the custodian annually.

Conclusion

We have shown you the possibilities in creating and utilizing a Self-Managed IRA. There are very few limitations and endless possibilities. Are you ready to begin really making a difference in your IRA investment goals? Regardless of the direction or facet of this structure you choose to utilize, the goal is the same: your nest egg. These tools, and the relationships you are building through The Investor Advisory Network, LLC WILL create a healthy and productive investment experience.

Contributor: Easy IRA Solutions

_Easy IRA Solutions_ _(EIS) is located in Austin, Texas. What EIS does is simply create a legal structure that allows IRAs and Rolled-over 401(k)s to participate in investing with the growing segment of nontraditional and alternative assets. EIS's core value has always been to educate people on not only the Self-Managed IRA structure but to be an advocate on how to use the structure to navigate the changing economic markets. Partnering with like-minded clients and cutting edge experts featured here in the IAN has allowed us to be part of the booming wave of investors succeeding in these turbulent economic times._

The staff of EIS has not only years of experience, but a background and passion for customer service. We consider ourselves advocates and believe that we are not just a product provider but a partner in helping people meet their financial goals.

# Chapter 4: Structured to Win: How to Make More and Keep More of Your Income for Yourself and Your Family to Enjoy Forever

America is at a crossroads.

With a backbreaking federal debt, recurring annual budget deficit, a sputtering economy and fiscal irresponsibility in all levels of government, this country needs a miracle to turn things around.

Thankfully, I'm a faithful man, and I believe that America was made to prosper. Government can't regulate this country into prosperity. Business is the engine that will fuel the recovery. Business generates breakthroughs, solves problems, creates jobs and gets money flowing. That's where the real economic recovery will start.

I believe that the business owners of this country (i.e. the capitalists) are the heroes of society. We create jobs. We demand excellence of ourselves and our employees. We push the envelope of what is reasonable. We build the economy and we drive it upward. We supply the funding that allows for philanthropy \- because without sufficient capital - philanthropy is impossible. It takes grit, guts, creativity and a host of other skills and attributes. If you've got the right stuff, it's the fastest way to create financial freedom and real wealth.

Somehow, somewhere along the line things got twisted. Business owners got a bad name as if we were greedy snobs looking to take advantage of the public. Granted, some large corporations earned that reputation. The Wall Street bankers that took the country to the edge of oblivion in 2008 did more than their share. The corporate executives who glided away on $100M golden parachutes should be taken out to the woodshed. However, that's not the average business owner. There are approximately 28 million small businesses in this country and they create approximately 50% of the jobs. Most of these business owners (people like you and me) are well-intentioned, hardworking people providing legitimate goods and services to a loyal base of customers and clients. It's for those people that I have written this chapter.

First, a point of clarification - I wrote this chapter for business owners, not attorneys or C.P.A.s. As a result, my emphasis will be on the practical application and benefits of the strategies discussed, not the technical analysis. I won't debate tax code sections and subsections here, nor will I cite much case law. That is reserved for another time and place. However, I gladly provide that information and support to my clients.

I'm not training you to become a tax professional. Everything within this chapter has been done by successful business owners - safely and for decades. The results are real and they are impressive. My goal is to make you a more effective and better informed business owner. That said, let's get to work.

The two biggest threats to your business and financial security are taxes and lawsuits. Taxes (federal, state and local) eat up between 25 and 50 percent of your annual income, and estate taxes can cut your family's net worth in half. Lawsuits are insidious because like many risks that only show themselves occasionally, we put down our guard. Then, when you least expect it, you get stunned by a lawsuit without having properly prepared. Unfortunately, I've seen friends and clients lose everything they own as a result.

Tilting the tax laws in your favor

Decades ago, the U.S. Supreme Court held that there are two tax codes in this country: one for the educated and one for the uneducated (see Gregory v. Helvering 293 U.S. 465 (1935). Stated another way, the tax rules for business owners are more favorable than the tax rules for W-2 employees. In fact, there are over 400 deductions available for business owners while W-2 earners are relegated to a mere handful.

The first key to optimizing your taxes is to pay for as much as legally possible with pretax dollars through your business. For example, using an effective tax rate (including Federal, FICA, State and City taxes) of 33%, this effectively gives you one third-off of your deductible purchases. So, for example, the tax code allows you to deduct the business portion of your food, your cell phone, entertainment, your automobile, travel, education and training, all of your medical expenses and much more. Let me illustrate with two examples. The myth is that you or your tax professional is already deducting everything that you can. I can say with 95% certainty that you're mistaken and that mistake is costing you and your business thousands of dollars.

Example A

W-2 wage earners with $100,000 salary would pay taxes of approximately $30,000. This leaves them about $70,000 in after-tax income to pay for all their living expenses such as their mortgage, auto expenses (use of expenses here would imply these are business-related, but they are not), phone, medical, travel, insurance, entertainment, etc. This is likely to leave them with very little "left over".

Displayed as a math equation, it looks like this:

Example B

Business owner with $100,000 income (after typical operating expenses)

Here, you'll see that business owners can pay for many of their "personal" expenses (i.e. virtually all of the expenses on the above list) through the business by converting them into legitimate business deductions.

That's a difference of $7,533 in your pocket. This can continue year after year for as long as you own your business.

Granted, this is an oversimplification (The C.P.A.s are going nuts right now.), but it accurately demonstrates that by properly maximizing your deductions, you can save a significant amount of money in taxes. Once you've read this chapter, you'll never look at your expenses the same way again. From now on you'll always ask yourself, "How can I turn this expense into a deductible business expense?" These rules are in the tax code to benefit business owners who know how to properly capture and use them. Knowing how to document these expenses bullet-proofs your tax returns.

The list can also (indirectly) include your kids' clothing and other expenses, electronic gadgets, get-aways, books and seminars, boating, skiing, golfing, fishing and other social outings, etc. It's said that more business is done on the golf course than in the board room. It's not a matter of trumping up your expenses and paying for them through your business. It's that many of the expenses that you are paying for personally are reasonable and necessary for your business to operate. These expenses can and should be paid for or reimbursed by your business.

Here's the secret that can save you $10,000 or more each year. The deductibility of many of your expenses isn't a function of the expense item itself. Rather, it's a function of the circumstances surrounding the expense. For example, if you ask your tax professional if you can deduct a pizza, they'll probably immediate say "no" (and they may give you a funny look or two). Yet the fact is that there are three distinct ways of handling this expense.

1. If you purchased the pizza for a working lunch for your staff, it's 100% deductible.

2. If you take a prospect to lunch and discuss business, its 50% deductible.

3. Lastly, if you shared that same pizza with a friend or family member and did not discuss business, it's not deductible at all.

By applying this same technique to all of your personal expenses, you will find many that can be converted into legitimate business expenses. The key here is to first identify the business expenses that you are paying for personally (have someone "in the know" go through your personal credit cards, debit card, checkbook and cash expenditures). Then, determine which ones can and should be paid for by your business. Depending on your income, this strategy can increase your deductions by as much as $75,000 (a year which results in an annual tax savings to you of about $20,000-$25,000 or more for as long as continue in business).

Having covered these basic deductions, let's discuss some more advanced strategies that can reduce your taxes and protect your assets. Each of these has been around for decades and has received the blessing of Uncle Sam.

Conservation Easements Designed to protect and expand the amount of "green space" available for parks, wildlife sanctuaries, etc., conservation easements provide landowners with a tax deduction in exchange for an agreement to leave the land forever green by not developing it. For example, imagine a 500 acre parcel located not too far from a major city. The land itself is valued at $1 million and if the owner built a residential housing development on it, it could be worth $9 million. Instead, the owner agrees to conserve the land and Uncle Sam gives him $8 million in tax deductions in exchange. By partnering with these landowners, participants can share in these deductions which can reduce their tax bill by as much as $1.50 for each dollar invested.

Energy Tax Credits To encourage the development of alternative sources of energy, the government gives tax incentives for projects such as solar, wind and clean coal energy production. An investment in such a project can provide taxpayers with passive income and at the same time save them about $1.30 for each dollar invested in the project.

E.S.O.P.s In order to encourage business owners to "share the wealth" with their dedicated employees, Employee Stock Ownership Plans were created. They are established as employee benefit plans that give employees a stake in the company. At the same time, they provide the owner a built-in exit strategy and can put the entire company in a tax-free structure. They work best for companies with 50 employees or more.

Captive Insurance Business owners often have insurable risks that are impractical or not cost effective to insure through normal property and casualty companies (for example, very specialized doctors such as a neurosurgeon, commercial real estate owners, heavy equipment companies, companies prone to cyber-attacks, etc.). You can set up your own private insurance company with premiums up to $1.2 million. These premiums represent deductible expenses to your core business and a rainy day fund should disaster strike. At a later date, usually three to five years down the line, any unneeded reserves can be returned to the owner at the lower capital gains rates.

These are just a few examples of the strategies available to you to protect your business and keep your taxes to the legal minimum. They've been around for many years and when done properly, they are not risky. What we have done is to take the strategies that billionaires have been using for decades and make them available to millionaires and future millionaires. In fact, we regularly see clients cut their taxes in half, or better. For someone making $100,000, that means an extra $10,000 to 20,000 each year. If you're making 300,000 annually, the savings could easily be $60,000 per year or more. To me it's worth the small investment of time and money to structure yourself this way, i.e.to structure yourself to win.

Don't fire your C.P.A.

Early in my career, I thought there was a big failing on the part of the accounting profession, particularly on the part of my family's C.P.A. Growing up in a family business (my mother was the book keeper) gave me some knowledge about business and finances. Yet, I rarely heard any discussion about tax strategies.

When I started my law practice I was surprised and frustrated at the lack of tax planning by my advisor. In fact, I often felt like my C.P.A. was working against me. My office was located in a suite of accountants and tax attorneys and I would often pick their brain. If my accountant told me something was not deductible, I would ask one of my colleagues. Invariably I would get a different answer. If I asked three colleagues the same question, I would likely get three different answers and so on.

Then I began to hear news stories of wealthier business owners paying extremely low percentages in taxes. It was reported that people like Donald Trump and Bill Gates were paying less than 10%. I was still paying between 30% and 40%, even though I was making far less money than them. Obviously I began to wonder what my CPA was doing wrong that was causing me to pay several times my fair share.

Tax Compliance vs. Tax Strategy

The answer lies in understanding the difference between tax compliance and tax strategy. The overwhelming majority of tax preparers (C.P.A.s, accountants, or tax franchisees) focus on compliance, not strategy. For example, they know which form to file and by when. They know what schedule to use and on what line number the item is reported. This is an important and daunting responsibility.

The tax code is a huge body of law (approximately 75,000 pages long), yet there's more to the tax code than the statute itself. There are levels of interpretation of tax law from revenue rulings, private letter rulings, case law and audit guidelines to be followed that can impact the deductibility of an expense. Now add the fact that the IRS has effectively deputized your accountant as part of the "tax police". So, if you thought that accountants were a conservative group of people before the added scrutiny, just imagine how cautious they are now.

Your current tax professional isn't enough

You've already got a tax preparer on your team; now you need a tax strategist. Without one, you are likely paying twice as much in taxes as you need to. This accumulates year after year, so unless you do something proactive about it, the situation will continue to get worse.

So far, we've focused on saving you more of your hard-earned money, now let's look at protecting it from creditors and predators.

Entity Structuring for Asset Protection

Corporations in their various forms were created for one primary reason: asset protection. Historically, business failures often resulted in loss of money and loss of life. For example, if a cargo ship carrying supplies to a foreign country sank, the cargo and crew were both lost. Not only would the owner of the vessel lose his investment, but the grieving widows and families could sue for the loss of their loved one and the income he produced. Corporations were created to legally limit this liability.

Today, there are "C" corporations, "S" corporations, Limited Partnerships, LLCs and their cousins PLLCs and LLLPs.

If you started your business more than ten years ago, you were probably told by your C.P.A. or family attorney to operate as a sole proprietor - which provides no asset protection - or to set up an "S" corporation. More recently, you were steered toward an LLC "because they are better than "S" corps", but you probably were not told what makes them better. Why?

The fact is that there is a lot to consider when choosing your business entity. For example, is the business generating active or passive income? Does it rely primarily on a single asset to generate that income (such as a rental property)? Is the activity inherently risky (for example, certain assets that generate income, job sites, income streams, etc.) Also, tax and liability laws differ from state to state, so you have to navigate varying state laws. Unfortunately, most mainstream attorneys and CPAs do not fully understand this topic.

I approach entity structuring in layers. This gives me maximum flexibility to start small and add to your structure as your business empire grows. Each entity, and each layer, serves a distinct purpose. The different entities and layers must be made to work together, as opposed to being independent from one another. The result is maximum asset protection, and tax savings.

Winners think differently than others. They make sure that they are structured to win. In business this means that you control everything while owning nothing. That is to say you should have few or no assets in your personal name. They should all be protected by the proper kind of entity.

Structured to win what?

Business is a battle. Every day, you are battling for customers, for market share, for profitability for recognition and security. You are also battling against lawsuits, intellectual property infringement, internet slander, excessive costs (including taxes), embezzlement and frivolous claims. You must play to win these battles.

The best way to win a fight is to avoid it altogether. Yet, this is not always possible. So the next best option in business is to structure yourself so that your adversaries learn early on that they cannot beat you so that they sound the retreat before wasting your time and resources.

An example:

A couple of years ago, a client (I'll call him Jeremy) told me that he was being sued by a former employee. Jeremy owned several successful franchise restaurants and the young lady claimed that a manager touched her inappropriately. (Thankfully, the security cameras were on during the "event" and the footage showed no wrongdoing on the manager's part.) Nevertheless, the lawsuit went forward.

One of the underlying ideas in the world of litigation is to find and attack the "deep pockets". In this case, the insurance company bowed out early, telling my client that these types of acts were not covered by his policy, so they would not provide a lawyer to help defend him or any coverage if he lost the case. It seems that most insurance covers everything but that with which you need help. So, Jeremy had to pay for his own defense. Also, any settlement would have to come from his own funds.

Fortunately, several years earlier we had done some planning of our own. I created a business structure that would withstand such an assault. During the pre-litigation discovery and negotiation process, I consulted Jeremy and his trial counsel and assured them that I was confident that the outcome would be favorable to Jeremy. Late one morning I got an anxious phone call. I was giving a seminar for about 100 business owners and during a twenty-minute break my phone rang. Jeremy told me that he was at his attorney's office that morning at settlement negotiations. He needed my re-assurance. "Drew", he asked, "how confident are you in the structure you set up? My attorney told me that I could get out from under this woman's million dollar claim by writing her a check for $125,000. I just want this thing to go away."

"Jeremy", I said, "I'm going to answer you as if you were my own brother. At the end of the day, it's your decision to make, but if I were you I would sit down at the negotiation table right across from the woman and her attorney. Look her in the eye and tell her to 'go pound sand'; then turn to her attorney and suggest that he call his malpractice carrier because the next lawsuit he'd be involved in would be defending himself against this woman's malpractice. That's how confident I am."

About an hour later I got a jubilant and relieved call from Jeremy telling me that the suit had been dropped and that neither the woman nor her lawyer got a penny.

That's what being structured to win is all about. It became apparent that as a result of the way we had structured Jeremy's business and personal assets, even if the plaintiff won the lawsuit, she would be hard pressed to collect the judgment. In fact, because of something called a charging order (see below), even a favorable judgment could cost the plaintiff more in taxes than she actually collected. The result was a complete victory for the good guys.

Business people typically don't look for trouble, but often it finds them. Let's face it, you are doing business with the public and the public is litigious. Bad stuff happens - that's real life. By structuring yourself to win, you can minimize the damage, avoid some problems altogether, dramatically reduce your income and estate taxes and provide financial security for yourself and your family.

A proper structure is your best defense and your best friend. The first step is to separate your personal assets from your business assets. The next step is to separate your different business assets from each other. On the personal side we use things like trusts and family limited partnerships to accomplish this. On the business side we use limited liability companies (LLCs), corporations and limited partnerships to do so.

Keep in mind that asset protection is not a "set it and forget it" proposition. As things evolve, you will acquire new assets and sell off others. Your entity structure will have to be updated.

Entity Choice

Let's look more closely at the different types of business entities. Pay particular attention to their practical application.

Sole Proprietorships

Sole proprietorships are actually non-entities because there is no legal distinction between you as a person and you, the sole proprietor. They are the simplest type of business to set up; perhaps this is why they are the most popular. There are no formal requirements; basically you just start doing business. You may or may not even wait to get a business card or website. Just decide that you are in business for yourself and away you go. Sole proprietorships have a calendar year (January 1 through December 31) and their income and expenses are reported on your personal tax return (Schedule C of Form 1040).

The problem is that sole proprietorships offer no asset protection at all. Legally, you and the business are one in the same. So a claim against your business automatically results in a claim against you. As a result, your personal assets including your home, automobiles, and bank accounts can all be attached in the event a judgment is entered against you. This may even be the case if you didn't know about the lawsuit and a default judgment is entered against you. Sole proprietorships are a risky way of doing business.

Never do business as a sole proprietorship. They give you no protection, and can be tougher to defend in a tax audit. Don't be penny wise and pound foolish.

Incidentally, filing a fictitious name certificate, otherwise known as a "DBA", does not help. A DBA is simply another name (like a nickname) for the business. It offers no asset protection or tax benefits.

General Partnerships

A general partnership is also simple to set up. The law defines them as the association of two or more people who get together for the purpose of making a profit. Again, there is no business filing requirements, annual fees or forms to fill out. Most people form general partnerships without even having a written partnership agreement. This is insane. Partners fail to realize that in business there are always challenges and disagreements and the partnership agreement can provide a roadmap for navigating these difficulties. Without this road map you are virtually condemning yourself to failure.

In terms of asset protection, a general partnership is the riskiest form of business. In a sole proprietorship your business risk is at least limited to your own negligence or wrongdoing. In a general partnership your partner's bad conduct can bring you down as well. You might be completely innocent, but you are legally joined at the hip and therefore equally responsible for any claims.

Plus, there is a legal doctrine for partnerships known as joint and several liability. This basically means that the plaintiff can choose to enforce a judgment against the assets of either partner, or both partners. If there are multiple partners, the plaintiff can pick and choose. So, for example, if you have $1 million cash in the bank and your partner has no assets, the judgment creditor can enforce the entire judgment against your assets alone, even if you did nothing wrong. This is another example of why quick and easy is not a good approach in business.

Corporations

Corporations are the first kind of entity that gives you the needed legal separation between the business and interpersonal life. They are separate from you, the business owner. Legally, it's almost as if you created a separate being when you set up the corporation.

One type of corporation is called a regular corporation or "C" corporation. Assets owned by the corporation fall under its protection. Income to the corporation is reported separately from your personal income (on form 1120). This means it's a separate taxable entity. It can be run on a calendar year basis or it can have its own fiscal year. It may have one shareholder (you), or it may have many, even thousands, of shareholders. Only a "C" corporation can be publicly owned.

In addition to filing its own tax return, a "C" corporation may retain earnings. Unlike other business owners, they operate either on a calendar basis or on a fiscal basis. There are also certain business deductions that can only be taken through a "C" corporation.

"S" Corporations

"S" corporations are so-called because they were created under subchapter S of the tax code. They start off as "C" corporations and are converted to "S" corporations through simple tax election by filing IRS form 2553. I think it would be expected from an attorney and gives a good foundation of believability and authority.

Like "C" corporations, "S" corporations are separate legal entities. However the most distinguishing factor is that they are what is known as flow-through entities. This means that any profit or loss from the "S" corporation is reported on your personal tax return. Almost all "S" corporations operate on a calendar year - January 1st through December 31st.

"S" corporations are still a very popular form for startup businesses. One reason is because many new businesses lose money during their first few years of operation. So, the flow-through feature allows the owner to offset their other taxable income by any loss they have in the "S" corp. So, for example, if you made $100,000 in salary but your "S" corporation loses $30,000, your gross income would be just $70,000 that year.

Limited Partnership

Limited partnerships have been around for a long time. They were originally designed as a means of separating the money partners from the management of the business. This would allow an entrepreneur to raise operating capital by bringing partners on board, while at the same time maintaining total control of the operation of the business. These were very popular with real estate projects because they allowed large amounts of money to be raised to purchase the property or building without the sponsor losing control. Limited partnerships have two types of participants, limited partners and general partners. The difference between the two is a matter of allocating risk versus control.

The investors are known as limited partners. The risk of the limited partner(s) is limited to the amount of the money they invested in the partnership. So, for example, if the limited partnership is sued for $1 million and each limited partner has invested $200,000, then the maximum risk each partner assumes is limited to their $200,000 investment. A creditor cannot force them to come out of pocket for the balance of the judgment. Limited partners have no voting rights in the business or its operation. All of the decisions are made by the general partners.

General partners have all the authority. They are responsible to make the day-to-day decisions of company. They also carry all of the financial risk on their shoulders personally. So back to our earlier example, a million-dollar lawsuit and three limited partners each with $200,000 in the partnership. This leaves a $400,000 shortfall.

The general partner will be personally responsible for the $400,000. Barring extraordinary measures, the personal assets of the general partner (including their home, cars, and bank accounts) can all be attached to satisfy the judgment. Yet, even this liability can be protected against by making the general partner a corporation. That way, only the assets of the corporation can be seized by a judgment creditor. The personal assets of the corporation's owner remain safe.

Limited Liability Companies (LLCs)

LLCs were initially created in the 1970s and are powerful both in their asset protection features and flexible for tax purposes. On the tax side, they can be treated in one of three ways for tax return purposes. LLCs are initially taxed as "disregarded entities" which means that they are ignored for tax purposes. Any income or loss is reported on a partnership return which flows through to the owner's personal tax return.

Alternatively, the owner may choose to have the LLC treated as a "C" corporation for tax purposes. In that case, any income or loss would be reported on form 1120; you can choose to operate it on a fiscal year and the other tax treatment of "C" corporations would apply as well. The other option is to elect to have the LLC taxed as an "S" corporation, in which case those tax rules would apply.

So what's the big deal about LLCs? Well, one initial benefit was that the requirement for keeping up with corporate formalities (in other words written corporate minutes, resolutions, etc.) was dropped in the LLC statutes. However, the IRS has effectively overruled this by requiring all such documentation in the event of an audit.

Nevertheless, LLCs are still my 'go to' entity. That is because of something called the charging order. The charging order only applies to LLCs and limited partnerships (not corporations or general partnerships). The charging order is an incredibly powerful tool for business owners yet it is virtually unknown in the business world and under-appreciated by the professional community.

If your corporation is sued and you lose the case, the result is a judgment against the corporation. In the case of an LLC, the judgment must be converted into a charging order by the court. That order effectively makes the judgment creditor a quasi-partner of the LLC. So far, this doesn't sound so good. However, your new quasi-partner has no voting rights so you still have full control of the business operations.

The real benefit shows up at tax time. You are still in full control of the LLC and can choose not to distribute the profits of the business. Nevertheless, you can issue a K-1 to your quasi-partner for their undistributed share of the profits. This results in a tax obligation without the offsetting benefit of the cash distribution. In other words, the creditor gets taxed on the money even though they received nothing. Keep in mind; you will still be able to access your share of the profits through other means.

Here's how it plays out in practice.

Remember my earlier story about Jeremy in the lawsuit brought by a female employee against the manager? At the negotiating table, what we were able to show the young lady is that even if she won a judgment of $1 million she would never get a penny of it because Jeremy, as the manager of the LLC, would simply opt not to distribute profits. (He would pull the money out of the business another way). At the same time, she would get a K-1 for the paper profits of the company which would result in a tax liability. If the paper profits were saying $1 million, she'd have a tax liability of approximately $400,000 even though she got no cash from my client or his business. Obviously, this is an un-winnable situation for potential judgment creditors. As I said earlier, the only thing better than winning a lawsuit is avoiding one altogether. Score a victory for the good guys. This is why, as your net worth and entity structure grows, you must have one or more LLCs in your structure.

LLCs can have one owner (single-member LLCs) or multiple owners (multi-member LLCs). Because the charging order is such a powerful tool, in recent years, some states have determined that single-member LLCs are not entitled to charging order protection. Currently, these states include California and Florida. The workaround is simple enough. You may already have a business partner or you could add your spouse or child as a partner. Alternatively, your main LLC could be owned by one or more other LLCs.

Other types of entities:

Professional Corporations (P.C.s)

P.C.s are a special type of corporation reserved for professionals, typically doctors and lawyers. They can be treated as "C" corporations for tax purposes or you can file the S election to have the corporation treated that way. There are also professional associations, professional limited liability companies, (PLLCs), Limited Liability Partnerships (LLPs), Professional Limited Liability Partnerships (PLLPs), Serial LLCs and International Business "S" corporations (IBCs). Each of these can have its proper place in an entity structure.

Structuring Yourself to Win

Now that you've got a basic understanding of the different kinds of business entities, let's look at how you can make them work for you. The two primary purposes for having a business structure are asset detection and tax savings. The fact is that you can go into business without a formal business structure. Many lawyers and CPAs recommend that their clients postpone setting up an entity until the business is profitable. "After all", they reason, "why spend the money on a corporation when you don't know that the business is going to make it?" While there is some cost saving benefit to this advice, I would err on the side of caution. Establish your corporation sooner rather than later.

A professional football player would not go into the game without his helmet and shoulder pads. Although cycling isn't much of a contact sport, even a cyclist wears a helmet, gloves and protective eye wear. Business can be a battle, and business entities are your protective gear. Setting up the proper structure early in the life of the business tilts the odds in your favor.

Without a protective structure, it's you against the world completely unprotected. Legally speaking, you and your business are one and the same. A judgment against the business can be enforced against your personal assets. That is to say that your savings, your home, bank accounts, etc. can all be attached by judgment creditors. These could be clients or customers or even business vendors.

The same rules apply to a judgment against you or a member of your family. If your teenage son gets into a car accident one Friday night, you and your spouse will be dragged into the fight. The resulting judgment can be enforced against your personal assets and your business assets. In fact, the more successful you are, the bigger the target you represent. Your success will give you "deep pockets". Your successful business, and therefore your livelihood, is a big target for creditors to go after.

Start your Structure

Your first entity is likely to flow through for tax purposes, either an "S" corporation or an LLC. My 'go to' entity is the LLC because of the added asset protection of the charging order and the flexibility for tax planning. But they don't work in every situation.

At this point your simple entity structure might look like this:

You've taken the important first step; you have separated your personal assets from your business assets. Now, a problem with your business won't wipe out your personal assets and vice versa. Instead of being completely unprotected and vulnerable to creditors, you've effectively put a 10 foot high, 10 foot thick wall of protection between you and the bad guys.

Multiple corporations for added protection

Take a trip to your favorite ski resort. Look past the beauty of the snow covered mountains, beyond the luxurious hotel, enjoyable food, great ski shop and private ski lessons. From an entity perspective, what you would see is that the hotel is in one corporation, the restaurant in another; the ski shop has its own, as does the ski school. On the mountain, each chairlift is probably held in a separate entity and the mountain itself is in multiple limited partnerships.

If you look at a casino, the same thing holds true. Each gaming area (slot machine, poker, roulette pit, etc.) is separated with entities. So is the hotel, the restaurants and the nightclub, even the parking garage. Why? It's to stop the domino effect of lawsuits. You know the old adage "don't put all your eggs in one basket." To be structured to win, you must first separate your personal assets from your business assets. Then, you must separate your businesses from one another. This is all invisible to the public; it's done behind the scenes for protection.

I think of asset protection in terms of layers. This allows my clients maximum protection and flexibility. I can increase their entity structure as they grow financially. At first, you'll have one layer, and probably just one or two entities. As your income and net worth grow, we'll add an entity and a second layer.

Or, if you were the owner of the ski resort mentioned above, your structure might look like this:

As you can see, each of the various business components (assets) is placed into its own entity(s). There could be one for each lodge on the mountain, and separate entities for each cluster of ten condos. Designing a complex entity structure is an art as well as a science.

Let's add a level of protection:

Your management company sits one level up in the structure. Unlike your core business, which interacts with your customers or clients, your management company only does business with you and other businesses you own. This puts its activities an arm's length away from creditors.

Legal separation

There is a concept in the law called privity of contract. Basically, this means that in the business context, no one can sue you unless they have a contractual relationship (privity) with your company. Your management company sits outside of that contractual relationship which makes it difficult to sue. Also, you may want your management company to remain private. For that reason, we could set it up as an out-of-state entity. Also, it will not have a website, nor will you print business cards for it. It is primarily for management and asset protection purposes.

It is likely to be "C" corporation for several reasons. First, "C" corporations can elect to be taxed on a fiscal year basis instead of using the calendar year. We can leverage certain tax strategies by setting your management company's year-end on a date other than December 31st. Also, there are certain deductions that can only be taken with a "C" corporation.

Keep in mind that your core business (LLC) is fortified by the charging order and now you've added a second layer of protection with your management company. These multiple layers of asset protection are the key to you protecting yourself and your family. As you add multiple streams of income and your net worth increases, we may add additional entities.

Family Limited Partnerships

Known as "FLPs", these are simply limited partnerships where the only participants are family members. FLPs are the final layer of asset protection, sometimes referred to as the "umbrella" entity. They should be used in conjunction with your living trust. Effectively, the trust provides the asset distribution plan while the FLP provides the asset protection. Properly used, they also have a powerful, though under -appreciated estate tax planning function.

There are various kinds of trusts that can be used in your entity structure. for example: Dynasty trusts, intentionally defective trusts, life insurance trusts (ILITS), and trusts with funny names like Crummey trusts and Grantor Retained trusts (GRITS, GRATS, and GRUTS). One or more of these trusts may have a place in your comprehensive entity structure.

Each client's entity structure will be unique based on his goals, assets, income, values and desires. Our approach is designed to maximize your asset protection while minimizing your income and estate taxes. Entity structuring and tax strategies are not a "do it yourself" project; they are properly left to capable professionals. Make sure to make such professionals part of your team so that you are "Structured to Win".

"It's your money, you should keep it." - Drew Miles

(This chapter is excerpted from the upcoming book of the same name by Drew Miles, Esq.)

Contributor: Drew Miles, Esq., President, Pathfinder Business Strategies

_You work hard for your money, and certainly you should keep as much of it as you legally can. That's where we come in. As Drew Miles, the President of_ _Pathfinder Business Strategies_ _says, "It's not how much you make, but it's how much you keep." Pathfinder Business Strategies helps you keep as much of the money that you earn to which you are legally entitled._

A Cum Laude college graduate and a Phi Beta Kappa academic fraternity member, Drew Miles trained as an attorney and practiced in New York for 12 years as the senior partner of his own firm, specializing in business and real estate. A member of both State and Federal Bars, Drew spent five years examining the deepest depths of the Internal Revenue Tax code ultimately discovering a treasure trove of often unused and unapplied statues by most accountants and CPAs. After years of research, Drew developed an extraordinary master list of more than 400 tax strategies that today form the proprietary intellectual foundation of the Pathfinder Business Strategies Tax Savings approach.

Drew grew up in Long Island, NY where he worked in a family business during his youth. After passing and being admitted to the New York State Bar in 1988 he established his own firm. In 1998, he made the decision to concentrate solely on his commitment to serve his clients and expand Pathfinder's scope of programs.

His unique approach combines what he has learned not only from his formal legal education, but also his informal business education. In addition, his 25 years of entrepreneurial experience in the development of programs designed to educate people in the fine art of building and preserving wealth has created what Pathfinder is today.

_Drew is an author, teacher, and international speaker. His highly acclaimed book_  Zero to Success _,_ _chronicles the steps every new business owner must take to ensure success. He has been featured in Forbes, the Dallas Morning News, American Banker, and Yahoo Finance. To date, he has helped more than 7,000 business owners save over $500 million dollars in taxes and liability. This is why he is known throughout the United States and Canada as the "Tax Saving Attorney"._

_To learn more about how you can cut your taxes in half while protecting your assets, contact Drew Miles at (772) 228-7702 or by email a_ **t** Drew.miles@pfbs.com **.**

# Chapter 5: What You Need to Know Before Investing in Gold and Silver

Thank you for taking the time to learn more about investing and the Investor Advisory Network (IAN), as well as this chapter's focus: Gold and Silver. I'm sure you are well aware that our economy is headed for uncharted waters. Never in the history of mankind has our global debt been so high. There are no historical guidelines to follow this time. When making investment decisions, we usually don't get a second chance, so it's important that we make the right choices - the first time - with our investments.

In times of great uncertainty, it's wise to rely on that which is certain and real. Throughout recorded history, the rewards of investing in gold and silver have been proven time and time again. I invite you to learn more about one of the most important asset classes of all time. It's my opinion that physical gold and silver should be a critical part of a solid wealth strategy. In this chapter I will clearly explain the reasons why this is a very prudent course of action.

Since we are condensing an abundance of knowledge into a single chapter, we only have space for an overview of the many aspects of investing in gold and silver. You can find much more detailed information on our IAN page or our website: www.GoldSliverAlliance.com.

To begin, let's first take a look at some of the reasons you should consider adding physical gold and silver to your portfolio.

Why Consider Gold and Silver as an Investment Option?

Anytime you make an investment, there is always a risk of capital loss. So it's always wise to evaluate the risk/reward factors of any investment before diving in. The risk/reward factors for gold and silver are unmatched. Over the past 5,000 years, gold and silver have been treasured by people, governments and individuals both during times of success and collapse. Throughout the rise and fall of the greatest empires this world has ever seen, precious metals always kept their purchasing power as a solid value. From 560 B.C. when King Croesus of Lydia created a gold coin with his image on it, all the way through to today, gold has been the most universally accepted form of money.

The amazing thing is, throughout those thousands of years, gold and silver have NEVER been worth nothing. Stop and think about that for a moment. Can you think of many other things of which you can say the same? I don't even want to recall the stocks and businesses that I have invested in over the decades that have gone to zero. Gold and silver have constantly withstood the test of time and have remained a consistent source of value without exception. Throughout history, countries have gone to war to gain more of it. Untold thousands have fought and died for it. The pirates made an industry out of stealing it. When the bad guys robbed banks, trains, ships and stage coaches, they always went for the gold and silver first. Why? They knew of its great value.

It has been said that during the Roman Empire, a gold coin would buy a quality men's suit. The same can be said today. You can still buy a pretty nice men's suit for the value of a gold coin. It's amazing that after all those years, gold's value has remained constant.

In addition, precious metals are an excellent form of financial insurance. Most prudent people buy insurance to protect themselves from sudden and tragic losses. Life insurance is there to protect the ones you leave behind. Health insurance is there to ease the cost of disease and injures. So for many people, precious metals satisfy the need to diversify against all of your assets based in the dollar. Precious metals are also financial assets that sometimes offer tremendous potential for explosive gains during times of economic instability.

Why Haven't I Heard More About Investing in Precious Metals?

You may be asking yourself this question, _"If gold and silver are such great investments, why don't more people own bullion and why hasn't my investment advisor encouraged me to invest in them?"_ Good question. After all, it's estimated that only about 2% to 3% of Americans own any form of precious metals bullion. Interestingly, many Eastern countries have much, much higher levels of bullion ownership per capita.

There are many reasons for this but one big reason is that the traditional _"paper"_ investment options like stocks, bonds and mutual funds, ETFs, Treasury notes, Forex markets, etc. make up the gigantic majority of the investment capital in the world. When you compare the amount of available, investable physical gold and silver in the world, to the total value of all the _"paper"_ investment options in the world, gold and silver looks like a fly on an elephant. The key to finding out "why" is to follow the money trail. The giant global brokerage houses and mega banks make billions in profits by selling these traditional paper investments and the majority of them don't offer physical metals at all. It's like expecting the BMW dealership to suggest you buy a Mercedes. It just doesn't happen. Besides, if those same companies started promoting the purchase of physical gold and silver, there would not be near enough metal to come close to satisfying the huge demand they could create.

The chances are good that your investment advisor or broker does not offer physical precious metals as an investment option. If they suggest you buy them, they will not make any profits on your metals purchases or future commissions on the portion of your invested money that you shift to metals. It's a lose-lose situation for them to suggest that you buy physical metals. For newer advisors, they typically don't even realize this other world of real assets even exists because they are pushed through a cookie cutter training program that brings everyone back to an overpriced / incorrect insurance plan. The key point here is to do your own research and make your own investment decisions based on the facts and do not allow yourself to be swayed by the mass investment media or self-serving investment advisors.

Physical Precious Metals vs. Paper Gold and Silver

It's important to understand that there is a HUGE difference between the actual physical, hold-in-your-hand gold and silver, and any _"paper"_ gold and silver investment. Many traditional investment advisors will try and convince you that paper metals investments are not only the same thing, but that they are actually better than dealing with all of that bulky physical metal. They will try to steer you to precious metals stocks, ETFs, mutual funds, mining stocks and funds, metals certificates, leveraged positions, and more. Often they will claim that's all you need to do to become diversified into gold and silver. Plus, you don't have to worry about shipping and storing these _"paper"_ forms of metals, so they are much easier to deal with and much quicker to buy and sell. This all sounds so nice and easy, doesn't it? That's why most people invest in _paper_ metals.

I encourage you to take a moment and think about this. All of these other forms of investments are _"paper"_ investments. The entire idea is to truly diversify and actually get the real, honest to goodness, hold-in-your-hand physical gold and silver. If or when we have the next stock market crash, most if not all of these paper investments will likely get caught in the selloff downdraft and their values will fall. What will happen to all of these _"paper"_ metals investments if the U.S. Dollar were to crash or collapse? After all, their value is backed by the dollar. If the dollar crashed, so will the values of these paper investments. My advice is that if you want to invest in stocks, bonds and other _paper_ investments then do so. But if you want to buy gold and silver, then buy the real thing. Voltaire got it right in the 1700s when he said, _"Paper money eventually returns to its intrinsic value - zero."_

Basic Precious Metals Terms

If you are new to precious metals investing, it's important to be familiar with a few basic industry terms. Let's take a look at some of the most common and important terms.

**Bullion:** This is usually the most misunderstood term. Some think of bullion as pirate treasure or giant bars of gold. The term bullion is used to describe gold, silver, platinum or palladium coins, bars, ingots or wafers which directly follow market spot prices and have known amounts and purities of the respective metal.

**Spot Price:** This is a key term that is critical to know. Spot price is the current, real-time market price of the precious metal, determined by the latest trades on the futures market as well as the over-the-counter markets. Thousands of websites around the world display the current spot prices of precious metals. When you buy or sell precious metals, the price is always based off of the current spot price. Spot price is a global price and it changes moment by moment.

**Margin or Premium:** This is one way to purchase paper metal. (It does not apply to buying physical metal). To buy or sell a futures contract, each party or side of the transaction must put a "down payment" on the futures contract. The contract is held by an independent central clearer. With your deposit, the central clearer "guarantees" the balance of the contract, promising to either party their potential profit. This is like purchasing the right to collect on the profits of an order of precious metals without having to buy the metal outright. The percent of risk is magnified because a small drop in spot price could force the buyer out of their paper metal position. Margin percentage requirements are set forth by the COMEX. Approximate numbers illustrated as a 5% drop in metal price could represent an 85% loss of the money used to buy the futures contract. The opposite would apply if there was a 5% increase in spot price.

**Spread:** This applies to physical metal transactions. It is the difference between the selling price and buying price of a specific metals product. If a vendor sells Silver Eagles at $6 over spot price and offers to buy them for $4 under spot price then they have a spread of $10. The smaller the spread, the better off the consumer stands when doing business with a vendor.

**Premium:** These terms are used to describe the difference between spot price and what the actual price is for a specific kind of gold or silver. For example, a 1oz U.S. Silver Eagle made by the United States Mint is easily recognized and guaranteed for its weight and purity. However, a 1oz generic bar of silver made by an unknown refinery would be unfamiliar and not guaranteed after it is in circulation. So naturally the Silver Eagle has more value and therefore, a higher price. Other things to consider would be the size of the metal. Also, generally speaking, the smaller the piece of metal is, the higher the premium will be. It is much easier to create a single 100 oz silver bar than it is to create one hundred 1oz bars. Premiums will follow suit as well. Factors for the metal Premium can include the costs of fabrication, distribution, supply/demand factors, broker/dealer fees and desired profit from the dealer.

**Troy Ounce:** This is the traditional unit of weight used for precious metals.

**Fiat Money:** Paper money or currency that is made legal tender by government law. Fiat currency is not backed by gold or silver.

**Legal Tender:** This is a coin or currency that is identified by a government to be an acceptable form in the discharging of debts within that country.

**Mint:** A place where coins or bars are manufactured. There are government mints and private mints.

**Numismatic Coins:** Precious metals coins that hold some collectible value are deemed numismatic. This is a broad term and its definition is unclear. Technically, a U.S. Silver Eagle is a numismatic coin as soon as it's made. It is both bullion and numismatic. The law that created the production of these coins even defines them as both numismatic and bullion. A numismatic coin's price consists of not only the precious metal's content but also commonly depends on their rarity, condition, production dates, historical significance, mint marks and beauty. Because of these factors, more valuable numismatic coins are often encased in clear plastic "slabs" for preservation and given a "grade" or score by Numismatists. The coin would be considered a numismatic coin before and after the grading process. Due to the fact that the most valuable numismatic coins are already "slabbed", generally think of numismatic coins as those that are already encased in plastic. It's not necessary to have a coin graded and slabbed for it to be considered numismatic, but it is a good idea.

**Ask Price:** The price at which a dealer offers to sell precious metals items to you.

**Bid Price:** The price at which a dealer offers to buy precious metals items from you.

**Rounds:** A round is a metal disk made of precious metals usually produced by a private mint. They are not intended to be used as money nor legal tender. They are struck with various images on the coins, are different sizes than legal tender coins and the weight and purity are not guaranteed by a government. Rounds generally carry less of a markup premium than legal tender, government issued coins.

**Junk Silver:** A term used to describe a bag of pre-1965 U.S. coins containing 90% pure silver. The coins have been circulated as currency thus the bags will not typically contain rare coins. They are sold in bags based on the total face value of the coins within the bag. A "bag" of junk silver is jargon for $1,000 face value of dimes, quarters, half dollars and/or dollar coins. A half bag would be $500 face value of the coins in the bag. Because the amount of silver in the coins is already known and easily traded, it is not economical to melt the coins just to be in another shape / purity.

**Assay:** A test to determine the quality and purity of a gold or silver product. When a gold or silver product has an "assay" test certificate, this is a guarantee from the assayer that the product in question does indeed contain the described amount and purity of gold or silver.

Okay, that should be enough information to give you a basic understanding. Let's move forward.

Why Precious Metals are a Critical Part of a Solid Wealth Strategy

**Liquidity** As long as you buy the right forms of metals, physical gold and silver are very liquid. It's so easy to call up a broker and lock in a buy or sell price for any quantity of bullion, and place your order. For a non-paper investment, precious metals are one of the most liquid investments you will find. Precious metals are perhaps the world's most liquid asset and they are traded throughout the world. I have an acquaintance that travels the world. He used to carry pockets full of cash on his trips. Now he carries 1oz Gold Eagle coins. He tells me he can walk into most any bank in the world, place the Gold Eagle coin on the counter and receive the approximate market value in any currency he wishes. Gold truly is the world's form of money.

It's true that unlike selling a stock or mutual fund on the phone or online, you do have to get the metals shipped. Many people who sell paper assets tend to make a big deal out of the shipping issue. Actually it's really not that big of a deal. It's amazing how many tens of millions of dollars' worth of gold and silver are shipped every day by FedEx, UPS, the U.S. mail and by other shipping methods. It's also hard to beat gold and silver's flexibility. You can buy and sell gold and silver from the other side of the planet with a click or a phone call, and you can also buy and sell it from individuals and small local shops right in your home town. You can use metals for trade, and buy and/or sell them to anyone you wish, at any time you wish. Try doing that with a stock or mutual fund.

**Portable** Gold is a very portable form of wealth. Many people are shocked to discover that, if you had some good size pant's pockets, you can put a half million dollars' worth of gold in your pant's pockets. You can put millions of dollars' worth of gold in a brief case. If there comes a time when you need to grab as much wealth as you can, with short notice, and take off, gold is not a bad way to go. Silver on the other hand, is quite a bit more bulky and less portable from a dollar value standpoint. I have a friend who always travels with his special belt. The belt has 1/4 ounce Gold Eagle coins sewn into it. If anything was to happen to him and he was to lose his wallet and his credit cards, etc., his plan is that he has enough gold in his belt to buy an inexpensive car or whatever he needs to get back home.

**Creditable** Some people call gold and silver global money. If you have the right forms of gold and silver, you will find that it is accepted practically anywhere in the world. Gold and silver are so creditable that they were officially recognized in the U.S. Constitution which states; _"No State shall make anything but gold and silver coin as tender in payment of debts."_ Our founders knew of these metals' creditability as well as Roman emperors who chose to have their image stamped on gold and silver coins and base their entire empires' monetary exchange on these two metals. Gold and silver have always been, and will continue to be, _"the real thing."_

**Privacy** Privacy is one of the big reasons so many wise investors choose to buy these shiny metals. They're some of the most private forms of wealth available. If you buy certain types of coins and bars in the United States, there is absolutely, positively no reporting required at all. That goes for when you purchase the metals and when you sell them. Additionally, for certain items, the quantities that you can buy and sell them in without having to be reported are completely unlimited! This is a HUGE benefit and if privacy is important to you, you will love this.

There are certain types of coins and bars, and certain quantities of coins and bars that can be bought and/or sold that DO have to be reported to the government. For these certain items and quantities, the broker/dealer whom you are buying or selling the coins from is required to complete the IRS form 1099-B with the person's name, address, social security number and more. They send a copy of that same form to the Internal Revenue Service. Clearly when you have to report the sale of your metals, your transaction is no longer private. For many investors, it's very important to know exactly which forms and quantities of metals are able to be kept private.

Another important issue to know about precious metals privacy is the rules regarding paying with cash. If you use actual green paper U.S. fiat dollars to purchase your precious metals with, and if the purchase amount is over ten thousand dollars, or if you make two or more related transactions totaling ten thousand or more in cash or cash equivalents, your precious metals dealer is required to complete Federal From 8300 and send it in to the IRS. To be very clear here, what is being reported in this case is the cash purchase of ten thousand dollars or more, NOT the purchase of precious metals. So even if you purchase the right types and quantities of metals, you can still be required to report the transaction if you purchase with ten or more thousand in cash. There are other forms of payment you can use that require no reporting such as bank wires and checks, even in unlimited amounts.

You will find many metals' broker/dealers who will not tell you the entire story on this and suggest that if you do not buy numismatic coins, you have no privacy when buying bullion. This is simply not true. If you purchase the right types of bullion, in the right way, bullion can be as private of an investment as you will ever find. For more information on this and a detailed list of exactly which types of metals are private and which ones are not, please visit our website.

**Tax Advantages** (This tax information applies to United States citizens only. Contact your accountant to verify if the information is valid for you.) A great aspect of owning precious metals is that you never have any capital gains or losses until you actually SELL your precious metals. You can hold your metals for decades with no reporting required. You can even have huge "paper" gains and huge "paper" losses during that time. But it's not until you actually sell them, that you then realize a gain or a loss. You do have to pay short-term or long-term capital gains income taxes on your gains, depending on how long you held the metals before selling them. Or, if you happen to have a loss when you sell your metals, you may be able to deduct the loss on your income taxes. It's up to you to report your capital gains or losses on your tax returns. It is not up to the broker/dealer from whom you bought the metals to report it. Since you can buy your metals from one dealer and sell to a different dealer or individual, the dealer who sold you the metals would have no knowledge of previous or future transactions. Again, you should always consult a qualified tax advisor on matters pertaining to investing and taxes.

When selling your metals, the broker/dealer who is buying the metals from you will be required to complete IRS form 1099-B for certain types and quantities of metals sold. Here is a partial list of metals that are reportable. For gold coins, 25 or more 1 ounce Canadian Maple Leaf coins, 1 ounce South African Krugerrands or 1 ounce Mexican Onzas are reportable. Also, if you sell 1,000 ounces or more of silver bullion rounds and/or silver bars that are .999 fine silver, at any one time, the sale is reportable to the IRS.

Some Key Factors That Impact the Performance of Gold and Silver

High Inflation or the Fear of High Inflation

Gold is widely known as one of the best hedges against inflation. Inflation is the loss of the currency's purchasing power. Gold often rises as inflation rises. As inflation rises, the value and purchasing power of your paper fiat dollars go down, but the value of your gold often goes up. Many investors seek a hedge to protect them from the inflation, and often turn to gold and silver. Historically the additional demand created during inflationary times often makes metals prices go even higher.

It's amazing how gold and silver's purchasing power has been so consistent over time. Here's a great example of how metals maintain their purchasing power. Back in the 1950s it took a little more than two silver dollars to fill up the family car with gas. Today, some sixty plus years later, you can still pretty much fill up your car with gas when using the value of a little more than two silver, 1oz coins. Sixty or so years ago, it cost a bit over $2 to fill up your car with gas. Today, it costs $45 to $65 dollars or more to fill up the average car with gas. Did the cost of gas go up that much? Nope. The value of our U.S. Dollar went down that much. Silver is the hero here. It has maintained its purchasing power over all of those years. Imagine if you had put some of those 1950s U.S. paper dollars into silver back then, imagine what the purchasing power would be today.

The Federal Reserve has kept interest rates at artificially historic lows for years. Even if the next move turns out to be deflationary, many experts believe it will be short lived and that inflation will be the next big wave. To me, common sense tells you that if the Federal Reserve has kept interest rates at historic lows for this long and if there is no room for rates to go much lower, and if we know they will not stay this low forever, then it seems pretty easy to guess which way they will have to go eventually. It would not be surprising if at some point, rates spring up rapidly and possibly over correct to the upside, as they seek market equilibrium. If this scenario were to happen, history tells us that it would be bullish for metals prices.

A Decline in the U.S. Dollar and/or Other Major World Currencies

After World War II, the Bretton Woods accord granted that the U.S. Dollar would become the global reserve currency. At that time, the dollar was redeemable in gold and was the strongest currency in the world. Things were great until 1971 when President Nixon signed the laws that ended the convertibility of the dollars to gold. That was effectively the death sentence for the U.S. dollar. Now the government was free to print all the paper dollars they wanted without having to worry about having the physical gold to back them up. It was like giving the government a blank checkbook, with unlimited checks. At that time, the dollar became a true fiat currency. Fiat currency is a currency that's backed by people's trust and faith in the government, and not backed by gold or silver. I don't know about you, but I know a lot of people who are starting to lose their trust and faith in the U.S. government.

Over the last 100 years, the value of the U.S. dollar has dropped dramatically. Ron Paul was recently quoted as saying; _"If you look at the record of the value of the dollar since the Fed's been in existence, we have about a 2-cent dollar. Six thousand years of history shows that gold always retains value and paper always self-destructs."_ Even Thomas Jefferson once wrote; _"Paper Money has been abused in every country it has been permitted."_ 100 years ago an ounce of gold was worth about $18.92. As I am writing this, an ounce of gold is worth about $1,400.

Any educated and honest person will have to admit that at the rate we are printing greenbacks, eventually there is no way the dollar can do anything but decline in value. Our government is clearly out of control and printing and spending money as if there were no concerns. If the dollar declines in the future, history usually dictates that gold and silver prices will eventually rise. In modern times, we have NEVER had the world's reserve currency hyper-inflate or collapse. If either of these scenarios were to happen, no one really knows how the global impact would play out, but some experts predict that the effects would be terrible.

Some economists have likened what's happening in our economy to a giant Ponzi scheme. The U.S. Government is spending way more than they are taking in. In order to keep funding the government's limitless appetite for spending, the Federal Reserve has to create more money for the U.S. Treasury to pay its bills, and the government then has to then pay back the Federal Reserve with IOUs that include interest. The more the government spends, the more they have to borrow and the vicious cycle continues and our nation's debt gets larger every day. With our 17 trillion dollar debt, it is clearly spinning out of control. In this type of environment, it seems like a safe bet to at least put some portion of your assets into physical gold and silver. Former Fed Chairman Alan Greenspan wrote, _"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."_

Sharpening Rising Interest Rates

Similar to inflation, gold and silver prices tend to increase as interest rates rise, although not always. A popular belief among some investors is that hikes in short-term interest rates have a tendency to halt inflation. Historically this scenario has not played out. Higher interest rates are inflationary because they raise the cost of borrowing and the overall cost of living. The Federal Reserve can't keep interest artificially low forever, and they have no way to go but up. At some point interest rates will have to go up and when they do, they will likely cause the metals' prices to go up as well.

Banking Crises

Global banks are a critical component to our world economy. Our global economy has become so connected, when a major World Bank fails, it sends shock waves throughout the world. When banks fail, people lose faith in the system and often turn to the safety and security that gold and silver offer.

What Percentage of Metals Is Right for Your Portfolio

Deciding how much of your investment portfolio to put towards precious metals is always an interesting question. It always comes down to personal preference. There is no one percentage that is right for everyone. To give you some guidelines or averages, I would say that the typical range is from 5% to 20%. I do know some investment advisors who work with high net worth clients and lately they have been advising clients to place as much as 40% of their assets into physical precious metals. For many, that would be somewhat extreme, but this gives you an idea of a range of investible assets that some investors are putting into precious metals.

It's important to first know your reasons and motivations for investing in precious metals and of course, your investment timelines. Precious metals' can experience some pretty intense price swings. I would not look at metals as a short-term investment. For most people, it would be good to have at least a 3 to 5 year planned hold time or more. The great news is, as discussed earlier, gold and silver are very liquid so it's easy to ramp your percentage of metal holdings up or down as needed. My suggestion is not to get hung up on the percentage you plan to invest in metals. If you don't own any precious metals, buy some and see how it makes you feel. It's much more important that you get started and do something; you can always adjust as you go along. Don't get stuck with the paralysis of analysis.

Risk Tolerance

As you know, investing is a very personal thing. Everyone's needs, wants, investment time frame, tolerances' for risk and price changes are different. The important thing to know is that investing in precious metals is not always a steady, smooth-sailing program. The market occasionally experiences some pretty wild price swings within relatively short periods of time. Sometimes investing in metals can be like the white-knuckle express.

Metals' prices are driven by a large number of influences such as: global usage, huge purchases and/or sales made by countries, banks, investment firms and wealthy individuals, global unrest, world events, worry about currency stability and changes in the value of the U.S. dollar, metals' supply forecasts, changes in government policies, interest rate changes, wars, terrorist events and much more. As you can see, most of these factors are totally unpredictable, at least in the short-term.

In my opinion, if you have somewhat of a long-term outlook, you should simply not worry about the short-term price swings. There will always be unforeseen events that will cause metals' prices to spike one way or the other. By far, the most successful investors I know simply don't worry about all of the "noise" of the short-term moves. Most of them simply accumulate metals on a consistent basis. When the price drops, they use that as a buying opportunity to increase their purchases. When prices unexpectedly spike up, they often take advantage of the gift the market has handed them and at least take some profits on their windfall gains by selling a portion of their metals, and then buy back in when the price takes another dip. If you have the right mindset about it, instead of being stressed out about the short-term moves, you can actually relax and enjoy trading in and out on big market moves. It's all in how you look at it really. However, if you have short-term investment needs or if your personality cannot deal with these types of price swings, then perhaps metals are not a good fit for you.

The last point I will make on this is, if the worst-case economic scenario were to happen to our currency, our banking system and the entire economy, there will be thousands of investors who will look back and say, _"Thank God I invested in precious metals,"_ and it's very likely that when looking back at those short-term price swings, they will look very minor indeed.

Gold vs. Silver - Which Is the Best Investment?

This is the classic question that always comes up, "Is gold a better investment than silver, or does silver trump gold?" As you may guess, this is a personal decision and everyone has their own preferences. To help you decide which metal is best for you, let's take a look at some facts.

Let's first look at some of the fundamentals of gold. Gold is the only form of money that has never failed in the 5,000 year history of its use, which you have to admit, is a pretty darn good track record. It can be a totally private form of investment and it's also a very portable form of wealth. In times of crisis, gold has been the safest go-to investment and it also has a great potential to increase in price. It's used as money, jewelry and has many industrial uses as well.

Silver has some excellent fundamentals as well. Currently there's more than five times more above-ground, available gold than there is silver. Since 1950 the total inventory of gold has gone from 1 billion ounces to over 5 billion ounces. Remarkably, during that same time period silver has gone from an inventory of 10 billion ounces to around 1 billion ounces. Silver is often called a miracle metal and is second only to oil as the world's most useful product. It is the world's single most electrically and thermally conductive element, and it's also the most reflective metal on planet earth. There are no known substitutes for silver. Thus silver has far more industrial uses than gold. Silver is used in every cell phone, every computer, cars, solar panels, deodorants, band aids, water purifiers, passports, appliances, jewelry, nanotechnology, clothes and many, many more products. Silver's use is rising every day and currently there is a supply/demand deficit that is only being made up by recycled silver.

Here's a fascinating example. The average cell phone has about $.22 worth of silver in it. There were approximately 6 billion mobile subscribers in 2011-2012. That works out to about a billion dollars' worth of silver just in cell phones alone. Since it is so difficult and expensive to reclaim the $.22 worth of silver in each cell phone, most of that silver is simply used up and never recycled, thus creating a continuous demand for new silver. The same is true for silver in the many other devices in which it is used.

So in terms of supply and demand, silver is a better bet. In terms of storage and size, gold is a logical choice. Now, to examine this further, let's take a look at the silver/gold ratio.

Silver / Gold Ratio

The silver/gold ratio is a great way to measure historical price differences between the two metals. Going back thousands of years, the average historical price ratio between silver and gold has been 16 to 1. (Some research shows that it is a 12 to 1 ratio if you go back far enough in history, but we will stay with the more conservative 16:1 ratio.) What this means is that it would take 16 ounces of silver to equal the price of one ounce of gold. As I am writing this, the ratio now stands at about 58 to 1, meaning that it now takes 58 ounces of silver to equal the price of one ounce of gold. If the ratio were to get back to its historical average of 16 to 1, the price of silver would have to increase over 360%.

Another aspect to consider is that silver is often called poor man's gold. The reason for this is since gold costs so much more, smaller investors cannot afford to buy gold, thus they turn to the more affordable silver. There are huge numbers of these smaller investors who are now turning to silver in a big way. A very interesting way to view what's happening now is to look at the actual gold and silver sales made by the U.S. Mint. The two most popular coins in the world are the 1oz gold and silver Eagle coins produced by the U.S. Mint. In 1986, the U.S. Congress passed a law that required the U.S. Mint to produce pure gold and silver coins that could be purchased by the citizens and thus give them a convenient and trusted way to purchase bullion. Very importantly, the U.S. Government guarantees both the weight and the purity of these highly desirable coins.

When you look at the purchasing volumes of these coins, it will give you a good insight into how metals investors are feeling. In April of 2013 the U.S. mint sold 19.5 Silver Eagle coins for every one Gold Eagle coin they sold. In July of 2013 that ratio jumped to 80 to 1. In August of 2013 it soared off the charts to 402 to 1. That's 402 Silver Eagle 1oz coins purchased for every one Gold Eagle 1oz coin purchased. Silver Eagle sales hit a new all-time record in 2013 and beat the previous record set in 2011 of nearly 40 million ounces. It is estimated that Silver Eagle sales will reach 45 to 47+ million ounces sold in 2013. That would be a 12% to 19% increase over the 2011 previous record.

When I see numbers like this, I always stop and ask myself what's driving these extraordinary actions. Why are so many people buying so many Silver Eagles right now? Certainly the price decline in the first half of 2013 affected metals' sales but I believe that an increasing number of people are losing faith in our currency and in our government's ability to successfully navigate us through these unprecedented economic times. Investors are taking matters into their own hands. They are taking some of their little green pieces of paper, (U.S. fiat Dollars), and converting them into something REAL - something that has a proven, lasting value and something that is in great demand and short supply. Gold and silver has a great likelihood to rise in value in the coming years.

You can find much more information on this subject on our website. If you can afford it, I think it's a great idea to purchase some gold and silver. You will just need to decide what percentage of each metal you want to start with. If your funds are limited, it's probably best to start with silver. Remember, don't stress about it. If you make your purchases and then change your mind, it is really easy to sell one metal and buy more of the other. It's not a final decision. The key is to get started. Get in the game. Get something, and then you can always add to it.

Numismatic Coins - What's the Real Story?

There is much confusion about numismatic coins. Numismatic coins are simply precious metals coins whose price depends more on the rarity, history, condition, date, mint marks, etc., than the value of the bullion content of the coin. These are often called graded and collectable coins. Typically each coin comes in a sealed, clear, hard plastic case, called a slab, and it's marked with all of the details about the coin and usually has a bar code and hologram on it. I must let you know that there's a lot of misinformation and trumped-up controversy over the viability of investing in numismatic coins. Like so many other things in life, investing in these coins can be good or bad, depending on your approach. Additionally, a lot of what you will read about numismatic coins is very bias based upon who is writing it.

Between 1795 and 1933, the U.S. minted gold coins for use as legal tender. This practice came to an abrupt halt in 1933 when President Franklin D. Roosevelt ordered an end to the minting and hoarding of gold coins. He issued an executive order for the government to confiscate all privately held gold, thereby making it illegal for Americans to own gold bullion. The government did specifically exempt the confiscation of _"coins with a recognized special value to collectors of rare and unusual coins."_ Even though it's estimated that only about 25% of the gold bullion was actually turned into the government, and there's no record of any citizens being convicted for not turning in their gold, only a relatively small number of good quality gold coins from that time period have survived the fate of being melted in the smelting pots.

Two important elements of numismatic coin investing are their value/appreciation likelihood and their unlikelihood of being confiscated by the government in the future. Let's review these two issues one at a time.

The Confiscation Issue

I must admit that over the decades I have not been a big _"confiscation"_ believer. After all, in 1933 when FDR signed the confiscation order, the United States was on the gold standard. Our U.S. dollars were backed by actual physical gold, and at that time, the government needed more gold to back its currency. Since 1971 when President Nixon took us off the gold standard, the central banks have been free to print little, green fiat paper dollars to their heart's desire. (Shockingly, since that time and since our currency has not been backed by gold, the dollar has lost 82% of its purchasing power. Since 1913 the dollar has lost 96% of its purchasing power.) A widely-accepted conclusion has been that since the dollar is no longer backed by gold, the government does not have the need to confiscate our gold again.

Many people now feel that the winds are changing. In 1954 the Treasury refined their definition of 'exempt coins' (exempt from confiscation) but in the 1970s when gold regulation was repealed, that definition ceased to exist. Since the time of the repeal, the issue of exemption has consistently appeared on the Treasury's Agenda of Regulatory Actions. However, to date, no new definition has become law. The bothersome issue is the fact that it has come up at all. If the government is not thinking about confiscation, then why would this issue have surfaced?

Over the years, Congress has given the President broad powers to take many actions if there is a _"declared national emergency."_ In 1933 the majority of U.S. citizens was suffering greatly due to the decimated economy, and most blamed the rich for their plight. (Does this sound familiar?) The majority of the citizens at that time did not own any gold so they had no problem sitting back and letting their government take the gold from all of those evil, rich people. After all, they assumed that somehow they would be better off if the government took the gold from those greedy, rich people who probably caused all of the economic problems in the first place.

The Trading with the Enemy Act of 1917, which grants the President exceptional powers, is still on the books today. (This is the law that allowed FDR to push the Emergency Banking Relief Act through Congress, which gave him the power to _"investigate, regulate, or prohibit the importing, exporting, hoarding, melting or earmarking of gold"_ in times of national emergency. Less than a month later, FDR issued Executive Order 6102, to confiscate the gold and the precedent was then set.)

Today, the government's gold reserves would only cover a tiny fraction of the debt that they have created and they are in desperate need of huge sums of capital to maintain their power. It's not hard to imagine that the privately held gold and silver reserves of its citizens and corporations have got to look pretty tempting to them. (Yes, some think that the capital need is so great that they would not only try to confiscate the gold, but the silver as well.) After all, the laws they would need to do this are already in place.

You can draw your own assumptions about any possible confiscation that may or may not happen in the future. What we do know for sure is that the government has confiscated gold bullion in the past. There is also a precedence of the government allowing its citizens to keep their collectable coins. What may happen in the future is anybody's guess.

Value and Appreciation of Numismatic Coins

Years ago the Joint Committee on Taxation of the House and Senate commissioned a study to be conducted by Raymond E. Lombra, Professor of Economics at Penn State University. Mr. Lombra's study was so convincing that it prompted the government to accept gold bullion as an acceptable asset in IRAs. This study also revealed that over the 33 year period that it covered, the average return on rare (high quality, graded and collectable gold coins) was 50% higher than that of bullion. Between 1979 and 2010 higher quality collectable gold coins actually performed slightly better than stocks. However, when correlated with inflation over that same time period, high quality collectable gold coins produced over 3 times more than stocks and more than 2.5 times more than gold bullion. The study found that with collectable coins, it's the quality that counts. Today, more currency can be printed in massive quantities with the push of a button. Rare, high quality collectable coins cannot be created out of thin air; you can't just go and make more of them. When you compare the available quantity of high quality, collectable/numismatic coins to the ever-increasing world population and the ever-increasing quantity of paper fiat dollars, it's not farfetched to think there is a likelihood that high quality collectible coins could continue to climb in value.

According to the CU 3000 Index (www.PCGS.com) which is considered by many to be a standard of numismatic coin performance, if you had invested $1,000 into a "basket" of gold collectable coins in 1970, its recent value would have been over $59,000. A $1,000 invested in the Dow in 1970 would have recently been worth about $13,000 and the same amount invested in gold bullion during that same time period would be worth about $24,000.

All investments carry risk and there is certainly no guarantee that any numismatic coin will increase in value. However, when you factor in the possibility of confiscation and then look at the historical performance of high quality numismatic coins, it does make a pretty good case to at least consider holding a percentage of them in your precious metals portfolio.

What Are the Best Forms of Gold and/or Silver to Buy?

Be aware that this too is a very hot issue and there is no one "right" answer to the types of metals you should hold. If you ask 100 different people what you should own, you will get a 100 different answers. A key determining factor is how much money you are going to invest into precious metals. Obviously if you can only invest a small amount, your options and ability to diversify will be limited. The more money you have to invest, the greater your options and the more you should diversify your holdings.

If you are just starting out or working to build up your metals portfolio, I don't think you can go wrong with the American Eagle coins or the Canadian Maple Leaf coins. Both coins are available in both gold and silver. These outstanding coins are two of the most widely recognized, trusted and respected coins in the world. Both governments respectively guarantee the weight and purity of these coins. They are easy to buy, and easy to sell. Both coins are approved to be held in a precious metals IRA. Very importantly, you can buy all of the gold and silver American Eagle coins, and the silver Canadian Maple Leaf coins you want, and there is absolutely no reporting of it, neither when you buy or when you sell. The gold Canadian Maple Leaf coins however are reportable when you sell them in certain quantities. If you buy from a broker/dealer who buys the coins from a trusted "mint direct" wholesaler, you are virtually guaranteed to always get excellent quality coins that come directly from the government mint and thus there's no worry about the possibility of receiving counterfeit coins.

If hyperinflation is a concern of yours or if you believe the U.S. dollar may someday crash or become greatly devalued, and/or if you would like to maintain a quick and easy medium of barter exchange, you may want to check out buying some Junk Silver. These are pre-1965, 90% silver U.S. coins. They are U.S. legal tender but due to their silver content, they are worth much more than the face value of the coin. For example, at the time of this writing, a pre-1965 90% silver quarter is not worth $.25; instead it is worth about $4.40 due to its sliver content.

If you remember the long gas lines back in the Jimmy Carter high-inflation days, you may remember that many smart gas station owners would let people cut to the front of the line and give them discount gas prices if they could pay in 90% silver coins. After all, at that time silver spiked to almost $55 an ounce. If in the future you find yourself in a position where you need to trade, these coins make an excellent and convenient solution. The downside is that bags of junk silver are heavy, bulky and will take up some space, so be aware of that.

You can purchase junk silver in bags that are denominated by the face value of the coins in the bag. Most bags come in $100, $250, $500, $1,000 face value amounts. Face value means that if you were to count out the coins in the bag, based on the amount stamped on the face of the coin, (10 cents, 25 cents, etc.), the total amount contained would equal the face value of the bag. Keep in mind, that while the face value of a $1,000 bag is $1,000, at the time of this writing, it would cost you about $21,000 to buy a $1,000 face value bag.

In my opinion, once you establish your core holdings of Eagles and/or Maple Leafs, (and possibly some bags of junk silver), it's fine to start buying some bars. If buying silver, I would start with 10 ounce bars and then move to 100 ounce bars. On the plus side, bars usually carry a lower premium markup amount than most coins do, so you can get more metals for your buck. They take up a bit less storage space than coins do and are easy to stack. Be aware that bars are not near as divisible as coins, so if you wanted to only sell a few ounces, you would not be able to do that with a bar. Obviously when you buy and sell bars, it's all or nothing.

With bars, you have an option of buying name brand bars or generic bars. Usually the generic bars cost a little less than the name brand bars, just like anything else. Keep in mind that at some point, you will likely want to sell some of your bars. The concern is you just don't know when that will be or to whom you will be selling at that time. In my personal opinion, I think it's best to go with a solid, name brand bar like Johnson Matthey or Engelhard, etc. If the bar is from a brand name, you will be able to see their name stamped right on the bar. Depending on who you sell to, market conditions and some other unknown factors, you may find it easier to sell a brand-named bar than a generic bar. Also, some purchasers may require you to have the bar tested to determine if it is genuine or perhaps counterfeit. To me, paying a little bit more for a trusted name brand bar is worth it.

To answer the question _"What ratio of the various metals options should I own?"_ I have laid out two scenarios below. There are no hard and fast rules here but here is my own personal preference.

$100K to $200K Investment

• 50% in silver American Eagles and/or silver Canadian Maple Leafs

• 10% in junk silver (optional)

• 10% in high quality numismatic coins

• 15% in 10 oz. bars

• 15% in 100 oz. bars.

$20K to 50K Investment

• **100% Silver American Eagles and/or silver Canadian Maple Leafs**

As far as gold goes, after I accumulate approximately $100k in silver, I might have one ounce of gold for every 50 to 100 ounces of silver. I would start off with American Eagle gold coins or Canadian Maple Leaf gold coins and then after I had a sizable amount of them, I would begin to diversify into gold bars.

You can purchase American Gold Eagle coins and Canadian Gold Maple Leaf coins in the following sizes: 1oz, 1/2oz, 1/4oz and 1/10 oz. Be sure to do the math on these before you buy. Usually the lower the weight, the higher the premium markup is. It takes much more labor to produce 10, 1/10oz coins than it does to produce 1, 1oz coin. Thus you will often pay a good bit more to purchase 10, 1/10oz coins than you will to purchase 1, 1oz coin. The same is generally true for bars, the larger size the bar, the lower the premium because larger bars are less expensive to manufacture on a per ounce basis.

What is the Best Way to Buy Precious Metals?

Generally speaking there are only a handful of different ways to purchase bullion and numismatic coins. You can buy from local shops and dealers, online broker/dealers, or from places like eBay®, Craig's List, newspapers, flea markets, etc. While there are exceptions, here are the general pros and cons of buying from each of these various options.

Buying Locally vs. Buying Online

When buying locally you don't have to pay the shipping and insurance fees and you don't have to wait for your shipment to arrive. It's generally cash and carry, so it makes buying locally quick and easy. When you buy online, depending on the amount you order, you may have to pay shipping and insurance to receive your order, if you do not qualify for free shipping. If you are dealing with a reputable, fairly priced broker/dealer, you will find that in real life, the shipping and insurance fees are very reasonable and generally very small.

When you do buy online, you will have to wait for your order to arrive. The lead times vary somewhat by broker/dealer but much more significant, they vary by the current availability of the actual metals. Due to the record-breaking demand, the U.S. Mint ran out of Silver Eagle coins three times in 2013. If the mint is on backorder, it's hard to get your metals until the mint produces them. It's important to note here that most experts agree that due to the relatively low supply of silver and the soaring demand, in the future we will continue to see longer and longer lead-times to receive metals and there will be continued outages and delays by the mint. That's just the reality of the marketplace and eventually it will likely be reflected in higher prices. As long as you are buying from a reputable broker/dealer, you can rest assured that you will always receive your purchases. If your local dealer buys from the giant wholesalers, they too will be affected by backorders, shortages and delays just as the online guys are.

A very important issue is, generally speaking, local dealers have a much smaller client base than most online dealers and thus they are not able to offer anywhere near the selection that online companies can. Since metals are commodities, bullion generally has a very low markup percentage, so it's very hard for a local dealer to inventory a large variety and deep inventory something that is so expensive and carries a relatively low markup. Often local dealers will sell you metals that they just purchased from the last guy who came in to sell his metals, so you often don't get first quality, high-quality, mint-direct metals and you often have a very limited selection to choose from.

From a pricing standpoint, most local dealers have much higher overhead costs, a smaller customer base and a smaller volume of sales. When broker/dealers purchase from the giant mint-direct wholesalers, the wholesalers offer volume discount pricing. So the more you buy from these giant wholesalers, the lower prices you get. Unfortunately the little guy is always going to be at a price disadvantage to the larger, high-volume companies. It's not unusual to find margins charged by some local dealers that are two to three times what is typically charged by online dealers. Obviously there are exceptions and it is always wise to shop around for the best prices, terms and service.

It's very important to keep in mind that many broker/dealers make the majority of their profits on hidden fees and up-sales. Be aware that many of them will lure you in with very low prices on core items like Silver Eagles. The price looks great so investors are eager to jump in. The problem comes when you go to check out. All of these previously hidden fees start popping up left and right. By the time you get to the final checkout, they have deceptively added a ton of hidden fees. Had you known that from the beginning, you probably would have never considered buying from that dealer. Now, the metals are in your shopping cart, you have locked in your price, you have jumped through all of the hoops, and many shoppers just say, _"Oh the heck with it"_ and complete the purchase. You don't have to settle for that. Do your homework and make sure you are aware of ALL of the fees and costs before you commit to buy.

Don't forget about sales tax. If you are shopping locally and if you're located in a state that charges sales tax on precious metals, you must pay the prevailing tax percentage on your metals purchases. Sales tax rates and laws vary by state. If your state charges sales tax on metals, this can have a dramatic impact on your total cost of the metals. I would strongly urge you to shop online if your state charges sales tax. Why would you just throw that money away if you don't have to?

Lastly, it's important to keep this in mind. Local stores often buy from their walk-in customers and then turn around and sell those items to the next buyer who walks in. Many of the local shops do not have the instruments or the expertise to inspect and insure the quality and authenticity of the items. Most of the time, when you buy online, you receive items that come straight from the mints, and that's the best single way to insure legitimacy and insure that you are receiving the actual metal and not a counterfeit item.

As far as shopping on eBay®, Craig's List, flea markets, etc., my suggestion is to avoid them. If you don't receive the item you purchased, or if you receive a different item than what you thought you were purchasing, or if you were to receive a counterfeit item, you usually have little recourse and it's a giant pain. A big percentage of the counterfeit precious metals that are introduced into the marketplace are sold through these outlets. You often have less sophisticated shoppers who shop for metals in these ways and sellers know it is very difficult for you to track them down to recover your investment. In my opinion these options are good for buying household items and the like, but not for something as important as investments that you will be depending on.

Dollar Cost Averaging

Several times a month I receive calls from people who are ready to _'go all in'_ on gold and silver. The stories are always very similar. They just discovered for the first time what's going on with the devaluation of the dollar and the light bulb in their head just came on about gold and silver. They are tremendously excited about it, and want to buy all they can right now! While I applaud the fact that they did finally realize the game that's being played and the importance of owning some physical gold and silver, I usually suggest that they relax and use the tried and true method of dollar cost averaging, just like you would do when investing in traditional _"_ paper _"_ investments.

The concept is solid. No one in the world can accurately predict the short-term price moves of the metals. Even if you did a complete study of the fundamentals, trends, supply/demand analysis and any other methodology you could imagine, the market is always subject to manipulation by the big players so they can always affect the short-term moves. So if you were to try and guess the perfect day and time to _'go all in'_ and make your big purchase, the odds are astronomical that you would pick the perfect time.

I always suggest that investors determine the amount they want to invest in metals and decide on a general phase-in time period that works for them. Then, you can generally divide your purchases up and make them over a period of time, thereby buying some at higher prices and some at lower prices. In most cases this strategy will beat the _'go all in right now strategy'._ The smart way to do it is to keep a keen eye on the markets. Be willing to adjust your estimated purchase time periods and amounts slightly, depending on the current price trends. If you look at a chart and silver has been in a downward trend, you may want to watch it and see if it starts to bottom out or reverse its trend and then make your next purchase. Of course you won't always be right, but if you space out your purchases and make minor-buy timing adjustments along the way as the market swings up or down, you should increase your odds of having an overall lower cost per ounce than you would by making one big purchase.

Keep in mind that occasionally there will be some rather dramatic market moves where it may become pretty obvious that it is a great time to step up your buy or sell amounts. Sometimes the market hands you a gift and it becomes clear that it is an exceptional time to buy or sell. You still may not want to go all in at one time, but just increase your purchase amounts from your previously planned amounts. This is also a wise method to use when selling your metals. You do the exact same thing, for the exact same reasons, but you are looking for price up-ticks to sell on.

Also, sometimes the market will run up substantially and present a great time to sell and take some short-term profits, and then buy back in again after the market finds its base. Many people find it fun and interesting to watch the markets and look for great opportunities as they present themselves. However, if this is not your thing, you can be sure that there are many, many buy-and-hold metals investors out there and that's a perfectly fine way to go if it works for you. I believe it's more important that you make the wise decision to own some physical metals, than it is that you timed your purchases correctly.

Here's the really important thing to keep in mind. If several years from now gold and silver reach the price targets that many forecasters are predicting, you will look back and many of the price movements today will look insignificant. So while we can't predict the short-term price changes, it's not unlikely to assume that the metals will continue to increase in value as the dollar continues to decline in value.

Precious Metals for IRAs and 401Ks

It's amazing that there are still so many people who have no idea that they can put physical gold and silver into their IRA, SEP, Roth and/or 401k. It's true. This is perfectly legal and allowed in the United States, IF you do it correctly. However, it needs to be a special kind of IRA. If your IRA or 401K is with any of the giant, main-stream brokerage companies, they are not set up for this and do not allow you to invest in physical precious metals. It's simply not possible to set it up through them.

If you call up your IRA custodian or the company who maintains your IRA and/or 401k and tell them you want to buy physical precious metals with your investment funds, they will most likely do everything they can to talk you out of it. They will likely tell you that you can _"achieve the same thing"_ by simply investing in precious metals ETFs, mutual funds, stocks, etc. Do you know why they will tell you that? I bet you do. Actually, there are two reasons. The first reason is they do not have the ability to sell you physical precious metals and if you end up buying precious metals, they will not make any money on them. Reason two is if you buy their "paper" forms of gold and silver, they will make money on those when you buy and sell them. It's really that simple. Follow the money; it leads you to the motivations.

Please keep this in mind. You MUST do this correctly in order to avoid finding yourself in a big mess with the IRS and possibly losing your IRA tax exempt status and having to pay all kinds of fees and penalties. First off, you need to find an IRA custodian who handles investments in physical precious metals, and there are not a lot of them. In most cases you will have to open a separate IRA for your precious metals, fill out a lot of forms, pay some fees, etc. The IRS will not allow you to move metals that you already own into your new precious metals IRA, so you will need to make new metals purchases for this. Also, you are not allowed to have physical possession of _most_ types of metals that can be held in your IRA account. Most metals are typically held by a custodian or a depository - more on this in a moment.

Mainly there are two different types of self-directed IRA platforms, the **Trust model** and the **Self-Managed model**. The huge majority of "gold IRA" programs that you see advertised are based on the Trust model. I'm sure you already guessed the reason why these guys spend so much on advertising. You got it... it's because they are very profitable to them. Some of you may be saying, _"But how can they make any money on this because many of them offer to set up a gold IRA for you for $50 to several hundred dollars and yes, some are even offering to do this for free. Why would they spend so much money advertising if they hardly make any money on it?"_ Well, the **Trust model** allows the companies to charge fees. Here are some examples: managerial fees, transaction fees, annual asset fees, wire fees, entrance and exit fees, purchase and sell fees, holding fees and much more.

It's not uncommon to have to pay thousands of dollars in fees, PER YEAR, on your _"_ free _"_ gold IRA. Plus, in addition to that, many of these Trust model companies dictate **where** **you buy** your metals from and dictate **where you store** your metals. Guess what? They often earn fees when you buy your metals and every month when you store your metals. If you like paying never-ending fees, you will love the Trust model.

The Self-Directed IRA based on the **Self-Managed model** offers much, much more flexibility. Plus, there are no managerial or transaction fees. This model allows you to purchase your metals from anyone you choose and you can store your metals at any licensed depository you wish. This allows you the option to shop around and hopefully find lower prices. You can set up a Self-Managed model IRA yourself, but there's lots of paperwork and it is pretty complicated. Unless you are an expert in this area, I would not recommend trying to go it alone.

Most investors opt to find a company who specializes in this, and who knows the forms, the laws, and all of the dos and don'ts, inside and out. It's not unusual to spend several thousand dollars to get a Self-Managed IRA set up correctly. However, I have found that most investors end up paying more in fees the first year, or in the first few years of a Trust model IRA than they will spend getting a Self-Managed IRA set up. After the Self-Managed IRA is set up...the ongoing fees are very, very small. Plus, you can take the fees to set up your Self-Managed IRA out of your IRA funds if you wish, so that your out-of-pocket funds are minimal. Or, there is also an option to pay the fees out-of-pocket so you do not deplete funds from your IRA.

Another thing I totally love about the Self-Managed IRA model is the tremendous flexibility it offers. After you buy as much gold and silver as you believe complete your portfolio, this model allows you to invest in things like: residential and commercial real estate, raw land, trust deeds, mortgages, private notes and placements, LLCs, foreclosure property, receivables, stocks, bonds, mutual funds, currency, futures, commercial paper and much, much more. This puts the power and flexibility into your hands and allows you to invest in the best opportunities and in what you know best. You can't believe how easy it is. When you want to buy an approved asset in your IRA, you simply write a check. That's it. With a Self-Managed IRA, you can manage it yourself.

If you become a member of the Investor Advisory Network, you will have direct access to some of the best and most diverse investment options and advisors available. The beautiful part is, if you set up a Self-Managed IRA, you will be able to easily use your IRA funds for the majority of the investment options available on their website.

Many investors these days want to invest in gold and silver but they are cash poor. They don't have a lot of liquid money sitting around to buy many metals with. However, most people do have a sizable IRA and/or 401k that they could buy the precious metals they want, if they structure a new precious metals IRA correctly.

What Types of Precious Metals Are Allowed In a Self-Directed IRA?

The current laws dictate that the gold must be .9950% pure gold and the silver must be .9990% pure silver, and both platinum and palladium must be .9995 pure to qualify. If you prefer to buy bullion bars they must be fabricated by COMEX, NYMEX, or ISO 9000-approved refiners. Some examples of acceptable forms of gold that's allowed to be held in an IRA are: American Eagle coins, Australian Kangaroo or Nugget coins, Australian Luna series coins, Austrian Philharmonic coins, British Britannias (2013 and newer), Canadian Maple Leaf coins, Chinese Panda coins, Credit Suisse and PAMP Suisse bars, U.S. Buffalo bullion coins, and various bars and rounds that are .995 pure or more.

Some examples of acceptable forms of silver that is allowed to be held in an IRA are: American Eagle coins, America The Beautiful coins, Australian Kookaburra coins, Austrian Vienna Philharmonic coins, British Britannia coins (2013 and newer), Canadian Maple leaf coins, Chinese Panda coins, Mexican Libertad coins, and various bars and rounds that are .999 pure or more.

For Platinum, American Eagle coins, Australian Koala coins, Canadian Maple Leaf coins and various bars of .9995% purity are acceptable. For Palladium, Canadian Maple Leaf coins and various bars of .9995% purity are acceptable.

Can You Really Store Your IRA Gold and Silver At Home?

There seems to be quite a bit of confusion over this question _; "Does the government really allow individuals to store the metals in their own Self-Managed IRA at their home or any place they choose?"_ This question is addressed in Section 408(m) (3) (B) of the U.S. Tax code. The code makes a distinction between what they term bullion and coins. For **bullion** , it must have a fineness level of .9950% for gold and .9990% for silver and the bullion must come from a COMEX, NYMEX or an approved refiner.

Section 408(m) (3) (A) contains the rules for **coins**. It says that most government manufactured gold and silver coins are acceptable. Popular examples include American Eagles, Canadian Maple Leafs, and Australian Nuggets. Section 408(m) (3) (B) of the Tax code states that **bullion** must be held "in the physical possession of a trustee". This is usually a specialized custodian and/or depository. For **coins** , the tax code has no such requirements. The code does not place any restrictions whatsoever on the storage requirements for gold and silver coins. Based on the U.S. tax law, your IRA can purchase gold and silver coins and you can personally store them anywhere you wish.

For many people, this news comes as a shock and a surprise. There are a few reasons for this. Many people in the business are simply not familiar with the IRS code. Another motivation is most people who get paid a fee for storing your metals will usually not go out of their way to let you know the details of the tax code that allow you to store your own metals. So at least you have a choice when it comes to storing coins for your IRA. You can either store them with a custodian or in a vault/depository, or you can store them in any place you believe safe. For many, having this option is a huge plus both cost-wise and for their own piece of mind.

Another really important benefit that you get when using the Self-Managed IRA model is that there is NO REPORTING when you buy precious metals. Plus, all your custodian has to do is annually report the value of your IRA (that you report to them), but they DO NOT REPORT what types of assets you have in your self-managed IRA nor where they are stored. These days many people find this to be a gigantic plus, because you can now have a totally private precious metals IRA.

How to Choose the Best Company to Set Up Your Precious Metals IRA?

As with everything, it always pays to shop around and do your research to find the company that is right for you. Just like we have said so many times before, always remember to get all of your questions answered upfront. Unfortunately, as many companies do not tell you about all of their fees if you don't ask, you will likely find out the hard way.

Often I get asked who I used to set up my self-directed checkbook control IRA. As you may imagine, I did tons and tons of research before I finally decided on the company to use, and ended up getting a really good education in the process. The company I chose and whom I am delighted with, is **Easy IRA Solutions**. Not surprisingly, they are an **IAN Prime Advisor** , and you can find out more about them in this book. I trust my IRA to them and I wholeheartedly recommend them.

Pitfalls to Avoid When Buying Gold and Silver

Below are some of the most common pitfalls to avoid when investing in gold and silver.

a) Buying from dishonest dealers. You may have heard the expression, _"You can't make a good deal with a bad person."_ This is very true when buying metals. It's estimated that there are over 10,000 metals broker dealers in the U.S. alone. The majority of them are very reputable and honest people, however; rest assured that there are still quite a few 'wolves in sheep's clothing' dealers out there. They target new and inexperienced investors and take advantage of their inexperience. There are practically an unlimited number of games that dealers can play to insure that they win and you don't. The best way to overcome this is to educate yourself, just like you are doing right now by reading this book. The more you know about gold and silver, the smarter shopper and buyer you will become.

That's why the Investor Advisory Network is such an excellent resource for investors. I truly wish IAN was available when I starting investing. I could have saved myself many tens of thousands of dollars and a great deal of heartache and stress.

b) If the price seems too good to be true, then you can be sure that it is! The metals market is global. These days anyone can check the spot price of gold and silver from a smart phone, computer, TV or just about anywhere. Since the beginning of time, humans have always been easy to fool when it comes to amazing deals. They seem to fall for the same scams century after century. As liquid as the metals market is, there is absolutely no reason for anyone to have to sell you metals at way below market prices... none!

The scammers always have a compelling story to justify why their super-low price is available right now, and only for you, if you are lucky enough and can act fast. Trust me on this. This kind of deal does not exist. Of course you can find an occasional seller on eBay® or Craig's List who does not know the value of what they have and/or they are in a financial crisis and are offering their metals at lower prices. These opportunities are few and far between and certainly not worth most people's time to seek out, unless it's a hobby for you. Plus, your odds of buying counterfeit items are much higher when buying from these sources. Just remember this; if a gold and silver deal seems too good to be true... it is.

c) Counterfeit metals. Reports of counterfeit precious metals have increased over 2,000% in just the past two years. There are two main reasons for this. As metals prices rise, it becomes more profitable for counterfeiters to enter the marketplace. In addition to that, the technology has evolved to the point where they now have machines that can do almost perfect jobs counterfeiting metals. It used to be that most of the counterfeit items were poor quality and was limited to mostly bars, because it was much easier to hollow them out, fill them with inferior metals and then cover up the holes with the real metal. Now, the machines are so precise that they do an incredible job of counterfeiting gold and silver coins, bars and anything you can imagine. In fact, some of them are now starting to counterfeit numismatic coins. They are so good that these days even some of the experts are fooled.

For the average person, it is not feasible to have all the instruments and the specialized knowledge to be able to tell the difference between the real thing and a counterfeit. So, what should the average person do to avoid spending their hard-earned money on worthless counterfeit metals? The easiest way to do this is to simply purchase from reputable dealers, who buy from mint-direct wholesales. That means the mints manufacture the items, they either sell directly to the broker/dealer, or they sell to a handful of giant mint-direct wholesalers, who sell directly to the broker/dealer. When purchasing this way, counterfeit items cannot be introduced into the supply chain.

The majority of counterfeit metals now comes from China and they are often found at flea markets, Craig's List, eBay®, etc. Often they are small sellers who are offering a below-market price, and unsuspecting buyers jump at the opportunity to get a great deal. These sellers can disappear in a moment's notice and that's how they usually avoid getting caught. As they say, everything that glitters isn't gold. Use your good common since and only buy from trusted dealers.

d) Another pitfall to avoid is buying commemorative coins from private mints. Commemorative coins from private mints are often the coins you see advertised on TV or in magazines that have various images on them that commemorate an event or famous person. The problem is they usually are filled with inferior metals and only have an ultra-thin coating of actual gold or silver on the surface. The advertisers are brilliant in knowing exactly what to legally say and what not to say. They say it in a way that most non-experienced shoppers are confused and often assume the coins are solid gold or silver. While some of these coins may be beautiful, they usually make lousy investments and cost way more than they are worth.

e) Most experienced metals investors will tell you, _"If you can't hold it in your hand, you don't own it."_ Another popular saying is, _"If your name is not on the title to it, you don't own it."_ The problem is thousands of individual and institutional investors believe that since they have a piece of paper saying they own metals, that they do own metals and that they can get them anytime you wish. Unfortunately, this is often not the case with gold and silver.

Sean Briscombe, a good friend of mine who owns the **Strategic Wealth Network** and who's a Prime Advisor of the Investor Advisory Network told me a fascinating story about a close friend of his. His friend sits on the board of directors of a major university. In 2010 they decided to purchase a billion dollars' worth of gold for their endowment fund. After analyzing all of the fees and cost of storing their gold at the COMEX, they decided that it would be less expensive to take physical possession of the gold and pay their own storage fees. Sean's friend went to the Chicago COMEXto conduct an inventory of their gold prior to it being shipped to their storage facility.

While touring the facility with the manager, he was shocked to see how empty most of the shelves were. They were trying to locate about 1,600 gold kilo bars that now belonged to the university's endowment fund. He could not help but to ask how much physical gold they had in the facility. The manager told him the total was around 2.3 billion dollars' worth. Somewhat shocked, he stopped in his tracks and asked; _"What's the value of all the gold contracts that you have against the gold on hand here?"_ The manager told him they had about 86 billion dollars' worth of gold contracts.

After doing a quick calculation in his head he then asked the obvious question: _"Soooo... what happens if more than 3% of the contract owners decide to take physical possession of the gold like me?"_ There was a very long and awkward silence. The manager then laughed out loud and said, _"Come on man, you and I both know that will never happen."_ Sean's friend simply smiled and said, _"We'll go ahead and have ours delivered."_

WOW! Is that scary or what? That is why the saying, _'If you can't hold it in your hand, you don't own it'_ is so critical.

How to Sell Your Precious Metals

Most likely there will come a time when you will want to sell some or all of your gold and silver. You may want to take some profits along the way, you may need to raise some cash, or you may choose to cash out at the top. It's actually pretty simple to sell your metals and it's kind of like buying in reverse. Just like you shop around for the best price when you buy metals, you should shop around for the best price when you want to sell your metals. You do not have to sell them back to the broker/dealer from whom you purchased them. You can sell them to an individual, a local metals shop or sell them back to an online metals company.

If you sell them back to a local shop, you will not have to incur shipping and insurance fees. When you sell locally, you and the dealer agree on a price and you get paid for your metals at the time of the transaction. However, as discussed above, local shops often have higher overhead and will usually offer you a lower price than a higher volume online company will. To ship metals to an online broker/dealer, most people just put them in a FedEx box, and ship them insured to the dealer. Often the additional amount they get from the sale of the coins more than makes up for the small shipping/insurance fee. Most brokers will then either mail you a check or wire the funds directly to your bank. People do this all day long and the process is actually quite simple.

If you stick with government issued coins and/or name brand bars, you will most likely find them much easier to sell. Otherwise, if you buy some unusual, uncommon metals and then call up a broker/dealer to sell them, they will usually need to see them before they commit to buying them and decide on a price that they will pay for them. It's amazingly simple to pick up the phone, call a broker/dealer and tell them you have a monster box of 500 American Silver Eagles coins that you want to sell. That is a no-brainer. On the other hand, if you tell them you have some generic silver coins with an image of Santa Claus on them and you are not sure who minted them, you will likely find them harder to sell, and will probably get less for them, even if they are actual 1oz silver coins. This is pretty much common sense, really. Selling a name-brand anything is usually easier than selling something generic.

Keep in mind that in most cases, when you purchase you will pay some amount above the spot price and when you sell, you will likely receive an amount below the spot price. Similar to stock brokers, the dealers must make a profit in order to stay in business. The difference between what they pay for the metals and what they sell them for is their spread and it's how they make their profits.

Where to Store Your Precious Metals

Where to store your metals is always an important question that comes up. After all, you invest a lot of money into your metals, so making sure that you keep them safe is vital. This is a very deep and broad subject with lots of variables, but we will hit the high points here. You can find more information about this important subject on our website.

The single most important factor in storing your metals is to diversify. Don't put all of your metals in one place. If something unexpected happens, then you will lose everything. Your core options are to store them yourself, or have a third party store them for you. Everyone's personal situation is different, so there is no one right way to do this. You should evaluate your own situation and make the decisions that best suit your needs. Each option has its own pros and cons. Evaluate your options and choose the ones that work best for you. It goes without saying, but always keeps your personal and family safety foremost in mind.

One thing I always suggest to everyone is to at least have a quantity of your metals where you can get your hands on them within very short notice. You've probably heard of a "Go Bag". It's a survival preparedness bag that you keep critical items in, and keep it readily accessible. If a disaster were to strike, you simply grab your Go Bag and head out. I don't suggest you keep your metals in your Go Bag, but I do suggest that you at least keep a small quantity of your metals around your home or office so that you can grab them at a moment's notice simply because, you never know what tomorrow may bring. Precious metals can come in pretty handy in uncertain times.

**Personal Storage** Many investors choose to store their metals in a safe, located in their home or office. For many people, this is a great option. Be sure and purchase a very high quality safe. Cheap safes are a complete waste of money and should be totally avoided. When it comes to choosing a safe, there are an almost unlimited number of different types to choose from. They come in many different sizes, shapes and price ranges. The most important ratings to keep in mind are the fire and burglary ratings. Think about the items you plan to store in your safe and choose the safe that has the right ratings for your needs. You really want to find a way to either bolt your safe to the floor or even cement it in if possible. Try to find a way to hide your safe. If they can't find your safe, they can't get to it.

Here's a great tip for choosing a safe. Call a local safecracker who has been in business for a long time and ask him/her. They have seen it all and they know which safes are high quality and which ones are junk. When you want to know which safes will hold up the best, ask the guy who breaks into them for a living. Another option that may sound strange to you at first is to bury your metals. You would be shocked to know how many wealthy people have millions of dollars' worth of metals buried in secret locations. Most people use larger size PVC pipes, and glue the caps onto each end to keep moisture and air out. Bury them at least four feet deep to avoid detection by a metal detector. Bury decoy pieces of scrap metals above and around the location to avoid detection. This concept has worked for thousands of years and it still works just as well today.

Some people choose to find little hiding places around their home or office to hide their metals. Places where no one would ever think to look. You can also search online and find many everyday items that have hidden compartments for storing valuables. Just be sure to use your creativity and imagination. Try to think like a thief would think. Again, don't put it all in one location. Spread it out in many different locations to diversify your odds. Be sure to have a system to keep track of where your metals are stored, and be sure to carefully hide or code your treasure map so that others cannot find it.

**Third Party Storage Vaults** There are many different vault storage facilities around the world. This can be a great option if you have a fairly large amount of metals. These are not inexpensive options but they can be one of the safest ways to store your metals. You should really do your homework when choosing the facility that's right for you. There are many different types of fees and storage options and it's important that you understand them up front. The most basic options are Segregated or Allocated vault storage. Segregated is the most expensive but it can also be the most preferred method. Segregated storage means that they store your exact metals individually for you. When you go to sell them or have them shipped, they will be the exact same metals that you had shipped to the vault. What you put in, is what you get out.

The other method is the Allocated method. Allocated storage means that you will have the exact same number of ounces of metals that you put in, but it will not necessarily be the same metals you had shipped to them or in the same form. They often use very large gold and silver bars because they are easier to store and more cost efficient. You may have shipped them 1,000 Silver Eagle coins, but when you request that your metals be shipped out, you may receive it in the form of a single 1,000 ounce silver bar. This option is a bit less expensive, but you must be sure that you are dealing with a reputable company and that you actually maintain title to your quantity of metals. Make sure that your facility has all of the right insurance and coverages in place.

**Bank Safe Deposit Boxes** Lots of investors want to keep it simple and just put their metals in a bank safe deposit box. Most people are totally unaware that this option does have risks. If your bank were to close or go out of business, or if there is a national emergency, you might not be able to access your metals for a period of time. Also, the contents of your safe deposit box are not insured by FDIC insurance. If your bank were to get robbed or destroyed in a disaster, you would not be reimbursed for your losses. Lastly, most people have no idea of the new Department of Homeland Security (DHS) laws that have been passed. DHS now has the power to inspect safe deposit boxes without warrant and seize any gold, silver, guns, etc. that they find. They don't even have to notify you. My advice is, if you want to use your safe deposit box, don't put everything you have in it. Diversify the storage of your holdings in different places so you limit your risks.

Lastly, I hesitate to mention this as some may think this is 'crazy talk'. If at some time in the future, the government were to declare a national emergency and decide they need to seize all gold and silver to keep the country going, the very first place they will likely go is to the vaults and banks, because that is where much of the metals are. It's their easiest option for getting the most metals with the least effort. So, if this is a concern of yours, then choose your storage locations carefully.

Keep Your Mouth Shut

You can do a fantastic job of diversifying the storage of your metals' holdings and still lose them all in a flash. There's something about human nature that compels people to want to talk about what they have and what they did. My strong advice here is to discipline yourself and tell no one where your metals are stored. If you feel compelled to tell your spouse or significant other, then that's your call. It's just a fact that the more people you tell, the greater the odds of something unforeseen going wrong. One of the greatest things about gold and silver is that they are one of the most private investments you can make. I encourage you to keep them private and keep them safe by keeping it to yourself. It's no one's business but yours.

How to Track Your Precious Metals Performance

Of course there are many people who simply collect, buy-and-hold metals, and have no intention of ever selling them, and that's fine. However, many people like to keep up with the performance of their metals' portfolio and track its progress. When you stay on top of your metals performance, it's much easier to take advantage of buy and sell opportunities that the market presents. Plus, when you sell your metals, you will need a record of when you bought them and what you paid for them, so you can claim a short-term or long-term capital gains profit or loss on your tax returns.

There are hundreds of web sites that will show you the real-time spot prices of precious metals. Simply Google precious metals spot price and you will find a huge number of sites where you can check the current spot prices. To really keep up with the entire performance of your metals portfolio requires a lot of time and manual effort unless you have a system designed to do this for you. As one of the benefits to joining the Investor Advisory Network, you may have the option to get a trial version of the Wealth Watchmen. We believe it is the world's most advanced precious metals tracking system. You simply plug in your metals holdings and any future purchases or sales, and the system does an amazing job of keeping you completely up to date with everything you need to know. It will even send text and email alerts to you notifying you of key indicators that you set for your portfolio. This is an invaluable service and just one of the many benefits that you get when you join the Investor Advisory Network.

Conclusion

Thanks for your interest in precious metals. I sincerely hope you found this information helpful and beneficial. In the beginning we mentioned that only about 2% to 3% of all Americans own some form of physical gold and silver. As has been the case throughout history, the masses have usually been wrong. They practice herd mentality and seem to do exactly what the majority do, and most of the time, that renders the worst results. We believe that a great transfer of wealth is coming. The majority doesn't see it coming and they are certainly not preparing for it. We are not driven by fear of what's to come, but by the massive opportunities we see ahead. Without a doubt, we believe that precious metals have a place in every prudent investor's portfolio.

We are proud and honored to be a Prime Advisor in the Investor Advisory Network. Most investors these days cannot afford to make wrong investment moves. For some, one wrong move and they're out. This is why IAN is so helpful. We take this responsibility seriously and commit to you that we will do everything in our power to help you maximize the success that you so richly deserve.

Please feel free to check out our website or give us a call. Our team is happy to answer any of your questions or help in any way. We would be honored to have a chance to earn your business. Thanks and we wish you amazing success.

Contributor: Doyle Shuler, Gold Silver Alliance

_We are a group of seasoned gold and silver professionals who believe in offering a fresh, new, bold approach to precious metals investing._ _The Gold Silver Alliance_ _was formed to provide an easier and more affordable way for metals investors to buy and sell metals. The Alliance is a group of like-mined, value conscious, independent thinkers who have the courage and wisdom to take the actions that are necessary to insure our own success._

You will love our Concierge Club. It's free to join and comes with tons of member benefits. We treat our Concierge Club members the same way we like to be treated ourselves. We don't surprise you with hidden fees that pop-up out of nowhere. We don't bait-and-switch our members by luring them in with low advertised prices and then hard-sell them on items that are more profitable to us. We operate with trust and integrity. It's who we are. Our philosophy is: if we can offer our Alliance Members superb values and some of the smartest, seldom seen investment options on the planet, you will tell others about us and help us grow the Alliance.

We offer value. We don't use high pressure, commissioned sales people. We don't spend millions on TV advertising and we don't pay movie stars to promote our company. We take those savings and funnel them back to our members in the form of more affordable prices. This allows us to offer our metals at prices that will make you smile. Our concierge associates will answer your questions and carefully guide you to the metals that are in your best interest and that offer the best values.

Our management team has over a half of century of experience in the precious metals industry. We have long-standing relationships with some of the largest wholesale metals companies in the world. Due to our high level of metals purchases, we are able to purchase from our wholesalers at the lowest price levels they offer. That's how we provide value for our Alliance members.

Head over to GoldSilverAlliance.com right now. Sign up for free, and check out all the benefits that we offer.

# Chapter 6: Investing in Oil & Gas: America's New Growth Engine

Why should any investor consider investment in the oil and gas industry? After all, oil and gas are commodities, and commodities are volatile, right?

Haven't oil and gas exploration and drilling investments always been fraught with risk?

And the industry attracts a lot of controversy—all that media attention about fracking and climate change and such. Doesn't that add even more to its risk profile?

Isn't the oil and gas business in its sunset years, soon to fade under the bright promise of renewables?

Yes, yes, and...well, maybe not so much. And, finally, not a chance.

Before we dive into the oil and gas industry's available options for investing, it helps to have an overview of the industry itself. We've also provided a handy glossary (see sidebar) for some of the key industry and investment terminology discussed in this chapter.

A Brief Glossary for Oil & Gas Investors

**Unconventional Resources** : Generally, these represent potential oil and gas reserves held in massive underground rock formations that are nearly impermeable—meaning the hydrocarbon molecules have very small or limited pathways to migrate across the rock to a producing well in commercial quantities without some physical intervention. The most widely recognized and commercial of these resources are:

• **Shales**. Shale is a fine-grained sedimentary rock formed when silt and clay-like mineral particles (i.e., mud) are compacted over eons. There are many different types of shales, but the black organic shales are the most common sedimentary rock and the source rock for many of the world's oil and gas fields. Over millions of years, oil and natural gas seeped up from these brittle formations into more porous formations, such as sandstone, that became the world's conventional oil and gas reservoirs.

• **Tight sands**. A catch-all term for sandstone reservoirs with very low permeability and porosity. Before the shale revolution, this was the fastest-growing source of natural gas in the U.S. It still comprises about 25% of total U.S. gas production.

• **Coal bed methane**. Wherever there are coal beds, coal seams, and even coal mines, there is naturally occurring methane. In coal mining, this can be a deadly hazard. But some innovative gas producers found ways to produce this associated methane by dewatering the coal beds; the methane was "desorbed" from the coal and produced with the water.

**Horizontal Drilling** : Drilling a well horizontally has been accomplished for decades. It mostly happened when a subsurface target was difficult to reach because of the terrain, remoteness of the target from the drilling facility, or because of environmental restrictions. After the initial portion of a well is drilled vertically to the target depth of an underground oil or gas reservoir, the well is angled carefully and in phases until it reaches a horizontal plane. Drilling a horizontal lateral well through an oil or gas reservoirs exposes—by orders of magnitude—much more of the formation to the well borehole than any vertical well could. Thus a single horizontal well can produce as much oil or gas as several or even many vertical wells could. Advances in downhole, remotely guided steering systems have delivered step-changes in efficiency in this costly drilling process. Most unconventional resources in the U.S. would not be economic to develop without horizontal wells. In the past decade or so, horizontal drilling has jumped from about 6% of all U.S. drilling to more than two-thirds.

**Completions** : Although oil and gas drilling is commonly understood, laymen outside the oil and gas industry aren't aware of the critical process that follows when drilling is concluded. Typically, when drilling concludes and the well has been secured, the rig is released, and a smaller, "service" rig moves onto the well location to deploy certain tools down the well borehole to undertake "completing" the well, or stimulating the start of production. The most widely used completion process is hydraulic fracturing.

LNG in the U.S., Today and Tomorrow

Liquefied natural gas (LNG) is natural gas that has been cooled to about -260 degrees F. in order to ship or store it as a liquid. Because natural gas in liquid form is much more compact in terms of volume (610:1), LNG enables natural gas producers with sources of supply that are far removed from their end markets to ship the fuel over great distances by specialized oceangoing tankers and onshore by truck. There has been a thriving world trade in LNG since the 1960s, and it continues to expand today. The U.S. started exporting Alaskan natural gas to Japan in 1969—a trade that was expected to halt in 2011 but instead has continued with a spike in Japanese LNG demand following the Fukushima nuclear facility disaster. Aside from this niche market, the U.S. as recently as the end of the last decade was expected to become a major importer of LNG, with dozens of new import facilities on the drawing board. The huge reserves and lower long-term gas prices associated with the unconventional gas boom have introduced a startling course correction. The new scenario calls for the U.S. to become a major exporter of LNG, with more than 20 LNG export projects planned. Buyers in Asia and Europe are eagerly lining up for U.S. LNG supplies that could undercut their existing natural gas supply sources by virtue of lower costs and enhanced supply security. Because LNG supplies are typically provided under very long-term contracts (typically 10-30 years), this emerging new source of demand will help keep a prop under U.S. natural gas prices for many years to come.

Oil and Gas Today

First, it's big. Really big. The production, distribution, refining, and retailing of oil, taken as a whole, represents the world's largest industry in terms of dollar value.[1] Throw in the natural gas side of the business—which has an even stronger growth outlook, and you're looking at a business that meets about 60% of the world's energy needs today.

And it isn't going anywhere soon. The International Energy Agency (IEA) estimates that global oil demand will climb from 87 million barrels per day in 2011 to just under 100 million barrels per day in 2035. This is mostly due to skyrocketing oil demand for transportation in rapidly growing economies such as those of China and India.[2]

Natural gas faces an even more bullish growth outlook, nearly doubling in demand over the next 25 years, thanks to its value as an affordable, low-carbon replacement for coal in generating electricity while the world grapples with concerns over possibly disruptive climate change.

World Energy Demand, Quadrillion BTU

Source: Energy Information Administration

Now comes the fun part. For decades, the United States—as well as most other nations—has been at the mercy of often hostile or unstable nations providing most of the world's oil. Oil embargoes, wars, and civil unrest have all contributed to price spikes that have at times crippled economies. Even natural gas has been used as a geopolitical tool at times (just ask Europeans about the frequent dead-of-winter cutoffs of Russian gas supplies).

Now all of that is changing, and it's due to a revolution in this more than 150-year-old industry happening right here in the U.S.

The Unconventional Revolution

Advances in the technology of drilling and completing wells have enabled oil and gas companies to economically develop and produce massive "unconventional" resources that were identified decades ago but held their bounty in "tight" rock formations—most notably oil and gas shales—that until now couldn't be stimulated sufficiently to produce hydrocarbons at economic rates. Recent advances in horizontal drilling and multi-stage hydraulic fracturing (yes, the unjustifiably criticized "fracking") now enable producers to increase individual oil and gas well production and ultimate recovery rates at several orders of magnitude greater than what would have been possible with vertical wells less than a decade ago.

This revolution has spawned a second look at America's recoverable oil and gas resources and turned the nation's—and perhaps even the world's—energy outlook on its head.

For decades, U.S. oil production had been in decline. Despite their huge oil and gas resources, America's federal offshore and onshore lands have failed to live up to their potential. Most of the U.S. Outer Continental Shelf and huge swathes of federal land in Alaska and the Western U.S. are locked up by the federal government for largely political reasons. Even in the relatively productive Gulf of Mexico, where industry has long had access and some success, output has fallen short of projections. Cost is a factor, and only companies with deep pockets or that are able to leverage partners' capital (usually both) are able to tackle the big stuff, especially in the Gulf's deepest waters. Wells in the deepwater Gulf can easily run upwards of $100 million apiece, and field development can add up to billions of dollars for oil fields that might produce only a few hundred million barrels of oil.

Even with that disappointment, coupled with continued declines in America's conventional, aging onshore oil and gas reservoirs, the dizzying pace of growth in unconventional resources has changed everything. Since 2008, U.S. oil production has jumped by 50%, slashing American import dependence to 40% from 60%. One state, North Dakota, has seen its oil production surge—and with it the state's economy—tenfold in about 5 years, to nearly one million barrels per day. It's as if we annexed an entire OPEC nation. China has replaced the U.S. as the world's #1 oil importer, and America is on track to become a net exporter of oil, according to the EIA.

Even with these dramatic recent gains, however, the outlook is for a more measured growth rate in U.S. oil production in the years to come. However, these unconventional oil resources are vast and long-lived, so investments in oil today could enjoy a level of stability that oil investors couldn't envision even 10 years ago. Could the wild oil boom-and-bust cycles of the past give way to the notion of oil becoming a steady, reliable, almost boringly consistent rate of return? Well, with today's crazy economic and geopolitical climates, nothing is guaranteed, but developing unconventional oil resources gives investors a better chance for stability in this sector than we've seen in generations.

Source: Energy Information Administration

The change in America's natural gas outlook has become even more impressive. For decades, American gas producers had to drill more and more gas wells, with ever more declining individual well productivity, in order just to maintain flat production. Unconventional gas changed that outlook—spectacularly. New supplies of unconventional gas—shale gas, "tight" gas sandstones, and coal bed methane—have spiked forecasts of continued U.S. gas production growth for the foreseeable future. Operating oil and gas companies have found so much gas in these formations that they've had to take a breather in drilling up these resources so as to not overproduce and totally collapse the domestic gas market.

The impact of this new supply is pretty mind-blowing. Even with rapidly accelerating gas demand expected in the U.S. electric power and residential heating sectors, it's apparent that there will be ample supply to support growing U.S. exports of natural gas as LNG as early as 2015.

The gas supply impact goes beyond the power and residential heating sectors. Ample, reasonably priced natural gas and its byproduct natural gas liquids (NGLs) are fueling a new boom in other American industries. NGLs such as ethane and propane are key petrochemical feedstocks, and the U.S. petrochemical industry is surging, adding capacity and out-competing European producers.

Additionally, America's producers of steel, fertilizer, aluminum, cement, and other industries that are heavy consumer of natural gas are retooling and adding capacity to take advantage of this new natural gas bounty, enjoying a price and supply advantage foreign competitors can't match.

That said, U.S. natural gas demand continues to grow, and the supply/demand balance will tighten again in the next 2 years—just enough to stimulate more drilling and promise a reasonable return while smoothing out the highs and lows of the price rollercoasters of the past.

Fear of fracking

What about all this hysteria over fracking? Well, hysteria is certainly the right word. Misinformation on this topic starts at the beginning: Fracking is regularly described as a destructive drilling process hyped by a mainstream media that relies primarily on industry opponents for its information. It isn't. Fracking is a well completion process that typically follows the conclusion of drilling a well. But drilling is an easy concept to understand and already associated in the public's mind with bad stuff (blowouts, oil spills), so lazy reporting confuses the issue from the beginning.

(After a well is drilled to its target depth, the original drilling rig is released, and a smaller "service" rig is brought in to deploy tools down the borehole that can use a variety of methods—including fracturing—to start the well flowing.)

Environmental pressure groups from time to time are compelled—like any other business—to increase revenues. Of course, to increase those revenues, they need something new to sell, so they create an apparent new threat to whip up public fears about impending environmental doom. The oil and gas industry has long been the go-to whipping boy for these groups, and suddenly fracking has been targeted as the new threat, even though it's been around more than 60 years and more than 1 million wells have been hydraulically fractured in the U.S. without a single report of groundwater contamination.

We could even cite the current administration's own public declarations absolving fracking of any environmental harm:

 www.api.org/~/media/Files/Policy/Hydraulic_Fracturing/HF-Comments-by-US-Officials.pdf

Even Hollywood has gotten into the act. _Gas Land_ , a 2010 documentary film purported to show the environmental damage caused by fracking in shale gas formations in several states. While garnering an Academy Award nomination and headlines for its controversial scenes depicting burning methane from a kitchen faucet, _Gas Land_ and its sequel _Gas Land 2_ were soundly rebutted amid claims of misrepresentation and junk science. Subsequent documentaries _Fracknation_ and _Truthland_ sought to expose those earlier films as misrepresenting the facts and science behind fracking. Even a major feature film, _Promised Land_ , starring international superstar Matt Damon, offered a fictional take on an oil and gas company representative seeking gas drilling rights from impoverished farmers in a small Pennsylvania town. The film portrayed the oil and gas industry as motivated by greed and lying about the environmental impacts of fracking. Despite heavy publicity for the film, its box office take was less than half its budget.

But put all that aside for the moment. Here's the reality: About 70% of all U.S. oil and gas drilling today targets unconventional resources. And 95% of those wells are fracked because they aren't economic without it (and many currently producing wells are re-fracked). So a frack ban would pretty much shut down the vast majority of future and existing oil and gas wells. According to a study conducted by IHS for the American Petroleum Institute[3], a complete ban on fracking would have the following results by 2018:

• Oil production would drop by 23%.

• Gas production would drop by 57%.

But the economic impact would hit sooner and would be devastating. A frack ban would by 2014 cause:

• U.S. GDP to drop by $375 billion, ushering in a "severe recession".

• A loss of 2.9 million jobs.

You don't have to be a Washington insider to recognize this as sure political suicide. So there will be no nationwide frack ban.

However, Washington doesn't always have to ban an industrial activity outright in order to cripple it. Legislation has been proposed to remove the oil and gas industry's exemption for fracking from the Safe Drinking Water Act (SDWA). This exemption was maintained after many years of exhaustive research failed to show a single confirmed case of subsurface contamination of fresh water aquifers by fracking. It was created in recognition of the environmentally benign nature of fracking. The SDWA was created to protect the nation's drinking water supply from surface or subsurface contamination by chemicals, pesticides, human and animal waste, etc. The 99.5% water/sand mix that is injected thousands of feet below fresh water aquifers hardly qualifies to be regarded in the same toxic class with pesticides and animal waste. And yet putting fracking under SDWA regulatory review and related treating/handling standards and practices could crush the economics of fracking for tens of thousands of wells nationwide.

All of these observations are not to suggest that there aren't challenges ahead for the oil and gas industry. Yes, oil is a commodity, and commodity supply and demand—and therefore prices—fluctuate, sometimes violently.

Certainly the fact that a handful of Middle Eastern nations still control most of the world's oil supply, with most of that coming through one of the most dangerous chokepoints at the mouth of the Persian Gulf, is still cause for concern.

In fact, the unconventional resource revolution is diminishing those threats every day. Part of the reason, of course, is the introduction of a major new source of supply with oil and gas from shales and other unconventional resources. But it's crucial to recognize that the unconventional resource boom is more than that; it's also the growing acceptance by oil and gas companies, especially in the U.S., of a whole new business model.

This new business model embraces conventional reservoirs too. Smaller, privately held operators are re-entering decades-old, low-producing oil fields and employing these new advances in horizontal drilling and multi-stage fracturing to revive these aging properties.

Now there's a new frontier, where enhanced oil recovery (EOR) processes meet unconventional resources.

Essentially, EOR consists of:

• Primary recovery of oil, typically with the reservoir's own natural drive, occurs at a rate of about 5-10% of the original oil in place in a reservoir.

• Secondary recovery, involving the injection of pressurized fluids such as water and gases to drive residual oil to the well, can boost total recovery to 25-30%.

• Tertiary recovery, a much more complex and expensive process involving the injection of carbon dioxide, steam, and other materials into an oil reservoir to improve the mobility of the oil and "sweep" it to the producing well, can add yet another 20-30% to recovery rates.

The oil and gas industry is just now beginning to study how these EOR processes might work in horizontal wells that have undergone multi-stage fracking. This sort of thing is still at a very embryonic stage. Given the hundreds of billions of barrels of oil and thousands of trillion cubic feet of natural gas in the U.S. alone—including some fields with primary recovery rates still relatively low even with fracking and horizontal wells—the potential recoverable resources seem staggering.

So here's the bottom line on how the unconventional resource business model has transformed the industry: With these resources, essentially the risk of whether or not an onshore oil or gas well will be successfully productive has been all but eliminated. Not that long ago, it was an accepted fact of life in the industry that the average success rate for an exploratory well was 1 in 10 and for a development well 1 in 4. No wonder an early history of the upstream oil and gas industry referred to the legendary wildcatters who succeeded as "the greatest gamblers."

That is no longer the case. There is virtually no exploratory wildcat risk today. According to Moody's in a recent report, years of trial and error have removed much of the uncertainty related to drilling for oil and gas in the U.S. because of what industry already knows about unconventional resources.

"The risk of drilling a dry hole has fallen nearly to zero," Moody's wrote, "and E&P companies are developing a repeatable, manufacturing-style approach to unconventional resources."[4]

Millions of oil and gas wells have been drilled and produced in the U.S. over the decades, and there is a vast library of well logs and other data that confirm the presence of hundreds of billions of barrels of oil and thousands of trillion cubic feet of natural gas "behind pipe"—essentially technically recoverable but stranded because it wasn't economically recoverable. Many of these formations were tested decades ago, even when oil and gas prices were high, but they couldn't produce at sufficient rates to be economic with standard completion practices and vertical wells. But much knowledge was gained about the rock geology and petrophysics, and industry steadily learned more about what it would take to perfect efficient drilling of horizontal laterals and deployment of multiple-stage fracks. New-design drilling rigs with automated features and equipment have optimized drilling efficiencies, reducing drilling and rig mobilization times in half. Multiple wells are drilled from a single concrete pad—by a rig with the capability to "walk" across the pad—to minimize the drilling footprint but also to keep costs down. Essentially, many pad-drilled wells are drilled in "batches," or essentially uniform in profile to minimize downtime and downhole problems. Nowadays, with these ultra-efficient rigs, drilling and rig mobilization costs often fall by a third or more as an unconventional play matures.

Make no mistake about it: Well costs have skyrocketed because of new techniques and strategies for hydraulic fracturing. Completing a well once was a small fraction of a well's cost. But now, in a typical oil or gas shale, a large number of fracks can be the biggest component of a well's cost, and the average cost of a U.S. onshore oil or gas well has more than doubled over the past decade.

But with this "hydrocarbon factory" approach, that's not a problem. The initial production rates for these unconventional resources can be so huge that many wells have a payout within 30-90 days and then produce at lower rates for decades.

According to Deloitte, "Technological innovations such as longer laterals, multi-well pads, and multi-stage fracturing have reduced the full-cycle cost of shale gas wells by 40-50% compared to conventional wells and more than doubled their average initial production rates to 60-80 million cubic feet per day.

"The entry of research and development-focused supermajors (the biggest international oil companies, e.g., ExxonMobil, Chevron, BP and Shell) and increased capabilities of service companies will continue to lower operating costs and increase well productivity. In 2008, a well in the Fayetteville Shale was estimated to produce 1.8 billion cubic feet of natural gas over its 30-year life. However, improvements in drilling technologies have increased that estimate to 3.2 billion cubic feet per well."[5]

Now that I have your interest about the U.S. upstream oil and gas industry and its bright future, in the next section, let's consider why you might want to invest in this sector and how you might best tailor your investment strategy to benefit from it.

Oil and Gas Investment Options

Why invest in oil & gas? Here is a summary of benefits and reasons to invest:

• **Oil and gas investments can serve as a hedge against rising prices for these commodities.** If your portfolio (or even just your household budget) gets dinged by high oil and gas prices, investing in oil and gas can help offset that bite.

• **Some investors choose oil and gas as a hedge against movements on stocks or interest rates.** Despite similar volatility, equities and commodities have rarely fallen in the same year; they tend to move in opposite directions. With markets roiling from uncertainty, investors looking to dodge some of the volatility might benefit from putting their money into one of the most volatile asset classes around: commodities. Sounds counterintuitive, right? Chaotic trading on the Chicago Mercantile Exchange floor, futures contracts, speculators, and the like don't exactly bring to mind the predictability so many investors seek. But for long-term investors desiring insulation from price swings in traditional assets, such as stocks and bonds, moving some money into a broad basket of commodities—wheat, oil, cattle, precious and industrial metals—could be a good bet. Experts tout commodities as a good hedge against inflation because the price of raw materials tends to rise with the price of the goods they're used to make. They also point to their historically negative correlation with the price movement of traditional assets. Other analysts agree that, used correctly, commodities can help protect a long-term investor's portfolio from shifts in the prices of their other assets. Putting some money into a number of different commodities can reduce your portfolio's overall volatility and still get returns similar to a portfolio with just stocks and bonds. But that calls for a lot of research focused on a number of different industries.

• **Other investors choose an oil or gas investment because they see that these commodities are in low and finite supply with rising demand, and the trends continue upward**. Oil and gas are commodities, and commodity prices have recently been driven higher by a number of factors, including increased demand from China, India, and other emerging economies that need oil, steel, and other commodities to support manufacturing and infrastructure development.

• **Some investors want to invest to add diversification to their overall holdings.** While diversification does not guarantee against loss, it is a key strategy used in financial planning to spread risk. The goal is to make investments in a number of different asset classes, each with their unique risk/reward characteristics, so that when one asset class is out of favor, the others will not be directly correlated and still maintain growth potential.

• **Potential payback on drilling programs.** The payback rate will obviously vary with the price, structure, and success of the program. Returns are not guaranteed, of course. Because oil and gas are depleting assets with nothing left at the end, it is essential for potential investors to understand that their payout comes back to them during the initial years of production. Then the declining yield curve will kick in, with diminishing returns each year. Many programs would be economically attractive even if the oil price falls—although payback would take longer. Make sure you study the offering memorandum and the sensitivity studies with your advisors. Oil and gas wells can produce for decades, even if the output eventually drops to a trickle. One of the first commercial wells ever drilled in America, the McClintock in Pennsylvania, is still producing after 150 years. Before the unconventional resource boom, a typical oil or gas well might produce 15 or 20 years, peak for a few years around the halfway point, and then decline at modest annual rates thereafter, with occasional interventions to boost production, depending on reservoir performance and commodity prices. Some shale gas wells are predicted to keep producing for 30-40 years, although the payout often has come within the first year.

• **Many investors choose a drilling program because of the generous tax benefits available.** Most oil and gas investments have some tax benefits, while drilling has much higher benefits not available in the tax code to other types of investments. More on this later.

What are reasons NOT to invest? What are the general risks and caveats?

• **Oil and gas investments can be volatile.** Cash flows are tied to two main variables: the price received and the amount of oil or gas produced and sold. The supply and demand curve, as well as the actual functioning of the wells, which includes both the cost of maintenance and the amount and quality of the production, affect cash flow. Price is affected by a myriad of issues—political, economic, weather, and supply-demand imbalances, just to name a few.

• **Type of ownership.** There are several different types of ownerships (limited partnership, general partnership, LLC, etc.) that may be encountered, but one common type is as a general partner. In contrast to a limited partnership, where the liability is limited to the amount of the investment, a general partnership has no such limit to its liability. If the expenses exceed the income generated by the investment, a general partner may have to bring in additional money to fund the shortfall. Because of its exposure to potential personal liability, a general partnership is not an appropriate ownership type for all investors.

• **Risks tied directly to the sponsor and/or company in charge of drilling and operating the wells.** Their success will be your success. It takes more than high oil and gas prices to make money. Knowing the background and track record of the company with whom you will be doing business is very important in the due diligence before choosing to invest. A legitimate oil and gas producing company will invite you to the drill site and explain the operation in detail, including any potential risk in the well not being successful. You should be given access to a geologist familiar with the prospect who can demonstrate his credentials in good standing with the American Association of Petroleum Geologists and who can give you a deeper understanding of the likelihood of commercial success for the drilling target in the context of regional geology and other nearby wells. A legitimate oil and gas operator won't avoid your questions and will do everything possible to address your concerns.

• **Drilling issues and other problems that can occur.** This can include a dry hole or uneconomic hole, delays due to weather, teams on the ground awaiting drilling rigs, etc. Drilling programs that are in proven fields or next to producing wells are called development programs, and are considered less risky than experimental programs ("wildcatting").

• **Oil and gas are depleting assets.** Typically one invests, gains the cash flow and tax benefits, and owns the interest until the wells runs out or become uneconomical to produce. Typical life of an oil well can be 20-30 years, with declining returns after perhaps the first few years, depending on location and other factors. Sometimes the wells or property are put up for sale after a few years; others times they are not. Make sure you understand the "exit strategy" for any investment you are considering, if there is one.

• **Relative illiquidity.** Some oil and gas shares can be sold or resold in an auction-style situation; however, any investment that does not trade on a major exchange should be considered illiquid and long-term.

• **External economic and political events affect oil and gas pricing and availability.** Because of this volatility, an investor should have a high-risk tolerance. Among energy choices, there are varying degrees of risk; while all should be considered high in risk, royalty programs are generally more conservative, while the most speculative are the exploratory drilling programs (as opposed to developmental drilling).

Some Investment Options

Oil and gas investment options range from the simple and obvious to the complex. If you have any kind of broad-based mutual fund or IRA, odds are pretty good you already are invested in the oil and gas industry to some small extent.

Taking that effort a step further would be buying stock or ADRs (American Depositary Receipt: A negotiable security that represents securities of a non-U.S. company that trades in the U.S. financial markets) directly in a public oil and gas company—whether a giant, integrated (meaning it has refining and petroleum product marketing assets) major oil company such as ExxonMobil or a large, independent oil and gas producer such as Anadarko Petroleum. Dividend yields tend to be low, growth rates middling, and a 7-9% return over time is typical. Not a bad option for a passive investor.

An even more cautious approach is buying shares in multiple oil- or gas-focused mutual funds or ETFs (An exchange-traded fund is an investment fund traded on stock exchanges.) This way you can expose your portfolio to oil and gas without incurring the risk of commodity price swings and without exposing yourself too much to a single company.

There are a number of oil- and gas-related derivative instruments that the industry itself uses to hedge its own production: futures contracts. However, the tenuous nature of these contracts and the volatile commodity price swings that can accompany them requires the investor to have a high tolerance for risk.

Then there are a number of ways to invest in oil and gas private placements—which can offer the prospect of a respectable return and cash flow while providing tax-advantaged benefits—as an alternative to stocks and bonds.

Private placements involving investments in working interests or royalties can offer a wide range of risks and rewards. Exploratory drilling programs tantalize with the offer of high returns, but risks can be substantial with unpredictable costs and results.

One intriguing investment opportunity is a self-directed IRA that relates to direct working interests in oil and gas exploration and development. Funds from a current IRA account can be rolled over into a new IRA account to facilitate a direct working interest investment in a drilling program. Oil and gas revenues resulting from that drilling program are then deposited in the new IRA account.

But if an investor wishes to avoid most of the risk and look for an opportunity with more predictable costs and long-term income, a better way to go might be a development drilling participation program targeting these prolific, high initial production, early payout wells in unconventional resource plays.

What is a DPP?

A Direct Participation Program (DPP) is an investment program designed to let investors participate directly in the cash flow and tax benefits of the underlying investment. Investors own a percentage interest or units in the offering or a share of the actual assets of an operating company and receive directly the cash flow and tax benefits from their investment.

So, for instance, if you buy an energy stock, you are a stockholder of the company, but the actions, tax write-offs, and net cash flow are all received by the company itself, not the stockholders directly (you can't write off drilling costs on your own tax returns, for instance).

Oil and gas companies often reinvest profits back into development, exploration, and growth, effectively giving away control of your profits. Not so in a DPP. The pooled investment monies are used for the program's goals, such as drilling, producing and then selling oil and gas for the cash flow, or acquiring producing wells or mineral rights with royalty payments.

The advantage of this is that you get the benefits of being an owner without having to set up a company or become an oil expert, which is the role performed by the program's sponsor. You receive revenues, you directly deduct expenses, and you receive your tax benefits. (Depending on the type of program, these benefits vary.) While each program has a stated investment goal, there is no guarantee the stated investment objective will be achieved.

Historically, 100% of the initial investment from successful wells is returned within the first one to two years of a drilling venture. The wells typically decline at a rate of 30-50% per year for the remainder of their often 20-30 year life.

DPPs are generally available only to accredited investors—that is, investors with a net worth of $1 million (or salary of $200,000 for two consecutive years), sold under what is called "Regulation D".

Most investors in a DPP would function as General Partners. GPs may use deductions from the program against income from any source and convert to Limited Partners upon conclusion of the drilling program—typically 6-12 months. A Limited Partner may use deductions from the drilling program only against passive income, and "C" corporations may use passive losses against active income.

DPP Tax Savings

DPP investors may immediately be entitled to deduct up to 85% of their investment in the current year as intangible drilling costs (IDCs). The remaining 15% is then spread over five years.

IDCs entail expenditures for wages, fuel, repairs, hauling, and supplies required to prepare and drill or recomplete an oil or gas well but that have no salvage value. Certain tangible drilling costs related to developing oil and gas wells include acquisition, transportation, and storage costs that typically are capitalized and depreciated for federal income tax purposes.

Additionally, a DPP investment can entail legal, tax, and investment structuring costs.

In some instances, the investor is able to reduce state income taxes, self-employment taxes, AMT, and the phase-out of deductions and exemptions. Therefore it is critical that a prospective investor engage the services of a trusted tax accountant, especially one with experience and knowledge of oil and gas investments.

Another DPP tax benefit is a tax-free depletion allowance on all income distributions available for the life of the well. The deduction may reduce the tax owed on income from the investment by 15-25% for the life of the well.

The table below illustrates how the sheltered distributions work with a DPP.

$8,000 Gross Income from wells

**-** 2,000 **Less lease operating costs & taxes**

$6,000 Net Income from wells (cash to distribute)

-1,200 **Less percentage depletion (15% of gross income for 2003, 20% of Net Income** **from wells)**

$4,800 Taxable income from wells

Tax benefits and the promise of an early payout and long-term income generation are the key benefits of directly participating in oil and gas drilling ventures: America's new engine for growth.

Breitling Energy Corporation BIO

My company, Breitling Energy Corporation, has operations and investment opportunities focused on horizontal exploratory and development drilling in major U.S. unconventional oil and natural gas plays. Among those are the shale plays: the Eagle Ford, Bakken/Three Forks, and Utica shales, all focused mainly on oil and natural gas liquids, and the Marcellus gas shale. Other strategic plays in our portfolio include various other unconventional horizontal plays incorporating "tight" sandstones, limestones, carbonates, and hybrid, or "combo," plays—mainly Midcontinent plays such as the Mississippi Lime, Cleveland, and Hunton.

Our operating areas featured long-lived oil and natural gas reserves with established production and abundant growth opportunities. In each of the company' operating areas, our deep backlog of drilling locations enables us to establish substantial economies of scale while we optimize drilling efficiencies and reservoir management best practices.

Our main goal is to augment the value of acquired properties by deploying advanced technologies and employing best practices in drilling and production. To that end, we:

• Acquire oil and gas properties that give a majority working interest and operational control or where we believe we can ultimately obtain it;

• Acquire properties that offer added incremental value through the application of secondary and tertiary recovery processes—notably carbon dioxide EOR—as well the complete array of other proven exploitation techniques;

• Maximize the value of our properties by growing production and reserves while keeping costs contained; and

• Keep focused in areas where we have or can feasibly secure a competitive advantage.

Our performance and our innovative approaches to oil and gas investing have caught the attention of the global financial services and investment communities. Breitling was named the Best Independent Oil and Gas Company-North America by World Finance magazine in 2011, 2012, and 2013.

Contributor: Chris Faulkner, President & CEO, Breitling Energy Corporation

_Chris Faulkner is the Founder, President, and CEO of_ _Breitling Energy Corporation_ _, an independent oil and natural gas company based in Dallas, Texas. Founded in 2004, Breitling Energy Corporation holds proved reserves throughout North America and ownership interests in operated and outside-operated leases in Canada, Europe, and the Middle East. The company focuses on adding profit-generating production to existing core areas and developing potential new core areas, employing state-of-the-art technologies for the development of onshore oil and gas projects._

# Chapter 7: Reserve Capital Strategy: the #1 Strategy of the Wealthiest Families in America

Today I'm going to introduce you to the Reserve Capital Strategy. This strategy will teach you how to control your personal economy. It is the foundation on which our entire program is built and ultimately will allow you to maximize your wealth, while minimizing the risk to your assets. Before we dive into it, let me provide you with definitions of the terms used in this chapter.

Reserve Capital Capital you want to protect, grow, and transfer tax-free.

Reserve Capital Strategy A strategy of creating an account to increase safety, liquidity, returns, and tax efficiency using your wealth.

Personal Economy Your wealth, or wealth that flows into your life, and where/how you allocate it.

For the last 70 years the economy has been controlled by Wall Street, banking, and the government. Today the economy is global and it's controlled by a few markets, central banks, and governments around the world. Someone can make a bad decision in Japan or Europe and it can have a global effect with dire consequences to the U.S. economy and potentially your own personal economy.

We already know a few things are happening right now that could have negative consequences for every American if you're not prepared.

Think about your personal economy for a moment. How much of your personal economy is tied into the global economy right now? How much of your wealth is stored in paper assets, like stocks, bonds, mutual funds or even cash? What might happen to your wealth, when the next wealth transfer occurs or the next bubble bursts? What happens when tax rates change or inflation triples?

These are hard questions to answer because no one can predict what will happen in the future. Unfortunately I don't have a crystal ball, but I do know a number of ways to insulate your personal economy from the global economy. That is what the Reserve Capital Strategy is all about: insulating your capital from risk.

Before I get into that, what is capital? Capital is money or financial assets invested for the purpose of making more money. If you have cash stuffed in your mattress, it is not capital; it is a depreciating asset, because of inflation.

In order to grow your wealth, you must invest your money, and turn it into capital so your money is making more money. But when your money is invested it is also at risk. So what if there was a way to protect your assets, your money, while also deploying it as capital?

This is the secret the wealthiest families in America have been using for generations, to grow and protect their fortunes. Families like the Rothschilds and the Romneys do it, but you don't need their kind of money to employ this strategy.

The first step is to maximize your available capital by minimizing or eliminating unnecessary wealth transfers.

Everyone reading this transfers their wealth every day. Some of these wealth transfers you know about, and others you don't even realize. How much of your wealth do you capture? How much is lost in transfers?

If I offered to write you a check for your entire lifetime income potential, what would you do with the money? Would you spend it? Would you give 50% of it over to the government for them to spend how they see fit? Of course not, you would save it and deploy it as capital (i.e. invest it).

How much money are we talking about? Here is an example. Let's say you are a 42 year old, making $150k/yr. (with a 3% increase each year from the employer), and have some savings in a 401K, IRA, etc. This is what your lifetime income and wealth potential might look like.

If you were able to capture and save 100% of your total income and wealth throughout your working years, you'd have over $10 million at retirement! Unfortunately, I can't write you that check. You will need to find ways to minimize the transfer of your wealth out of your personal economy. By joining the Strategic Wealth Network (www.strategic-wealth.net)), you will learn how best to accomplish this goal.

The problem is that we don't capture 100% of our wealth. We transfer that wealth every day, unknowingly, and unnecessarily. The first way wealth is transferred away from you is through paying taxes. For many of you this means 30% of your income is being transferred to the government and out of your personal economy every year....year, after year, after year, after year. How much is that over the working lifetime of our 42 year old example? Let's take a look:That's almost $3 million transferred to Uncle Sam, during your working years!

The second way wealth is transferred is though debt service. According to the national association of mortgage brokers, the average American allocates 40% of his/her earnings to debt service. That's home loan debt, credit card debt, car loans, student loans, etc.

This transfer of wealth continues on forever, for many families, because they never get out of debt. How much money is that over the working years of our 42 year old? It's an additional $3.9 million! So far, he will have transferred almost $7 million of his hard-earned income and wealth to others!

The third way we transfer wealth out of our personal economy is though our lifestyle. These are living expenses, vacations, transportation and Starbucks. What is this number for you? For many people this is around 20%.That's another $1 million gone from his personal economy!

As a result, that leaves only 10% of your earnings left for savings, which can be deployed as capital and invested. In this new economy, that is simply not enough to accomplish your retirement or lifestyle goals, but you already know that. It's why you're still reading this....

This is the dirty little secret on Wall Street that NO BROKER WANTS YOU TO KNOW! This is the broken promise of Wall Street.

These transfers of wealth are lost potential capital, and once they're gone, they're gone forever. This is because all the money you will earn in your life is fixed. Capturing and preserving your capital is the key to true financial success!

One advantage of the Reserve Capital Strategy is that you can deploy your earnings as capital and still have access to your money for expenses (i.e. invest your money, but still have it available to buy stuff). This could be anything from a new car purchase, college education for your kids, or your annual vacation. This strategy essentially turns one dollar into two. How is this possible?

There are three ways you can run your personal economy...

The modern way people handle large expenses is by borrowing. These people are debtors. They work to spend. They don't have capital working for them because they can't save. When expenses come up they borrow money and slowly repay the loan with their future income. They always pay interest. This cycle of borrowing and repayment continues but they're always working to get back to zero.

The traditional way our parents and grandparents handled large expenses is they saved their money, and when they had an expense come up, they emptied their savings to pay for it, or "drained their tank". As savers move though their life they're continuously going through cycles of filling their savings tank, then draining their tank. Every time they have a big expense their tank is drained and they return to zero. Sadly, they are no better off in the end, than the debtor.

The third way is to be a wealth creator. These people preserve, and store as much of their money as possible, and collateralize their wealth when they need to make a purchase. This is what the wealthiest families in America have done for generations.

How does this work? You may have already done this and not realized it by borrowing from your 401k, or taking a Home Equity Line of Credit. You're simply "collateralizing" the asset.

The idea is simple. You build up your Reserve Capital Account, it earns uninterrupted compound interest, and when you need to make a purchase or maybe even an investment, you use your Reserve Capital Account to secure a loan to make the purchase.

I know what you might be thinking; won't this just make me a debtor? Not if you do it the right way. The interest rate on the loan can be equal to the interest rate on your savings and you will still come out ahead. How?

The answer is "compound interest" and how it differs from "loan amortization". Let's look at an example using the Reserve Capital Strategy:

Let's say you have capitalized your Reserve Capital Account, and are borrowing $50,000 with an APR of 6% for 25 years.

Over the course of the loan you will pay $46,645.21 in Total Interest (because over the course of the loan the principal is reduced and you make payments.)

That same $50,000 in your Reserve Capital Account earning 6% interest (the actual dividend payment at the time of publication) over the course of 25 years will earn $173,248 in interest (because the principal increases over the term as interest compounds.)

Earned Interest: $173,248

-Loan Interest $ 46,645.21

Net Gain $126,602.79

Plus, you still have the original $50,000 in your reserve capital account for a total of $223,248.

Now imagine if you had just spent that $50,000 cash, and "drained the tank". You'd be out $50,000 and lost the opportunity to earn $173,248 in interest for a total loss of $223,248! That's a huge opportunity cost.

That is why just being a saver does not work for long-term wealth building.

There are a number of different accounts that can be used to employ this strategy.

1. You can use a Savings or Money Market

2. 401k or Qualified Plan

3. Margin Account on Stock Portfolio

4. Home Equity Line of Credit

5. Permanent Life Insurance

While many accounts might work as a reserve capital account, there are obviously some that work better than others.

In a permanent life insurance policy, the insurance company pays an annual dividend, of at least a guaranteed minimum amount, and the account grows tax-deferred.

The secret is to properly structure the policy so that you can stuff as much cash as possible into the contract, while minimizing the fees. Over the life of a properly structured contract the fees are reduced to less than 1% of the cash value invested.

This is where it gets good. Once you collateralize your policy you have full access to enjoy or even reinvest that money risk-free by collateralizing your account, while still enjoying uninterrupted compounding. How important is uninterrupted compounding? Let me give you an example:

Say you saved $1,000/ month, into a savings account that earned 6%. After 4 years, you have $52,495. If you were to drain the tank and buy a car, for example, you'd have to reset your compounding, and begin saving all over again. You'd lose all the interest accumulated during the "recapitalization phase", plus the interest on interest accumulated, plus the principle saved. If you bought five cars in the next 25 years, and did that, it would be a $626,173 mistake! This is illustrated below.

Now what could you do with that money? You could use it to pay for your vacation, your car, or your daughter's wedding.

You could also invest that money into a productive asset like real estate or even use it to fund your business if you wanted, and you're now capitalizing the same money in two places at the same time, stacking those returns on top of each other. You could earn arbitrage interest on the money in the life insurance policy as well as investing the collateralized funds into an opportunity, which could earn a good rate of return while enjoying the mini-hedge of your Reserve Capital Account. Here's a "napkin drawing" of that scenario:

(This is a hypothetical example of a scenario, using the Reserve Capital Strategy)

Step 1: Collateralizing your policy and taking an unstructured loan of $50k @ 4.75%.

Step 2: Repositioning the $50k into an opportunity with a 10% return.

Step 3: Notice that your PLI (permanent life insurance) dividend is still paying you 6% on all your cash in the account.

• Notice the arbitrage (difference between rate of borrowing, and rates of return) between the 6% dividend being paid, and the loan rate of 4.75% = 1.25% (that's pure tax-free profit inside the RCA).

• When you add the 1.24% arbitrage to the 10% opportunity return, you get a net return of 11.25%

Step 4: Add the returns from the 10% opportunity back into the policy, recapitalizing your account, plus additional returns, and you can stack the returns inside a tax-free vehicle.

Step 5: When Uncle Sam comes knocking, asking you to pay tax on the investment, where will you go to get the money? Who's money will you use - yours, or the life insurance carrier's? How can this shore up the transfer of wealth through paying taxes?

So what's the catch?

First, you have to qualify, and this includes a medical exam. Second, you're limited by how much you can invest in a contract. Government regulations dictate the funding and use or control of these accounts.

Everyone's personal economy is unique and everyone's goals are different. So the best way to take advantage of this strategy is seek out an insurance adviser who knows how to properly structure these policies. This is a unique time in history. The greatest wealth transfer from one class to another is going on right now; the wealth generated from paper, and derivatives of paper products, including cash reserves, are going to transfer into other asset classes. It's happening now and if you don't get on board you're going to wake up and everything will have changed.

What might it look like if you were to reposition your wealth, and create a system of using your money more efficiently and effectively? How much safer might your family's wealth be? What might the next generation's future look like if we were to teach them these fundamental principles?

What might you lose if you don't create a plan of protecting and growing your current wealth? How much of your wealth are you willing to risk? What's your plan for securing your family's wealth today, and securing the next generation?

As we move towards the end of 2013, we try looking through the crystal ball. 2014 appears to be interesting (Mom always said an old Chinese curse was "May you live in interesting times".) With the wrangling between Congress and the White House, Europe's stagnation, and the Asian economic flatness, it looks like things here in the U.S. could slow down somewhat. In difficult times, people have always looked to guarantees. They have always wanted the assurance of knowing that not only would they not lose money but also that they were guaranteed of some appreciation over time. They also like knowing they have liquidity and access to their money because as Charles Hugh Smith wrote, "The best hedge against uncertainty is cash".

The value proposition life insurance represents to clients is unparalleled in the financial services industry. There is no other product that can provide to the public the range and depth of security, liquidity and strategic synergies that life insurance does. Let's look at these claims:

Security Human Economic Value is critical when looking at how much life insurance a person should own. There is no other approach which consistently maximizes the amount of protection to replace the economic value of the person who is insured. The legal profession recognizes this approach and it is commonly used in wrongful death lawsuits. It was also the basis of the awards recommended by the 9/11 Commission. In businesses, key person and succession planning are critical in allowing those entities to withstand the loss from a vital economic entity's death. There are, of course, many other reasons to want coverage but these are just a few of the applications.

But there is a lot more to Security. It is the security of knowing that premiums can never go up, no matter what time of life a client is in. Security is having premiums waived because the premium payer is disabled and is not able to work. Security is knowing that cash values are fully protected from lawsuits and creditor claims, and payments from policies are protected, too. Security is knowing that the company backing the promises is one of the strongest financial institutions in America. Security is knowing that policy loans are a contractual feature and explanations or reasons for loans are not required. Finally, security is knowing that the advisor is there for the client's interests first and that the person making the recommendations is a highly-trained professional.

Liquidity There may be no other time in recent history when overfunding policies could be as critical as it is today. With the stated FED policy of low interest rates, the ability to stuff cash into a policy is absolutely one of the most vital opportunities available to our clients. Cash is king unless it loses value due to inflation and taxes. We know that policy loans are one of the strongest features of whole life insurance. No explanations, no reasoning with loan officers, just a signature for legal purposes and money is on the way! The ease of accessing a loan is unheard of in the rest of the financial industry.

However, more important than the ease of access is the long-term benefit to the client from uninterrupted compounding. Having the ability to never stop the power of compounding, coupled with the high level of liquidity is something that does not exist outside of life insurance. The economics of cash flow dictate that we should have the most efficient means of storing our capital if we can access the use of it at the same time. Other people's money or leverage is how we can help our clients benefit from the power of compounding and having a non-direct recognition company to provide it is something truly special.

Strategic Synergies Self-insuring is an extremely costly proposition and it is a wonder that so many misinformed people fall into that approach when funding retirement. It has to be out of ignorance or it's due to the inability to understand basic economics.

Let me show you an example:

A 35 year old with an income of $100,000 typically qualifies for $3,000,000 of initial death benefit (life insurance) using the "Human Economic Value" approach by underwriters. While the premium (cost of insurance) for that amount of Whole Life is higher than what I would be comfortable recommending, let's look at the math. This is only an example; normally I would not want to exceed 10% of their income for base premium. So at 65, using today's projections, he would have $4,269,000 in death benefit and it would grow to $6,688,000 by 85 even if he stopped paying the premium at retirement. In theory, he would be able to spend down the full $6,688,000 because that is the amount that would be replaced with life insurance proceeds at his death.

What this really translates to is over $250,000 of yearly after-tax income for twenty years (from age 65 to 85). The net present value of that stream of income is the equivalent of a lump sum $3,562,000 on the day he retires. In other words, at the very least, he would have **had to earn almost 11% each year and every year during his accumulation phase to have enough money to provide him with this additional cash flow**. A different way of saying this is if we assumed he could take a 4% distribution from a pool of capital (the typical model financial advisors use to show retirees how much they can take out in distributions, each year), he would need over $8,000,000 of additional funds to provide him the extra $250,000 of after-tax income. Since it isn't likely he would have the extra money, the only way he could enjoy the better lifestyle is from owning permanent death benefit and then having the freedom to spend down his assets without fear of disinheriting his loved ones and the people who depend on him.

It is the synergy of the strategy that is so powerful, not the rate of return on the cash value or death benefit. The freedom and ability to be creative and to be able to have options in retirement is why this synergy is so important.

At the end of the day, knowing that the death benefit will be there, no matter what, is why we can advise our clients the way we do. Replacing the economic engine that powers a family or business during the accumulation years requires having enough death benefit. Spending down strategies during retirement requires having enough death benefit. Having liquid use and control of the money when you want it, or need it, are critical to maximizing the economics of cash flow.

Which is the best part? They all are! You don't get one without the others. Whenever a client buys a whole life insurance policy they improve their situation tremendously. They get all the features and benefits that go with the contractual guarantees and the upside that goes with sharing in a mutual company's success.

If 2014 turns out to be "interesting", let's be sure we have in place the guarantees and the foundational pieces we need to meet the challenges ahead.

For more on this and other strategies of the richest .1%, click here:

<http://strategic-wealth.net/welcome/reserve-capital-strategy/>

Contributor: Sean Briscombe, CLA, CMPS, Senior Consultant & Wealth Strategist, National Institute of Financial Education

_Sean Briscombe, is a Certified Liability Advisor (CLA), and a Certified Mortgage Planning Specialist (CMPS). He has helped individuals and institutions to manage their liabilities, increasing their cash flow by "finding money", for more than 12 years. He is an industry leader and founding member of the_ _National Institute of Financial Education_ _(_www.NIoFE.org _) where he helped pioneer Financial Education and certification requirements for Liability Management (managing liabilities into assets), developing the coursework and training for Certified Liability Advisors._

Sean now contributes his expertise as Senior Consultant and Wealth Strategist, as well as assisting in the overall education and training of wealth strategies and planning, for institutional and individual clients nationwide. Additionally, he assists with research and development of capital allocation strategies, and is active in the negotiation, structuring, and execution of venture and client partnerships. Sean is active in due diligence, transaction structuring and execution, as well as support and transaction exit activities, for individual and corporate clients.

As a former member of the United States National Diving Team, training for the Olympic Team, he knows what it means to be dedicated and goal-oriented, as well as how to achieve world class success. After successfully starting, operating and selling several high tech companies in the late 1990s, he decided to help educate clients and corporations by coaching and training them on his unique concepts, ideas, and strategies. He started in the real estate and mortgage industry in 2001, coaching and training teams of Certified Liability Advisors (CLAs), and from 2001 until now has worked in a variety of roles as coach and mentor to Real Estate, Financial Planning, CPA and Estate Planning firms, and others. As a recognized professional in the field, he is frequently asked to speak at various events around Texas and the southwest.

# Chapter 8: The Asset of the Century

Did you know that Qualified Retirement Plans (which are Tax-Deferred plans), could be almost the worst thing you can do for your retirement? Some of the most successful investors in the world, as well as many of the largest financial institutions, have used a little known formula for decades to accumulate massive wealth, while at the same time cutting their risk to near zero. Isn't it time YOU are finally let in on the best kept secrets to portfolio security?

This chapter will reveal to you a little-known, yet amazingly powerful wealth creation program that in-the-know investors are licking their chops over. It's all about a little-known, IRS-approved strategy (buried under Section 7702 of the IRS tax code). The code allows for **TAX-FREE SAVINGS**... not just **Tax-Deferred** savings. This little known plan offers:

• No Limits to annual contribution amounts

• No distribution penalties

• No restrictions on what you use the money for

• Your account **NEVER** decreases in value due to market downturn

• Access your money at ANY age for ANY reason

• Gain **tax-free** and **penalty free** access to your money

• Participation in upside market growth and eliminate downside market risk

• No mandatory minimum distributions required

• **Your money is PROTECTED from future tax increases!**

This plan allows you to efficiently build wealth and out-perform qualified plans with **ZERO MARKET RISK!**

Plus, this program is the PERFECT option for IAN members because with this unique program, you do not have to choose this option OR one of the other great options available to IAN members. If you structure this program correctly, you will be able to take advantage of all the benefits mentioned above, plus you can ALSO leverage the majority of those funds and invest in just about any type of investment you wish such as:

• Precious metals

• Various forms and types of real estate

• Traditional stocks, bonds, mutual funds, ETFs, etc.

• Business and equipment

• Receivables and notes

• And MUCH more!

For most readers, this will be a totally new concept and it will likely shock you once you understand it. You will most likely be upset that you have not been doing this all along. Don't worry. It's not your fault. This is a very little-known program and only a very, very few people are specially trained and knowledgeable enough to structure this program properly. Plus, a new enhancement to a tried and true program has only been available for about a year. Don't miss out on one of the best kept secrets in the financial world!
Introduction

The financial vehicle I will be sharing with you is ideal for the readers of Investor Advisory Network publications. There are many factors which make our firm and our products wholly unique. One of our first factors that I would like to bring to your attention is our flexibility. As an asset, the flagship product we will be discussing today is an enormously desirable foundational asset. The foundation is the most important part of any retirement plan. A good foundation can also be the leverage that allows you to achieve new levels of financial proficiency. Our flagship product, as well as the strategies we show for the most efficient utilization, does not compete with any of the other investments presented in this book. In fact, we complement the other strategies incredibly well. When evaluating this concept, it should not be approached as an either/or situation in compared to the other concept. This product is designed to leverage your portfolio, put your lazy money to work, give you a highly favorable taxation position, and allow you to still retain complete control of your money. The ability to leverage the same dollar into multiple different venues is the core reason why this product and our utilization model are so efficient and desirable for IAN members. We have found that more often than not, clients who understand what we are saying and follow our plan are more inclined to do additional investing, because we have given them a control and responsibility over their finances that is unmatched by any competitor.

Our plan integrates and complements everything from Short-term Real Estate, Long-term Real Estate, Gold and Silver, Hedge Funds, Oil and Gas, Business Development, and Business acquisition. My point is this, while this plan is designed to run as a standalone retirement plan, the flexibility this plan affords, may allow you to leverage into avenues previously perceived as unobtainable. This is _THE_ retirement plan for those who want _control_ over their money. This plan is so solid, so safe, so liquid, has such favorable rate of return, has such tax-efficiency, and has such a low expense ratio, that it is safe and solid enough to make it a stand-alone, voluntary retirement vehicle. I feel _very confident_ that this product is flexible enough to meet your needs, goals, and wants in ways you may have never thought possible. Whether you care more about security in retirement, reducing a tax burden, making your portfolio efficient, or being able to have complete control in a very unstable time, _you will find a value here today, unlike anything you have ever been presented before._

The above statement is 'bold' in more ways than one! I know this. What I will present to you today, is unlike anything you have ever seen before. I can make this claim so boldly, because this fabulous foundation, to which I have referred, is actually a patented product. You may have heard of a similar product. You may have heard of similar utilization concepts. You may have even heard of similar guarantees and options, but aside from those who have already talked with someone in our organization, you have never heard what I will share with you today. I can assure you of two things. First, _you are currently_ _leaving money on the table._ Second, _you are taking unnecessary risks_ _._ That said, I want to share with you a variety of concepts, facts, applications, and features, all of which will strengthen your belief in the two previous assurances. I want to start from the very basics and work to the more in-depth. I will lay the first brick of my chapter's foundation, as we discuss a real life example and the key element of control.

I want to share with you a story of a man with whom I have NOT done business. He did not purchase any financial products from me, but he had simply worked all his life and contributed to the plans provided through his various workplaces. Now readers, before you flip past this chapter because you are self-employed or a wealthy investor, bear with me. The strategies I will be sharing with you today will certainly be of value to you. Whatever your financial position is, you will be presented with a clear concept and strategy that, if utilized correctly, can help you protect, grow, and leverage your money. You will see perhaps the most tax-efficient, leveraged, secure, powerful, and flexible strategy available today. We will cover more of that in-depth as we progress through this chapter.

_This story starts with a man who walked into my office shortly before Thanksgiving, 2011. We will call him EJ for the sake of privacy. I wish I could say his story was an isolated event. It is not. EJ sat down across the table from me as I prepared to visit with him about his financial situation. I asked EJ to share with me his story, to tell me what brought him into my office. With a somewhat weary, somewhat bemused expression, he began to narrate his recent history. He turned 61 years old the prior month, and thanked God for the time he had seen on this earth. He proceeded to share with me that he knew the meaning of hard work. He started his first job when he was 16. Raised by two parents who both lived through the Great Depression, he was taught that saving money was a must. At every job he worked, he participated religiously in their retirement plan. Entering his 57_ _th_ _year, he optimistically anticipated retirement! Then life happened._

As he shared the next chapter of his life, his expression was that of one who felt helpless in the hands of another. He proceeded to tell me that, in 2007, he was diagnosed with prostate cancer. He went on to tell me that it was a miracle that he was still here - how fortunate he was. Unfortunately, his financial situation was far from fortunate. The medical bills far exceed the small amount of health insurance coverage he had. The additional costs of treatment, travel, lodging, medical equipment, denied claims, and more kept piling up. With his savings exhausted, he first turned to the equity in his house, which was nearly paid off. They denied him a loan since he was not currently employed. He was left with no choice but to turn to his retirement accounts. These withdrawals were made from the end of 2007 through 2009, when he was elated to be told by the doctor that he was in full remission. With a disappointed shrug he said words that I can still hear today. "I can't believe how fast the money went."

_We continued our discussion, spent more time talking about the blessing of being cancer-free, and then reverted back to his finances. I asked him what he wanted me to do for him, and I got an answer that was wholly unique from anything I had ever heard from a client before. After I asked the question he started writing on a notepad. As he wrote, my mind wandered back to his words that kept echoing in my head, "I can't believe how fast the money went." I_ _could_ _believe it. I knew the implications of withdrawing from a qualified account. He was slapped with the ordinary income tax as well as an additional 10% penalty since he didn't meet the plans exception for medical hardship. 2008 also marked one of the worst downturns in our recent financial history. Coupling the tax burden with significant market downturns was the perfect storm - a storm from which his financial vessel never emerged. Yes, I knew full well how the money seemingly vanished overnight. I was snapped back to reality as he slid the note pad back across my conference table. On it was a long list of names. I looked at him for explanation and he replied with a smile, "That's my family. I've heard you on the radio, and after meeting you in person, I know you have the answers I wish I'd known back in the day. Will you talk to them? I did everything I knew to do, and it wasn't enough. I want them to know more, to know all the options, to have a plan for life, but also be prepared if that plan gets destroyed."_

Like I stated before, this story of EJ is not an isolated event, and the principles are even farther reaching than his specific situation. I plan to reference some aspects of this story as I present a new concept to you, as well as while I elaborate on some of the risks associated with the currently promoted investment and retirement options.

The Concept

Before I begin to suggest to you what will likely be a new concept for some, I want to establish three things with you as my readers. First, I ask that you approach this chapter with an open mind. You _will_ be introduced to a concept that is outside your box of knowledge. When that happens, you have two choices. First, either be willing to expand your box if your research and continued discernment leads that way; or you can ignore this concept, because it is outside the realm of common knowledge. I implore you; don't let conventional wisdom or pride lead you to the latter. Second, if this concept is not new to you, please do not tune this out because you have already made an evaluation. There have been significant product advances, recently patented, that turn this concept into a model of efficiency. Any previous evaluations may be obsolete, as this product has some of the lowest costs, not only in its own industry, but especially compared to mutual funds, 401ks, and other accounts. Your time spent reading this chapter will profit you new and applicable information to your finances. Finally, bear in mind that this product, and the sub-concepts that support the product have been used by the wealthiest of Americans, Banks (Bank of America, JP Morgan Chase), Investors, and Entrepreneurs (Walter E. Disney and JC Penney). With that in mind, allow me to expound upon a concept that will absolutely astound you with its liquidity, safety, rate of return, leverage capabilities, and sheer versatility.

In the financial industry, the terms: product, vehicle, strategy, concept, process, and plan are used almost interchangeably. I would like to do my best to standardize the communication, and for the sake of my analogy, will be referring to all these different terms as "financial vehicles". This standardization should help communication, as well as allow me to draw a powerful analogy. When you think of "vehicles" there are many different modes of mechanical transportation. From a buggy, to a train, to a car, there are a variety of different ways to get you from 'point A' to 'point B'. Just like in your financial journey, there are a variety of methods to get you to retirement. What I'm going to show you today will be a financial vehicle, that when plugged into our transportation analogy, will look like a shiny, aerodynamic new car, able to run off electricity, natural gas, or diesel.

Following this analogy, the other options would be more comparable to a passenger train, an old buggy, or perhaps a beat up old car. All those other options are significantly better than walking, but in no way compare to the model of efficient transportation I described above. Just to make sure my analogy sinks in, an analogy I plan to delineate in great detail and with many facts as we proceed through this chapter, _I am planning to show you something so efficient, so powerful, and so comprehensive, it will make the other investment options in its class look like old cars, trains, or even a buggy_.

Introducing the Asset of the Century

As I draw back the curtain you may find some level of surprise, as it's a rather boring revelation. This premier financial vehicle is _Indexed Universal Life Insurance_ or IUL. Hold your horses before you drive away with your buggy; set aside any pre-conceived notions and perceptions you may have about the IUL, as I present facts, documents, and information that will validate every statement and analogy I have made so far. The significant product advances and rapid decline in market conditions have both driven the IUL to its stand on the winner's platform. We'll talk more about our specific flagship IUL, as well as compare it not only to other IUL's, but also to various other assets.

What Sets us Apart from the Competition

What is being presented to you here is not your average life insurance product. It's far from it. Although many of the things I will write about may apply to many other Life Insurance products, our Flagship Product is far from common place. This is not your grandmother's Whole Life contract, your dad's term policy, or your uncle's Variable Life product. This is a conservatively based product that is 100% exclusive to our distribution channel. This is not something you can buy from your auto insurance salesman. You can't buy this from your brother-in-law who has been trying to sell you insurance for years. This is an elite product, only in the hands of a select few agents.

The reason there is some degree of limitation on this product is due to a matter of aptitude. The agents who are able to successfully sell these premier financial vehicles are more educators than salespeople. The ability to properly design and structure a permanent insurance policy is something that I would say less than 5% of agents have in their skill set. With that in mind, you can see why there are so many horror stories of clients with poorly designed products that did not meet their expectations. This problem is not the fault of the product, because the IUL is simply a tool. It is much like a scalpel. A scalpel in the hands of a surgeon could save your life. A scalpel in the hands of a child could be an incredibly dangerous thing, both to the child and those around him. All the agents in our organization have been trained both on and off the field to be proficient 'surgeons' with permanent life insurance.

As I proceed through this chapter, I plan to make many points about the IUL in general as a savings tool. These points will apply to any IUL. At my firm, we write for MANY carriers, but we do have one flagship product. This product is patented. This means we have the exclusive ability to write it. This product outperforms the competition by drastically increasing the internal efficiency of the policy. By increasing the efficiency, it means you have a lower expense ratio, higher account value, and significantly higher amounts you can take as income distributions. That said, I digress back to discussing the pros and cons of not only the IUL, but the other commonly promoted products in its class.

How to Evaluate an Asset

There are 5 key elements in any good financial asset. These elements are: **Liquidity, Safety, Expense Ratio, Return, and Tax-Efficiency**. You can use the acronym **LiSERT** to remember these evaluation points. It is vital to evaluate all assets in your portfolio against these measurements.

• **Li** quid - Can you put your hands on the money in less than 72 hours?

• **S** afety - Do you have a potential for loss? How likely is the loss, and how much can you lose?

• **E** xpense Ratio - How much does it cost me to have or how much does it cost me NOT to have it?

• **R** eturn - What is my potential for return?

• **T** ax-efficiency - How is my tax position affected if the asset's value decreases, increases, or stays level?

As we look for the ideal asset to serve as the foundation for a solid retirement, we must look for assets that exhibit the attributes listed above. Taking those attributes, it stands to reason that a perfect asset would be: 100% liquid from day one, 100% safe with no possibility of loss in any scenario, 100% free, have infinite return, and tax-deductible going in, tax-deferred while growing, and tax-free when you distribute it out. The asset I just described does not exist. This may explain why you have some level of discomfort with your portfolio! However, it stands to reason that some assets may have more of these attributes than others. Therefore, when considering a foundational asset, it makes sense to look for an asset that has the highest scores on all the above listed attributes.

Common Retirement Vehicles and Distributions

Let's examine some of the various tax-advantaged plans. A plan that may let you participate in the market, but since you earmarked the dollars for retirement, it allows you to be in a more favorable position than annual taxation. You will need to evaluate both a Roth and Qualified retirement account. Both plans are designed for retirement, but in our vehicle analogy, are more like a train than a car. You have very limited flexibility, and a lot of "tracks" you have to follow. Between RMDs, Early Withdrawal Penalties, and limitations on collateralization, there is little versatility in these plans. Remember the story of EJ? His plan was on track, he had a destination, and he was in the train, but when life tried to take him on a different route than his 401k's train tracks directed, he was unable to follow that new course without a very painful dismount.

Common Retirement Vehicles and Market Volatility

The majority of our voluntary retirement savings plans are directly influenced when the market has a major downturn. In other words, your savings vehicle is subject to market volatility. I liken using the market to grow a retirement, without using any of the available tax codes designed for retirement, to having your primary vehicle be a buggy. It's not very fast, you have little mechanical leverage, but you do have a lot of control when it's working right! Unfortunately, if your horse (in this case the market) either dies, gets sick, or decides not to go in your desired direction, you have no choice but to either get out of that buggy, or ride it till it rests at the bottom of a hill. You may have some perceived measure of control, with bits, bridles, and reins, but at the end of the day, your horse is what drives you. Your vehicle is only as good as the horse. Volatility in the market, just like volatility in the horse, can prove to create a less than optimal method of transportation for the long journey of retirement.

Common Retirement Vehicles and Taxes

First, the two most prominent options for voluntary retirement grade savings vehicles fall under two tax treatments: Qualified or Roth accounts. Qualified accounts are tax-deferred. Tax-deferred means you didn't pay taxes now, so you will pay taxes at withdrawal. The majority of 401ks, 403bs and IRAs are Qualified accounts. Roth accounts are a step in another direction. You pay tax up-front before the dollars go in the account, and are allowed to harvest the principle and growth tax-free. Since Roth is just a tax-classification, you can have Roth 401ks, 403bs, and Roth IRAs, but the most common Roth vehicle is the Roth IRA. Both tax structures have their pros and cons, many of which we will address as we move through this chapter.

Furthermore, in comparing a Roth to a Qualified account, you must evaluate the risk. It's much like a farmer looking to plant his crops. Suppose he could either pay tax on the seed at time of purchase in the spring, or pay tax on the entire harvest in the fall? If his plan is for a bountiful harvest, the prudent farmer pays his tax in the spring. The risk you run with a tax-deferred qualified retirement plan is that the future date to which you postponed paying your taxes may have a higher tax bracket than the one you are in currently. With the increase in debts and spending of our government, it is feasible to predict an increase in future taxes. This means that not only are you on a train that may be difficult to divest yourself from, you are also waiting till the end of the journey to find out how much your fare will cost. If there was an increase in the price of fuel (Tax Increases), you can imagine that as you get off this train, your ticket price, due before you exit, will reflect all increases incurred during your trip. The control is taken out of your hands! A Roth is a step in the right direction, but still holds some restrictions related to distributions and access of your account that are less than optimal. Unless you need to use the funds from a Roth at one of the predefined train stations built into the tax code, such as Medical Hardship, First Home, Education, or attained retirement age, you lack the flexibility to do so without a penalty.

The IUL: Internal Cost

Before I address the previous issues, I want to touch on one of the most common misnomers associated with Indexed Universal Life Insurance as a savings vehicle. I often hear objections to life insurance based on a perception that it costs too much. In fact, most people think life insurance is one of the most expensive assets to own; however, _a properly structured IUL can actually be one of the least expensive assets you will ever own._

Consider this comparison: Your parents owned a taxable mutual fund. They pay 20% tax religiously every year on the gains. The day that they die, you receive your inheritance. Imagine the IRS calling you up and telling you that since your parents paid tax so faithfully, they decided to give you a full refund on all the tax your parents paid. Can you imagine that? Of course not! The story is laughable. Let's take another situation. Your parents instead have an IUL. It is tax-free, but instead you pay 20% of the earnings in costs of insurance charges from this "expensive IUL". This 20% is actually much higher than the charges we experience in our policies due to our exclusive product, which we will discuss in far more detail later. For now, let's assume a high percentage, and say the 20% would be paid in a cost of insurance that you would otherwise have paid in taxes. Now, imagine your parents passing. You receive your inheritance. Imagine the insurance company calling you up and telling you that since your parents paid cost of insurance so faithfully, they are going to send you a full check, tax-free for all the cost of insurance charges your parents paid. Is that laughable? Hardly. It's contractual. That is the power of IUL.

As I mention Life Insurance, the conventional wisdom, television performers, and other so-called financial experts likely come racing to your mind. "The costs are too excessive." "You would do better saving the dollars than putting them into the insurance contract." For the majority of insurance contracts that are out there, I may agree with you! However, when properly designed, an insurance policy can provide the best leverage, tax advantages (under Section 7702), and downside risk protection you will ever find in one financial vehicle. Furthermore, this specific product, the flagship IUL at my firm, has a patented process that drastically decreases the insurance COMPANY'S risk, which is passed on to the IUL owner in the form of lower internal operating costs and increased efficiency and profitability. I will go more into what sets this apart from other life policies as we get further into the chapter.

The IUL: Security against Market Volatility

The IUL addresses **Market Volatility** with a Fixed Indexed Account strategy. This means that your cash value gets credited interest based on the returns of an annually picked individual stock index or a blend of multiple stock indexes. Notice I said your money is credited interest BASED on the returns, not because it is invested directly in the market. This makes a big difference when it comes to risk and control to you as a client. Since the returns are based on the stock index, the IUL can also have various guarantees, including downside loss protection. Our flagship product has an annual guaranteed minimum credit rate that will never fall below 0%.

That means in any given year, regardless of how negative the market is, the negative market return will not cause you to have a dime less in your account. Let that sink in. The S&P 500 fell 35% in 2008. Your loss is 0%. Think of EJ and his story in this light. How different might his story have been if his account was not reduced 35% DURING his withdrawals? Now every good salesman for the stock and mutual fund industry will tell you over time the market eventually rights itself, and the S&P average will return to 7%. That is true, but have they studied the ORDER of returns and that effect on the end RATE of return? The story of EJ is more dramatic than that of the average person, but how much more effect does a withdrawal have in a negative year than in a neutral or positive year? The losses five years before and after retirement age are the most acute losses a saver will ever experience. There just isn't enough time to make up the losses. When you take withdrawals in a down year, it's like getting paid 75 cents on the dollar for your savings. **Reducing or even eliminating your risk just makes good sense.**

What about the upside though? What do I give up in return for this guarantee of no loss? In our flagship product, the 'Cap', or maximum interest you can be credited, is between 13% and 16%. If you think that trading a maximum return of even 13% for a floor of 0% is a bad deal, you are crazy. Needless to say, the protection against a volatile market gives you a far greater security and control over your assets if and when life doesn't go exactly as planned.

I cannot stress the power of the Guaranteed Index Account enough. When in the market, volatility is absolutely your enemy. This is pure and simple. In an IUL, with a Guaranteed Index Account, volatility is your friend. When the market has a significant downturn, you get a 0% return. Now once the market is significantly lower, it will likely rebound. As the market rebounds, you are able to participate in all the gains even though you never experienced the losses. This means you get the good of the market, without the bad. What I'm about to tell you is tremendous. It's what the banks, the financial institutions, and those seeking to control the information flow don't want you to know. _Over the past 20 years, the Guaranteed Index Account has had historically better returns than being directly in the market itself, but without the risk._

The IUL: Preferred Distributions (Tax-free, Penalty-Free, Any Time, Any Reason)

The IUL also has the answer for an increase in future taxes. Under IRS code 7702, distributions from an IUL, if structured correctly, can be TAX-FREE. This means you pay tax on the dollars going in, but pay NO tax on the gains when you distribute the money coming out. You pay tax on the seed, not the harvest. All the gains you reap after purchasing the policy can be distributed TAX-FREE. Should tax rates soar or markets crash, your account will be blissfully impervious to either of these two catastrophes. Also, should you need to access the money prior to age 59 and 1/2, there is no 10% penalty. You can access your money at any time, for any reason, with no penalty.

The IUL: A Financial Lever

So, obviously the IUL makes sense in comparison to other retirement vehicles for someone who wants the safety without sacrificing returns; but what about the younger investor? What about someone who wants to take a little more risk? What about the wealthy investor who is looking to increase his accumulation, and is not as concerned with the guarantees of retirement, but simply wants to take advantage of every tax and investment principle available to grow their wealth to its maximum potential? My final point will summarize how this plan can fill the void for someone looking for a stand-alone secure savings vehicle, but also serve as a leveraged platform for those looking to vitalize their portfolio like never before.

The final and most important advantage to an IUL is the element of control and access. With a traditional retirement plan, it's there to enhance your savings for retirement. It does not help you accumulate any more than the principle you save, plus the interest you earn. There is no element of leverage. Leverage is positional advantage. Leverage is having one dollar, positioned correctly in correlation with the fulcrum, which allows your one dollar to raise multiple dollars to new levels. I know the analogy seems childish, but think of a see-saw. Imagine if one end of the see-saw was twice as long as the other. One child may very well be able to lift three children of equal weight. The same principle applies to leverage of money. Having your dollars correctly positioned is KEY to having the most efficient, safe, and profitable portfolio. In a traditional retirement vehicle, you typically save, earn interest, and then take income. The only leverage is the interest you earn on each dollar you have saved. This is better than not saving at all, but it's still a train on tracks. It is far too rigid and unforgiving, not to mention unable to take advantage of any opportunities that aren't at a pre-defined station point. On the other hand, with the IUL, you have the ability to access your account value prior to hitting retirement age WITHOUT PENALTY! This means that rather than just having funds available at retirement age, should that business deal come along prior to age 59 and 1/2, should you desire to pay cash for something and finance it yourself to avoid a high interest rate, or should you _need_ to access the money prior to retirement for any reason, YOU CAN. You have complete control over you finances, so you can make decisions unencumbered by the traditional rules of retirement plans.

Summary

Before we go into the specific details of our flagship product, I want to reiterate the five areas in which our IUL clearly outshines the competition.

1. It protects against MARKET VOLATILITY with guaranteed 0% floors and high caps (13-16%).

2. It eliminates the concern of future increase in taxes, by allowing for TAX-FREE distributions.

3. It increases YOUR _control, access, and versatility_ should life throw you either an opportunity or a tragedy.

4. It offers higher security **without sacrificing return** : Historically better returns than being directly invested in the market, _without the risk!_

5. Exclusive Internal Policy mechanics allow for significantly decreased costs, increased accumulation value, and significantly increased distributions.

As we near the conclusion of this chapter, I want to make sure I cover in detail exactly what and how our flagship product actually works. We are going to get into the mechanics of our product so you can see all the gears inside this powerful vehicle. I plan to show you three things before I close this chapter:

1. The strategy used in designing a "properly structured" IUL.

2. The factors every Insurance Company must consider when they determine their internal charges on an insurance policy.

3. Not only why our Flagship Product lowers costs DRAMATICALLY, but why the competition can't match this exclusive product.

Ignorance vs. Strategy

When you think of Life Insurance, the conventional wisdom, television performers, and other so called financial experts likely come racing to your mind. "The costs are too excessive." "You would do better saving the dollars on your own than putting them into the insurance contract." For the majority of insurance contracts out there, I may agree with you! However, when properly designed, an insurance policy can provide the best leverage, tax advantages (under Section 7702), and downside risk protection you will ever find in one financial vehicle.

I believe there are only two SMART ways to buy insurance: pay the _least_ premium for the _most_ coverage or pay the most premium for the least coverage. Everyone has heard of the former idea. That's called shopping! Suppose you want $100,000 of life insurance. You could get a variety of quotes and see who offers the best price. So the lowest price for $100,000 of insurance is determined by the insurance company, how cheap they are willing to offer it. Most people don't know who decides the _maximum_ amount you can pay for that same $100,000 of insurance. This amount is actually determined by the IRS. So it stands to reason that if you want to have the MOST efficient cash value, you will have the least amount of insurance the IRS will allow you to buy, for the amount of premium you _want_ to put into you policy. This allows you to have the lowest internal costs for that Death Benefit attached to your IUL coverage. Basically, you don't buy any more coverage than the amount specified by the IRS, as the minimum Death Benefit allowed for the amount of premium you want to contribute each year.

The Math

Now the math begins. I say math and not magic, because magic is merely an illusion. Math is concrete. What I am about to show you is a patented, mathematically sound, viable strategy, that one insurance company has used to produce an IUL that has an unfair advantage over the competition. In fact, it blows the competition away. Before we discuss the tremendous attributes of our Flagship Product, let's review where we are now. The IUL is clearly a significantly better retirement vehicle than the competition. Even the so-called tax-advantaged plans can't hold a candle to the efficiency and flexibility of the IUL. Also, the ability to have access to your savings prior to retirement age may allow you to take advantage of some financial opportunities that otherwise would have been outside your grasp. This plan enables someone to take advantage of compound interest without interruption, leverage against this compounding asset, and make the leap from simply being a saver, to a true wealth creator. Being unable to make this shift into a position of control over their finances is what has kept so many Americans away from the elusive security and wealth they are so desperately trying to obtain.

What our flagship Index Universal Life policy has done is found a way to reduce the insurance company's risk in relation to death benefits. Typically, when an insurance policy is issued, the Insured will make an election to name a primary and contingent beneficiary. So, for example, Dad buys a million dollar life policy, names Mom as the primary beneficiary, and son Bobby as the back-up beneficiary. Suppose dad passes away shortly thereafter. Mom will meet with the life insurance man, and he will explain to her the options for how she can receive the death benefit. She can either take installments or a lump sum, and it is entirely her choice! Mom weighs the options and decides on taking 30 years of payments, so the money doesn't run out. If she were to pass away during those installments, the unpaid portion of the benefit would go to the son, unless another election had been made. Not many people are like Mom! Now let's take another example. Suppose Mom and Dad die at the same time, without a trust. That means Bobby is meeting with the Insurance man by himself. He decides on the lump sum. This lump sum quickly turns into a few lifestyle purchases before he decides to invest a portion for future needs. It doesn't seem all that different, but the key is in the installments. You see, there is more risk, due to the time value of money when an insurance company has to pay out a lump sum versus an installment. Therefore, to stay financially sound, **an insurance company HAS to assume that nearly everyone, if given the option, will take the** _lump sum_ **.** This is why you are charged an internal cost of insurance on ANY life insurance policy. It's the cost to guarantee that a death benefit will be paid out should someone pass away sooner than life expectancy dictates. Insurance companies know how to evaluate that risk, based on the law of large numbers, and using actuarial tables and mortality credits. The key thing to remember is that _an insurance company's net financial impact is worse if the client takes a lump sum_ , because that money is no longer working for the insurance company.

The Flagship Product and How It Works

Now, enter our flagship IUL product. Enter the math. Enter a new era of investment grade life insurance policies. Everything else previously discussed still applies. All the strategies, protections, leverage, taxation and other features previously discussed are still applicable. There is just one small addition that was made to the already strong industry of Life Insurance. Our flagship product has a patented a process in which the IUL _owner_ can make an irrevocable designation that the beneficiary will receive the proceeds from the death benefit in the form of installments. This election flips the previous actuarial risk on its head! Now, instead of the insurer having to assume that a beneficiary will take the benefits as a lump sum, and consequently have to charge MORE, they know _contractually_ that the beneficiary WILL be taking the benefit as an installment, so they can charge _less!_ There is an infinite amount of flexibility with this specific policy and the benefit election, allowing a parent to retain control even from the grave! The real value, however, comes from what it does to the internal costs of the policy.

Because the insurance company is able to better evaluate their risk, they are able to have SIGNIFICANTLY lower cost of insurance charges inside the policy. This is so significant from an insurance company's stand point because instead of having to take the million dollar death benefit out of their interest-earning account (losing not only the million, but also what that million could have earned if they did NOT have to pay it out), they are now able to use simply the interest the million earns to pay the installments due the beneficiary. It is not uncommon for us to see the illustrated 'cost of insurance' charges inside the policy be reduced to $0 mid-way through the policy's lifespan.

What this means to a client is that they will have the lowest internal fees on their account when they need the greatest security (at retirement). You can have all the benefits of tax-deferred growth, tax-free-distribution, guaranteed no loss/floor, high potential earnings/caps, the ability to take asset-based loans, flexibility of distributions (no age minimum), and the added benefit of a healthy built in Death Benefit should your time be called unexpectedly. All these benefits are built into a policy that can show an attractive net rate of return _after tax_. When compared to taxable vehicles, this concept, paired with our flagship, patented and exclusive product, is the clear winner. In fact, we think it's The Asset of the Century!

BONUS!!!  
Detailed Analysis

I have attached the following graphs and explanations supporting my claim that the IUL is the most prudent foundational asset.

Indices used:

• Stocks: S&P 500

• IUL: S&P 500 with 13% cap

• Gold: 2nd London Listing

• Corporate Bonds: Moody's AAA

• Government Bonds: 20-Year Treasuries

• Oil: WTI Oklahoma

• Real Estate: FHA House Price Index

• Natural Gas: Henry Hub Gulf Coast

To support our assertion that IUL is the best "foundational" asset for a portfolio (highest return for the lowest risk), here are some observations related to IUL compared to other assets:

Low-Risk

IUL has no loss in bad years. The only other assets with no annual losses were government bonds and corporate bonds. (Important note: returns used in this analysis assume bonds held until maturity.)

Both government bonds and corporate bonds have significant interest rate risk (i.e. could lose money) if sold before maturity, and since most people agree that we will have higher interest rates in the future, current bonds face significant devaluation if sold before maturity, and therefore should only be in a portfolio if the investor is committed to hold until maturity (i.e. their liquidity cost increases as interest rates rise)

• IUL worst year of 0.00% compared to stock market worst year of -37.58%

• "Natural" resources like oil, gas and precious metals are also disqualified for "foundational" asset consideration due to double digit losses in bad years

• IUL has low volatility

o 3rd least amount of return volatility after government bonds and corporate bonds

o IUL volatility range of only 13.00% compared to stock market of 61.06%

• Low default risk

o IUL is sold by the highest-rated industry in the world—the life insurance industry

o With the recent bankruptcies of cities and municipalities, and with the recent threat of debt default by the U.S. government, it could be argued that life insurance companies have the lowest risk of default of any asset

• Low creditor risk

o Depending on state law and ownership structure, IUL benefits can be 100% protected from lawsuits and bankruptcies

Strong Returns

• IUL is the only asset where return could significantly increase when investor passes away

• IUL is the only asset that can be sold in later years for significantly more than policy values

• IUL policy values have consistently higher returns

o 3rd best "average" return of any asset since 1/1/2000

• Highest return of any traditional (i.e. non-speculative) asset (IUL averaged 6.30% compared to stock market of only 0.85%)

o Highest "total" return of any asset since 1/1/2008

• IUL up 58.29% compared to stock market of only 13.06%

o 3rd best "total" return of any asset since 1/1/2003

• Highest "total" return of any traditional (i.e. non-speculative) asset (IUL up 135.27% compared to stock market of only 81.91%)

o 3rd best "total" return of any asset since 1/1/2000

• Highest "total" return of any traditional (i.e. non-speculative) asset

o IUL up 135.27% compared to stock market of only 12.52%

o This is significant...IUL would have grown to more than DOUBLE what the S&P 500 index did since 1/1/2000!

o IUL - $10,000 would have grown to $23,527

o S&P 500 - $10,000 would have grown to $11,252

Low Expenses

IUL could be the least expensive asset if properly structured, funded and utilized

• Tax Favorability

o IUL could be the most tax efficient asset if property structured, funded and utilized

• Liquidity

o IUL could be the most liquid asset if properly structured and funded

o This liquidity can be used for either withdrawals or loans

• Leveragability

o IUL could be the easiest asset to leverage (i.e. borrow from) if properly structured and funded

o IUL loans are asset-based and as such...

• Credit and income not required or checked

• No cash flow payment required

o Loans are non-callable

• Insurance companies cannot force loan repayments like brokerage companies can do on margin loans

o Low interest rate risk on loans

• Either fixed or capped interest rates

o Loans can be used for...

• Ideal for financing the acquisition of other assets

Examples:

o Use as down payment on investment real estate being held long-term

• Since no payment required, could pay off policy loan when property is sold

o Use for acquiring and rehabbing "fix and flip" real estate

• Since no payment required, could pay off policy loan when property is sold

o Purchasing gold

• Since no payment required, could pay off policy loan when gold sold

o Purchasing stocks

• More favorable than using callable margin loans from a broker

o Financing automobiles

• Note: must make normal car payment back to yourself/policy for this to work long-term

• Pay yourself interest rather than bank

o Financing business equipment

• Note: must make normal lease payment back to yourself/policy for this to work long-term

• Pay yourself profit rather than bank or leasing company

• See your accountant for additional tax benefits associated with this strategy

• Tax-free college funding

o Additional benefit is that IUL policy values are not counted against you or your child for financial aid calculations

o Other college savings plans (i.e. 529 plans) do count against you or your child for financial aid calculations

• Tax-free retirement income

Closing

In closing, I want to thank you for bearing with me thus far. I hope the information and data put forth here today was useable and valuable to you. I implore you not to sit on this information. Take the time to do the appropriate research and evaluate this in regards to your own finances.

To learn more and have a tailor-made custom plan, please contact Strategic Investment Network. _Don't leave money on the table or take unnecessary risks any longer_! You have nothing to lose, only to gain from speaking with us.

Contributors: Richard Amburn, Samuel T. Prentice and Doyle Shuler of Barefoot Retirement

_The core staff of Barefoot Retirement has over 40 years combined experience. Each of the members of the Barefoot Retirement team has a true passion for educating our clients. Our mission statement is to educate our clients to a point where they are empowered to make their own best decisions. Through product research, advisor education, and gifted communication skills, the Barefoot Retirement team has refined our program to be of significant value to everyone from the affluent investor, to the average worker just looking to supplement their retirement. The Barefoot Retirement Plan was formed around a flag-ship product, with exclusive features. This exclusive product has proven to be the flexible and viable answer for the economic storm that all Americans face today. That's why people are calling this plan,_ " _America's Most Powerful Retirement Plan._ "

_Please visit us at:_ www.BarefootRetirement.com _and claim your_ FREE _copy of our new, bestselling book,_ " _The Barefoot Retirement Plan._ " _While visiting, you can also get a Free copy of our one-of-a-kind, Barefoot Retirement Calculator._

# Chapter 9: Introduction to FOREX Trading

The Benefits of Forex

• Forex is the largest and the most liquid of the financial markets.

• The volatility of the Forex market enables traders to profit on exchange rate fluctuations.

• Forex traders profit regardless of market direction, whether the U.S. dollar is rising or falling.

• The trading cost of the Forex market is very low, creating one of the most cost-effective means of investment trading.

• Forex accounts are traded on margin, allowing investors to leverage their capital to trade larger positions and provide potential for greater returns.

• The Forex market operates 24 hours a day, 5 days a week.

The Rise of an Open Currency Market

When people think about investing in the financial markets they typically think about stocks, bonds, mutual funds, and exchange traded funds. Rarely do investors think about so-called alternative investments. There is, in fact, a financial market that dwarfs the world stock markets called _Forex_ (an abbreviation of Foreign Exchange). Forex is a global decentralized market that determines the relative value of one currency over another at any given moment.

Thank You Richard Nixon

In July 1944, the Bretton Woods Accord was convened. In an effort to avoid the mistakes following the First World War, several resolutions arose to help the European economies recover from World War II. The resolution pegging the European currencies to the U.S. dollar had the greatest impact on the global economy in the decades that followed. At the time, the U.S. dollar was a _gold standard currency_ , meaning the value of the dollar (and the European currencies pegged to the dollar) was fixed to a specific quantity of gold.

It did not take long before the Bretton Woods Accord came under attack. The inability of sovereign states to manage the value of their own currencies became a major point of contention in Europe. Unchecked inflation and the energy crisis in the early 70s caused investors to flee to gold to protect their savings, causing the price of gold to soar. Because the dollar (and the European currencies pegged to it) was fixed to gold, they too skyrocketed. In an attempt to deal with surging inflation in the U.S., and a dollar value flying to the moon (effectively ceasing exports), President Richard Nixon dropped the gold standard requirement in 1971 and introduced the _fiat currency_ system. This effectively ended the Bretton Woods Accord's pegging of European currencies to the U.S. dollar. Soon after, the Chicago Mercantile Exchange launched the International Monetary Market. The fiat currency system was the first time free-floating currencies began trading on an open market and were allowed to rise and fall with supply and demand. It is this fluctuation that made speculation on future currency values possible, and ultimately created the _spot market_.

The Forex Spot Market

In the early days, foreign currency trading was almost entirely restricted to the largest financial institutions to facilitate international trade, called the _Interbank Market_. Overtime an _over-the-counter (OTC) market_ evolved among pioneering speculators using phones and fax machines to buy and sell currencies. In the spot market, trades are settled immediately; however, even though the trades were considered executed, the physical delivery of the currencies can take up to two days after the trade was executed. In the days of phones and fax machines, this was called _T+2_ \- trade plus two days. Where the Interbank Market was primarily facilitating international trade, including taking long-term positions to _hedge_ against the devaluation of currencies, the speculator was attempting to make a profit on the fluctuation of price in currencies.

The rise of the Internet, and the electronic trading of stocks online, created an enormous retail trading market. This new retail market attracted a network of online Forex brokers offering direct currency trading services to speculators. These brokers and a number of software developers began to develop electronic trading platforms to trade online in the late 1990s. The influx of retail investors into a decentralized, over-the-counter, secondary market, with no central laws, regulations, or governing body, trading across sovereignties, attracted massive financial fraud. In addition to prevalent confidence schemes, in the early days it was commonplace for investors to be at odds with brokers manually filling their buy and sell orders and trading against them. Investors eventually organized against unscrupulous brokers and shared tips and techniques about timing trades and hiding their orders from the brokers' clearing desks.

Today, execution is electronic with no human intervention or manipulation, making the markets faster, safer, and more efficient. The growth and success of Forex over the years has opened doors to an ever-increasing number of online trading platforms, including the automation of trading via software programs or algorithms directly accessing brokers through _APIs (Application Programming Interface)_. The development of these automated trading systems is where **BlackBox Alpha** has found its niche.

The Mechanics of Trading Currencies

The Forex market is traded in pairs. Similar to traveling in Europe or Japan and going to a bank to exchange U.S. dollars, you receive a quote from the bank to convert your dollars. You sell your dollars to the bank to buy Euros or Yen. In the foreign currency market currencies are quoted in pairs, for example, the amount of U.S. dollars you need to buy a Euro. In this way, the value of a currency is determined by its relationship to another currency. In this example, the U.S. Dollar and Euro are listed as EURUSD. The Euro is considered the _base currency_ , and the U.S. Dollar is considered the _quote currency._ The currency pairs show how much of the quote currency is needed to purchase one of the base currency.

At the time of this writing, the _bid price_ (or buy price) for the EURUSD is 1.35027 - meaning that it will cost $1.35 to purchase €1.00. Conversely, you can sell the EURUSD (which means you would be selling the base currency, the Euro, and buying the quote currency, the U.S. Dollar). The _ask price_ (or sell price) for the EURUSD is currently 1.35038.

Unlike the stock markets, most Forex brokers do not charge a commission. The brokers' fees are typically built into the _spread_ \- the difference between the bid price and the ask price. In the example of the pricing above, the spread is 1.1 pips. The term _pip_ is the common term used to designate price differences between any two currencies (derived from "Performance Index Paper", which large corporations use to hedge their currency risk). A pip is usually the fourth decimal place in a price quote. (The exchange rate for the Japanese Yen is an exception; the pip is represented by the second decimal place).

In the example above, the pip is only 1/100th of one penny in price movement. This may seem nominal, but the liquidity in the foreign currency market is enormous and just a slight one pip move represents a massive amount of money. The combined average daily trading volume of the NASDAQ and the New York Stock Exchange this year is estimated around $188 billion. The average daily trading volume of Forex is estimated at $5.3 trillion. The foreign currency market is almost thirty-times bigger than the major U.S. stock markets!

In addition, most Forex investors trade on _margin_ using _leverage_. Leverage is a financial tool that allows you to multiply the value of your investment x times. When you open an account with your broker, you can choose your leverage. In the United States, the _National Futures Association_ (like the SEC, the NFA is the regulating body for the U.S. futures industry, including foreign currency trading) limits leverage in foreign currency trading to 50:1, but some foreign brokers allow leverage up to 500:1, or even 1000:1.

The value of each pip in price movement depends on four factors: the currency pair being traded, the size of the trade, the account leverage, and the exchange rate. The calculations can get somewhat complicated, but to put it in simple terms, if the size of your trade is $1,000 and your leverage is 50:1, your investment will be $50,000. Using the price above, a single pip move is equivalent to $5.00. In other words, a 0.0074% price movement would be equivalent to a 0.5% move in equity. You can begin to see the power of Forex trading. Many times positions are only open a few hours, or even a few minutes or seconds using algorithms for _high frequency trading (HFT)._ As trades close, and equity increases, subsequent trades can begin compounding on the new equity levels.

Another peculiarity of Forex is its continuous operation. Because the foreign currency market is global, it is open 24 hours per day from Sunday, 5:00 pm EST/EDT when the market opens in Sydney (Australia's Monday morning) through Friday, 5:00 pm EST/EDT when the market closes in New York. In a full year the U.S. stock markets are typically open 2,125 hours, while the Forex market is open 6,330 hours. This is equally intriguing as it is disconcerting to new foreign currency traders. News events from central banks across the globe can have significant impact on the prevailing trend of a currency pair. For example, a trader may go to sleep with a EURUSD trade open overnight and wake up to find the market has moved against him or her when the Bank of Japan made an interest rate decision or the Reserve Bank of Australia's governor gives a speech.

Basic Trading Strategies

In foreign currency trading, as in all trading, there are two majority philosophies of trading. The first is _fundamental trading_ , which considers a country's overall economic health in relation to other global economies, and how the different currency pairs will respond. The second is _technical analysis_ and the attempt to predict price movements based on _trailing indicators_ and _momentum indicators_.

Fundamental Investing

Fundamental Forex traders evaluate currencies and their countries, like an equities investor would evaluate companies, and use economic announcements to gain an idea of the currency's true value.

Fundamental trading may take a long-term perspective on currency trends, including banks, multinational corporations, and countries holding large positions in foreign currencies as a hedge against future price movements. Another long-term fundamental strategy includes the _carry trade_ , which is selling a currency that is offering lower interest rates and purchasing a currency that offers a higher interest rate - in other words, borrow low, lend high.

The trader using the carry trade strategy captures the difference between the pairs' interest rates. Trading a leveraged account, a foreign currency investor can make the trade highly profitable even with only a small difference between the two rates.

An example of a USDJPY (U.S. dollar, Japanese Yen) carry trade happened in the late 90s when Japan decreased its interest rates to zero. Investors borrowed yen and bought U.S. dollars. The investor would earn the difference between the Japanese interest rate and the U.S. interest rate. With leverage, the returns could be substantial.

For example, an account trading at 50:1 leverage could create a substantial return on a 3% yield. With a $10,000 trade, a trader would control $500,000. In the currency carry trade from the example above, the trader would earn 3% per year. At the end of the year, the $500,000 investment would equal $515,000, or a $15,000 gain. Because the original investment was only $10,000, the real return would be 150%. It is these types of examples that are so alluring, and attract traders to the Forex market. However, the truth is that this strategy only works if the currency value remains unchanged or appreciates. With a highly leveraged account, the risk exposure over a year is enormous. If (or when) the currency value depreciates, or briefly swings, the exposure could cause a margin call if the trader's account is not properly funded. The truth is the trader would have to maintain a substantial amount of cash in his/her account to cover the margin requirements, which would substantially reduce the effective return.

For the spot market investor trading a leveraged account, a long-term position increases market exposure and risk. For the purposes of our discussion, fundamental investing is typically _trading the news_ , which is often a very short-term strategy. Trading the news is an attempt to anticipate a country's economic reports and their impact on the exchange rate of currency pairs. These trades are typically open for only a few minutes, and very often the exchange rates swing wildly leading up to and following the announcements. Scheduled news events include major economic reports, such as: interest rate decisions, gross domestic product, unemployment claims, consumer confidence, etc. Because these events are scheduled to the split second, trading can become very volatile as the market tries to anticipate the outcome before the announcement, digest the announcement, and finally respond to it.

In the chart above you can see the effects of a speech given by Federal Reserve Chairman Ben Bernanke. Prior to the speech you begin to see the price vary wildly, more than 25 pips during a single 15 minute time period, and then suddenly drop more than 85 pips as the market reacted to the speech. Traders trading the news attempt to predict breakouts like this and place trades to capitalize on the sudden price movement. (Note: the price eventually dropped close to 140 pips, and then reversed to eventually return to the pre-speech highs just 48 hours later).

Because reactions to news events are notoriously difficult to predict and measure, many foreign currency traders gravitate to technical investing.

Technical Investing

The basic presumption of technical investing is that historical price action predicts future price action. The challenge of technical analysis is developing a strategy using the enormous amount of market data available to create a statistically significant forecast model.

Let's take a closer look at the assumptions a technical trader makes:

1. Historical _price action_ predicts future price action. In other words, by studying historical price movements a trader may recognize a consistent pattern that sets up the change in price.

2. Anything that influences an exchange has already been factored into the price by the market. This includes: economic, political, social, and psychological factors. The idea being that with millions of investors and trillions of dollars exchanging hands each day, the trend and flow of money is what becomes important.

3. History repeats itself, often, in predictable patterns. These patterns are called _signals._ The analysts goal is to recognize a current market signal by examining past signals.

4. Prices move in trends. Once a trend has been established, it usually continues for a period. (Sound familiar? _An object in motion tends to stay in motion unless acted upon by an external force_. A news event, for example.)

Traders use price charts, volume charts, and mathematical representations of market data as pieces of their strategies to find the ideal entry and exit points for a trade. Some of the more popular or recognizable representations, or studies, include: _Moving Averages, Bollinger Bands, Relative Strength Index (RSI), Stochastic Oscillator, and Fibonacci Retracements_. There are literally hundreds of books, tutorials, and courses available on each of these studies. Let's take a closer look at one of the easier to understand indicators.

Moving Averages

Moving averages are one of the most commonly used indicators. The benefit provided by a moving average is to reduce exchange rate fluctuations. The moving average smoothes out these fluctuations in price, making it easier for the trader to identify and authenticate market trends from the normal up-and-down movements in price common to all currency pairs. Technical traders seek to find a trend when studying pricing data. If a trader identifies an uptrend, the probability is that if they place a buy order their position will increase in value.

Technical traders also attempt to identify _trend reversals_ using moving averages. Trend reversals happen at the point the market determines a currency has reached its peak value. By identifying a trend reversal, the trader can close their positions at the most profitable level. Moving averages can help in both regards.

In the EURUSD chart above you can see the smooth moving average line. The price movement begins to flatten out as the moving average line moves down at a sharp angle. The point the price movement crosses above the moving average line indicates a trend reversal. This is confirmed by the sharp price move down, which immediately recovers above the moving average line. Also note that the price movement on the right side of the chart continues to move above the moving average line. When the price touches the line, it bounces back up. This is also a strong indicator of a trend.

You can see how the moving average indicates a trend, and how a price reversal signals either a buy or close, or both. You can also see how a Forex trader makes money regardless of the direction of the market:

• If a trader had a sell order open (i.e. the trader would be selling Euros, and buying U.S. dollars) that was gaining value as the trend moved down (as the USD gained value), the trader would begin taking note when the price flattened and began moving in a range between 1.3420 - 1.3440. This would indicate a good time to close their trade and lock in their profit.

• The trend reversal illustrated above also indicates a good entry point to place a buy order and begin riding the trend back up.

The example above is not an unusual scenario in foreign currency trading, but is idealistic. The responsibility of every trader is to preserve their investment capital. The challenge of every trader is to manage risk. For every pattern identified, there will be an exception.

For example, in the chart above, the price flattening could have just been a slowdown in the trend, perhaps due to reduced volume as the Sydney market closed and the London market opened. A trader may have placed a buy order when the price moved above the moving average, only to find the trend continue to move down (against the trader's open buy position) when the market spiked down again around midnight.

Lessons Learned

It is very important for any investors considering foreign currency trading to understand what the risks are. The _Commodity Futures Trading Commission (CFTC)_ is required to disclose the numbers of unprofitable traders, which hovers between 72% and 79% every quarter, according to its filings.

Between 72% and 79% of traders lose money every quarter.

In addition to a very fast moving market and fundamental differences between the stock market and Forex market, fraud is a significant risk to any new foreign currency investor. In fact, CFTC Chairman Gary Gensler recently said Forex scams were the "largest area of retail fraud" his agency oversees. The National Futures Association (NFA), an agency established by Congress that is funded by Forex brokers, issued an investor alert in February 2007, which included:

"Unfortunately, the amount of forex fraud has also increased dramatically. Since 2001, the Commodity Futures Trading Commission (CFTC) has filed 93 enforcement actions in federal court against hundreds of firms, owners and employees for defrauding over 25,000 customers who lost over $395 million in forex schemes." (Investors can review the full Forex investor alert here: <http://bit.ly/fxinvestoralert>).

Tips for New Forex Investors:

1. Only deal with reputable brokers. Only trade with a broker that is a member in good standing with a recognized regulator. The regulators in the United States are the Commodity Futures Trading Commission (CFTC), and the National Futures Association (NFA). The agencies keep a public record of all complaints against regulated brokers and their resolutions online.

2. After you have identified a reputable broker, open a Forex demo account. Practice trading on this account for at least six months to a year before opening a live trading account. Learn to identify trends in the market. Observe how news reports affect the various currency rates. Learn to manage risk.

3. Become a student of the markets. Study foreign currency trading by reading books and articles on technical analysis, join the active trading communities online, and most importantly, actively trade your demo account to put theory to practice.

4. Only invest _risk capital_ \- money you can afford to lose. It is extremely important for investors to understand that foreign currency trading should only be a minor piece of their portfolio. Even with our experience and expertise, foreign currencies are only a minor part of **BlackBox Alpha's** portfolio.

A Word on Leverage

When trading on margin, a trader is borrowing money from their broker. The collateral for the money borrowed are the funds in the trader's account. The collateral is expressed as the minimum margin the trader is required to hold in their account.

As we mentioned early in this chapter, a 50:1 leverage lends the trader $50 for every $1 the trader invests. In other words, if a trader makes a $1,000 investment at 50:1 leverage, the trader has the potential to earn profits on a $50,000 trade. Of course, in addition to the earning potential this leverage gives the trader, the trader faces the risk of losing money based on the $50,000 trade, and these losses can add up quickly. Traders suffering a loss without sufficient margin remaining in their account run the risk of triggering a _margin call_.

When a trader has open trades, the broker continually calculates the unrealized value of the trader's positions to determine their _Net Asset Value (NAV)_ \- the value of all positions if they were closed at the current market rate. If the open positions lose so much potential value that the remaining funds in the account are in danger of falling below the minimum margin limits, the trader could receive a _margin call_. Depending on the trader's broker, he/she could receive a request to add more funds in his or her account, or the broker may simply close all open positions at the current market price to limit further losses. In either case, the trader could end up losing the entire balance of his/her account and may even owe additional funds to cover his or her losses.

When selecting your broker, make sure you understand what the broker's margin requirements and policies are.

Risk Management

The most important concept for any trader to learn and understand is risk management. Risk should be a calculation based on statistics and probabilities. Risk should never be a gamble. The difference between gambling and speculation is risk management.

The most basic risk management includes _leverage_ , _position size_ , and _stop loss_. By considering each of these, a trader can calculate the potential losses and adjust accordingly to bring the potential losses in line with what the trader is willing to risk with each trade. In the example we used in _The Mechanics of Trading Currencies_ section of this chapter, using a 50:1 leverage, and investing $1,000 in a trade (the position size), a single pip loss in the EURUSD would result in a 0.5% loss in the value of the trader's position. If the trader's total account value was $100,000, this would be equivalent to a 0.005% loss in value. Using these calculations, the trader can set the positions stop loss to an acceptable level. For example, a 100 pip stop loss would limit the loss of this trade to 0.5% of the trader's total account value.

The next steps in risk management would include observing the market to identify trend reversals and reduce the risk of a _stop loss_ , observing the strategies _profitability_ to adjust risk accordingly and test how changes in various settings affect the overall profitability and _risk:reward ratios_.

What is Quant Trading?

Quantitative trading is the method of creating trading strategies based on analysis which relies on mathematical computations to identify trading opportunities. Price, volume, and momentum are some common data inputs used in quantitative analysis.

**BlackBox Alpha** specializes in developing algorithms, or computer programs, to automatically trade foreign currencies based on quantitative analysis. The benefit of _algorithmic trading_ in the foreign currency market is eliminating _trader psychology_ , speed of execution, and the ability to trade 24 hours a day.

The Process of Developing an Algorithm

The process of developing an algorithm is extremely rigorous and takes several months to create, and sometimes years to optimize. The general steps in developing an algorithm are:

1. Identifying a pattern in the markets.

2. Quantifying the pattern with mathematical formulas (this becomes the beginning of the trading model).

3. Observing the markets to see if the model holds up, and to identify and quantify any instances of false positives.

4. Programming the trading model.

5. _Backtesting_ the trading model against several years of market data. Identifying patterns that affect risk:reward ratios, return to Step 4...

6. _Forward testing_ the model in live market conditions. Again, identifying patterns that affect risk:reward ratios, return to Step 4...

The cycle of programming, backtesting, forward testing, and programming again may continue hundreds of times. In addition, _walk forward testing_ is the process of continually testing proven algorithms against current market conditions. For example, a proven algorithm may be continually running a dozen or more tests on different variables that may affect risk:reward to identify more optimal settings for current market conditions.

**BlackBox Alpha** sets high bars in various key performance indicators that an algorithm must meet to be proven, including: risk:reward, _drawdown_ , profitability, _profit factor_ , sharpe _ratio_ , and _geometric average holding period (GHPR)._ Minimum standards have to be met for each of these measurements even before **BlackBox Alpha** reviews an algorithm's returns.

Investment Opportunity

**BlackBox Alpha** provides balanced, industry leading returns to select qualified investors deserving to live the good life. Our model includes almost ten years of consistent market-beating returns - including record returns following the stock market crash in 2007. For an updated prospectus please visit **BlackBox Alpha** online at www.blackboxalpha.com.

### Glossary

**Algorithm:** A set of rules for accomplishing a task in a certain number of steps. One common example is a recipe, which is an algorithm for preparing a meal. Algorithms are essential for computers to process information. As such, they have become central to our daily lives, whether ordering a book online, making an airline reservation or using a search engine.

**Algorithmic Trading:** A trading system that utilizes very advanced mathematical models for making transaction decisions in the financial markets. The strict rules built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.

**Ask Price:** The price a seller is willing to accept for a security, also known as the offer price. Along with the price, the ask quote will generally also stipulate the amount of the security willing to be sold at that price.

**Backtesting:** The process of testing a trading strategy on prior time periods. Instead of applying a strategy for the time period forward, which could take years, a trader can do a simulation of his or her trading strategy on relevant past data in order to gauge its effectiveness.

**Base Currency:** The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency. For accounting purposes, a firm may use the base currency to represent all profits and losses.

**Bid Price:** An offer made by an investor, a trader or a dealer to buy a security. The bid will stipulate both the price at which the buyer is willing to purchase the security and the quantity to be purchased.

**Carry Trade:** A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

**Commodity Futures Trading Commission (CFTC):** An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The Commodity Futures Trading Commission regulates the commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud.

**Drawdown:** The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

**Fiat Currency:** Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for "it shall be".

**Forex:** The exchange of one currency for another or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX."

**Forward Testing:** Forward testing is a simulation of actual trading and involves following the system's logic forward to gauge its effectiveness in live market conditions.

**Fundamental Trading:** A method of evaluating a currency that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the currency's value, including macroeconomic factors (like the overall global economy and conditions) and country-specific factors (like economic and financial conditions).

**Geometric Average Holding Period (GHPR):** The geometric average return formula is used to calculate the average rate per period on an investment that is compounded over multiple periods. The geometric average return may also be referred to as the geometric mean return.

**Gold Standard Currency:** A monetary system in which a country's government allows its currency unit to be freely converted into fixed amounts of gold and vice versa. The exchange rate under the gold standard monetary system is determined by the economic difference for an ounce of gold between two currencies. The gold standard was mainly used from 1875 to 1914 and also during the interwar years.

**High Frequency Trading (HFT):** A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.

**Interbank Market:** The financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties. While some interbank trading is performed by banks on behalf of large customers, most interbank trading takes place from the banks' own accounts.

**Leverage:** The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

**Margin:** Borrowed money that is used to purchase currencies or equities. This practice is referred to as "buying on margin".

**Margin Call:** A broker's demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker's particular formula.

**Momentum Indicator:** The Momentum Technical Indicator measures the amount that a security's price has changed over a given time span.

**Moving Average:** A widely used indicator in technical analysis that helps smooth out price action by filtering out the "noise" from random price fluctuations. A moving average (MA) is a trend-following or lagging indicator because it is based on past prices. The two basic and commonly used MAs are the simple moving average (SMA), which is the simple average of a security over a defined number of time periods, and the exponential moving average (EMA), which gives bigger weight to more recent prices. The most common applications of MAs are to identify the trend direction and to determine support and resistance levels. While MAs are useful enough on their own, they also form the basis for other indicators such as the Moving Average Convergence Divergence (MACD).

**National Futures Association (NFA):** The independent self-regulatory organization for the U.S. futures market. NFA membership is mandatory for all participants in the futures market, providing assurance to the investing public that all firms, intermediaries and associates who conduct business with them on the U.S. futures exchanges must adhere to the same high standards of professional conduct. The NFA operates at no cost to the taxpayer, as it is financed exclusively by membership dues paid by members and assessment fees paid by users of futures markets. The national headquarters is in Chicago and there is an office in New York.

**Net Asset Value (NAV):** The balance of deposits, realized and unrealized profit/loss, and interest, minus withdrawals.

**Over-the-Counter (OTC) Market:** A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network.

**Pip:** The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point - for most pairs this is the equivalent of 1/100 of one percent, or one basis point.

**Price Action:** The movement of a security's price. Price action is encompassed in technical and chart pattern analysis, which attempt to find order in the sometimes seemingly random movement of price. Swings (high and low), tests of resistance and consolidation are some examples of price action.

**Profit Factor:** The profit factor is defined as the gross profit divided by the gross loss (including commissions) for the entire trading period. This performance metric relates the amount of profit per unit of risk, with values greater than one indicating a profitable system.

**Profitability:** A regulation for evaluating whether to proceed with a project or investment. The profitability index rule states: If the profitability index or ratio is greater than 1, the project is profitable and may receive the green signal to proceed. Conversely, if the profitability ratio or index is below 1, the optimum course of action may be to reject or abandon the project.

**Quantitative Trading:** Trading strategies based on quantitative analysis, which rely on mathematical computations and number crunching to identify trading opportunities. Price and volume are two of the more common data inputs used in quantitative analysis as the main inputs to mathematical models. As quantitative trading is generally used by financial institutions and hedge funds, the transactions are usually large in size and may involve the purchase and sale of hundreds of thousands of shares and other securities. However, quantitative trading is also commonly used by individual investors.

**Quote Currency:** The second currency quoted in a currency pair in forex. In a direct quote, the quote currency is the foreign currency. In an indirect quote, the quote currency is the domestic currency.

**Risk Capital:** Investment funds allocated to speculative activity. Risk capital refers to funds used for high-risk, high-reward investments such as junior mining or emerging biotechnology stocks. Such capital can either earn spectacular returns over a period of time, or may dwindle to a fraction of the initial amount invested if several ventures prove unsuccessful. Diversification is key for successful investment of risk capital. In the context of venture capital, risk capital may also refer to funds invested in a promising start-up.

**Risk:Reward Ratio:** A ratio used by many investors to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. This ratio is calculated mathematically by dividing the amount he or she stands to lose if the price moves in the unexpected direction (i.e. the risk) by the amount of profit the trader expects to have made when the position is closed (i.e. the reward).

**Sharpe Ratio:** A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.

**Signal:** A sign, usually based on technical indicators, that it is a good time to buy or sell a particular security. Trade signals come in a variety of forms, including bull or bear pennants, rectangles, triangles and wedges, as well as head-and-shoulders chart patterns. Trade signals may also bring attention to abnormal volumes, options activity and short interest.

**Spread:** The difference between the bid and the ask price of a security or asset.

**Stop Loss:** An order placed with a broker to sell a position when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a position.

**Technical Analysis:** The academic study of historical chart patterns and trends of publicly traded stocks. Technical analysis of stocks and trends employs the use of tools such as bar or candlestick charts and trading volumes to determine the future behavior of a stock. Much of this practice involves discovering the overall trend line of a stock's movement.

**Trader Psychology:** The emotions and mental state that dictate success or failure in trading securities. Trading psychology refers to the aspects of an individual's mental makeup that help determine whether he or she will be successful in buying and selling securities for a profit. Trading psychology is as important as other attributes such as knowledge, experience and skill in determining trading success. Discipline and risk-taking are two of the most critical aspects of trading psychology, since a trader's implementation of these aspects is critical to the success of his or her trading plan. While fear and greed are the two most commonly known emotions associated with trading psychology, other emotions that drive trading behavior are hope and regret.

**Trading the News:** A technique to trade equities, currencies and other financial instruments on the financial markets. Trading news releases can be a significant tool for financial investors. Economic news reports often spur strong short-term moves in the markets, which may create trading opportunities for traders. Interest rates, unemployment and export rates, or the central bank's policy shifts can cause a deep change of an exchange rate.

**Trailing Indicator:** A technical indicator that trails the price action of an underlying asset, and is used by traders to generate transaction signals or to confirm the strength of a given trend. Since these indicators lag the price of the asset, a significant move will generally occur before the indicator is able to provide a signal.

**Trend Reversal:** A change in the direction of a price trend. On a price chart, reversals undergo a recognizable change in the price structure. An uptrend, which is a series of higher highs and higher lows, reverses into a downtrend by changing to a series of lower highs and lower lows. A downtrend, which is a series of lower highs and lower lows, reverses into an uptrend by changing to a series of higher highs and higher lows.

**Walk Forward Testing:** A method used in finance for determining the best parameters to use in a trading strategy. The trading strategy is optimized within sample data for a time window in a data series. The remainder of the data is reserved for out of sample testing. A small portion of the reserved data following the in-sample data is tested with the results recorded. The in-sample time window is shifted forward by the period covered by the out of sample test, and the process repeated. At the end, all of the recorded results are used to assess the trading strategy.

Contributor: Joshua A. Bevan, Managing Director, BlackBox Alpha

_BlackBox Alpha_ _is a quantitative asset management firm that specializes in developing foreign currency trading algorithms. By capitalizing on currency price fluctuations 24 hours a day, BlackBox Alpha is able to deliver consistent outsized returns. The algorithms have taken more than five years to develop and are continuously tested against current market conditions. By systematically capturing a few 1/100ths of one percent and leveraging each high probability trade, the algorithms quickly compound profits._

BlackBox Alpha was founded by Joshua Bevan and Katherine Chamberlain to raise capital for the quantitative trading methods Joshua has been developing since 2008. Quantitative trading uses strategies based on mathematical analysis which rely on computer number crunching to identify trading opportunities. Joshua uses high-probability trading techniques and complex risk management to win over 90% of his trades. BlackBox Alpha also uses quantitative methods to invest in debt and equities to balance the firm's portfolio and offset the risk of foreign currency trading.

Joshua Bevan holds a BA Multidisciplinary Studies, MS Management of Information Systems, and a certification in programming from Duke University. He has worked in technology and information systems since 1996, including serving as Director of IT for a technology startup in the financial services industry, managing over $3.5 billion in assets during his tenure.

Prior to founding BlackBox Alpha, Katherine Chamberlain worked as Leasing Manager and top leasing agent for a large real estate investment trust, which owns over 150 properties on the West Coast and employs several hundred leasing agents nationwide.

# Chapter 10: The Mobile Home Park Industry as an Investment Vehicle

The Mobile Home Park Industry as an Investment Vehicle: It's Unique Attributes  
Which Include Harnessing the Power of the Decline of the U.S. Economy.

Mobile Home Parks, also known as "trailer parks" and "manufactured home communities", are as unique to America as Route 66 and the hotdog. There are roughly 50,000 mobile home parks in the U.S., and not a fraction as many in the entire rest of the world combined. The only other country that has mobile home parks similar to ours is Canada, and they have only around 500. In most of Europe, trailer parks are known as "caravan villages" and are rarely used for permanent habitation as opposed to recreational use.

The story of the mobile home park's inception is an interesting slice of American history. When the automobile was invented, many of America's wealthiest families were the first to buy the new invention and, when going on tour in their new toy, found that there were no suitable places to spend the night (long before motels were built). As a result, these wealthy Americans would build fancy trailers that often featured mahogany and brass fittings, and their own matching china, crystal and linens. When the day's driving was over, the rich would sleep in the fancy trailer, while the servants would sleep in tents on the ground. Throughout America, towns and cities wanted these affluent customers to stop in their area, so they built free "trailer parks" for the wealthy in which to park their vehicles. This is where the phenomenon of mobile home parks began. During World War II, the U.S. government took hold of the concept of mobile homes as a solution to the housing shortages at military bases, and ordered roughly 500,000 units for immediate delivery - the largest mobile home order in history. Immediately following World War II, these servicemen took advantage of the G.I. Bill, and the government raced to move these mobile homes to college campuses to handle the dorm shortage there. At one point in time, mobile home parks had a higher demographic than stick-built homes, as they were where you would find G.I.s who were in college learning to be doctors, dentists, lawyers and engineers. Many continued in these mobile homes when they initially went into private practice. However, the boom of stick-built suburbia siphoned off these customers, and the mobile home park industry began a decline into simply affordable housing.

During the rise of American affluence in the 1960s, 1970s, and 1980s, the mobile home park suffered its worst decline, as the caliber of residents continually fell off. Then a new trend began - a megatrend that will continue for decades to come. The American economy started to decline. Jobs went overseas. Real wages fell. Inflation intensified. Suddenly, the U.S. housing market was awash in demand for affordable housing. This shift is what is fueling the resurgence in the mobile home park industry, to levels it has never seen before.

The math is simple. Roughly 20% of American households earn $20,000 per year or less. Nearly 50% of American households are on some type of social subsidy. If you earn $20,000 per year, you can only afford roughly $500 per month in housing cost (around 30% of income). That does not count the roughly 10,000 Baby Boomers that are retiring _each day_ into an average social security income of $14,400 per year. Mobile home parks and Class-C apartments are the only source of housing at this price point. When battling head-to-head, mobile home parks always win as more desirable, as they offer no neighbors knocking on the walls, floor and ceiling as well as a yard, a pet, and a community feel. More importantly, they offer the one part of the American Dream that apartments can never touch - mobile home park residents can also be homeowners. Since most mobile home park residents own their own homes, they are essentially "stakeholders" in the park itself, with a vested interest in what goes on there.

Now, you would think that the simple solution to the affordable housing crisis in the U.S. would be the old-fashioned mobile home park. But the problem is that the supply is effectively capped at what already exists. The reason for this is that mobile home parks are no longer allowed to be built in virtually every city in the U.S. While most cities acknowledge the need for affordable housing, they don't want it in _their_ city. In the entire United States, there are roughly ten new mobile home parks built per year. There are far more than that being demolished and re-developed each year, so the net supply is actually falling slightly each year. Of course, when you have rising demand and fixed supply, the result is always greater rents and profitability, and that's exactly what is occurring. There are equally important attributes that make mobile home park investments unusually successful.

Mobile homes are actually not "mobile" at all

Before mobile homes, all mobile home parks were filled with recreational vehicles. These RVs were never greater than 8' wide and were pulled behind a car or truck. One day, an RV manufacturer inquired as to if it would be possible to make a trailer even wider than 8". What he found out was that the Department of Transportation would allow a trailer wider than 8" if it was moved with a special one-time moving permit. Thus began the mobile home. With mobile homes now ranging up to 18' wide, one thing is certain - they are anything but mobile. It costs roughly $3,000 to $5,000+ to move a mobile home from point A to point B, including the move, set, tie-down, utility connections, skirting, decks and stairs. That does not include fixing the things in the home that get broken in the move - if the home can even be moved at all. Many mobile homes are not road-worthy after sitting in the same place for a decade or more. Others were built before 1976, and therefore do not have the HUD-code seal that virtually all cities require today to bring a mobile home in. The bottom line is that once the home has arrived, it virtually never leaves. The customers in that home may come and go, but the home itself will be in the park forever. This gives mobile home parks phenomenal stability in revenue.

Mobile home park owners do not have to fix toilets and make capital repairs on the homes

This is the big difference with apartments, and virtually all the other niches of real estate. With a mobile home park, you are just renting the land, not the physical structure. That means that you are not responsible for the petty, costly repairs that happen with other forms of housing. While the park owners must address any problem with the common areas (playgrounds, pool, etc.) and with the delivery of utilities (master water line breaks, etc.), these issues happen rarely. Meanwhile, all the day-to-day repairs that pop up, from broken toilets to leaking roofs, are not the park owner's concern. In addition to the financial impact of avoiding these issues, there is a huge savings in management costs as a result. Mobile home park owners do not have to worry about constant repair calls and potential liability from those broken items, such as a non-working door lock.

Mobile home parks do not have giant capital upgrading costs

In most forms of real estate, you have to upgrade or modernize the physical plant every so often. Industrial, office and retail buildings often have to provide extensive finish-out for tenants. Apartments have to undertake costly roof replacements and aesthetic enhancements, such as taking a brick wall and covering it in stucco, changing the roof line or replacing the balconies. Mobile home parks - since they don't own the units but only the land - escape these giant capital calls. This also has big benefits when it comes to the cost of a turn-around, as almost all repairs are light and aesthetic in nature, such as patching potholes and planting flowers.

Mobile home park rents can be pushed higher frequently, and in meaningful increments

Since mobile home parks are the cheapest form of housing, there is always plenty of room to push rents and still remain the lowest cost alternative. Most park owners push their rents 5% per year, but others can obtain 10%+ annual increases. The reason, other than the fact that they have no competition, is that the tenants cannot afford to move the home, and will tolerate increases more than customers who can easily create a bidding war and move with no cost to them. Another reason that mobile home parks can push rents more effectively than other forms of real estate is that there are no new parks being built to mess with the supply/demand relationship, and the fact that most mobile home park leases are month-to-month and are not subject to any form of rent control. We pushed the rent at a park in Grapevine, Texas from $100 per month to $275 per month within 60 days of acquiring the property. The market rent had been $100 for over a decade, while the market rent grew to exceed $300 per month. While the tenants did not like the increase, not one moved their home.

Mobile home parks can still be bought from the original 'Moms & Pops'

Because the majority of mobile home parks were built in the 1960s and 1970s, the original builders are often still the owners. This means that you can work directly with the 'moms and pops' - the best group from whom to buy real estate. These hard-working Americans employ good common-sense, reasonable prices and a sense of fair play. There are numerous stories of moms and pops extending "brother-in-law" deals to buyers, including zero-down and low prices. Many of these elderly sellers are more concerned with higher purposes than just money, and are more than happy to help make a change in the buyer's life through ensuring that the purchase will go smoothly.

Many mobile home parks are financed with seller carry

Moms and pops normally do not have any debt on the park, having paid off their mortgage years earlier. As a result, these parks are debt-free. This allows the mom and pop to seller-finance the transaction, which is hugely more beneficial than getting a bank loan. Among other benefits to seller financing are the fact that you do not have to find a bank or sell a loan committee on the idea, you do not have any points to pay a bank, you do not have to worry about a credit check on yourself, you can normally get a below-market interest rate and, most importantly, the loan is non-recourse. My first five deals were all seller-financed. On the company level, we currently have around 50% of our parks seller-financed. No other niche of real estate can match that record.

But the banking is pretty attractive, too

Mobile home parks have the lowest default rate of any form of commercial real estate. As a result, banks really like these loans. One of the hottest sectors of park financing is conduit debt. Also known as CMBS debt, these loans are originated by a regular bank, but are then sold on Wall Street. They feature 10-year terms, low, fixed interest rates, and are non-recourse. Many people do not realize that these hugely attractive loans are available in the mobile home park niche - not just in glossy office tours and shopping centers.

The demand is unbelievable

One of the biggest differences between mobile home parks and other forms of real estate is demand. The demand for affordable housing outstrips anything you have ever experienced. We run a test ad before we buy any mobile home park, and we will not buy it unless we get at least 30 to 40 calls in one week from a simple classified ad. In some parks, the demand exceeds _100 calls in one week._ This is a direct result of the facts we discussed earlier, such as the limitation on supply, and the growing need for affordable housing for the mountains of households that are getting poorer. There does not seem to be anything on the horizon - contrary to what the Federal Government would hope - that would stop this continual decline in jobs and incomes. The number of people who need affordable housing, even if the economy finally bottomed out, is many times greater than all the mobile home park lots that exist in the U.S. Consider this: nearly 8 million Americans already live in mobile homes. There is only around 20% of supply left in existing mobile home parks. We are reaching a critical time for affordable housing, and the park owner stands to reap all the benefit.

THE BIG ADVANTAGE: MOBILE HOME PARKS HAVE THE HIGHEST YIELDS IN REAL ESTATE

Mobile home parks are normally bought and sold at around 10% cap rates. The cash-on-cash return is often 20%+. How is this possible? Well, that's just the way the business developed over time. Since mobile home parks are not your typical bread-and-butter real estate type, the sellers figured they'd have to give a few extra points of yield to entice you to buy. That precedent continues on, even though it probably does not need to. There's really no reason why mobile home parks should sell at higher yields than apartments - in fact, the opposite is probably true. But that's the benefit you get from being part of the second youngest assets class (only self storage has been around for less time). Some compare mobile home parks to the Wild West, and that may be pretty accurate. It's the final frontier in real estate, and the risk/reward is extremely attractive.

How mobile home parks work

In a typical mobile home park, the owner owns the land and improvements, such as utility lines, roads, common areas, amenities, etc. The tenant rents out a lot in this park, and has possession of the lot only as long as he pays his rent. The park owner's only responsibility under the lease is to provide all of these improvements in good, working order. As long as the water and sewer is flowing, and the roads don't have giant potholes, and the grass is mowed in the common areas, the park owner has done his job. The bottom line is that this is not a very management-intensive business. When I bought my first park, having come out of the billboard business which is extremely customer-related, I thought I needed to have an office in the park and be there every day from 9 to 5. Boy was I wrong. You see, I thought that a park was more like a restaurant, in which the owner had to be there to provide the service, but in a mobile home park, the land is the service, and it does not need any supervision at all. Essentially, the park owner is like a feudal lord who rents out his lands to the tenant farmer. His value-add is simply having ownership to the land.

How mobile home parks behave in different economic climates

Mobile home parks have attractive characteristics in a number of potential economic scenarios including:

• _Inflation._ Mobile home parks, like virtually all forms of real estate, perform well in inflation, as the value of the park is based on rents, which rise with inflation, while the mortgage does not increase to match those increasing rents. Many a fortune in real estate has come at the hands of inflation - and many a bank's failure has been a result of erosion of principal. Since mobile home park leases are traditionally month-to-month, they can raise rents faster than any other asset type, which makes them an all-star performer in inflation.

• _Deflation._ Because of the supply/demand dynamic, it is hard to envision mobile home park rents ever going down. There is no historical period to date when this has ever occurred. One reason may be the floor that the government has established via minimum wage. Since you cannot pay a worker less than $7.25 per hour (minimum wage), the earnings at the bottom of the income ladder cannot go backwards. Since our core customers are these low-income earning folks ($7.25 per hour equals $14,500 per year in income), we are protected, for the most part, from deflation.

• _Recession and Depression._ This is where mobile home parks truly beat all other forms of real estate. In every other niche, prosperity brings higher rents and values. But mobile home parks are uniquely contrarian - they perform the opposite of typical real estate investments when it comes to doom and gloom. As the ranks of the needy rise, looking for affordable housing, so does our demand and rents.

Another risk that needs to be addressed is potential functional obsolescence. Considering the fact that mobile homes already are at the bottom of the food chain in detached housing, we are nothing more than "shelter". As long as we provide "shelter", and have the basic attributes of housing, there is no risk that we would become obsolete. Sure, single family homes and apartments have to worry about room sizes and floor plans. Our customers only demand rooms and floors.

How to make money with mobile home parks

Mobile home parks are not hard to make money with, as long as you follow a few basic rules and focus your energies on the key drivers to great deals. Since demand for affordable housing is giant and a given, the successful mobile home park purchase revolves more around the cost side of the equation and what you pay for the property. Like all forms of real estate, the amount your pay immediately determines your odds of success and failure, so being able to competently evaluate the deal is essential.

Some tips on how to value a mobile home park

One of the biggest mistakes many investors make in determining the value of a mobile home park is not focusing on the land value only. The only part of the revenue that should be used in calculating the net income is the lot rent. Many mobile home park owners will try to include home rent, late fees, and vending machine income - the whole kitchen sink. The problem with this concept is that you cannot apply a 10% cap rate to this type of income - or often, any value at all. Only the lot rent is legitimate rent and worthy of application of a cap rate. Everything else is just "junk income": real income but not worthy of giving any significant value to it. Many times, there are offsets that render such additional sources of income moot. For example, late fees are offset by bad debt. Laundry income is offset by water, sewer, electricity and gas costs of the machines and the building that houses them. Successful mobile home park investors focus only on the lots and land.

Institutional-grade infrastructure is a must

Many people fail to discern the difference between a bunch of mobile homes in a field with dirt roads, and a park with paved road, parking pads, professionally engineered utility lines, etc. If you want to obtain bank debt and the ability to push rents and operate the park profitably, you must choose a mobile home park that has "institutional-grade" roads, utilities, parking pads, and all the other items that go with it. It makes sense, right? If you want to win the Kentucky Derby, you have to own a thoroughbred, not a mule. Don't think that all mobile home parks are the same - because they're not.

Avoid private utilities

Since the beauty of mobile home park ownership is low maintenance and worry - as well as low capital expense requirements - then why ruin that with having to draw your own water and treat your own sewage? When you have a well or septic, packaging plant or lagoon, you have basically turned yourself into a real water or sewer utility company. You have all the same risks and worries, only without the trained personnel to watch over them for you. In addition, the downside can be huge in a world of the EPA and Phase I environmental studies.

Perform solid due diligence

Benjamin Franklin once said "diligence is the Mother of good luck". This concept was as successful 300 years ago as it is today. If you know the property you are buying inside out, then you take all the risk off the table regarding poor performance and surprises, and improve your odds of winning substantially. Without diligence, all investing becomes merely speculation, and is no different than gambling at a casino. We hate gambling - we're sore losers. We only want to get involved in successful ventures, and due diligence is the key.

Search for stabilized parks with upside

We have found the key driver to making a fortune in mobile home parks is to focus on finding parks that are "stabilized with upside". That means parks that have good cash flow and infrastructure, but that have plenty of room to improve them with rent raises, cost cutting and greater occupancy. Shoot for parks that offer a 10% cap rate on the front end, but that you can push to a much higher level using basic business tactics that are rock-solid and easy to institute, like raising the rent level. We wrote a book once on this very subject, called The 10/20 Method to Mobile Home Park Investing. The point of the book was that the best mobile home parks start out as stable 10% cap rates, and then blossom into 20%+ cap rates over time. These types of parks are safe, because they can always be re-sold and re-financed, yet have the potential of creating vast wealth.

Samples of successful stabilized with upside deals

My first park was located in Southern Dallas. I bought it for $400,000, with $10,000 down and the rest carried by the mom and pop owner. I pushed the lot rent enormously (from around $150 to $350 per month) and increased the occupancy from around 40 lots to over 80. I also cut the costs by discontinuing the park's policy of providing free cable TV, reducing the salary of the manager, and other tactics. I sold the park 8 years later for $1,525,000. That's a good rate of return; I think we'd all agree.

On another recent deal, we bought a park in West Texas and did nothing more than raise the rent and increase the physical appearance of the park by rebuilding the burned clubhouse and other items. Within 9 months, we received an offer for the park that was $1 million more than we paid. What made this deal so successful was that we really did not care if we sold the park or not, and had no thought of putting it on the market for another five years or so. When a mobile home park makes a good income, there is no pressure to sell and, as a result, you can negotiate harder. Mobile home parks are the reverse of raw land speculation, in which you have to come out of pocket continuously for property taxes and insurance, and are just praying that a buyer will come your way some day.

On a deal in Laramie, Wyoming, all we had to do was to fire the manager who had embezzled about $70,000 per year in revenue, and raise the rent for a net profit of around $600,000 upon sale.

It seems too good to be true, but it's not

Many people think that these type of return levels are ridiculously too high, and can't possibly be accurate. This is because real estate investors have become too willing to accept low rates of return. If you buy an apartment complex at a 6% cap rate, with rents that are maxed out and 100% occupancy, there's no way that you are going to make any money. How could you? You'll be lucky to find another sucker willing to accept 6%. However, if you can buy a mobile home park at a 10% cap rate, with room to push it higher, then you should be very successful. So the bottom line is that mobile home parks are not too profitable, but that all the other sectors of real estate are not profitable enough. There's been such a concentration in real estate investing over the last several decades that cap rates have been pushed far too low in many real estate niches. We would have no interest in buying properties at low cap rates, and neither should you. Mobile home parks are the one sector that offers a reasonable reward for the risk, and have the odds in your favor.

Conclusion

Mobile home park investing offers one of the best combinations of return, risk aversion, and future potential. Affordable housing is one of the biggest growth industries in the U.S. Maybe that's why Warren Buffet is the largest owner of mobile home manufacturing and financing in the U.S., and Sam Zell is the largest owner of mobile home parks. You're in good company when you buy mobile home parks. We've been buying them as fast, great deals come available - at a speed of about 2,500 lots per year - and hope to buy as many lots in 2013 and beyond. Mobile home parks are a great investment, and worth further consideration by any investor who is looking for outstanding returns.

Contributor: Frank Rolfe, Vice-President, MHP Funds

_MHP Funds_ _is the 18_ _th_ _largest owner of mobile home parks in the United States, with over 7,500 lots spread out over 16 states in the Great Plains and Midwest. Founded by Frank Rolfe and Dave Reynolds, and later joined by Eric Siragusa, MHP Funds_ _buys under-performing mobile home parks and improves their property condition and net income, normally through a formula of increasing occupancy, increasing rents, and cutting costs. It is a formula that the principals have been using successfully for over two decades._

_Frank Rolfe and Dave Reynolds have bought and turned-around over 200 mobile home parks in the past 20 years, and are well-known writers and speakers on the subject of affordable housing and the mechanics of successful mobile home park operations. They have been used as a source in articles ranging from the Wall Street Journal to the New York Times, and their books on the industry have been the number one seller for over a decade. These can be found at_ www.mobilehomeuniversity.com/

Prior to buying mobile home parks, Frank Rolfe built from scratch the largest privately-owned billboard company in Dallas/Ft. Worth and sold it to a public company, now known as Clear Channel. He holds an A.B. in Economics from Stanford University. He lives in Missouri with his wife and daughter, where he also donates time to the Lions Club and the Landmarks Commission.

# Chapter 11: Investing in Self Storage Units

Introduction: The Top 10 Reasons Why Self Storage is the Hottest Sector in Commercial Real Estate

There are many other reasons I prefer self storage to other real estate product types as we'll discuss throughout this chapter. I have thoroughly enjoyed the business, and I am thankful for the opportunity to pass this knowledge on to others that may be interested in the industry. In addition, I consider myself a lifelong student in the business, and I believe in perpetual improvement.

To begin, I will share with you the top 10 reasons why I decided to sell all my houses and apartments to invest in ONLY self storage:

10. **Endless Opportunities** \- If you already own a plot of land in a GOOD location, you can build. Now I don't want to oversimplify the process because there are a great deal of zoning and approval hurdles you may have to jump over, but this is a real estate business that is much easier to get into compared to most others. Also, contrary to popular belief, the large, public operators in the industry only account for about 12% of the estimated 64,000 facilities in this country worth $22 billion in 2012. That means there is a **huge opportunity to pursue roughly 56,000 facilities that are owned by** "mom and pop" investors that are already established and cash-flowing, and were developed specifically to sell off to investors once they were stabilized!

9. **Sky Rocketing Demand For Storage** \- We have an insatiable appetite for storage in this country, with over 2,000,000 units having been added since 2000. Probably the most exciting prospect for the industry is the aging of the baby boomers. There are roughly 77 million baby boomers in this country as of 2009, and they account for approximately $2 trillion in spending power. A recent poll by the Self Storage Association of a sampling of Baby Boomers revealed that upon retirement, **50% planned to travel** , **40% planned to move** , and 10% planned to start a new job. What do people do when they move? That's right, they store stuff. Downsizing, buying a second home, or even a like-swap in houses necessitates a need for storage. **One economist recently compared the opportunity in this industry to sitting on the oil industry in the 1950s or sitting on Silicon Valley in the 1990s!**

8. **Multiple Ways to Increase Value** **and Profit Centers** \- I have had a great deal of success in creating value with properties once I acquired them, but found the opportunities greater with self storage. There's only so much you can do to a house or with apartments that truly adds value, or commands a higher rent. But with self storage, you can take a vanilla facility and create multiple additional income streams such as:

a. Retail centers that sell locks, boxes, moving supplies

b. A truck rental service through a 3rd party, or in-house

c. A business center that charges for computer usage, copies, and fax

d. eBay® Add-it centers where customers can pay you to sell their "stuff"

e. A pack and ship business, and approximately 30 more profit centers that we have identified, and continue to grow.

These additional services can contribute as much as 10-15% of the total income a facility brings in on a monthly basis.

7. **LOW, LOW, Operating Costs** \- With my apartments, I was responsible for paying the utility costs for many of the common areas and vacant units, and in some properties, the gas and water was on one meter, and was included in the rent. I was forced to pay for my tenants' wasteful use of gas and water. When the cost and/or taxes on these utilities increased, guess who paid for it: ME! You simply can't pass those increases along to the tenants without them going down the street to a competing property. With self storage, however, the expenses are minimal to begin with. You will pay for lights in the parking lot, and utilities for the office, but those can be monitored, and increases can be easily absorbed. **This makes budgeting for utilities and other variable costs a breeze compared to properties with tenants and toilets.** As a result, self storage operating costs are typically much less than office, retail, and apartment buildings, which lower the overall break-even occupancy.

6. **Low Rent and Collection Losses** \- 48 of the 50 states have a lien law with regard to self storage collections procedures, and the other two provide steps that an owner can take to collect past due rent. Each state's law differs slightly, but most give the self storage facility owner the ability to perform the following steps when a tenant's rent is past due:

a. Remove the tenant's gate code from the system, locking them out of both the facility and their unit.

b. Place another lock on the unit to keep them from entering it. This is what we call over-locking the unit.

c. Auction their goods if payment has not been received, typically within 90 days after they were given notice.

Each state requires that the tenant be given notice that they are past due, and most require proof that notices were sent by certified mail or some other traceable format. Each state also specifies specific timing for each one of these actions, and also requires that proper notice is given to the tenant, and to the public by way of the local newspaper that their unit is being auctioned off. The laws also specify what an owner can and can't do with regard to the tenant's belongs, and most require that the entire unit is auctioned off as a whole to avoid any liability. Either way, this is far better than a landlord's recourse when going through the legal process of evicting and collecting back rent from tenants in the single family and multi-family apartment world.

5. **HIGH Cash Flow** \- Rental rates for self storage facilities are similar to other real estate product types; however, lower development and operating costs create higher profits and a greater return for investors. In addition, leases are month to month, which provides the ability to raise rents in conjunction with market demand. Self storage tenants won't typically rent a truck, call their friends, and waste a Saturday morning to move their stuff down the street just because their rent increased by $3 per month. But if you raise rents once or twice a year by 3-5%, multiplied by several hundred units, with no increase in expenses, you begin to see why **industry experts so often refer to self storage facilities as the proverbial "Cash Cows".** By contrast, if you were to raise your rents in your single family or apartment portfolio by 3-5% once or twice per year, you would have a mass exodus on your hands!

4. **Low-Risk** \- Self storage space is rented on a month-to-month basis to hundreds of different customers, most of which are individuals and small businesses. With self storage, no single move-out is going to cause a major drop in rental income. Compare this with other forms of commercial real estate, where a flagship tenant or multiple high paying tenants can really spell disaster. In addition, self storage has the ability to absorb economic fluctuations better than other real estate investments. For example, when the economy is good, people buy more; therefore they need extra space to store their extra stuff. When the economy is down, individuals and businesses may downsize their house or business space, and therefore turn to self storage as a cost effective place to store their belongings. **As a result, self storage has the lowest failure rate (8%) and subsequently lowest loan default rate of any real estate product type (compare to apartments which have a 58% loan failure rate!).**

3. **Leverage or Other People's Money (OPM)** \- Given the fact that self storage has the lowest loan default rate of any real estate product type, lenders are now making 80% - 90% LTV loans on established, well-constructed, and well-managed facilities with strong track records. In addition, there are several private investors that are funneling millions of dollars into the market to partner with self storage developers and investors due to the industry's tendency to outperform the stock market and other real estate investments. Given the reasons I just discussed, and the industry's track record, it is much easier to convince your wealthy friends and family members to become investment partners in a self storage facility than it is with other real estate product types.

2. **No Tenants** \- The number of times you will be in contact with the typical self storage customer is very minimal over the duration of their tenancy. According to the Self Storage Association, 95% of self storage customers do not return to their unit until the day they move out of the facility. Therefore, the industry norm for hiring a manager is based on a 1 to 400 ratio, or one manager to manage every 400 units. There are also several owners who are taking advantage of new technologies that have become available in the self storage industry, most notably, kiosks. These machines resemble an ATM and are typically installed at the front gate and allows a customer to rent a unit, pay with a credit card, and even dispense a lock, all without ever coming in contact with the manager! In contrast, the widely accepted rule of thumb for managing single family and multi-family properties is a 1 to 100 ratio, or one manager for every 100 units. Quite simply, single family and multi-family tenant commands a greater amount of babysitting. You have to chase them for rent, answer their maintenance calls, respond to complaints about dogs, kids, their neighbors, broken down cars, noise, bugs, etc., and spend an incredible amount of time writing letters and responding to each one of these issues or for every time someone is in violation of their lease, or the house rules. In addition, the eviction and collection cost each month is very time consuming, with little results. By comparison, I have never taken a phone call from the patio furniture in unit 105 complaining that the lawnmowers in unit 106 were playing their music too loud!

1. **No Toilets** \- The typical self storage facility is constructed from steel, or concrete, has a steel roof, metal doors, gravel or asphalt drives, and most likely, a stainless steel fence. Some may have a small office on site with a computer, phone, and one bathroom; that's it! Steel walls and roofs last for decades without any maintenance. Door springs need to be replaced from time to time, and every ten years or so you may have to add more gravel, or resurface the lot, but that can be easily budgeted for, and most fences last 20-25 years without the need for any maintenance. And of course, the enemy of all landlords \- toilets, or any other indoor plumbing for that matter, is nonexistent in a self storage facility. Unless you have climate-controlled units, there are no furnaces, air-conditioners, or water heaters to maintain. **When a tenant moves out, you don't have to clean, paint, or replace the carpet; simply take a broom or blower, and sweep it out!**

Industry Overview: What is Self Storage?

**Self Storage Association Definition:** _Self Storage facilities are real property designed and used for the purpose of renting or leasing individual storage spaces to tenants who are to have access to such space for the purpose of storing and removing personal property._ _They offer rental on a month-to-month basis of individual spaces where customers provide their own lock and have sole access to their space._ Today's typical storage facility may comprise several one or two-story buildings on two to 6 acres of land, or a multiple-story building, containing a carefully designed unit mix of spaces. The units typically range in size from 5X5 to 10X30 feet with 30,000 to 120,000 total rentable square feet of space. Self storage facilities frequently feature large roll-up doors and drive-access to outside spaces and offer outside parking for storage of boats and recreational vehicles, which often can't be stored in residential communities. Today's facilities normally have the following features:

• Contain 10,000 to over 100,000 rentable sq. ft.

• Offer a wide range of unit sizes

• Are well lighted

• Are paved vs. graveled

• Have storage units divided by steel, movable panels

• May have some or all of their spaces climate-controlled

• Contain high-tech security systems, including electronic access, cameras, and digital video recording.

• Have perimeters that are walled or fenced with security gates

• May or may not have a resident manager

• Have single or multi-story buildings

• Provide carts and dollies for use by its customers

• May contain movable storage modules

• Sell storage and moving related supplies

• Provide ancillary retail services and products.

From the real estate perspective, self storage:

• Meets the needs of several consumer groups (residential & commercial)

• Uses simplified structures

• Makes efficient use of land, especially odd shaped parcels in less desirable locations

• Has short construction time, thereby providing little traffic disruption

• Uses very little energy!

History

The conventional concept of personal storage began in England when British banks were asked to safeguard valuables for clients embarking on extended voyages. Overcrowded vaults quickly forced them to seek storage lofts from drayage companies (the first moving companies). The first mini-warehouses for household and personal items were built. The two-story structures were built with packing on the lower floor and private storage rooms on the second. Except for expansion into multi-story buildings, things remained the same for decades, until the 1950s when costs rose. This led to construction of palletized warehouses which were designed to handle crated customer goods that could be stacked three levels high.

Access to household/personal goods was restricted and it was expensive, since customers had to make appointments to obtain items and pay each time for the service (stored property could only be reached by forklifts which were operated by staff) and business hours were limited and normally did not include weekends.

Initial development of self storage facilities in the U.S. occurred primarily in the Western United States and the Sunbelt states. Contributing factors were: a transient population moving to new jobs and a better climate, retirement condominiums, apartment and townhouse residences and slab construction, etc.

Many facilities were developed prior to 1979, with 1978 generally acknowledged as one of the greatest growth years in the industry. As the decade of the 1980s began, increased self storage construction activity occurred along the Eastern coast of the United States, with increased interest in Canada, Europe, Australia and other countries of the free world.

Self Storage Tenants

It's been said that self storage is used by people and businesses in transition, but that's only part of the picture. Self storage is used by a wide range of consumers with different needs that may include:

• Homeowners and businesses in need of temporary space for overflow of property or inventory

• Those in the process of relocating

• Property stored in relation to an estate in transition due to death, litigation, restoration, etc.

• Businesses in need of space for general control of inventory, records, supplies and equipment

• Businesses that are expanding or contracting

• Businesses storing seasonal displays

• College students storing books, desks, etc. during summer

• Military personnel in need of low cost space or are on temporary duty

• Seasonal visitors with household items and sports equipment

The advantage of using rental storage space is increased flexibility, low cost, convenience, and value.

Self storage space is generally rented on a month-to-month basis and does not commit customers to long-term leases. Tenants may typically leave whenever they want and rent only the space they need. A recent study shows that the average length of tenancy for a typical customer is 11 months, and 24 months for the average commercial tenant. The cost of self storage space is lower than office or retail space, saving users money. On average, self storage is roughly 60% less than the cost of most office space on a per square foot basis. Self storage users can often find facilities in their local area and they receive additional service value because self storage managers are trained to counsel consumers on how to store items more efficiently in less space, thereby reducing the cost.

Self storage is a useful management resource for small businesses, since businesses can easily obtain more space as they grow without committing to expensive long-term leases. Furthermore, it provides businesses with a means to cut costs, should they need to downsize. Self storage is also useful for college students and seasonal visitors who may rent space for a season and for military personnel who go on temporary tours of duty, but intend to return to the area, and for those who can't afford to rent more living space.

Today's Market

Estimates of the overall number of self storage facilities operating in the United States varies greatly but most industry veterans estimate that there are somewhere between 65,000 to 70,000 facilities as of the date this eBook.

As the population becomes more familiar with self storage, the demand for off-site storage has expanded to accommodate the growing needs of the business community by storing files, medical records, excess inventory, equipment, etc. In some areas business storage accounts for 30% or more of the total tenancy of a facility. Easy access, convenient office hours, short-term rental agreements, and no long-term commitment to pay for space which may not be needed in the future, make the self storage facility extremely attractive to the retail customer, contractor, home-based businesses, manufacturers and pharmaceutical representatives, etc.

The industry still remains relatively unsophisticated and highly fragmented. **Today, roughly 80-88% of all self storage facilities are owned by small independent "mom and pop" operators.** In addition, there is a considerable amount of medium to large players undergoing consolidation, although it is becoming more difficult for the larger buyers to accomplish since most owners realize what a great low maintenance, high-cash business it is, and therefore are reluctant to sell. As a result, the top 50 companies control approximately 25 percent of the square footage in the industry.

As demand for space has grown and the self storage industry has evolved, consumers have become more familiar with the property type (92% of the households in the U.S. were familiar with the concept, according to a survey sponsored by the Self Storage Association in 1989). Inasmuch, local and regional competition ranges from a handful of properties to scores in a given trade area. Accordingly, customers may choose where they will store and from many different options, with unit size and the choice of climate or non-climate-controlled space being the base options. Today, consumers have the ability to compare and choose from among a variety of self storage property styles and customer services to meet specific storage needs.

Competition in the self storage market is increasing. Maximum success for investors/operators depends on the ability to meet customer needs with convenience and value.

To satisfy customers, today's self storage must look to locate in retail corridors, light commercial or even high density residential neighborhoods, in addition to traditional industrial and heavy commercial areas. Newer facilities emphasize architectural aesthetics in construction and are designed to blend in with the retail or residential nature of the areas they serve. Landscaping has also become a prime consideration, as well as the interaction of storage development with adjacent planned tracts of offices, retail stores and business parks, in order that incubator space is available to support public planning. All of this is done with the aim of creating a clean, stable, secure upscale image that supports the perception, and the reality of trust among current and prospective customers.

Investment Opportunities in Self Storage

Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties. **Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation.** However, self storage offers a number of benefits that I feel make it even more attractive of an investment. Those include the following:

1. We are becoming a more transient society, moving around more and creating a greater need to store our stuff, thus the demand for self storage is increasing.

2. Americans tend to accumulate a great deal of possessions, and we don't want to "weed out" those things we don't use or are sentimental or have nostalgic value, which in turn, creates more demand.

3. Most new communities will not allow us to store our boats, jet skis, RVs, or even multiple cars on the street or in front of our homes.

4. Many retirees downsize their homes which require additional storage space that their smaller homes don't provide.

5. More and more Americans are buying second homes which increase the demand for storage space.

6. College students utilize storage space when moving back home for the summer.

7. Many businesses are downsizing and operating out of smaller offices that necessitate a need for storage space.

8. Many small distributors will utilize self storage from which to operate their businesses.

9. Pharmaceutical reps will use climate-controlled storage for samples and inventory.

10. The eBay® phenomenon has created a huge demand for space.

11. Other home based businesses are also creating demand for off-site storage.

12. Lower Development costs - self storage facilities development costs are often 30 to 50 percent less than office, retail and apartment buildings.

13. Lower Operating Costs - Operating costs for self storage facilities are substantially less than office, retail and apartment buildings. As a result, self storage owners are more isolated from large increases in utility and other variable costs that occur in the open market.

14. Lower development and operating costs make break-even occupancy ranges lower than other forms of real estate.

15. Occupancy is generally more stable and therefore predictable as there are typically a greater number of units in which to "spread the risk" than in other forms of real estate.

16. Month-to-month leases mean that rental rates can be adjusted easily. When occupancy increases, I will adjust rates to compensate for the demand.

17. Demand for self storage is not dependent upon the economy. When the economy is good, people buy more and store more. When the economy slows, people downsize, and require a cheaper alternative to store their extra belongings.

18. Low management overhead as customers typically only need the manager to move in or move out, compared to office or apartment complexes that requires a high number of customer contacts and constant and ongoing interaction.

19. A well-run, stabilized self storage in a good location is very desirable to other investors and institutions, making self storage a very liquid investment.

20. It's no wonder self storage has the lowest loan default rate of all commercial real estate property types!

Debunking the Myths

Now that we've discussed all the reasons that make self storage a fantastic investment, we should take some time to break down a few of the myths that have been floating around with regard to the industry. Like many other industries, self storage has been evolving for several decades now, and many of the general assumptions by outsiders surrounding this business simply do not apply. Some of the common myths are as follows:

1. "If you build it, they will come."

In the early years, this was somewhat true. But in today's competitive landscape an owner/investor must perform very careful analysis and/or feasibility studies to determine whether a potential development site or an existing facility is a wise investment. In addition, there are many areas that are, or are becoming overbuilt, which drastically changes the projected lease up and overall occupancy potential for a facility.

2. "Self storage is an easy business."

This may have been somewhat true in the past as well, but like any business, if it were easy, everybody would be doing it. Far too many real estate investors treat their business as a hobby rather than what it truly is: an asset with many moving parts that must be managed from day-to-day as opposed to a stock or a mutual fund that you purchase and only infrequently check on its performance. Today's self storage arena is very competitive, and successful owners are always thinking of ways to increase income, decrease expenses, and strive for operational efficiencies across all facets of their operation.

3. "All self storage properties are cash cows."

As we discussed earlier, self storage facilities have the lowest default rate of all property types, but it doesn't mean that owners don't default and that many others are struggling. Generally this is due to poor planning before acquiring or developing a facility. An owner/investor must perform thorough due diligence when it comes to competition, population growth, land costs, construction costs, market rental rates, and the management of the facility before purchasing or developing a facility. If you do not have the time or the expertise, a feasibility study should be conducted by an experienced individual within the industry to avoid buyer's or developer's remorse.

4. "This is a cheap business to get into."

Again, this may have been somewhat true in the past, but not any longer. Today's customer is demanding a higher quality facility than what the industry provided in the beginning. Today's facilities possess a higher quality construction, are fully paved, fully fenced with security gates, typically have state of the art digital video surveillance and recording systems, and are considerably larger than in the past, which necessitates an office with a part-time or full-time manager. Land costs are higher as most developers prefer to locate in high-traffic locations as opposed to the hard to find or industrial park sites of yesteryear. In addition, construction materials have been on the rise recently due to fast developing foreign nations which affect development costs, and good existing facilities are being sold at record high prices as the word is out on what a great investment self storage has become.

TO BUY OR TO BUILD

The Advantages of Buying Versus Building

There are several advantages to buying rather than building a self storage facility. These advantages include:

1. Quick Entry

Quite simply, buying an existing facility will get you into the business faster. Bypassing the development process will allow you to take over an existing operation without the time and hassle of building and creating the business from scratch.

2. Predictability

Buying an existing self storage facility gives you a historical track record based on past operational performance. This will provide an indicator to the future success of the facility, all things considered.

3. Ease of Financing

Typically, financing an existing facility with a proven history of net operating income is much easier than construction financing, which is highly speculative. There is a wide variety of products available to finance existing facilities in today's market. Financial institutions have a large appetite for well performing self storage facilities and therefore are offering high loan-to-value loans at very desirable interest rates.

The Advantages of Developing Versus Buying Include:

1. Not buying someone else's problems

When buying an existing facility, you may be buying someone else's problems that can prove expensive to fix. Be certain to have a licensed inspector perform a physical inspection of any facility you may be interested in purchasing, and be sure to verify all income and expense reports to determine the true Net Operating Income of the property to avoid any surprises.

2. Choice Site Selection

Developers are free to choose a location far from competitors and be first in an area that is experiencing a high rate of development. As in most businesses, if you are first to market, you can grab onto the customers in that area, and in self storage, customers typically don't move their stuff just because another competitor comes to town.

3. Low start-up Cost

The cost to buy land and develop a facility is usually significantly lower than the price of acquiring an existing facility, looking strictly at a cost per square foot basis.

4. Preferred Product

A developer can build a state of the art facility to meet market demand. It is much easier and more cost effective to build a facility with all the new industry "bells and whistles" than it is to retro-fit an older, tired facility with electronic gates, paved driveways, digital video surveillance systems, newer door/locking systems, business centers, kiosks, or adding a retail center and office.

5. Potential for Higher profits

If you do your homework and choose a good site, and build a marketable facility from both a user and a potential buyer's perspective, you could reap a windfall of profits upon stabilization and ultimately the sale of your facility. Of course there are no guarantees, but history has shown that developing, and managing a facility to stabilization and then selling has proven to be considerably more profitable than buying and selling an existing facility.

Creating Your Business Plan

Now for many people, the thought of creating a business plan is akin to the fear of public speaking. However, it does not have to be such an unpleasant task, especially since we already have the information. Our personal financial statement, the project due diligence and the market analysis comprise just about all of the information needed. All we need to do is to organize this information into a coherent document. Our business plan is an opportunity to present ourselves and the deal in the best possible light. **It is designed to give the lender an in-depth look at yourself as a borrower including your past successes, the reasons why this project is so strong, and the reasons it will succeed in this market.** This will all be supported by facts from your research and due diligence.

Plan Format

My plan is written as a combination business plan and loan application that focuses primarily on the subject property I want to acquire. It includes a summary of my past experience and successes, my present portfolio of real estate and pertinent financial data, but the primary focus is on the deal.

Below is a sample outline of a loan proposal and business plan. A good plan is professional, grammatically correct, free from spelling errors, logically organized, and most importantly, thorough.

We will discuss these elements in the pages that follow.

1. **Summary Page**

a. Borrower name and the entity that will hold title to the facility

b. Property Legal Description

c. Purpose of the loan

d. Loan amount and terms requested

e. Loan Ratio, or Loan to Value (LTV) requested

f. Collateral and source(s) of repayment

g. Financial Summary

2. **Market Summary and Analysis**

a. Area map including facility, and photos of the facility

b. Demographics: Population, growth, employment and income

c. Market Trends

3. **Neighborhood Analysis**

a. Location Description in relation to customer base

b. Market Position

c. Competition

4. **Property Description**

a. Site plan and analysis

b. Aerial and or Satellite Photo (www.GoogleEarth.com)

c. Property Photos

d. Property Description and Rent Roll

e. Improvement plans

f. Management Summary

g. Marketing Plan

5. **Financial Data**

a. 3-year historical financial performance (if possible)

b. 3-year projection of operations

c. Basis for these assumptions

d. Source and use of Funds requested

6. **Borrower data**

a. Ownership structure and Entity

b. Background and experience of principal

c. Personal Financial Statement of borrower

7. **Exhibits**

a. Building and site plans

b. Survey

c. Sample Lease

I will now discuss each section in detail and provide examples of the information that should be included for the lender:

Summary Page

A single page summary of the proposal presents the property and the loan request in Table Form. The summary contains all pertinent facts about the proposed facility and serves as an introduction to the project. It also serves as a quick reference for deal points so that anyone looking for the pertinent data does not have to search through the whole proposal to find an answer.

My layout is simple and concise. The headings address the pertinent questions of identifying the borrower, the property, and the purpose of the loan, the amount of funds needed and the terms for repayment, and the security and the source of repayment. Requested lending ratios are listed as well.

Typically, the LTV and debt coverage ratios are the first calculations any lender performs when evaluating a loan request. I make it easy to find and discuss. I also highlight the operations and furnish supporting documentation for further consideration.

The summary supplies the answers to the most pertinent details of the project. The rest of my proposal will support the highlights with facts, figures, and further clarification.

Maps

Following the summary page and prior to the market analysis, I will insert maps that depict the location from both a regional, street level, and satellite basis. A local lender will invariably know the neighborhood and immediately be able to zero in on the location, creating a familiar feel right away.

Maps are readily available and free at websites such as www.mapquest.com and www.mapsonus.com.

Satellite Maps are available at www.googleearth.com which adds just another degree of professionalism and credibility to your plan.

A local map showing the property relative to area neighborhoods and services adds detail to the discussion regarding market position. For example, I show the location of the project in relation to any multi-family apartments, high-density neighborhoods, and proximity to other retail related services when possible. I also try to stress visibility if the facility is located on a major road with high traffic counts.

Area Description

Most lenders already possess this data in lengthy form, so I prefer to use bullet points to highlight the major points. This also lets them know that I have done my homework and that I have a good grasp of the market in which I am planning to invest. I will draw this from the demographic reports available at www.ESRI.com.

Competition

The competition includes information for the subject facility and the pertinent information for each direct competing facility. The following is an example from the information gathered through the Self Storage Demand Estimator we discussed earlier, a sample of which is included in the Appendix and on the forms CD:

You can include further detail from the SSA Self Storage Demand Estimator with regard to demand and supply and an estimate of overall occupancy, but it may not be required. The point I am trying to make is that once again, I am demonstrating that the competition has been evaluated and the project is properly positioned. I will then summarize my opinion of the market position with regard to the subject facility and state my conclusions regarding future demand.

Property Description

This section details the actual physical features of the facility and includes photos, site plans, surveys, and perhaps charts. Any deferred maintenance and/or planned improvements are discussed along with a brief discussion of how I plan to manage the facility after acquisition. The site plan shows the buildings and improvements to the property, along with a unit breakdown if possible. I also try to supply an existing survey if I can obtain one from the seller. I will include the satellite photo as well, and discuss the site's topography, ingress/egress, parking, visibility, utilities and any special features such as a retail center, business office, kiosk, billboards, signage, cell tower and landscaping, etc. that may be worth noting.

Photos provide an excellent illustration of the facility. An aerial photo along with the satellite depiction from www.GoogleEarth.com or from www.terraserver.com can show proximity to neighborhoods, multi-family apartment complexes and the competition as discussed above.

If you are using a customer provided aerial, be sure to include the date and note any significant changes that have been made since taken.

Facility Photos should include both interior and exterior views. If using a digital camera and editing software, you can add captions or short descriptions directly printed on the photo.

I also include a current rent roll summary which shows the unit mix and corresponding Rental Rates, along with a description of the facility's general condition and occupancy history. I include how I plan to improve the property by increasing occupancy, decreasing expenses, and whether I plan to construct additional buildings, install a kiosk, security system, fencing, electronic gate, etc. and the associated costs of each.

Management

**Your plan for managing the facility is crucial to getting any loan approval.** If you plan to manage the facility yourself, describe your history and experience in a format similar to a résumé. If this is your first large property with multiple tenants, highlight your previous experience managing multiple smaller properties. If you are new to the industry, focus on your people skills, organizational acumen, construction or remodeling experience, and all prior experience in real estate whether you have been a realtor, mortgage broker, appraiser, surveyor, or property manager; all can be talents you bring to the table.

I always discuss my experience and expertise in leasing, collections, maintenance, and my specialty, operations. I will also list the 3rd party vendors or contractors I frequently use to handle my lawn/landscaping, painting, door and spring repair, general maintenance, parking lot sealing/striping, and my property management software vendor. I will also identify who will be on-site to show prospective tenants, prepare the leases, take the service calls and tend to the day-to-day operations of the facility, and the proposed hours of operation. If I plan to use a self-serve kiosk for 24-hour leasing and rental payments, I will also list that here, and include a brochure of our kiosk vendor in the appendix or attached in the body of the plan as reference, along with their website address. In addition, if I plan to use a call center, I will note the name of the vendor and the hours I plan to utilize their services in addition to their brochure and website address.

Marketing

Depending upon the location of the facility, the current status of its marketing efforts, and the nature of any planned expansion, a detailed marketing plan may be required. The plan may include plans for new or additional signage, a name change, the yellow page and phone book ads, and perhaps some sample copy of your ads and brochures that will be available in the leasing office and distributed to the community. I also include the cost for updating any existing websites, or for designing one from scratch. For most facilities, a projection of an annual budget based on ad costs would be a good start. If this is a turnaround facility, or if I plan to add a significant number of new units, or specialized storage such as climate control, RV condos, or record storage, I may plan to expand my marketing efforts to advertise the newly repositioned facility.

Financial Data

**The financials are where the proverbial rubber meets the road.** This will determine in the lender's eyes, as it already has in yours, that the project is viable. This is the section that will be referenced the most, so I am certain that it is accurate, and does not conflict with any other financials already presented, or in any other place in the loan request.

Most lenders like to see three years of operating history, and would also like to see projections for the following three years after purchase. I am always certain to explain any abnormalities in the financials should there be any drastic increases or decreases in income or expenses from the previous three years. I always pay close attention and include as much financial information as possible. Don't forget your audience here; these folks want to see as much financial detail as possible which also includes narrative that tells the whole story. Not only are the lenders impressed with my preparation, but being thorough gives me confidence in the deal for my own peace of mind.

If rental increases are based on the completion of improvements, be careful to account for the increased rents. The cash flow will increase over time, but not all in one year as the leases are almost always staggered, with an average tenancy running approximately seven months. I am always certain to be realistic, both for the lender as well as myself when stating the projections for future years.

I always check all financial reports as well as all my statements two to three times for accuracy in reporting. If I make changes to the statements, I am always certain to change the statements in the text accordingly.

This is final evidence of thinking the deal through. Addressing the transaction cost in an orderly fashion demonstrates that I have performed the necessary homework to establish the overall feasibility of the deal. If the facility plan includes loan proceeds to fund any improvements or expansion, I will include a line item schedule of funds requested.

Background of Principals

The final section of my loan proposal includes a very lengthy "hero file" where I detail my past experience and investment successes. It is a separate, spiral bound booklet that lists in detail a breakdown of the deals I've done in the past, highlighting the profits on the sale of each property. I will also include a list of current facilities in my portfolio, focusing on the increase in Net Operating Income of each facility after I acquired the facility and implemented my best business practices in operations and management. I also include a résumé outlining my formal education and industry training, designations, and a list of my awards and recognition. I round out the résumé with notes on my family and extracurricular hobbies and interests. **I am a firm believer in adding a personal touch to my plan which helps to find common ground with my lenders and the committees that will ultimately review my request.**

Exhibits

I include as much information in the package as will help to sell the project. At times, I may overdo it, but I would rather err on the side of producing more than enough information for the lender to make a decision, rather than omit what they may be looking for. Tax returns, detailed vendor contracts, proposals for improvements, etc. should be referenced as "available for review upon request, but not included with this proposal".

Packaging

I prefer to copy the package on 3-ring paper, and include in a binder with tabs for reference. Any one of the large office supply stores can assist you with this document at minimal cost. Remember, **our goal is to have our loan proposal moved to the top of the heap when all the loans are proposed at the monthly loan committee meeting, and ultimately, given preferential consideration for being so professional and complete.** Make it generic in nature, but include a formal cover to the bank and lender to whom you are making the request. There have been a few occasions where the lender wasn't able to fund the loan for some reason, in which case I would retrieve the package and forward it to another bank to start the process over.

In summary, when I have taken the time to prepare a thorough business plan and loan request, it has been given the attention and priority it deserves. Subsequently, I have had a great deal of success in getting my deals funded, and grow my business in ways others have failed.

Thanks for spending some time reading about the nation's hottest and simplest real estate investing strategy! Although I'm biased, I invite you to visit my website to view the testimonials from all my students and student/partners whom I have helped others to become real estate millionaires, without all the hassles of tenants and toilets. Having endured a near bankruptcy experience managing over 500 tenants and toilets, I realized that after surviving, and now thriving in real estate with self storage, my purpose in life was to go out and share my story and business by teaching other investors that there definitely is a better way to invest in real estate - a safer way with a greater opportunity to create huge amounts of wealth, and how to do it much quicker. Since then, I have devoted a large part of my efforts through the creation of my home study systems, three-day Self Storage Academy, and the dozens of one-day seminars, webinars, and speaking engagements at the industry's largest shows, where I reveal all my secrets and share my business with those wanting to take advantage of what I learned over the years. I invite you to do the same by visiting me at www.SelfStorageInvesting.com, the industry's largest educational company designed to provide all the tools for investing in Self Storage. So don't wait another day slugging it out with tenants and toilets, or in another weekly meeting with your boss. Go there now and sign up for my free six-part course on how to invest in Self Storage.

Contributor: Scott Meyers, Owner & President, Self-Storage Investing

I began my career by building a large portfolio of single family and multi-family properties. I spent the first ten years in real estate investment fighting with tenants and toilets and it almost drove me into the insane asylum and the bankruptcy court! Chasing tenants that wouldn't pay, trying to stay ahead of rising taxes, insurance, and utility bills, and the ongoing, unexpected maintenance calls almost forced me out of the business. I began to ask myself, what area of real estate could I invest in that could utilize the talents and experience I have gained, without all the hassles of tenants and toilets? Well, after weighing all options, and after speaking with many of my mentors in the industry, I ultimately chose Self Storage as the area I wanted to pour my efforts into and secure my future.

So after 11 years of amassing a large portfolio of single family and multi-family apartment complexes, I began to sell them all off, and started investing in self storage facilities. As most people say once they have found their true calling, I wish I would have done it sooner! The self storage business isn't without its fair share of challenges, however, and I certainly wouldn't call it easy. However, my life has changed dramatically the day I sold my last apartment complex with all those tenants and toilets and traded them for self storage units filled with nothing but....... STUFF!

_My home study course, "The Complete Guide to Finding, Evaluating, and Purchasing Self Storage Facilities",_ www.SelfStorageInvesting.com

To your success!

# Chapter 12: The Power of Cash Flow Investing

Introduction . . . and a little background.

We know you've received **The Black Book of Alternative Investment Strategies** because of your interest in non-traditional ways of participating in today's investment markets. We're pleased to have been invited by the Investor Advisory Network to contribute to this publication, with a chapter that will introduce you to an approach that, despite its lack of complexity and simple name, offers the potential to change your view on investing and the success of your investment program in dramatically positive ways.

But first, by way of introduction, let us tell you a little about ourselves and why we're such enthusiastic supporters.

Jeremy, with an MBA from The Wharton School (University of Pennsylvania), had worked his way up in the corporate world to a good job with a Fortune 500 company, investing in his 401(k) and also trying to build up some savings, like so many of his colleagues and buddies. In 2002, having lived through the dot com market collapse, and being a pretty low-risk, slow-and-steady kind of guy, he began to get a little nervous and started looking for alternatives that offered less volatile and more predictable returns. He came across something called passive cash flow investing, educated himself in it and slowly began to give it a try. Eventually he started to roll more of his savings into that type of non-traditional investing and by 2007 he was actually able to leave the corporate world, having built up enough cash flow to make that possible. Since then he's been a full-time cash flow investor and hasn't looked back.

David, too, started out working on the marketing side of the corporate world, but in 2007 went out on his own (with his wife) to explore the world of real estate. He had become impressed with what he had learned about an investing method called self-directed IRAs and, as he discovered was allowed by that technique, began to invest some of his retirement funds into real estate. This was a stroke of luck and good timing that saved him from seeing 40% of the value of his IRA disappear in the 2008 crash as happened with so many others around him 100% invested in the market as it went through its precipitous drop. This was a powerful moment for him, and he decided to create a company to share with investors the valuable insights and information he had learned and developed from that experience.

It probably hasn't escaped your notice that the common event for both of us was two market crashes seven years apart that confirmed the validity of seeking alternatives to traditional stock and bond investments to build wealth to live on and prepare for retirement.

We know alternatives are why you're reading this. Chances are pretty good that you're currently involved with more traditional ways to grow your money, so we encourage you to jump right into this chapter for a quick read that we hope will open your eyes to a powerful, proven investment approach that's still under the radar for many investors - but well worth learning about.

We hope you see value in what follows and ultimately benefit from it. If you have any questions after you read this, feel free to contact either of us or your financial advisor . . . and we wish you happy and profitable investing!

Cash flow investing: could it be the right thing for you?

It's pretty much a given that we'd all like to find the ideal investment route, the singularly perfect way and place to put our money and then sit back and look forward to a great life and rich retirement.

Could that solution be the concept known as cash flow investing? After all, as you'll learn below, observing its techniques offers a good chance of consistent positive performance not subject to the volatility of the stock and bond market . . . can provide predictable and impressive income and asset growth on a recurring basis over the years . . . can be structured to provide powerful tax advantages . . . and can be managed by experts you pick while at the same staying in ultimate control. Considering all that, it seems like the perfect way to build assets and wealth.

But no, we can't say following its dictates is exactly perfect - because while all of the statements above are good and true, no one investing method is without risk. However, for many investors this concept can be a powerful tool that increases your chances of exactly that and, in our minds, comes pretty close to just-this-side-of-perfect.

Of course, much still comes down to the choices you make, the people you work with and ultimately the quality of your investments. In this chapter we hope to show you that compared to many other more traditional (and even some non-traditional) techniques, making financial decisions following the principles of cash flow investing can very well give you the ability to deliver results appreciably more impressive than other approaches you may currently be using or contemplating both in terms of predictability of returns and total returns.

Because the principles of cash flow investing can positively power retirement plans as well, we'll also touch briefly on the simple steps you need to take to make funding these kinds of investments with your IRA and 401(k) possible . . . and even why exploring that route for your retirement fund doesn't necessarily lock you in to anything if you change your mind, depending on the types of alternative investments that you choose.

Along the way of our cash flow discussion, we'll also give you examples using real estate, just one of the investment types available to cash flow investors and recommended as a strong alternative to the traditional stock-market - to illustrate where the numbers come from - and why they can look so good.

_What exactly_ _is_ _cash flow investing? (And some other definitions.)_

The technique is simply defined as follows:

_Cash flow is essentially investing cash (or other assets) in order to receive_ _recurring_ _payments - typically monthly or quarterly. These recurring payments provide the cash flow investor with a_ _return on investment_ _. Cash flow investments generally include a cash flow return and an increase in value (appreciation)._

Let's provide an example of cash flow investing using a simple real estate purchase. (Again, real estate is only one of a number of possible investment asset classes, but an excellent one. We'll have more on this later.) The principles remain the same whether the investment is in residential or commercial real estate.

In this example, someone puts up a lump sum of cash (or invests with other partners) to purchase a property in order to receive the monthly or quarterly income that the rent of the property produces.

• The investment property is purchased for **$50,000** and the rent is **$800** a month.

• The gross scheduled income is **$9,600** (12 x $800).

• We will assume a standard vacancy rate of **8%** , thus reducing income by **$768.**

• Assuming a fairly standard **45%** expense ratio, we project annual expenses of **$3,974.**

• This nets an annual income of **$4,858.**

• This yields a **monthly cash flow of $404.**

• This is a cash flow return on investment (ROI) of **9.7%.**

(This, by the way, is an appropriate representative example, since a cash flow return of roughly 10% is a good rule of thumb for those just starting out in terms of what you might be able to expect from this type of investment. That does not include any appreciation or increase in value of the property, which is often projected to increase 3-5% per year, on average, due to inflation.

So with this representative example in mind, let's discuss the overall benefits of cash flow:

• Cash flow investing allows you to stop speculating blindly on uncertain returns. It affords realistic protection against volatility associated with certain other asset classes (the best/worst example being the stock market). Nobody can predict where the stock market will be a year from now, but with cash flow investing, if you're selective and invest only in low-risk opportunities - with real estate, for example, highly occupied (85-100%) properties - it's fairly easy to predict what your cash flow will be because you can estimate your income and expenses within a reasonably accurate range.

• Cash flow investing allows you to build a more predictable future for you and your family. Through careful planning and, of course, prudent investment decisions, you can more reliably "set yourself free" by leaving your job (as Jeremy did) and fund both your ongoing existence and, if you choose, a retirement plan that allows you to maintain the wealth you build without ever encroaching on your "nest egg."

• Cash flow investing lets you invest like the rich for "wealth-adjusted returns, which often includes significant tax benefits." The wealthy tend to have opportunities that others don't have access to - and investing in cash flow is one of their elemental secrets. Many of their investments include depreciation and other tax deductions that may defer most or all taxes into the future, letting them (and you) benefit by writing off some of the assets and depreciation - tax deferral that can amount to a huge benefit long-term in any wealth-building program as it opens up growth to the power of compounded returns.

• Cash flow investing enables you to take control of your returns. You can invest in what you want (and know) or work with an operator (aka manager of an investment) in whom you're confident, instead of, say, having to hope that the stock market will come through. Also, with some non-traditional investments, you have the power to add value to your investment. For example, if you face a vacancy in a real estate property, you can increase your marketing or rehab the property to rectify that situation. Under the right circumstances, you may even choose to increase the rent. Some of these steps do amount to extra costs, of course, but they often can be planned for and they allow you to make improvements in your property (and thus protect or improve your return) by exercising your own free will. If you own mutual funds or stocks, you're just along for the ride and your return will be completely immune to any effort you would personally hope to make to improve the value of those assets.

• Cash flow investing works for both taxable and non-taxable purposes. The reliable building of income and assets that results from following these principles can be applied to tax-advantaged environments and programs as well, with their benefits thus magnified (for instance, the tax-deferral aspect of IRAs and 401(k)s). Regardless of your priorities, cash flow investing helps you earn potentially higher and more predictable returns, short-term and long, than traditional investments.

What about "traditional" and "alternative" (non-traditional) investments?

We've given you our mantra that the solution to the risks with traditional stock market-related investments is changing your focus to non **-traditional, alternative** investments that generate cash flow, but what exactly are some of the risks inherent in **traditional** investing?

• With traditional investments, there's no guaranteed predictability, and therefore you can't plan your future based on past market activity (a case in point being that, despite its ups and downs, the market ended up essentially flat between 2000 and 2012, which unfortunately set back the retirements plans of tens of millions of people in the U.S.).

• Traditional investments are subject to stock market seasonality and cyclicality. There are emotional (some would call them irrational) decisions that drive the market up and down in spikes, and create and burst bubbles. Prices are also vulnerable to the shock of world events (whether or not they reasonably relate to the value of stocks) and to high frequency trading.

• With traditional investments, you have no personal power to add value - your inability to do anything about, say, Apple introducing a bad iPad leading to possible negative effects on your Apple stock versus our example of being able to rehab rental property you may be holding.

We've pointed out that to date, knowledge and use of these alternative, non-traditional investments has been held (if not intentionally) pretty close to the vest by the sophisticated investment community.

Here is www.Investopedia.com 's definition of an **alternative investment** :

An alternative investment is an investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.

That sounds both simple and pretty heavy, but we're here to suggest that it's time - and it's easy - to start "investing like the wealthy" in non-traditional investments and gaining the long-term advantages of cash flow investing.

Alternative investments come in essentially two types:

• Alternatives that deliver recurring, predictable cash flow with a high degree of probability. These alternative payments do serve the purpose of cash flow investing

o Monthly residential real estate rentals

o Quarterly commercial real estate payments

o Monthly ATM payments (from the ownership of non-bank ATMs)

o Monthly hard money real estate loan interest

o Monthly lease payments

o and others

• Alternatives that do not deliver recurring payments over the life of ownership but speculate on the payment of lump sums after a period of time. With their unpredictability, these alternative payments do not serve the purpose of cash flow investing

o Small family home flips

o Land banking

o Residential real estate development

o Commercial real estate development

o Speculative oil drilling

o Precious metals (gold, silver, etc.)

o and a variety of others

There are compelling reasons to focus on the "right" kind of alternative investments in a cash flow portfolio.

• With them, you have a greater hold on your investment activity - deciding whom to work or invest with, having the ability to add value to your investments and allowing you to invest in cash flow, not speculate on appreciation.

• They offer you a choice of flexible structures (time horizon, amount of investment, amortization schedule and so on) to suit your needs, often providing the ability to align the investment manager's incentives (when he/she gets compensated, etc.) with yours.

• It is possible to find unique and hard-to-find opportunities, without increasing your risk, if you know where to look.

• In commercial real estate, as an example, the total annual returns you can expect can be impressive once you total the three possible ways to earn money with this type of vehicle - your cash flow, the increase in your equity if you're paying down an annualized mortgage each year and some expected appreciation. Using even conservative projections, you could earn between 17% and 20% per year on a typical property.

That's huge - more than double what you would achieve with the market if you assume 8% annualized growth (which actually might seem high if you examine the stock market average over the past decade, but we'll give the market the benefit of the doubt by using the S&P's long-term historic annual growth).

All that being said about the benefits of "investing with the wealthy," successful cash flow investing still takes hard work - and you need to be very careful to avoid these potential threats to success:

• To avoid years of sub-par or no cash flow, you need to be selective in your investment choices. Importantly, _you need to_ _center your selection of investments on the generation of cash flow (income),_ _not_ _appreciation_.

This is a core rule for this type of investing.

• You need to ensure that you are properly diversified across enough opportunities to avoid the risk of "having all of your eggs in one or too few baskets". This can be avoided by paying particular attention to how much you invest in each opportunity. If you need advice on how to choose the right investment amounts for you then be sure to consult with your investment advisor.

• You do not want to get to the point where you're encroaching on your investment capital, having to withdraw from your next egg for expenses, thereby reducing your investable funds, your future earning power and your wealth. The simple way to mitigate this is to carefully forecast your needs and plan ahead to generate the cash flow you'll require before you leave your job or retire.

• You need to constantly work on optimizing your investment decisions by staying current on the economy and economic data, networking, reading other materials like this, investigating investment courses - and being flexible and resilient enough to learn from your experience.

• To avoid lack of liquidity \- which is to say, finding yourself with the inability to take advantage of strong investment opportunities as they come along - plan ahead to avoid over-allocation of your total investment pool.

• Finally, while cash is normally a great thing to have, for the cash flow investor, it isn't. Having too much idle cash (other than what's necessary, of course, for day-to-day operations and emergencies) instead of keeping it in working investments comes with an opportunity cost that can and should be avoided.

Why we like real estate.

As we've noted, there's a world of choices once you've decided to focus on alternative investments that deliver recurring payments. With research and diligence, cash flow success can be achieved with investments of many types, both "niche" and normal. We certainly have investigated different asset classes . . . but on balance we believe that, if it's appropriate for your investing goals, consistent, predictable and positive results can flow from making real estate the primary asset class in which your cash flow assets are invested.

• To begin with, a successful real estate investment by its nature can provide a number of ways to make money — from predictable monthly cash flow to appreciation in the property itself to the tax benefits that real estate provides. In addition, real estate allows you to make money one more way, through debt buy-down. You can borrow money against your holdings, and long-term, if you're paying off that loan with cash-flow income you're receiving from your tenants. You're making money on your investment without anything having to come out of pocket.

Real estate, then, allows you to make money four ways.

• Real estate is a proven method for building wealth, with more millionaires having been made through real estate than any other wealth-building medium in the world. Long-term real estate ownership historically has proven to be a strong vehicle yielding high appreciation, often far superior to other retirement asset choices. Further, modest real estate investments (i.e., $25,000 and up) can be "shared" via syndicated participation in larger real estate investments that would normally be out of the reach of smaller investors.

• Careful selection of real estate investments affords realistic protection against volatility as compared to certain other asset classes (and certainly compared to stock-based holdings). For instance, if you are selective and invest only in low-risk real estate opportunities - let's say 85- 100%-occupied residential properties - it becomes fairly easy to project what the year's net cash flow from rentals will be, as you can usually predict expenses within a certain range - this in contrast to being at the call of the fluctuations and higher risk of other investment classes.

• Real estate is a diverse asset class affording a variety of opportunities serving different investment objectives (dependable cash flow, property appreciation in the short or long-term, or both) and also allowing the possibility of anticipating and adapting your investment mix as the nature of the real estate market changes over time.

• Unlike traditional market-based assets, real estate is a tangible holding. As we've seen, stock exchange-based holdings do not represent a hard asset, and can be subject to the pricing and whims of the market, sometimes emotional and often not predictable. Contrarily, the floor on a hard real estate asset doesn't usually go to zero.

• As we've demonstrated before in our discussion of non-traditional investments, with real estate in your portfolio, you have tangible power to add value to your investment.

What types of real estate investments can you include in your cash flow program?

The answer to that question is "almost anything" . . . but do keep in mind the imperative of tilting toward recurring cash flow over property appreciation.

Categories available for an interested investor to participate in real estate can be broadly defined as follows:

• Single-family investments:

Residential real estate investing in single-family residences is a very classic real estate investment.

The last few years, of course, have witnessed major decreases in the values of homes across the country along with a flood of foreclosures (now abating) and short-sale activity, and although a recovery is underway, single family still represents an extremely attractive investment. Continued tight lending standards, following the wave of foreclosures, should also help keep the rental market robust in the foreseeable future. A steady supply of renters combined with low home prices is an excellent formula that can make this type of investment in a self-directed account a success.

• Multifamily (apartment) investments:

Multifamily is one of the best real estate investments you can make in today's market. Historically, multi-family has low vacancy rates and unlike other commercial sectors such as retail or office, multifamily has shorter-term leases that help the owner quickly capitalize on changing market conditions. Multi-family is also well-known for providing stable cash flow as long as you invest in the right types of multi-family properties in the right locations.

Recent years have proven to be a great time to invest in multi-family. As the current economy, still in recovery, continues to take its toll, the impact on long-term multi-family investment properties is positive. Demand for multi-family housing is expected to double in the next few years as home ownership rates remain soft due to continued tight lending standards and poor credit scores. Also, the next generation of renters, the Echo Boomers, are projected to increase the renter pool by nearly five million people over the next ten years. More renters in the market should help keep cash flow trending steadily upwards as property values continue their recovery climb.

• Commercial Real Estate:

Commercial real estate also offers tremendous opportunity and diversity within this type of investment. The most critical factor in commercial real estate investing is the experience and expertise of the operator and his or her ability to either manage the property or oversee the property manager. Commercial real estate is more akin to running a business, and understanding both the micro and macro economic factors that can make this type of investment successful is crucial. For most of us passive investors, the real skill in analyzing these kinds of opportunities lies in the ability to determine if the operator is skilled enough to operate them successfully.

Some examples of commercial real estate investments include retail shopping centers, office buildings, mobile-home parks, self storage facilities, industrial buildings and hotels. Commercial real estate can provide excellent diversification across asset types and location.

Some commercial real estate asset classes, including mobile-home parks and self storage facilities, for example, are known for their strong performance during economic downturns and can therefore offer particularly good diversification to help reduce cyclical volatility for investors.

• Trust deed investments:

Less known as a type of real estate investment, but under the right conditions an effective use of investment funds, you can lend other people money for their real estate transactions. In this case, the loan is secured by real property and you are loaning money on specific terms and conditions for a specific property.

• Tax lien investments:

This type of investing involves purchasing "liens" on residential and commercial properties levied by counties for failure of others to pay property taxes. Once the late bill is settled (and most are), the government will contact you and pay you back the amount you originally paid plus substantial double-digit interest. Investing in tax liens, however, is a labor-intensive process and can benefit from the help of an expert.

• Real estate notes:

Real estate notes, or mortgage notes, are ideal for investors who want to own real estate without the hassles of traditional property ownership. Instead of buying an actual piece of property, investors buy the loans, or notes, that are secured by a piece of residential or commercial property.

Notes have a wide range of entry points, making them accessible to a broad range of investors. Like every investment, what would make the most sense for you depends on what you're trying to accomplish, how long you have to accomplish it and your own risk tolerance. This type of investing is specifically appropriate for those who want to invest using their retirement funds.

In real estate - and in cash flow investing generally - how do you find the best investments and whom should you choose as advisers and partners?

This, of course, is a huge question that we can't answer in a short document like this. But we can sum up our thoughts in three broad words:

• Networking

• Education

• Integrity

In our summary to this chapter, we'll mention again the importance of constant networking and learning as you develop and manage your investment program moving forward. There's no better guide to success than education and learning from your own and others' experiences - and there are many ways to do that.

However, it will be the quality of the people you run into and seek out and with whom you work as you move along your journey of cash flow investment that, bottom-line, will have the greatest impact on the success of your efforts.

It's a general truism in business, and we would say most important in the selection of investments, that the deals you make aren't as important as the people with whom you make them.

To narrow it down for now, let's again take real estate. We have made the case that real estate is something you should investigate and that in our own actions and through the advice and techniques we've given to others, the rewards have been substantial - but one lesson we have learned and that guides us in everything we do is that WHOM you invest with matters more than WHAT you invest in. It's as simple as that.

Integrity and performance are that important - and this philosophy goes way beyond real estate, extending to every participant at every stage in the process of building and operating your program.

Integrity is a characteristic hard to spot (and here's where your networking and personal experience will eventually guide you to the right people), but a true comfort once identified.

Performance is identified and measured in a myriad of ways depending on the nature of your investments and what stage you're in - but using real estate as an example once again, performance is evidenced in the process of selecting your investments from the many which will (eventually) be pitched to you. In this case, the best-performing operators (those holding properties and proposing you participate in them) provide you or your real estate advisor in-depth, 360-degree reports and analyses of proposed properties and investments, exhaustive in their detailing of every aspect relevant to the purchase from the nature of the neighborhood, type of construction, history of occupancy to the quality of management and their support team. Of course, the best operators include detailed, credible, and conservative income forecasts and projections. Our preferred operators are those who strive to "under-promise and over-deliver" to build long-term relationships with investors as opposed to those who "overpromise and under-deliver" just to make a quick buck at the expense of investors.

We can vouch from our years of experience that there will be many fine players along the path of creating and investing in your cash flow program, and we trust it won't be hard for you to find individuals and firms with competence and integrity to serve as your partners, suppliers and advisers. The search for these qualities is something you absolutely never should lose sight of.

We abide by an investment philosophy borne out of historical analysis and actual observed results - that cash flow investing can allow you to earn more predictable returns that significantly outperform the long-run average of the stock market. That in turn will lead to strikingly increased long-term wealth.

Let's take a macro look at some simple representative returns from traditional and non-traditional investing and see what compounding over the years can do in each case with an initial investment:

Take **$100,000** as a starting figure and use a conservative **11%-20%** target return for cash flow (remember the 17%-20% rule of thumb above) vs. the historical S&P 500 figure of **8%**.

If you assume 8% annual growth with the market, you'd be talking about almost $1.1 million in net worth after those 30 years:

$100,000 @ 8% 30 years = $1,076, 516

But if you took a look at investments that were on the lower end of the alternative investment return schedule and were generating about 11% for 30 years, then you'd have about $2.5 million in net worth - about two and a half times what you would have achieved with the market.

$100,000 @ 11% 30 years = $2,593,102

Impressive. But here is where it gets really powerful: if you were looking at what we honestly would consider to be more of a normal total return range for alternative investments, on the lower end you're talking about maybe 15%, which would literally deliver you more than eight times the net worth than from the market over 30 years of investing.

$100,000 @ 15% 30 years = $8,290,345

And on the high end, you can get up to $34 million!

$100,000 @20% 30 years = $34,891,198

Now, that number may seem crazy, but we can say that we've personally earned annualized returns of more than 17% over the past 11 years through a whole slew of passive cash flow investments, so his number would be somewhere between 10 and 15 times what the stock market would be predicted to do. An even crazier thing is that we've actually earned those returns between 2002 and today, and during those years, despite gyrations up and down, the stock market was flat, so in theory we would be at even higher multiples compared to what we could have earned in the market during that period.

So now you get a sense of why these types of return are typically reserved for the wealthy. The point is; this is how the wealthy invest! You can, too.

We've alluded to two types of investors - active and passive. What are they, and what's right for you?

As with many decisions in life, once you've made the jump into cash flow investing, you have the choice of becoming an "active" or "passive" investor. The definitions of these two levels of involvement are intuitive, and based on your available time, past experience, your roll-up-your-sleeves-and-get-involved-in-all-decisions nature and your self-confidence when it comes to real estate matters, the choice will probably be easy.

An **active** participant seeks out alternative investments where he/she has full control - for example, in buying a single-family home for the cash flow it offers, the active investor takes title to the property and assumes all management activities (or hires a property manager) as well as all decisions relating to financing and selling the property. This takes time and attention, magnified for a multi-property portfolio. Active investment is thus best suited for people with the time, detailed knowledge about a specific type of investment and/or who wish to retain full control.

A **passive** participant invests in alternative investments that are managed by someone else, hiring experienced operators (syndicators) to handle the assets. In buying that same single-family home, he/she may do so using a buy-and-hold of a pool of homes that is managed by an experienced operator in exchange for management fees and a split of the profits. The operator/manager is given full control of budget, spending and decisions on which properties to buy, on structuring the investment opportunity and on the financing and selling of the property. The key to successful passive investing is to make sure the operator(s) hired are experienced in that type of asset or property. Passive investing is best suited for persons without the time or the expertise to get deeply involved (or who just choose not to take on that responsibility) and who are willing to invest in an opportunity managed by others with full day-to-day decision-making powers, thereby handing the control over to an experienced operator.

The decision on depth of involvement is yours, though we tend to recommend that the starting real estate investor strongly consider a more passive entry into this new world. This can, of course, change over time . . . and the decision need not always be based on an investor's industry knowledge or confidence level. We are proponents of and committed to passive investing, as it has proven to be the best fit for us after years of investing.

While there are pros and cons to both approaches, definite factors often augur in favor of passive investment:

• Passive investing allows for more diversification. Operators with specialized experience can he "hired" across various asset classes and geographies, allowing passive investors to be much more diversified than active investors. You gain diversification along with expertise by investing with experienced operators.

• Passive investing obviously makes it easier to accommodate the schedule of part-time investors with jobs, as the operator is responsible for managing the investment.

• Passive investing can generate significant cash flow results without doing as much work! Most of the work is upfront in evaluating the property and the operator. Once that's done and the investment is in place, most of your work - metaphorically and with only a little exaggeration - is going to the bank and cashing your checks (with even less work if you receive electronic [ACH] payments)!

(Success can and should never be considered totally hands-free; it still revolves a lot around researching and evaluating investment opportunities, and constant and long-term planning is required to ensure that the resulting cash flow matches your personal and family needs looking forward, regardless of degree of investment "involvement.")

• Passive investing allows you to leverage other people's credit. This allows you to invest in multi-million-dollar properties where your credit doesn't qualify you but someone else's does, opportunities that you might otherwise never be made aware of. Getting involved on this basis has no effect on your credit rating. Most passive investments accept retirement accounts, with the creation of a "self-directed" account and then the transfer of funds from the existing retirement account, which is easy to do. More on that shortly.

**It is vital that you define your cash flow priorities, your goals and your activities with a** long-term plan **.**

By now we hope we've begun to convince you that focusing on a cash flow investment program, one that utilizes alternative investments and places you in an active a mode as you feel fits your time and predilections, is the beginning of a successful plan to help you escape the corporate world, to enjoy life and, if you wish, to build a comfortable retirement plan.

It is all that - but true success and a smoothly working investment program begins and continues with a long-term plan.

Plans can be simple or they can be complex, but they all should involve defining your monthly cash flow goals for living expenses, for retirement and for any "extras" in life, and then evaluating and planning out a cash flow program that delivers the right amount of income ideally at the right time. This is possible by choosing investments offering monthly or quarterly payments at the right times and with the right time horizon to match your budgeted expenses and also, ideally, delivering income over and above those foreseeable expenses for reinvestment purposes.

We believe cash flow is king and it can change your life with the right moves and the right effort to find the right investments . . . with the right plan.

**Now a few more words on** retirement **: the good news is that virtually all aspects of cash flow investing can be done using your retirement savings. The great news? The benefits of cash flow are leveraged immensely by your plan's tax-deferred status.**

IRAs, 401(k)s and other retirement plans can feel like they come burdened with rules that restrict investments to those offered by your company's 401(k) custodian or the custodian you've been working with on your IRA, and in most cases that means you're probably invested 100% in market-related equities or funds.

Just as non-retirement-related investing can be put on a vastly better growth track by shifting to cash flow investing, so too can your current retirement plan portfolio. Since tax-deferral continues to apply with your new retirement fund, all the benefits we've spoken about and the power of compounded returns become significantly upsized.

It's legal and it is simple to make the transition. All you need do is create a "self-directed" retirement plan (say, an IRA) with the assistance of an IRA custodian firm familiar with this type of retirement account, which takes only about $50 and 24 to 48 hours to set up. And then you're ready to transfer all or a portion of your funds from your standard plan, easily and with no tax implications, because you're merely rolling your portfolio from one retirement custodian to another. Your IRA custodian then in effect becomes the trustee of all your future investments into your new fund.

The rules governing cash flow investing in a retirement plan differ a bit from non-retirement plans, but observing them amounts to little restriction in your ability to benefit in every way we've described so far.

• There are three - only three - non-traditional, alternative investment categories excluded legally from investment in a self-directed retirement plan - collectibles, life insurance and stock in "S" corporations.

• One more restriction: you, your IRA fiduciary and certain family members cannot do business with your IRA (sell services to or live in an investment property, etc.) - essentially all lineal relatives (parents and grandparents, children and grandchildren) and their spouses. (You may go sideways, though - to brothers and sisters and so on.)

As we note, there are few and mild restrictions compared with the immense benefits of "investing with the wealthy" in retirement plans.

Summing it all up.

We hope you're intrigued by what you've begun to learn about "how the wealthy invest" and how many of them do so well in growing their assets and wealth by following the principles of cash flow investing. We've reviewed the basic tenets of the technique, and discussed why, although the range of acceptable investments is wide, we're fans of real estate for both those starting out and experienced cash flow investors. We hope you understand that these types of investments are available in relatively reasonable minimum investment amounts (starting at $25,000).

We leave you with the reminder again that your success with cash flow investing never stops benefiting from education and networking to share in the experience of others and find new investment opportunities.

There are many fine investment clubs, classes and other opportunities to do this around the country, and we encourage you to use them to your advantage. In addition, Jeremy and David each host monthly public meetings of "For Investors By Investors" (FIBI), an organization with over 10,000 members that was co-founded by Jeremy in 2007. FIBI hosts casual monthly meetings throughout Southern California and across several states focused on the subject of alternative investments. Their purpose is purely networking and information exchange, with profit motives and sales pitches strictly prohibited. FIBI has experienced strong interest and growth since it was founded in 2007 because investors know they will not be pitched books, tapes, or seminars at any FIBI meeting. You can find more information about FIBI at www.Meetup.com (search for "FIBI".)

We hope you don't wait long to take advantage of this impressive investing approach. Regardless of your chosen investment path, we wish you good luck and successful investing!

Contributor: Jeremy Roll, Roll Investment Group & FIBI

_Jeremy Roll,_ _Roll Investment Group & FIBI_ _is a full-time passive cash flow investor in alternative investments. He has been an active real estate and business investor for over ten years and manages a group of over 750 investors in the U.S. and Canada who seek passive/managed investments in real estate and businesses. Jeremy is also Co-Founder and Partner of For Investors By Investors (FIBI), a public investor networking group with over 10,000 members and meetings across Southern California and several states. He also serves as an Advisor to Realty Mogul, an online crowd funding marketplace for real estate investors and operators. Jeremy is originally from Montreal has an MBA from the Wharton School (University of Pennsylvania). He welcomes e-mails (_jroll@rollinvestments.com _) to discuss real estate or business opportunities of any size and he enjoys helping people via his network whenever possible._

Contributor: David Coe, Founder, Freedom Growth

_David Coe is a real estate advisor, agent and investor specializing in passive cash flow investing, and founder of_ _Freedom Growth_ _, a self-directed consulting firm focused on helping clients build a diversified retirement portfolio with real estate. David co-organizes the Manhattan Beach chapter of_ FIBI _. He also serves on the Board of Directors for the South Bay Association of REALTORS® and the Redondo Beach Educational Foundation. David loves networking with fellow investors and can be reached by email at_ david@freedomgrowth.com _._

# Chapter 13: Wealth the Right Way

You know the reason you're investing - to earn money. That's as basic and straightforward as it gets. We have yet to encounter anyone that invests to lose. Yet people lose every day: smart people, famous people, sophisticated and accomplished people. Run down a list of Bernie Madoff's clients and you'll be hard-pressed to find a slouch amongst them.

It's vulnerable and it feels icky, but try and put yourself in one of his client's shoes. Madoff had much of the world thinking he was a rich phenomenon, and as sure of a thing as a sure thing gets. In all likelihood, he made big promises and worked hard to showcase an aura of impressive results. The reality is he will be noted in history as one of the most glaring examples of an emperor with no clothes.

It's crucial to understand Madoff didn't rise as high as he did because of sound investment principals. He sat high and mighty atop his deck of cards for one reason: _self-doubt_. He successfully convinced people to put aside their better judgments and critical reasoning skills. He invited them to feel a part of some kind of exclusive, inside club - where the motto was: believe the airs of wealth that you see, trust me and don't bother trying to understand the amazing powers of my brilliance.

He had people convinced they didn't need to know or understand what they were investing in, and to some degree, that it was impossible to explain...so long as clients were pleased with returns, the fact that they didn't understand "how" didn't matter.

Wrong. Dead broke wrong.

Investing starts with you. It starts with you knowing yourself and to be willing to do the homework to "trust and verify." Most believe "trust" but don't "verify." It takes time to do this, but the time spent in verifying the details up front will ensure better results down the road. It's the same thing we do with our properties. Pay your time now or pay the penalty later. It starts with you knowing your objectives. It starts with you knowing your vulnerabilities and the details. It starts with you knowing how to ask questions - even ones that you may fear sound unintelligent or too basic. If an investment doesn't or can't make basic sense to you, run.

Harry M. Markopolos's name isn't nearly as well-known as Madoff's. He's the forensic accountant that spent nine years trying to alert the Securities and Exchange Commission that Madoff was a fraud. It started when Markopolos was approached by his employer to create a program similar to Madoffs because clients gave him _carte blanche_ to invest the money as he saw fit. So, Markopolos analyzed the numbers, and within five minutes determined something didn't add up. Within four hours, he mathematically proved the model was a flat out fraud.

How?

The biggest red flag in his mind was that the return stream presented rose steadily with only a few downticks. Graphically, it displayed at a near perfect 45-degree angle. It was claiming to participate in the markets, yet completely defying them.

Certainly, Markopolos, genuinely gifted and accomplished in his own right, doesn't represent the typical investor, but every investor can learn from Markopolos. He applied and remained loyal to basic common sense. Something was being presented that was simply too good to be true and he took the time to research. It may take more than five minutes or four hours, but you instinctively have the same ability. Most all of us do, it's just that the swindlers of this world are masterful at getting us to turn "off" our critical reasoning skills.

With all that in mind, here's a list of key questions every investor should ask:

• **What's my appetite for risk?**

Am I young and easily able to recover if an opportunity doesn't pan out? Am I nearing retirement and needing stability more than high yielding returns? This is the kind of question where there's no right or wrong, just what's right for you. The greater the risk, the greater the potential upside - and that's what you need to deliberate.

• **What's my timeline - short-term or long-term?**

One year? Three years? Ten years or more? This makes an enormous difference in the types of investments that will be a good match.

• **What actually makes sense for me at this stage of my life?**

Your appetite for risk may be telling you one thing, but your life stage/timeline may say another. When in doubt, we encourage you to err on the side of whichever voice is the more conservative one. The risk-taker in you may not be quite as thrilled, but you're still apt to make a more sound financial decision by being sure to take your life stage into account.

• **DO I UNDERSTAND WHAT I'M INVESTING IN?**

Kids these days tell us typing in upper case is the written equivalent of SCREAMING. So, we put this question in all caps because we're screaming at you. Furthermore, we're knocking you upside the head, and capping it off with a face palm to our own heads.

_Of all the questions, this one is the most important._ You're infinitely more vulnerable - in every way - if you don't understand what you're investing in. You're infinitely more apt to not understand risks and outcomes. You're infinitely more likely to be caught off guard if it doesn't yield the kind of results you were hoping for. You're infinitely more prone for some dishonest person to come along that portrays himself as more knowledgeable than you can ever hope to be in the investment vehicle, and play you for a fool. Furthermore, if an offering gets too complicated, we tend to pass. Don't leave your power with the experts. Use your gut and brain in listen carefully to the story and see if it seems to make sense in both gut and brain.

Quite frankly, it's why we like real estate. It's something tangible and easy to understand. Here's the thing to remember: your money may make you three, eight, 12 or 24 percent - and it's good to understand different vehicles that yield those different results. Not understanding the basics of what you're investing in can not only yield you nothing, it can cost you your nest egg.

• **Is the opportunity I'm evaluating sound too good to be true?**

Remember that 45-degree angle Madoff's model appeared to yield, which was in stark contrast to how the markets were actually performing? It was red flag number one for his most prominent critic. Other key phrases to watch out for: "sure thing" and "guaranteed."

Any investment has inherent risks. You need to know what those risks are, and what that means in terms of what could happen if a deal doesn't happen the way you hope. Parachutes aren't the worst thing in the world, even if your investment firm needs to use it. A prime example of this is the foreclosure process; we'll talk more about that later. For now, know the far greater risk is associated with convincing yourself your investment doesn't need to pack the parachute at all. Turbulence happens; be aware it may happen while you're on board.

• **Do I believe what I'm investing in?**

You don't have to confuse this bar with the kind you set for your charitable donations, but each of us as a responsibility and obligation to understand money is powerful thing. You should want your investment to go into something that you think does some good or serves a useful purpose. If you can't fathom why another person would want to pay money for what you're investing in, it's a signal that it's not a good fit for you personally.

• **Do I trust the** _ethics_ **of who I'm investing with?**

There are two essential components to trusting who you do business with: _trust in their ethics_ and _trust in their abilities_. In terms of ethics, what guides their moral compass? How do they behave when no one is looking?

Reality check: no one ever comes right out and says "I'm not a great person" - especially the slimiest people on the planet. They often work hardest to come across as ethical, making your job all the more difficult. That's why _assessing a person's ethics is often better observed than discussed_. How does the person treat others? Does the person move around a lot - whether it's physical moves or burning through personal relationships? Have you noticed the person lie to someone else?

Let's break these down. How a person treats others is an indication if they respect people they perceive to have less power than themselves. We all know the type - the people that behave one way to people that can do something for them, and quite another when they think the person can't. Their actions tell you something about their perceptions of the worth of others. Those perceptions tell you something about their character.

Moving around a lot, whether it's from city to city or person to person also likely says one of two things. We're not talking the type of moves associated with a career like being in the military - where there's a clear, long-term commitment to an organization that just happens to necessitate moving. We're talking about the types that either get a bad rep and need to move, or don't know themselves well enough they just seem to bounce from one thing to the next. Either way, it's not to whom you should hand over your money. Stability is the prized trait you're looking for in this regard.

Lastly, there's lying. If you know a person has lied to someone else, there's one key takeaway: they will lie to you. There's overt lying, lying by omission, white lies and the nuanced reactions people give when put on the spot about something sensitive (does the dress make my butt look big?). No, all lies are not the same. But they are all pangs, shades or blatant forms of dishonesty. The takeaway is this: _to the degree the person is dishonest to another, they will be dishonest to you - and that's the degree you need to feel comfortable about_.

If you think life's little observations don't matter, think again. They're clues. _How a person treats others is a clear and relevant indication of how they'll treat your money when you're not looking._

• **Do I trust the** _abilities_ **of who I'm investing with?**

The next component of trust is in a person or firm's abilities. Is the person an actual expert? Does the person know how to think and navigate any and all possible environments? Again, actions speak louder than words. You want to know everything you can about their experience, education, track record and results. Ask questions about how long the firm has been in business, volume of business and for references. Take the time to read a person's bio. If it doesn't fully answer a key question, ask for the answer.

While we've established you want someone honest and ethical handling your funds, ability in the financial world also means someone with a backbone. Two types of people can win in business: nice guys and bullies. One type will lose: pushovers. You can be nice and hold the line. You can be a good guy and command respect. You can fire someone that isn't right for a job and do so in a way that respects the other person's dignity. You can be fair to others and put your foot down and insist others be fair to you and your investors. You can only be successful with other people's money if you have enough self-respect to stand up for what's yours. It's not a matter of _if_ someone will try to skate or come in under par with your money; it's a matter of _when_.

The thing about a bully is he will certainly hold his own in the ring, but he's also prone to bully you when you don't even realize you've stepped into the arena. We'll share an example later on.

Yet you still want someone that, when challenged, can step into the ring and hold his own. He's likely fighting on behalf of your child's college education or your personal retirement funds. When provoked, he needs to know when and how to throw however many strategic punches it takes for a threat to be averted, but after it is, you want the guy that gladly takes off the gloves.

• **What homework have I done to affirm that trust?**

This may seem like a redundant question, or a repeat of the one above. Too often, people want to skip the due diligence stage and jump in at the end of a one-hour presentation. You're busy. We get that. Taking a few extra steps like running a background check and actually calling a reference (or two or three) can be worth it, as can spending a little time with a person outside the office.

References will yield you as useful information as the questions you ask. You want to know how the person communicates disappointing news as well as the good. Are they able to explain the status of an investment in a way you can understand? Are they forthcoming if something doesn't go as hoped? Are they able to navigate challenging financial times as well as the good ones?

You also want to know what will be done to keep you informed as the investment process progresses. You want to ask how accounting is handled and what kind of reporting you can expect to see. You want to have access to the books at any time. The key trait you're seeking here is _transparency_. Consider "homework" an ongoing responsibility.

Evaluating the Multi-Family Opportunity

Hopefully you feel more empowered than ever, and have greater faith and confidence in your ability to make good financial decisions for yourself. The next step is to evaluate your options. Specifically, we're out to help you determine if investing in commercial real estate is right for you, and if so, which program best suits your objectives.

First, here's why we like real estate over other investing options. For starters, it's a tangible, hard asset \- there's no faking bricks and mortar. With as much funny business that goes on along Wall Street, many of our clients tell us they've come to the sad conclusion it's a game they'd rather not play. Secondly, real estate assets perform for you. The cash flow we receive is distributed quarterly to the Limited Partners. Another advantage has to do with taxes. As an owner of the property, the limited partners receive tax depreciation as long as cash is invested. Qualified plans or IRAs do not receive the tax benefit. Finally, when we do sell the properties, the profits are taxed at a capital gains tax rate as long as we hold the property for more than 12 months, which is the plan.

Thrive, FP offers two kinds of investment opportunities - our Debt Program and our Equity Program. These programs are designed for investors with different objectives and needs. Before we share the specifics of those programs, we want to zoom out and share with you the steps we go through when determining what properties or people in which to invest or to lend money.

What we invest in

Thrive, FP makes investments on real estate-backed assets, or loans to people investing in real estate. This means for every cent we place, there's a tangible asset on the ground. We happen to be big fans of real estate because it meets our criteria for believing in what we're investing. People need places to work, sleep, eat and live. Most of those places are apartments and other commercial real estate assets.

Within the commercial real estate sector, there's retail, office, industrial and multi-family property types \- all relatively self-explanatory. Multi-family properties are perhaps the easiest to explain in perhaps painfully basic layman's terms. The term refers to housing where multiple housing units are clustered together and rented to people. The most popular kind of multi-family property is apartments.

Why we invest in it

People need places to live, so in this sense, multi-family properties provide one of life's most basic and universal necessities. In that sense, it's a service we feel good about providing, particularly as we've evolved in the way we've gone about delivering that service. We see tenants as people, not commodities, and believe in running properties in a manner that respects the human spirit.

We like multi-family properties in particular because they tend to be a more stable asset type than other commercial real estate sectors. What we saw in the last down turn is that people flocked to rental properties. For many, changes in the home loan process meant that they couldn't afford the down payment money required to purchase a home. Yet, even as the economy improves, rental properties in growing areas continue to fare well. That's because there's a continuous supply of young people turning 18 and leaving the nest. The key is being sure to invest in areas with population growth.

Where and What

Population growth has been particularly strong in: Texas, California and Arizona. As such, our firm focuses our investments in these three markets exclusively. We understand markets cycle; the economy will go up and down. So population growth tends to act as a hedge against the dips and lows.

Of course, simply investing in any multi-family property in one of these three states isn't a winning formula in and of itself. That's why we focus on urban areas, with particularly strong residential growth. In Texas, this has meant areas like Austin, San Antonio, Houston and Dallas. In Arizona, it's been Tempe. Within our target areas we look for properties that are in areas where people have an established track record of wanting to live.

Often existing properties in established locations are considered Class B or C-level properties. Properties are grouped into levels, and assigned a grade by the market - not too different than the grades you get in school. Class A refers to the shiny new properties built with modern touches and high-end finishes. They tend to command the highest rental rates. Class B properties are often just older Class A properties, and still have healthy rental rates and occupancy levels. Class C properties are generally more than 20 years old, and as such, are viewed as outdated by the market. As such, they tend to have the lowest rental rates.

Simply doing a drive-by, you may find yourself thinking the Class A properties look the most attractive. But it's the Class C properties that tend to offer the greatest upside to investors when a new buyer comes in and makes strategic upgrades.

The thing about Class B and C properties is that a greater percentage of the population can afford them. This means we aren't competing for the dollars associated with the top echelon of tenants. Class A dwellers are often on their way up the economic ladder. They're the young professional straight out of college that will likely own a home within five years, or they're a trendy jet-setter that will want to move to the even better, newer Class A property in a few years. Tenants in Class B and C properties tend to stay longer - when they're happy with how a property is maintained and managed. As we've found, through our years of experience, lower turn-over rates translate to greater profit margins.

From time to time, we have invested in a new property - but it's been in an established location, otherwise known as infill development. It's been in conjunction with partners that focus on creating affordably opportunities for a broader cross-section of the population.

The thing we like about established locations and affordable price points is that they're proven. We can get the property and area's history, otherwise known as market data, and analyze it backwards and forward - and then determine its future potential. The analysis process is the next step, also known as underwriting.

The Microscope Treatment

Earlier in this chapter, we advised you to know what you're investing in and who you're investing with. Remember that last question about homework?

First, we'll provide a technical definition of the term underwriting, and then we will present ours. Underwriting refers to the process that a service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or credit).

Thrive, FP's underwriting means doing tons and tons of homework. That's about as laymen as it gets, and it's the plain truth. We're are as suspicious and meticulous as possible, and we couldn't be more proud of it. Translation: we investigate every potential investment with the same tenacity a lawyer performs discovery when going before the Supreme Court - ditto when we're investigating a potential borrower.

Investopedia offers historical perspective on the word 'underwriting', noting it comes from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. The principle remains true to this day.

Another term for investor could be risk-taker. It's just a less-appealing label. However, it gets to a point that's crucial to understand: all investments involve risk. It's a matter of how risky is right for you and your money. Certainly nothing ventured, nothing gained. What proper underwriting means is we do our very best at is minimizing the venture and maximizing the gain.

In terms of homework, we study a property's location in depth. We want to know the area's demographics, nearby employers, transportation access, etc. We study a property's occupancy rate. Not just current figures, but as far back as it takes to see how the property performed in the most recent economic dip. We study its age and condition, wanting a full understanding of what's apt to break in the near future and a few years down the line. JP's father has a great saying "if it works well in the rain, it will be great in the sunshine."

We also determine its value and fire sale price. We define fire sale price as the amount the property is likely to sell for if we had to sell it in a big hurry. Every possible scenario is important to understand. Everyone is happy if everything goes well. Our goal is to make sure we don't lose money if things don't go as well as we all expect. It's that whole parachute thing. We insist on packing one to go along with every venture.

Not only does this process help us determine if a property is worth buying, it helps us determine how to best utilize it in the future. If there's a property with below-rate values because it offers sub-par conditions, it's our job to determine what improvements to make and what new rates are appropriate to charge. You must know a particular sub-market's norms to be strategic with every cent you invest.

Responding to Underwriting's Results

Keep in mind, there's doing the homework, and reacting appropriately to the results. Case in point: Thrive recently went through our due diligence process. Everything about what we were finding was leading us to believe a borrower and property would fit our criteria. As such, we had told some of our investors about the opportunity, and had been raising funds for its purchase. Near the very end, something surfaced on our radar screen about the property that gave us pause - pause enough to walk away from the transaction at the last minute. Specifically, we learned something about a potential borrower's past history - how a situation was handled with a former associate - that we found troublesome.

We'll be honest; we went to our investors with our tail somewhat between our legs. This wasn't news we were hoping to share. While we weren't wrong in thinking the property had potential, the borrower didn't pan out to be as right as we require to meet our investment standards. We were concerned with how our investors would react to an unanticipated let down. Would they be mad? Would they think we wasted their time? Would they understand we were telling them as much as we knew and understood in real time, but that understanding changes with the more knowledge you gather?

Much to our relief, our investors handled the news well. They understood we were trying to ensure positive results. Some told us they trusted us more than ever - because they knew it wasn't easy to walk away. Here's the hard truth: Thrive itself would have made money on that deal. Our fees would have carried us through just fine, and made it worth it to us as individuals. The results to our investors were less clear. The perceived risk was just too high to feel good about.

To bring it back to a point made earlier, this scenario is why you don't want to give your money to a bully. A bully would have turned a blind eye and placed his own self-interests above his clients' best interests. Maybe it would have ended ok, maybe it wouldn't. Our conscious wouldn't allow us to continue knowing what we knew and shouldering that kind of risk. We wouldn't have advised our friends and families to put their money in the deal, and that's our standard.

More times than not, underwriting positions an investment firm to create appropriate terms for each deal.

Terms and Safeguards

Once we fully understand a property or a borrower, and determine it fits our criteria, it's time to create the terms. Specific amounts and terms are customized based on the specifics of the perceived strength/risk of a property or borrower.

The thing we're vigilant in doing is building in safeguards. For the properties we invest in, this means:

• We select "Best-of-Class" operators who specialize and excel at operations. Many firms try to do asset, property management and operations. We think it is better to focus on our strengths and leave the operations to our "Jedi Master" partners. Thrive, FP makes less money, but our investors get a bigger and better team who specialize in their respective strengths.

• We utilize our extensive broker network and local experience to obtain a detailed history on a property and its neighborhood before buying. We discussed this at length in the section above.

• We pay close attention to our portfolio with a highly experienced asset manager, while watching closely for any important trends. We trust, but always verify, with our property managers.

• We underwrite with room for market fluctuations and unanticipated issues, not just "sunny day" scenarios.

In lending, examples of safeguards include:

• Securing a promissory note that's personally guaranteed by the borrowers.

• Executing a deed of trust. This serves as legal notice to the world, and provides for an accelerated foreclosure should a borrower default.

• Insist the borrower obtain fire, hazard, and lenders' title insurance.

• Receiving independent verification of a safety margin, and lend no more than 65 percent of loan-to-value, or less in most cases.

This also means we never put in more than the fire sale price. In this case, fire sale price means what we could sell the property for if we had to sell it in a big hurry. In other words, if the borrower defaults and we had to foreclose on the property, our investors would still recoup the value of the property for their investment. It may not yield as much as if everything went smoothly, but it still means you're apt to land on the ground in one piece. Thank you, parachute; thank you.

Next up, it's time to proceed with the investment. We offer qualified investors an opportunity to participate in one of our two programs, our Equity Program or our Debt Program.

Our Equity Program

Accredited investors with a minimum of $100,000 to invest are eligible to participate in our Equity Program. It's ideal for investors seeking greater returns over a longer time period, specifically anywhere from one to seven years. Between our two programs this one has greater risk, greater rewards, and takes more patience.

Our investors are able to use cash, self-directed IRA funds or 401K savings to participate in this program. The IRS (Internal Revenue Service) qualified Real Estate Investing as acceptable investments. This means you _can_ defer interest and take advantages of other tax benefits afforded to recognized retirement plans.

The concept lets you unite with other investors to jointly purchase multi-family real estate properties that you wouldn't be able to purchase as an individual. As an owner, you receive monthly dividends based on how well the property is performing. Typical monthly dividends range from 16 to 24 percent of the amount you invested.

The bottom line is this program offers a hassle-free approach to real estate investing. Clients reap the benefits from high interest returns without having to deal with issues like being a landlord, vacancies, tenants, repairs, evictions, etc.

Our Debt Program

Accredited investors with a minimum of $100,000 to invest are eligible to participate in our debt program. It's ideal for investors seeking great returns in a relatively short amount of time. Loans in this category are typically short-term, specifically anywhere from six to 24 months. Our net annual yield to our lenders is currently garnering eight to 12 percent Annual Percentage Rate.*

Our investors are able to use cash, self-directed IRA funds or 401K savings to participate in this program. Like our equity program, the IRS qualified Trust Deed Investing as acceptable for IRA or other retirement account investments. This means you _can_ defer interest and take advantages of other tax benefits afforded to recognized retirement plans.

The concept essentially turns everyday investors into a bank. It sounds lucrative, but banks aren't known for taking risks. That's why they tend to stay with secured loans such as mortgage loans or auto loans. Think about it...has your bank ever offered you a loan to purchase stocks, bonds or mutual funds? Yet, they will gladly offer you a loan to purchase real estate. Private lending is an excellent way for a private individual to act like a bank, enjoying high returns with a relatively low-risk.

Thrive, FP specializes in lending private funds to professional real estate developers and local home builders for both commercial and residential real estate transactions. These short-term bridge loans are fully collateralized by real estate. As a private lending company that represents a fairly large number of private individuals, we're able to secure financing for these developers and builders in this tight credit market, while at a much faster pace than traditional mortgage lenders and banks.

The collateral for the loan is the specific piece of real estate for which the loan is funded. In other words, the borrower's property is the security for the loan and the debt is evidenced and secured by a _first deed of trust_. The private lender's name is reflected on the deed of trust and is recorded in the appropriate county to make the loan or debt a matter of public record. The connotation of "first" trust deed signifies that our lien has a first priority status, which means we maintain the premiere right to foreclose on a property if there's a default on the loan.

It's important to note that the maximum exposure we give is 75 cents on every dollar, otherwise known as a 75 percent loan-to-value ratio. This means that if a property's value is worth $1 million, which we determine during our thorough underwriting process, then the max we loan is $750,000.

Another safeguard worth noting is states like Texas are called Deeds of Trusts states. This means they have a non-judicial foreclosure process, which significantly accelerates the timeline associated with a foreclosure, should it need to occur.

The bottom line is this program also offers a hassle-free approach to real estate investing. Clients reap the benefits from high interest returns without having to deal with issues like being a landlord, vacancies, tenants, repairs, evictions, etc.

*Net of loan servicing fees, assuming loan is paid as agreed. Past performance does not ensure future success. Money invested in trust deeds is not guaranteed to earn interest or insured or regulated by the FDIC.

How to Get Started

In compliance with applicable securities laws, Thrive, FP has potential investors complete a Confidential Questionnaire ("CQ") establishing "Accredited Investor" status prior to receiving an actual Offering, (Private Placement Memorandum) to review. For more information, please contact our office at (512) 692-4195 or info@ThriveFP.com.

Standard Disclosure: Mortgage paper securities are not rated or insured against loss and may be subject to significant risks that are further described in the general and specific offering circulars. Past performance is not a guarantee of future results. Investors are urged to read the entire private placement memorandum before investing. We invite and welcome your questions.

Keeping you Informed

Above, Thrive, FP advises you to do your homework, and then keep doing it. We try and make that as easy on you as possible. Each investor receives quarterly reports on each asset they invest in and we are always reachable if you have questions. Also, each one of our investors is welcome to review our books at any time.

The Anti-Slum Lord

One thing we didn't get into above is what happens after we close on a property. We do reference our alliances with top operators, and that's key. At the end of the day, they answer to us - so it's incumbent upon us to set a tone.

Some Class B, and in particular some Class C landlords have reputations as slum lords. Slum lords know they rent apartments to tenants with fewer options than people with more economic means. In other words, they don't care about their tenants' satisfaction because they don't think they need to in order to make money. It's just another form of bullying we discussed above, and quite frankly, it leads to a vicious cycle of perpetual disrespect that yields no winners in the long run.

What Thrive, FP has found is that a little investment goes a long way - investments in properties and investments in people. When you're making strategic investments in areas with a dense population, people at all economic levels respond.

In terms of investments, this can mean anything from new carpet and countertops, the addition of a business center or energy-efficient appliances. More than that, we've found programming makes people feel "seen" and valued as the human beings they are. Class A-level properties often roll out the red carpet - incorporating all kinds of special events or little perks for being a customer. That's not historically been the case in Class B, or certainly Class C properties.

We fundamentally want our tenants to succeed. We want them to get the job or get the raise, or have access to the goods and services they need. That's why we offer events like job fairs or rides to the grocery store, which are so well-received.

We stated in the introduction that we want people at EVERY link in our economic chain to succeed. Our team has a long, successful track record of turning under-performing properties into ones where investors and tenants alike benefit. We serve people within our communities with far more than the walls they inhabit. We make environments safer, save money through energy efficiencies, and try to connect people as neighbors and friends creating flourishing communities.

Imagine knowing that your investment is out there improving the quality of life for others - while simultaneously generating healthy returns. While we're just as conscientious and protective about the bottom line, we also genuinely care about the tenants in our communities. Our philosophy is that when they succeed, a property succeeds - and when a property succeeds, investors win.

Contributors: JP Newman and Adrian Lufschanowski, Owners & Operators, Thrive, FP

_Thrive, FP_ _is the new name of Principals Capital Funding and First Capital Funding, two entities owned and operated by JP Newman and Adrian Lufschanowski. Together, we have raised funds and purchased more than 3,200 apartment units in Dallas, Houston, Austin, San Antonio and Tempe, Arizona over the past two years (mid-2011 to mid-2013), along with our strategic operating partners. Under its First Capital Funding division, we have lent more than $30 million in "private first trust deed lending" over the past three years as well (mid-2010 to mid-2013). While those statistics highlight our last few years, it's important to note the firm itself has been in business since JP's father founded the company in 1976._

The name was changed in October of 2013 to reflect the firm's guiding philosophies and future focus. We want each of our stakeholders in the economic chain to thrive - and thus our new name: Thrive, FP. The FP stands for "for purpose" and "for profit."

Thrive, FP is a real estate investment firm that looks after communities and real estate investments. Our team has a long, successful track record of turning under-performing commercial real estate properties into projects where investors and tenants both benefit. We serve people within our communities with far more than the walls they inhabit. We make environments safer, save money through energy efficiencies, and connect people with meaningful social services.

At the same time, we try to present opportunities and real estate investments to our clients that we would present to our own family members, employees, or invest in ourselves, which we often do.

Fundamentally, that's what makes Thrive, FP different. We care about protecting our clients' investments immensely. Many have become dear friends because they know we only present investment opportunities that we would present to our own staff and families.

Just as important to our business model are the tenants in our communities, which we also consider to be our clients. Our philosophy is that when tenants succeed, a property succeeds - and when a property succeeds, investors win.

Thrive, FP's Adrian Lufschanowski and JP Newman

# Chapter 14: Create and Protect Wealth with Real Estate

The Proven Blueprint I've Used To Generate 10-20%+ Annual Returns Every Year for the Past 15 Years

If we haven't met yet, my name is Jeff Ballard. Growing up, my childhood dream was to be a builder; I was fascinated with the idea of creation.

Little did I know that just a few decades after building massive forts with Lincoln Logs (at least I thought they were massive at the time) and extravagant mansions with Legos, I'd find a way to turn my childhood dream into a more amazing reality than I could've ever imagined.

I'd participate in over $800 million in real estate transactions with over 700 participant owners, achieve financial freedom, and develop a blueprint for repeatable success making money through real estate - all before my 40th birthday.

Over the next few pages, my intention is to share with you three items that will help you get in the real estate game or take your current real estate investments to the next level:

1. The Four Biggest Mistakes People Make When Investing in Real-Estate (do any of these and you're likely sunk).

2. My Five-Pillar System to Create and Protect Wealth with Real Estate (we actually make more money when times are "tough").

3. My Answers to the Two Questions I'm Most Frequently Asked - "How do I get started (even if I have limited funds at the moment - i.e. $50,000)?" and "How do I get better returns?"

Before we get into that, we should first discuss...

Why I Believe Real Estate Is the Single Best Wealth Builder and Wealth Protector Around

Growing up, I was on both the Dean's lists... the good one and the bad one. I started college when I was 16 and was quickly recruited by a venture capital company that specialized in "profit maximization through business and asset optimization" (that's a fancy way of saying they tweaked operations to make a business or property more profitable).

Through this work, I discovered that I was particularly talented at looking at the structure of a business deal and finding ways to increase revenues and decrease costs. This is a skill I use to this day in each of our deals (and we'll talk more about how you can do this too, later).

They put me in their real estate division and it was there that I learned:

Why and How Wealthy People Use Real Estate as a Vehicle to Protect and Grow Their Wealth

**First** , landowners throughout the history of modern civilization have been power brokers. It has been a proven asset class for centuries.

**Second** , one of the most popular investment philosophies for the preservation of wealth amongst the world's wealthiest families is to invest in companies that provide basic human needs. The need for shelter is primal. For centuries, wealthy families have utilized residential real estate to protect and grow wealth and enjoy passive returns.

**Third** , for someone with $5 million or more to invest, 10%, 20%, and even 30%+ annual return deals were easy to find (I was shocked when I first learned this). Those with under $5 million couldn't get in on the game (this is something I would eventually make my mission to change).

**Fourth,** there are incredible diversification opportunities inside real estate to ensure you're cash-flowing during both the good times and the tough times - there's always a play in every market (this is really an incredible science).

**Fifth,** when purchased properly, real estate represents the most secure investment opportunity and best inflation hedge available.

It turns out these wealthy families were playing "Lincoln Logs and Legos" on a much larger level.

My first project was negotiating the lease space for Camelot Music in the city of Houston. This is back before the digital age, a time when music stores actually existed and were thriving. I had no idea what I was doing with the negotiations, but I understood what the numbers should be to make the deal successful. My mentor at the time told me - "Jeff, most people will go out and just sign the contract. Most people listen when someone says, 'Here's the price, take it or leave it.' The reality is there's an art to negotiating a great deal."

So, I started negotiating and fell in love with the process and opportunities. The Camelot deal went extremely well and I was a rising star in the firm.

I Quickly Began to Understand the Role the Government Can Play in a Deal (both Good and Bad).

You see, the overall economy is intimately tied to the success of the real estate industry.

I'll never forget sitting in a room with President Bush (the first) and listening to him discuss how tax credits could be used in real estate to help stimulate the whole economy. Because politicians understand the driver that real estate is for the economy, there are often great opportunities with these tax credits (a discussion for another time).

The lessons I learned during my time in venture capital were priceless. I learned about value-add properties and the different classes of properties (A, B, C & D and when each one should be purchased, held, built, and sold). I discovered a new world of maximizing opportunities and took this time to learn the discipline required and wealth multipliers in the real estate game.

_After Seven Years in the "Vulture Capital" Industry, I Was Burnt Out and Distanced from My Faith -_ _It Was Time to Move On._

The 80-90 hour weeks had taken their toll. The selfishness in the Vulture Capital industry was toxic. I had really started falling away from my core beliefs as a Christian and I felt I had to break free while I still could. I remember the moment like it was yesterday. I was sitting in my apartment one day after work.

It was a Wednesday afternoon and it was a miracle I wasn't at work (usually I'd go in before the sun came up and get home long after it had set). I was excited to discover there was a great baseball game on. Suddenly, the power shut off to the whole building. I walked outside to figure out what was going on, and realized the whole block had no power.

Up the road from my apartment was a small church. They had a Wednesday Mass and since I had been promising myself I'd start going back to church I figured the timing was perfect. I hopped in the truck, went over to the church (which also had no power), and was the only one there under the age of 60.

The pastor said "Well I guess we're going to call off service because we don't have any electricity..." and I said, "No, you can't do that!"

I told the pastor the story I just shared with you and he said, "Well we're definitely going to have service then," and proceeded to light the room with candles. The pastor and I talked for a bit after the service; he invited me back the following Sunday and told me about their need for a youth pastor. I thought there's absolutely no way, because I simply didn't have the time.

Two weeks later, the firm I was working at decided to relocate from Houston to Arizona.

After a lot of prayer, I gave my resignation. I moved back to Austin so I could be closer to home, took a job with a local church, and became a youth pastor.

**At the time, I thought I was done with real estate** _for good._

The Mission Trip to Mexico That Changed Everything

I was a youth pastor for four years. As part of my work, I took groups of kids to Mexico City for two-week mission trips. I loved the work there so much that one time I sent the kids home and decided to stay a while.

Doing this work in Mexico brought a new awareness and appreciation to my life. I had always thought that you grow up, get a job, make money, and that's how you "live your life."

Things were different there. Many didn't even have toilets, just a five-gallon bucket over a pipe. They had no real roof - just pieces of wood wrapped in plastic. Despite these conditions, they were some of the happiest people on the planet.

I loved the contribution I was able to make to the community and the impact the community had on me. The experience in this little town in Mexico really changed my life.

My girlfriend at the time was getting restless, and was demanding I come home. I felt that the work I was doing was meaningful and necessary and prayed, "Lord, send me a sign when it's time to go home."

About six months into the mission, we were just putting the finishing touches on a youth center that included a basketball court. The kids were stoked. I was driving a van to get some needed materials when the other guys in the truck started shouting "Alto! Alto! Alto!" which means "Stop! Stop! Stop!" in Spanish.

We were on the highway, so I pulled over and realized the ground was moving. It was a 6.7 earthquake and about 60 people in the small town I was in died. I took this as my sign that it was time to go back home.

Back Into Real Estate, but with a Much Bigger Mission

I emerged from my experiences in Venture Capital and youth pastoring with a very unique résumé. My time in the VC world had given me the skills and understanding to be very successful in the real estate industry.

My faith, my time as a youth pastor, and my experiences in Mexico gave me an incredible appreciation and commitment to a purpose bigger than me. I decided to fuse the two together and get back into real estate - but do it in an entirely different way.

I challenged myself to create a model that provided more value for more people than any other investment out there - one where the value was shared and more people could access the returns and security that real estate can provide.

A model that could really be of deep service to more than just the ultra-wealthy.

A model that allowed those with $100,000 or even $50,000 to get in the game in a meaningful way.

I took my savings and purchased six lots in Austin to build duplexes. I wanted to test the model with my money first. They all sold before we could even complete the construction, and the returns were incredible. It was possible, and it was happening. The model worked.

I was back to my childhood dream of being a builder, and this time it had a much deeper purpose and mission.

A Ticket to Financial Freedom: from Six Doors to 200 in One Year, 200-2700 in the Next Five

The business started growing exponentially, and the model was crushing it.

We started our own construction company, management company, and brokerage all centered on the same goal of maximizing total value and producing an incredible return for all parties involved (more on this later). I had built a complete system that allowed people to create financial freedom. I had created financial freedom for my family and myself.

At this point I think it's important to discuss a definition to financial freedom - since that's likely one of your goals if you're reading this chapter.

When I was five my Dad gave me an old Norman Rockwell painting. It has silver dollars around it, every denomination of silver coins, and the picture is called "Freedom From Want." He always instilled in me that if you work hard, you'll be successful no matter what you do. To me, that picture symbolizes our family's definition of financial freedom:

1. The freedom to chase your dreams

2. The freedom to do what you want with your life

3. The ability to make a difference in other people's lives

Over the past 15 years, we've participated in over $800 million worth of real estate transactions with over 700 participant owners. In other words, we have helped over 700 people take control of their financial future, and we're just getting started.

Today, I personally have about 80-90% of my assets in the real estate sector. I understand the dynamics of the market and the diversification strategies used to prepare for the best of times and the tough times. I know now why many of America's wealthiest families have significant portions of their wealth invested in real estate.

At one of our owner events last year, someone asked me when I was going to retire. I told him that I didn't think I'd ever retire. I love the game of real estate. I can't just sit back and do nothing, and our mission is so much bigger now.

So now that you understand why real estate is an essential asset class to create and protect wealth, I'd like to share with you...

The System I Use - Step-By-Step

Here's the simple formula to the success we have used:

**First** \- you need to avoid the big mistakes. Many people that work with us are in a position where they can't afford to take losses or strike out, so avoiding the mistakes can help keep your investment safe and secure.

**Second** \- you need to understand the core principles that allow you to spot the properties that'll grow at the 8%, 10% or 20%+ per year rates.

**Third** \- you'll need to plan your immediate next steps (if you're taking things to the next level or just getting started).

So let's get going...

The Four Biggest Mistakes That Cause People to Fail with Real Estate

(Make Any of These and You're Likely Sunk)

The Four Biggest Mistakes Are:

1. Lack of Discipline on the Purchase

2. Over-Leverage Due to Lack of Capital

3. Poor Asset Management

4. No Access to Great Deals

Let's dig deeper into each one...

Mistake #1 - Lack of Discipline on the Purchase

Two of the most important lessons you need to understand about real estate are:

A. "You Make Your Money When You Buy"

B. "Buy When Everyone Is Selling, Sell When Everyone Is Buying"

I'm not sure where I originally heard those two quotes, but whoever first said those was a very intelligent individual.

The first lesson above is a crucial part of the real estate process. When you purchase an asset you should understand exactly how the deal is going to play out. What I mean by this is that before a single dollar is spent, you must take the time to analyze all the costs of acquiring, modifying, upgrading, managing, and selling the asset to ensure that your purchase is sound. Too often people buy an asset _hoping_ for something to change instead of _knowing_ they've made a great investment.

When we evaluate a property, we run a simulation that calculates exactly how much we expect every piece of the deal to cost. It calculates exactly how much we'll have to outlay over the deal from the moment we take title to the moment we place it in one of our portfolios or sell the property.

Too many new investors purchase a piece of property without knowing exactly what they're getting into. If you're getting into this industry, you need to do it with expert guidance. You need to put in the time required to learn the industry. You need to understand the complexities and the disciplines of the real estate game.

Wealthy families have developed an extremely effective way to make sure that their children don't lose the family's money from one generation to another. Anytime the family makes an investment, they bring in a board of independent consultants to help them make the purchasing decision and ensure that it is a sound financial investment. I recommend you do the same when you're purchasing real estate. Convene your own board of experts who can help you crunch the numbers accurately and make the right purchases. These should be people who have the results you desire and the willingness to assist you in achieving the same success. Now does this mean that you'll always get exactly what you projected? Unfortunately, no.

However I can tell you that because of the way we buy, **we've never lost money on a deal**. I'm going to say that again because it's a key part of our system - **we've never lost a dollar**.

Sure we've missed projections a few times and not ended up with the full projected profit, but the disciplined nature of the way we buy makes sure we're getting deals with enough padding to support any bumps in the road.

The second lesson in Mistake #1 is...  
**Getting Caught Up In a Buying Frenzy**

Unfortunately, human nature can sometimes get us into trouble when it comes to investing. This is why it's important to have a process for taking emotion out of these decisions.

In 2004-2006 in Austin, Texas - where we've done a lot of work - the market was booming. Prices were sky-rocketing, but our participant owners and myself were off-loading our properties during this time... the returns were incredible. Some of my friends heard we were selling property in Austin and thought we were crazy. We weren't crazy, we just understood the market! Everyone was buying which meant it was time to start selling.

We'd list something, and by the end of the day have multiple offers over asking price. As an expert in real estate, I can tell you that the real estate was building itself into a bubble. Anytime you hear of a situation like this and you're considering investing, think BUYER BEWARE!

Many people even use these 'frenzy' opportunities to take advantage of people. One of the many unfortunate examples of this is a woman who thought she purchased seven duplexes. Unfortunately, they weren't performing. She had heard of us through a friend and gave us a call to see if we could help out.

We went out and took a look at these "duplexes." It turns out they were mobile homes. Never in my life have I seen a mobile home billed as a "duplex" until then. On top of that - they were in a terrible neighborhood. It was so bad that when one of our maintenance men was there checking out the property, he heard a "pop, pop, pop", went out to his car, and saw a man shot dead in the street. This is clearly not the type of asset we want in our portfolio.

Unfortunately, she had purchased the property through a realtor without looking at it herself or having someone she trusts look at it. She ended up in a position with an equity value that reflected a loss of over 80%.

I can't even begin to tell the amount of stories we hear like this; we could fill books with stories of people who just want out of the property because it's such a nightmare. Don't end up in this position. Don't think there's a way to shortcut the process and get rich quick. Real estate is an incredible vehicle to build and protect wealth, but like any investment you must respect it and use it properly.

Be disciplined when you purchase, completely understand your numbers and exit strategy, and make sure you review your plan with someone who truly understands the industry and has your best interest at heart.

Mistake #2 - Over-Leverage Due To Lack of Capital

Leverage is one of the biggest multipliers available in the world - it makes a good decision better and a bad decision worse.

Here's the golden rule for leverage: _Leverage is great if and only if the asset is stable and performing._

Typically when we structure deals, we bring leverage in as the last piece, once the asset is already performing. Many think leverage is the best way to expand your buying power, but if you start off your project fully leveraged and one thing goes wrong, you'll lose the entire property and your equity. It's also possible to get so upside down on your first property that you never get a chance to invest in another.

This would be a good time to mention the "No Money Down" Get-Rich-Quick Real Estate Schemes out there. While this is cute marketing, I'd suggest you run in the other direction if someone is pitching you one of these "opportunities."

In our expert opinion, you need a minimum of $50,000 to start doing real estate the right way. The right way to start is not to leverage your capital to buy a $200,000 or $500,000 property (more on this later).

Mistake #3 - Poor Asset Management

A good asset management company will not only pay for itself (they usually charge 8-10% of collected rent), but they'll actually make you money and eliminate the stress from the situation. Just like with finding a great deal, finding a great asset management company takes some work.

Let's face it - nobody wants to get the call in the middle of the night that the toilet has broken, the apartment is flooded, the AC is broken, or the heat is not coming on...

Management companies are the ones that take that phone-call (24/7/365) and use their relationships in the industry to get your tenants taken care of quickly and cost-effectively.

When we first got started, I opened the yellow-pages, called an asset management company, and turned over the keys. I was shocked when I saw the way they managed my properties... It was terrible. Expenses were up over 300% at times, renters were leaving properties, rent wasn't being collected, equity value was decreasing due to poor maintenance, and the rents they were getting were below market value. They were calling me asking for a check instead of sending me one.

This was the opposite of a home run; it was a strike-out.

So, We Formed Our Own Management Company - One That Was Built for Protecting and Creating Wealth, One That Understood the Investor's Mindset and Goals

One example of a process we put in place is the incident reporting system for after-hours requests. Many management companies talk a big game when it comes to service, but having a terrible response time is the #1 complaint against management companies. The system we put in place results in a less than ten-minute response time for a tenant to hear from our technician in emergency situations - even after hours.

In addition, we do extensive screening of potential tenants. If you've ever rented a property, you probably remember paying $45-$135 for background checks and having to list your previous places of residences. The ugly truth is that many management companies collect this money and never run or check the background reports to properly screen applicants. This leads to a huge amount of turn-over in your property, which directly hits your bottom line. That's not cool.

Currently, our management company manages over 4,000 doors which gives us an incredible collective buying power and an ability to realize economies of scale. We also have an incredible amount of data on what services cost, which allows us to detect any outlier expenses that could eat into profits.

When asset management is done right, you'll realize higher rents, higher occupancy, maintain higher equity in your properties, and experience lower expenses on required maintenance and service items.

When you get into real estate, make sure you find a great asset management company to partner with.

Mistake #4 - No Access to Great Deals

Before coming to work with us, one of our participant owners (who's a brilliant brain scientist) invested in two pieces of land priced at $1 million when he heard a large Fortune 500 company was considering moving to the area. He put 20% down and had a mortgage on the rest.

He figured that this influx of jobs and capital would make the land out west more valuable. If it had happened, it would've been a great play. Unfortunately, that Fortune 500 Company picked the other side of town, and only moved half of the jobs expected.

Now, he's had his money tied up in this property for years and has been in a negative cash-flow situation for years. On top of all that, he's stuck with two pieces of land that likely won't be built on until his kids or grandkids are his age!

When you don't have access to a great deal, the best thing you can do is keep your cash in hand and wait for the next one. Do not try to manufacture or force a great deal.

The problem many people have is they can't ever find a great deal because:

• They're not sure how to tell which ones are great deals.

• The deals they're seeing have already been sifted through by companies like ours.

We're fortunate that our 15 years of over-delivering for our partners has built a track-record, Rolodex, and reputation that gives us access to extraordinary opportunities. Our office receives hundreds of opportunities each week in addition to my staff of six individuals trained to go out and find us deals. (We call that "bird-dogging" in the industry). Oftentimes, we see these opportunities months before they'd hit the typical online websites or MLS.

Out of 1000 potential deals, about ten will make it to my desk and we'll execute on one or two, and that's if it's a great batch of opportunities.

To make this easy for you - I've included the information about our brokerage that is built by investors, for investors below. If you're looking for opportunities or help finding great properties, feel free to give us a call.

When you're financial future is on the line, you should not be speculating. Be disciplined and wait until you find a great deal.

At this point I hope the discussion on avoiding these four mistakes will keep you from making the most common mistakes I see people make. Now it's time to get into the fun stuff...

My Five-Pillar System to Create and Protect Wealth with Real Estate

This system is something that's taken over 20 years of experience in the industry to create and I hope you find it valuable.

The Five Pillars to My System Are:

1. Focus on the Fastest Growing Real Estate Markets in the World

2. Focus on Residential Real-Estate

3. Out-Hustle and Out-Research the Competition

4. Cut Out the Middle-Men

5. Understand Market Dynamics

Pillar #1 - Focus on the Fastest Growing Real Estate Markets in the World

"A rising tide lifts all boats."

Pillar #1 is extremely simple. Many people like to invest in their backyard - because that's the area in which they are familiar.

I think it's extremely important that you're investing in the right areas. I believe in an investment philosophy that maximizes our probability of meeting and exceeding expected returns - that means focusing on the areas expecting to see population growth over the next decade. Once a city begins growing, it can really gain momentum and allow you to recognize extraordinary gains.

At the time of this writing, areas to look closely at are Austin, San Antonio, and Dallas, Texas, Oklahoma City, Oklahoma, and North Carolina. Because of these areas being widely known as growth areas - they're the ones most likely to go through frenzies, so invest wisely. Make sure you take your time, study the trends, and know the right time to buy and sell.

Pillar #2 - Focus on Residential Real-Estate

As I mentioned above, one of the most popular investment philosophies for preservation of wealth is to invest in companies that provide basic human needs. The need for shelter is primal.

While many people like commercial real-estate (and I understand the allure of a triple-net lease), we've always seen more success and opportunity with residential real estate.

Here are three cardinal rules for residential real estate:

• Usually, the types of properties you want to live in are not the best ones to invest in.

• The people who often make the money on new construction are either the builder or the second owner (so be one of those positions unless you're purchasing a primary residence).

• Anything under four doors is a huge risk.

Let's expand on that final point a bit, because it's really important.

A four-plex is an OK situation but duplexes are dangerous.

Let's imagine if half of a duplex is vacant... guess what you get? Half the income, which means you're now in a negative cash-flow situation each month. (Instead of cashing a check each month you're now writing a check each month.) People buy single-family homes all the time because they're perceived to be "safe," but you're suddenly in an all-or-nothing situation - a lack of diversification is never a good situation to be in.

Even if you're just getting started, there are ways to avoid being in these bad situations. Investing in residential real estate, done right, opens up the door to much higher returns.

3. Out-Hustle and Out-Research the Competition

Insiders know the majority of new investors fail because they underestimate the task at hand.

While the concepts of investing in real-estate are simple, the execution is a full-time job requiring due-diligence every step of the way. It's easy to make a mistake that puts a project upside-down. Experience is the best, and also the most expensive teacher.

Our team has over 100 years combined experience in the business and an impressive track-record so if you're just getting started, reach out to us, or a company like us, to help you get started. I always have loved the idea of standing on the shoulders of giants.

With that said, when you begin your investment, whether alone or with an advisor, two of the most important metrics you need to be looking at are the CMA's and the indexes. For anyone in the industry, the CMA's are very standard. CMA stands for "Comparative Market Analysis" - basically it's an analysis of what the other properties in the area are selling for. It's very important that you look closely at CMAs. Different states have different rules, and it's easy for two properties to look the same but be very different (i.e. built in different years, different quality construction, or different neighborhoods even though they appear to be across the street).

The second major metric is indexes; these tell you how much real estate is renting for. These metrics are available and accurate since they are prepared by the government so they know where to funnel federal assistance programs. Indexes are usually provided on a $/square foot basis (i.e. if it's $1/ sq. ft., a 900 square foot apartment would rent for $900 per month).

These are actually extremely well prepared documents and are free for you to access! Whenever I'm considering investing in a new city, I start by studying the patterns in the indexes over the past decade and projections for the next decade. In the process of reviewing a deal, I'll typically go through 400 or so pages of data and information to get a good feel for the property. When you plan on investing in real estate, make sure you're taking decisions seriously and properly researching the situations. Please do not jump into these investments without knowing exactly what you're getting into.

4. Cut Out the Middle-Men

The world of investing is full of "fees." I hate fees. Be very careful with fees when you're investing in anything as it's a way your profit is vultured out of the deal.

I recently saw a deal that came across my desk from a highly-recommended commercial real estate investing firm. On top of the 80/20 profit split in favor of the house, there was a 2% asset management fee, and a 1.5% financing fee. Ouch.

Fees don't belong in real estate, so be careful when people start lining up their fees. Even 1% or 2% over the course of your investment can add up to a lot of money that should be in your pocket. To eliminate fees, optimize ROI, and maximize efficiency, we cover every critical area - from sourcing deals to planning and construction to management in-house. It's a "no fees" model that allows the community to do more with their dollars. I recommend you look to build or invest with companies that have a similar model and take a very close look at any fees with your investments.

5. Understand What Type of Market We're In...

As I mentioned above, there are incredible diversification opportunities inside real estate to ensure you're cash-flowing during both the good times and the tough times. This is really where the magic happens.

By specializing in small fast-growing regions, we're able to fully understand the pulse of the market months before the big-box investment funds. This ability to see market trends and act on them keeps our partners protected and enjoying healthy returns throughout every season.

When you're in the industry you can tell when one area is softening and one is becoming more robust. When areas change, you simply switch gears.

It's taken 20 years to develop a system where we can easily shift from buying to selling to building to rehabbing.

If you told me I just had to buy properties I'd be bored and disinterested. If you told me I just had to build or rehab, I'd be bored and disinterested. But seeing how the different areas of the game all work together is fun to me. It's exciting and it opens up incredible investment opportunities.

Opportunity for more copy on the formula - buy when selling/sell when buying

This marks the end of the five pillars I have used to create financial freedom for myself and have taught hundreds of others to use as well. I hope that you've found this information valuable and it helps you take the right next step for you with your investments.

There is one final lesson I'd like to leave with:

"You Can Either Work For Money or Money Can Work For You. "

Very early in my career a mentor shared with me the quote above. Investing in real estate is about putting your money to work for you. It's about generating passive returns that are hands-off and tax advantaged. It's truly the vehicle that allows you to take your wealth-building to the next level.

With that said, let's get on to the FAQs...

The Two Big Questions and Next Steps

FAQ #1 - How Do I Get Started?

If you're just getting started, whether it's with $50,000, $500,000 or $5,000,000 I recommend you "Play the Bank" on your first few deals. What I mean by this is that you should put yourself in a position where you are the lender to a successful, trusted firm with a proven track record (in the first lien-holder position). This way, you don't have to deal with the majority of the risks in real estate and don't have to make any of the difficult decisions.

It allows you to see the transactions as they play out, and start to get a lay of the land while earning 8-12% on your money. Most importantly, it allows you to build your experience and expertise while avoiding the four big mistakes. There are a handful of companies out there that can put you in a position to do this - including ours.

One of the unique ways our company works is that we take the time to understand where you want to be long-term and educate you on exactly how the deals are done. The reason for this is to build a plan based on your goals and make sure you're in the know and in control of your financial future.

For example, some people love playing the bank. They love the idea of 8-12% consistently without having to get involved in any decisions. Others eventually want to be involved on the real estate purchasing side and are interested in the higher risks and higher returns. Some even want to be a weekend warrior and do rehabs part-time when the market's right. You make the decision where you go after you've learned the industry. However, despite what you want to do long-term, "Playing the Bank" for at least a deal or two is really a smart way to go (and one you can do even if you're starting with $50,000).

FAQ #2 - How Do I Take Things to the Next Level?

The people who ask me this question are usually those who have heard me discuss the 10%, 15% and 20%+ returns that we enjoy on our investments and want to know how they can get in on those projects.

Usually there's at least two items that need to change if you're not seeing these returns:

• Better Asset Acquisition

• Better Asset Management

Contributor: Jeff Ballard

We manage a full-service brokerage, management company, and real estate advisory service. Each person's situation is unique, and we'd be happy to take a look at your portfolio to discuss the opportunities and optimization opportunities. The best next step is to give us a call.

I hope you've found this information valuable. It has become my life mission to help people use real estate to empower their financial futures and create financial freedom. I'm excited to see what our community can accomplish together and I look forward to seeing you at one of our owner events in the near future.

# Chapter 15: "No Matter What it Takes" Strategy for Real Estate Success

Investment choices today are as varied as the people making them. Regardless of what flavor investment you're looking for - and the level of risk you're willing to accept - you have a number of choices to make that will determine the kinds of returns you'll see.

Real estate has been the consistent choice of people looking for tangible results from an investment that they can touch, see, and feel, as opposed to more volatile and subjective paper-based investments. But, if you're considering investing in real estate, there are some distinct challenges to overcome and pitfalls to avoid if you want to make the experience a positive one - and reap rewards that will last.

The residential real estate market is ever-changing and recent events have made turning a profit a bit of a challenge for investors that aren't ready to roll with the punches. In this report I'm going to teach you some principles that will help you survive, thrive, and begin to turn the corner towards achieving your goals and your dreams.

Regardless of where you're at in your investing career - a brand-new, starry-eyed investor or a seasoned veteran - you either have discovered or will soon discover that there's one big reason that real estate investors lose money.

They make mistakes.

It doesn't matter whether a mistake is large or small. Each has the potential to cost you money, and over the course of a real estate investing career, even the smallest of mistakes can cost you tens - even hundreds of thousands of dollars.

This chapter is dedicated to helping you avoid mistakes that can cost you money. I want you to make as much money as you possibly can, but in order to do that, you need to avoid mistakes and also settle on a strategic investing plan that can be replicated for continued success.

You Aren't Alone

Whatever you do at this point, I don't want you to think I'm talking down to you or criticizing you in any way. Because when I first got started in real estate I made every mistake that someone could possibly make. Within a year or two I managed to lose about $500,000 in a series of bad moves. As a matter of fact, I probably invented a couple. However, I didn't rest on my laurels complaining about what I'd done wrong; I didn't lick my wounds, and I didn't quit. I learned from my mistakes, changed my strategies, and began to see positive results. Since that time I've made millions of dollars from real estate and I'm going to show you how you can, too.

What I did wrong in the beginning is probably where you're going wrong - because almost everyone does it at some point in their career. It's not what you may think, so I'll save you the trouble of playing guessing games. The number one reason so many real estate investors lose money in real estate is because of the way they _think_ about real estate. What I mean by this is that if you're like most beginning real estate investors, you play little mind games with yourself and you hope to turn a profit.

Decisions are based on bad reasoning, questionable logic, and general assumptions. A lot of people like to fly by the seats of their pants in everything they do, but you can't do that with real estate. If you pay too much for a stock, you can lose money, but it's even more critical that you invest wisely in real estate. The stakes are high - and the potential profits can be awe-inspiring.

The "What if" Concept

Unsure how to go about real estate investing, the average investor adopts a business model that makes sense to them that is based entirely on assumptions - many of them flawed (although they don't know it yet). When you do this you're playing with fire. Instead of using sound logic you're probably following what I'll refer to as the "What if" concept. Be honest with yourself for just a minute and tell me if this sounds familiar: when you analyze a potential investment property, you'll run the numbers, make a series of assumptions, and decide that it will work if ( _pick one_ ):

• the property will rent for the amount you've estimated

• you can find a buyer immediately and convince them to pay market price

• you can rehab the property and find a buyer within a reasonable period of time

What if you find an investment property you like and the market rents will support a rental rate of $1,200 per month? If your monthly expenses are only $1,000 you'll be able to slip $200 into your pocket every month and begin to smugly think that real estate investing is one of the easiest games in town.

What if you locate a property for 60%-70% of market price? If you can buy this property, you could flip it faster than your local IHOP restaurant could flip a pancake. Surely somebody would jump at the chance to save 30%-40% off retail prices. Real estate is really simple - and anybody can make it work.

What if you take out a mortgage on a property that you can gut and fix within 90 days? If you can get it fixed quickly and get it back on the market, you could sell it, make money - and repeat the process. Could there possibly be a quicker, easier way of making fast money?

There's a problem with approaching real estate investing with these thought processes. They're flawed and will lead to almost-certain failure. It doesn't matter how militantly you've followed your strategy, if you play the game like a rookie, you're going to get rookie results. Rookie results will kick you to the curb as a real estate investing failure in no time flat.

These "What if..." situations are common real estate investing scenarios. Thousands of novice investors try these strategies every year. A lot of investors make a whole lot of money using one or more of these strategies. These strategies may work...for a while.

Then..."What if..." turns into "What now?" When you base your ability to turn a profit on a singular investing approach you can still make money as long as all the trains are running on time. You know as well as I do that eventually the best-laid plans can be turned on their ears. "What if..." really can become "What now?" because you're overlooking a universal truth about real estate investing - actually several.

Three Fundamental Truths

The reason that this strategy is flawed is because you're overlooking a few fundamental truths about real estate investing. Here they are as I see them:

• Markets Change - The real estate market is just as susceptible to changing conditions as any other investment opportunity. Generally speaking, real estate gains in value year after year. However, just like the broader economy or the stock market, real estate runs in cycles. It's not unusual for real estate to enter periods of appreciation or depreciation. If you assume that an investment will always gain in value, you can and will lose money.

• Laws Change - You might purchase a property expecting that you'll always be eligible for specific tax credits. By the same token you may expect to be able to participate in the federal Section 8 housing program. If you purchase a property with the expectation that you can supplement your rental income from tenants based upon receiving federal rental assistance checks on behalf of tenants and the eligibility rules change, you might find yourself shut out of an income stream that you depend upon for a fair amount of real income. Failing to be cognizant of changing laws can cause the profitability of a property to evaporate.

• Lives Change - One out of two marriages ends in divorce. If you purchase an investment property with the expectation that your marriage is on solid ground and for some reason "Happily Ever After" fades into "Have Your Lawyer Call My Lawyer", you might find yourself in a situation where you absolutely have to sell to in order to satisfy a divorce decree. What will you do if your marriage falls apart and you have to sell while the market is down and your property has negative equity when it's time to sell?

• Circumstances Change - What will you do if your spouse sours on the idea of investing in real estate or one of your children requires specialized medical care for some dreaded disease? The circumstances in existence when you initially purchased a property can change in the blink of an eye. Failure to be aware of the possibility that circumstances can and do change on a daily basis can be financially devastating.

I'm going to give you three examples of how real estate investing mistakes can derail your plans and destroy your dreams very quickly. Imagine yourself in the following three "What if..." situations. These situations will give you an idea of just how quickly you can go from being in charge of your destiny to hanging on for dear life.

Plan A: Bubble Investing

Until the real estate bubble burst in 2007, it was almost impossible to not make money in just about any market. For instance, in Florida the market was expanding so dramatically that you could buy a property based almost entirely on a fairly accurate verbal description and - even if you had negative equity to start - could hold it for a few months and still turn a profit.

More than one real estate investor who didn't know any better would jump into the market, take a call from somebody describing their property, and decide whether to move forward. So how did some of these investors make a decision if they couldn't see the property?

They would ask for a description of it.

As long as the market was skyrocketing northward at breakneck speed, the ability to analyze a deal was optional. It made millionaires out of novices who were clueless about how to make money and who were simply the beneficiaries of favorable market conditions. So what happened?

As you know, the market fell apart and the guaranteed profits went the way of the dinosaur. When that happened, all these "What if..." investors became "What now?" investors and their existence was jeopardized. Not knowing what to do, they began falling one by one like little dominoes.

These investors weren't bad people - nor were they stupid. They just didn't know what they were doing. Instead of being able to roll with the current market conditions they were rocked by conditions beyond their control. Why did this happen to them?

In short, they were well-positioned to continue making money as long as the sun kept rising every day as it had since they jumped into the market. The market, like the sun, kept going higher and higher. In their experience there was no such thing as a rainy day. Plan "A" was making them so rich that as long as the market continued to rise the need for having a Plan "B" never occurred to them. Do you know what else never occurred to these investors? It never occurred to them that their Plan "A" was also flawed.

When the rains came, as they inevitably will, the only option they had was to fall to the wayside as real estate failures.

Real estate investors can make tactical errors for a variety of reasons. Unfortunately, they frequently don't realize they've made a tactical error until it's too late to change course. By then the train has left the tracks in a massive financial derailment that could take years to clean up.

When real estate investors are first starting out, many of them will rely on the guidance received from a real estate investing course, a book they've read, or a series of articles that they've seen on the Internet for advice about how to succeed as a real estate investor. If you've ever bought one of these resources, you're very aware that they almost always universally recommend that you have or develop a working knowledge of your local real estate market. As a result, a lot of brand-new real estate investors will purchase property very close to where they live with the erroneous thinking that because it's in their local real estate market that it is a good investment.

That's not always the case.

Just because a property happens to be in your neighborhood doesn't necessarily make it a good investment. However, partially out of laziness and partly because of an honest misapplication of the above principle, far too many real estate investors purchase property just down the street or around the corner from their own residence.

Take it From John

Take John for example. Because he knows his own neighborhood and the property values much better than areas farther away from his home, he decided to get started with a property just a stone's throw from his front door step.

The good news is that it's a very attractive property - and he can point it out to his friends as tangible evidence that real estate investing is a great idea. The truth is, he paid retail for the property, but he rationalizes it in his mind because of its proximity to his house. It is, after all, one of the best-looking places on the block.

Plus, he ran the numbers himself so he knows he will realize a small positive cash flow every month as long as he can handle his own property maintenance. The property management is simple enough. All he has to do is swing by the property once a month and pick up a rent check from the tenant. Anyway, it won't hurt to learn a little bit about how to effectively deal with tenants and tenant issues. He actually enjoys this aspect of property ownership and, anyway, it's fun and even a little invigorating.

Maintenance is no trouble because he's always been the type to strap on a tool belt on the weekend and he enjoys putting together those cheap pressed sawdust furniture items his wife insists on buying at Wal-Mart. It's also really easy to rationalize his decision because while he is learning more about the up-keep of his property, it allows him to keep up-to-date on the overall condition of the property and is helping him to become a better landlord and real estate investor.

His "What if..." investment is working out much better than he had hoped, and now he's living his life's dream \- in miniature. He is a real estate investor. Although he isn't experiencing the level of success he had initially hoped, he realizes that it's still early in his career. Overall, he has no complaints.

Then everything changes with a simple phone call from his boss.

He's been transferred to Portland, Oregon.

What now?

Left with no choice but to go, his "What if..." real estate dream is about to become the poster child for "What now?" real estate regret. When he lived just down the street from his investment, it seemed like a good idea. Although he had to handle his own maintenance and management, John did have positive cash flow every month, which is more than he could say for some of the other investment opportunities he had looked at.

Once his move was complete he went from being a part-time real estate investor to full-time worrier. Even though John's property was in outstanding condition with no deferred maintenance (thanks to his regular handyman efforts) he was concerned about the possibility that something major could go wrong. Things were looking good for now, but a lot could change in a hurry. As long as nothing broke, he'd be OK.

Then the bottom dropped out of John's "perfect" plan: John's too-good-to-be-true tenant proved that he was - and promptly stopped paying his rent as soon as John was too far away to physically do anything about it. Adhering to the concept that "The mice will play while the cat's away," his positive cash flow evaporated as soon as steady flow of rent payments stopped.

Unfortunately, begging, pleading, and threatening to put a curse on his first-born did nothing to get John's tenant to pay his rent. He was stuck hundreds of miles away from a tenant who steadfastly refused to pay his rent, so John had no choice but to dip into his dwindling savings account to pay the mortgage payment on his property.

John decided to give his tenant a call to reason with him. Surely he would start paying the rent once he understood the importance of on-time rental payments. Claiming poverty, he promised to pay within a few weeks.

Unfortunately, John didn't have a few weeks for his tenant to get his financial house in order. The mortgage company needed to be paid today - not next month or when the urge struck him. Losing his composure, John told his tenant to either pay his rent or get out. So his tenant opted to leave - after filling the pipes with cement and remodeling with a baseball bat. The damages - several thousand dollars' worth - would have to be fixed before another tenant could move in.

After six or seven months he's at his financial breaking point. John's budget could hardly handle one payment - and two was almost enough to put him in the poorhouse. Before he can re-rent the property to another tenant, he'll have to scrape up the cash to repair the place, and finding a contractor he could trust was going to be next to impossible.

Never in a million years did John consider the possibility that he would be transferred to another part of the country not long after pulling the trigger on a real estate investing career. Because John thought he had done such a good job of vetting his rental candidates - and because of his payment history - he didn't even consider the possibility that his tenant would become a conscientious rent objector.

Unfortunately, these situations are rarely foreseeable. Furthermore, most times they won't even appear on your long distance radar screen as distinct possibilities. When you do your "What if..." projections you feel good about the numbers you come up with if the result is a positive number. When you don't know your numbers are flawed and things take a turn for the worse, you have an important question to answer: "What now?"

Here's a third situation that can throw your nice, finite "What if" projections into a tailspin of real estate investing uncertainty. Not only is it an unknown situation, but it's a situation you simply can't plan for unless you have a crystal ball.

A Quick Fix and Flop

You've found the perfect fix and flip property. After running the numbers through your mind countless times you're convinced it's a winner. After rehab expenses, which you've figured no fewer than 100 times, you think you'll be able to turn a profit of about $35,000 if you can sell the property at current market value.

The first stage of your renovation goes a little better than expected. You're just under budget and your project is progressing as expected. The contractor you've hired for the job is doing good work and is showing up as promised. Keeping an eye on your calendar, you're impressed when he completes the job a few days ahead of schedule and right on budget.

You decide the renovation is in the bag and there's nothing else that can possibly go wrong.

You call a real estate broker on the phone to come look at your house. She's impressed by the condition of the property and by how much curb appeal you've managed to give the place on a shoestring budget. She even said your property has character. Asking her opinion, you're gratified to see that she agrees with your assessment of what your property is worth. You settle on your asking price and happily sink a metal sign into the front lawn and wait for the inevitable calls to come.

And then the inconceivable happens.

In one of the unexpected and seemingly random acts of violence that plagues your city, a young woman innocently walking her dog is gunned down just down the street from your property. The property isn't in a seedy part of town, but it's not in the one of the best neighborhoods of your city, either. However, one death has marred the neighborhood's reputation in the eyes of local real estate agents. Not wanting to promote the area because of its newfound notoriety, your property has become damaged goods in the eyes of the public and the real estate agents you were counting on to sell your property.

Once again, your "What if..." concept has become "What now?"

When you invest in real estate with a wing, a prayer and a "What if..." scenario, you don't know what to expect. If everything goes exactly the way you have it mapped out you will make money, and in many cases - a lot of it. By the same token, if there's a single variable that you've failed to consider, you're in deep trouble.

You never expect that things won't go the way you have them mapped out, because doing that would call into doubt your ability to look carefully into a situation and know with a degree of certainty what will happen in the future.

A Certain Future?

The reality of life is that we don't know what the future holds. If we did, we'd all be professional athletes, ballerinas, police officers, or princesses, and these decisions would have been made by the time we were five years old. Since we know this isn't true we have no choice but to conclude that accurately guessing the future is as difficult as solving a Rubik's cube in the dark.

"What now?" is a scary place to be because it forces you to acknowledge that you don't know the answer and that you will likely be losing money - a lot of money - on what you had thought was a foolproof transaction.

If you want to move beyond the uncertainty of not knowing if, when, or how much money you're going to make in a real estate transaction, and you also want to avoid the mistakes inherent to thinking about real estate in terms of "What if..." it's absolutely essential that you set yourself up so you're never left asking the "What now?" question in the first place.

In order to avoid being left with the money-losing question of "What now?" you must redefine the way you look at real estate investing. Instead of entering a real estate transaction with a single strategy, you go in with your eyes wide open to the reality that life very seldom goes the way we have it planned. As a result, it's of paramount importance that you have a real estate investing strategy built around always having another move up your sleeve that will allow you to make money on a deal.

No Matter What

I call this the "No matter what" strategy. It truly is a comprehensive strategy because if you buy a property with the intention of renting it out and you find that you can't make money despite your best intentions, you move on to "Plan B". If your alternative falls apart, you go to "Plan C".

The "No matter what" concept doesn't say that you don't have a preferred strategy or method of attack. What it does say, however, is that no matter what you do, there are a dozen different ways you can make money on a real estate investment. If each plan falls apart despite your best efforts, you don't miss a step because you always have another move you can make.

Because you have so many effective strategies available to you, you're never going to get caught in public with your pants around your ankles looking for a graceful way of exiting stage left. If every single strategy turns out being a loser, you can smile, shrug your shoulders, and sell your property. Even then, you'll make money because it is a contingency for which you have planned - even if the specific situation is a surprise.

That's the raw real estate power of being a "No matter what" investor.

Because you go into every investment with a solid game plan and an exit strategy you'll never have to worry about where your blood pressure pills are. You'll have the flexibility of knowing that sleep will come easily to you each night because the question of what you'll do if a specific strategy fails will have already been answered.

The No Matter What Strategy Defined

If you want to avoid making mistakes you need to have more than one option available to you. One specific strategy will help you make money no matter what you do. The way you make it happen is by redefining what you think of as a good deal.

If you pay retail or near-retail prices for property, you limit your options. For instance, if you pay 90%-95% of retail for a property you intend to rent out, you limit your options. You may have every intention of putting a renter in the property and holding it for 5-10 years. "What if..." real estate investing strategies say that it will work if all the trains are running on schedule.

There's no room for error, deviation, or any of the other life situations that can derail your ideal investment opportunity. However, when you buy property with the "No matter what" mindset, you'll make money regardless of what happens. You can still make money when every possible investing strategy fails. While highly unlikely, you should plan for every possible contingency to cover your assets and guarantee that making money is still in the cards.

If you recall the example I gave you of John, the novice investor who bought a property near his home, he was able to turn a small profit by doing his own property management and handling all of his own maintenance. While he made more than one mistake along the way, the biggest mistake he made was in the price he paid for the property.

If he had been able to pay less for the property he would have opened up a world of opportunity for himself. When he made the initial discovery that he couldn't turn a profit on his investment without doing his own maintenance and management, he could have implemented another strategy that would have allowed him to make money.

Then, later on, when he was notified by his employer that he would have to pull up his roots and relocate to Portland, Oregon, he wouldn't have been left with the terrible choice between staying with a property that was just barely profitable or transferring out of state. He could have just switched gears and moved on to another strategy that would still keep him in the black.

Finally, when the mother of all financial insults took place and he discovered that his too-good-to-be-true tenant had badly damaged the property, he had no good alternatives available to him. All he could do at that point was try to scrape together a monthly payment and tread water financially on a month-to-month basis with a property that was generating no income.

Had he had more options he could have done something about it.

The "No matter what" strategy would have covered his backside. He could have quickly sold the property for what he could on the open market, put the property behind him, and still put money in his pocket when it sold.

The way he could have done that is by controlling how much he paid for the property when he bought it. If you can buy a property cheap enough, you'll make money regardless of what happens. You have the peace of mind of knowing that a hundred different things can simultaneously go wrong with your property, your tenant, or your strategy, and there will always be another weapon in your arsenal that will make it possible for you to make money.

The real estate market has fallen apart in many parts of the country. Strategies that worked well when values were rapidly rising are no longer possible. Instead of lamenting what might have been, you could simply move on to something that will work given the current market conditions.

Buy your property cheaply enough to make money and you can use whatever strategy that will work in order to make money instead of playing "What if..." and hoping for the best. It's a huge mistake to do otherwise.

Keeping Your Emotions in Check

The key to avoiding the mistakes and pitfalls inherent to novice real estate investing is to give emotion its proper place at the table when purchasing real estate. Allowing emotion to control your investing decisions is to real estate what allowing a five year-old child to make all discipline-related decisions in your household is to domestic tranquility.

Neither one should have a position of authority or you'll experience disaster every time. Emotional considerations are the root causes of any number of bad decisions. A lot of them can't be avoided, but when you're buying real estate for investment purposes you can't afford to give emotion a place at the table.

When you're buying real estate that you intend to live in, emotion can and will sneak in the side door and command a prominent place in your thought processes. That's only natural. Your primary residence is in many cases an extension of you and your personality. We decorate our homes to be pleasing to us. We like it when people praise our home and tell us how much character it has. In these cases, emotional considerations are a good thing.

But investment property is radically different. You're not planning on living in an investment property for thirty or forty years. You won't be raising your children in your investment property, debating important family issues, or doing any of the other things that make a house a home.

Emotion tugs at our heartstrings and can cause us to do things we normally wouldn't. Emotion can lead you to pay more for a property than you should or to pay more for a property than it is worth. So you'll be doing yourself a favor if you can keep emotion out of the decision-making process of your real estate investments.

The question you have to answer, though, is: how do you keep emotion out of the real estate investing decision-making process? The answer to this question is important, but there's an even more important issue I need to address first.

What if...John Was a No Matter What Investor?

In the three examples I told you about, including the example of John, "What if..." investors formed a real estate investing strategy, but I would almost bet every dollar I have that they let emotional considerations enter into the equation. Let's take a close look at John's ill-fated investment property just down the street from his house.

What do you think his primary reason was for buying so close to home? It was familiarity with the area closest to his home and the fact that he could point his investment property out to his friends. That's an emotional consideration.

He could have bought something that would have made a better investment if he had taken the time to really analyze the investment, but instead, he fell in love with the property. He liked the property so much that he set aside logic and bought a property that would only be profitable under tightly controlled circumstances. In other words, he let emotion take over. By letting emotions take over he abandoned logic and ultimately lost his shirt by making a bad investment.

There is a better way of thinking about real estate that can help you to avoid the mistakes and pitfalls facing real estate investors of all experience levels. This strategy will work every time you even consider an investment property.

The reason it will work is because it strictly limits the access that emotion has in the way you go about the process of deciding the relative merits of any investment you're considering making.

We've already established that excess emotions can suck the life - and the profits - out of your investments. Do you know what one component will help you make an unemotional decision?

Good Numbers Tell No Lies

This one word answer has huge implications for the future success of your real estate investing career. Numbers. That's it, nothing more.

By taking emotions out of the investing property equation and inserting numbers in their place you can eliminate many of the mistakes that imperil your future. You can use specific mathematic equations that can tell you in very simple language whether or not an investment makes sense. If the numbers are there, you proceed - if they're not you simply walk away.

Effectively limiting your exposure to mistakes begins when you're considering making a purchase. Numbers don't lie. They tell a story about whether or not you'll make money with a particular property. The ingenious thing about this strategy is that you don't have to pull the trigger and put your financial security on the line in order to decipher whether or not you'll make money.

There are 24 hours available to you today. There are thousands of properties out there that you could conceivably invest in and possibly make money. You have several options you can utilize in deciding whether a property is possibly worth pursuing.

With the first model, you go look at each property to ensure that it meets quality standards, you do your due diligence, and you meet with each property owner before making a decision. That's a daunting, time-consuming process that can fill your days with unproductive activity that won't get you any closer to buying a single property.

This method involves doing a cash flow analysis and working up a sample budget and determining whether you'll have positive cash flow if you buy the property at a specific price. While you always need to know if a property will make money, you only need to know if certain properties will make money. The only property you care about is one you will buy. None of the other properties matter.

A better way is for you to find out in advance what the numbers are and quickly make a decision. By putting my strategies to work with mathematical formulas you can analyze a property within minutes. You'll know right away whether you can make money with a property. Instead of wasting time on senseless activity that bleeds all the energy out of you, you could be doing things that will build real sustainable wealth.

There are a whole host of mistakes you can make as a real estate investor that will take the wind out of your sails and will cause you to doubt your commitment to pursue real estate investing as a wealth-building mechanism for your future. Numbers - good numbers - are the only mistake-neutralizing tonic that will save your time, your sanity, and your investing future.

You can choose to follow the low road and still reach real estate investing success. It will require that you make a series of mistakes and commit some costly blunders. You'll take longer to get where you're going, but you can still get there.

The other solution is to look at real estate investing without blinders, to take the high road that leads directly to success. To avoid arriving at your destination financially devastated, you need to learn how to use numbers and formulas to your advantage. These and dozens of other strategies, profitable tips and techniques are available to help shorten your learning curves at www.coachingbypeter.com.

Contributor: Peter Vekselman, Real Estate Investing Coach

_I am one of those people to whom doing the usual and customary thing runs contrary to the way I'm wired. Instead of going the traditional and culturally accepted route of getting a job after college and working my way up the corporate ladder, I chose the uncertainty of the entrepreneurial lifestyle, founding multiple successful businesses before ultimately settling on real estate investing. After building one of the largest and most successful real estate investing companies in the southeastern United States, I continued adding affiliated businesses to my arsenal, and I realized one day that I was pioneering an entirely new and successful business model:_ _providing clients with one source for all their needs._

_I began getting franchise requests from people who wanted to learn how to achieve the results I had, without the trial and error of developing and implementing an untested business plan and making mistakes along the way. When one of my staffers suggested I make myself available to a student to teach my system in a one-on-one learning environment, I accepted and did that very successfully for a period of time. In the beginning, it was a markedly unstructured learning environment. Numerous students took advantage of my unorthodox coaching clinics. As I continued teaching students, my teaching methods got increasingly better and the number of requests for personal coaching grew. My real estate company and my holdings continued to grow. To find out more about my program, visit_ www.coachingbypeter.com

# Endnotes

[1] <http://en.wikipedia.org/wiki/Petroleum_industry>

[2]  www.iea.org/publications/freepublications/publication/English.pdf

[3]  www.api.org/~/media/Files/Policy/Exploration/IHS_GI_Hydraulic_Fracturing_Exec_Summary.pdf

[4]  http://fuelfix.com/blog/2013/06/14/moodys-risk-of-a-dry-hole-has-fallen-nearly-to-zero/

[5]  www.deloitte.com/view/en_US/us/Industries/d687f0575368b310VgnVCM3000003456f70aRCRD.htm

