12RDE0325 GetSmarterWithYourMoney

NOTICE
This publication and the accompanying materials are designed to provide accurate and authoritative information
in regard to the subject matter covered in it. It is provided with the understanding that the publisher is not engaged
in rendering legal, accounting, or other professional opinions. If legal advice or other expert assistance is required,
the service of a competent professional should be sought. Reproduction or translation of any part of the information
contained herein, in any form or by any means, without the written permission of the owner is unlawful.
Rich Dad Education

4255 Lake Park Blvd. Ste 300
Salt Lake City, UT 84120
© 2012 Rich Dad Education. All Rights Reserved. The Rich Dad word mark and logos are owned by Rich Dad Operating Co.,
LLC and any such use is under license. Rich Dad Education and Learn to be Rich are trademarks of Rich Dad Operating Co.,
LLC. 12RDE0325 9-12
DISCLAIMERS
DISCLOSURE FOR FINANCIAL MARKETS
Stocks and Options trading have large potential rewards but also
involve large potential risks. One must be aware of the risks and be
willing to accept them in order to invest in the stock and options
markets. Any decisions to place trades are personal decisions that
should be made after thorough research, including a personal risk
and financial assessment. The company’s products (including but
not limited to training and coaching materials, and newsletters) are
for educational and/or illustration purposes only, and are provided
with the understanding that: (i) the company is not engaged in
rendering legal, accounting, or other professional opinions; (ii) no
solicitation and/or recommendations to buy or sell any stocks and/
or options is made herein; and (iii) no representation is being made
that any of the accounts or trades mentioned in this presentation or
educational materials will or is likely to achieve profit or losses similar
to those shown or are appropriate for your personal account. Virtual
trade transactions are performed with delayed data. The company
and employees, subcontractors and alliances may own, buy, or sell
the assets or options discussed for the purpose of trading at any
time. No express or implied warranties are being made with respect
to company services and products. If legal advice or other expert
assistance is required, the service of a competent professional should
be sought. The company is not liable in any form. You must receive
a copy of the publication Characteristics and Risks of Standardized
Options (ODD) prior to buying or selling an option. Copies of the ODD
are available from your broker, at http://cboe.com/Resources/Intro.
aspx, or from The Options Clearing Corporation, One North Wacker
Drive, Suite 500, Chicago, Illinois 60606. Access to software features
subject to maintaining a valid data subscription.
DISCLOSURE FOR FORECLOSURE AND EQUITY SHARING TECHNIQUES
The Foreclosure Training course or foreclosure content presented in

Company trainings, products and services are intended to provide
generalized broad-based experiential real estate foreclosure and
pre-foreclosure training techniques. This information is not intended
to provide legal advice or detailed guidance on how to properly
conduct foreclosure and/or pre-foreclosure activity in your state. As
with any regulated activity, we strongly recommend that you consult
with an attorney.
There are currently a growing number of states that have enacted

legislation that could impact how you participate in foreclosure and/
or pre-foreclosure activities in those states. Violations of these laws
may result in civil and criminal penalties, including damages, fines
and terms of imprisonment. For more information about these laws,
please refer to the additional information located at the following
website:http://www.richdadeducation.com.
DISCLOSURE FOR FORMS
All forms contained herein are provided for educational purposes

only. The provider does not assert any warranty, express or implied,
as to the legal effect and/or completeness of the forms, including
the implied warranties of merchantability and fitness for a particular
purpose. The provider hereby disclaims any and all liability with
respect to these forms. The provider suggests that you contact an
attorney to ensure that the forms are modified to meet the laws of
your state.
TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1: STARTING YOUR OWN BUSINESS. . . . . . . . . . . . . . . . 7
Success in Your Hands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Set Yourself Apart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Establishing Your Path for Success. . . . . . . . . . . . . . . . . . . . . . 10

Finding the Right Business for You. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Starting Your Own Independent Business. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Purchasing an Existing Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Buying a Franchise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Getting Your Business Underway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Legal Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Start-Up Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Expense Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Choosing Your Business Legal Structure . . . . . . . . . . . . . . . . . 21

Things to Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Types of Business Legal Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Which Structure Is Right for Your Business? . . . . . . . . . . . . . . . . . . . . . . . . . 25
Developing a Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Planning for Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Components of a Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Writing Your Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Financing Your Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Personal Savings and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Credit Cards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Friends and Relatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Banks and Credit Unions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Grant Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Angel Investors and Venture Capital Firms. . . . . . . . . . . . . . . . . . . . . . . . . 47
Hard Moneylenders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Preparing for Your Company’s Future . . . . . . . . . . . . . . . . . . . 48

Business Building Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Keep Moving Forward! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 2: INVESTING IN REAL ESTATE. . . . . . . . . . . . . . . . . . . 51
Real Estate Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

The Potential Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Financing Your Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Wholesaling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Finding Wholesale Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
What You Should Know. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Rehabbing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Finding Distressed Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Be Prepared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Determining If the Deal is Right for You. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
The Importance of Home Inspections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Optioning Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Using Options in Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Nice Homes in Nice Neighborhoods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Benefits as the Buyer or Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Creating Win-Win Situations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Three Unique Opportunities for Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Property Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Develop Your Property Management Skills. . . . . . . . . . . . . . . . . . . . . . . . . 94
Treat It Like a Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Be Prepared. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Commercial Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Property Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
It’s All in the Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Understanding Commercial Calculations . . . . . . . . . . . . . . . . . . . . . . . . 103
Learn More. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Build a Knowledge Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

SECTION 3: INVESTING IN THE STOCK MARKET. . . . . . . . . . . . 113
The Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

An Organized Venue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Brokerage Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

Stock Symbols. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
The Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
The Organization of Stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
The Role of the Economy in the Stock Market. . . . . . . . . . . . 124

Analyzing Economic News. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Understanding the Impact of Interest Rate Changes. . . . . . . . . . . . . . . 128
Keeping Emotions in Check. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Monitoring Key Economic Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Investing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Determine How You Will Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Develop a Knowledge Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Apply Sound Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
Follow an Investing Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
How to Read Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Commit the Seven Rules of Investing to Memory . . . . . . . . . . . . . . . . . . 150
Technical Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Support and Resistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
SECTION 4: IN CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
SECTION 5: GLOSSARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Glossary of Common Business-Related Terms. . . . . . . . . . . . 171
Glossary of Common Real Estate Investment Terms. . . . . . . 182
Glossary of Common Financial Investment Terms . . . . . . . . 188

INTRODUCTION
INTRODUCTION
Welcome!
Congratulations on your desire to increase your financial IQ. The fact

that you are reading this means you have taken the first step toward
better understanding how you can become financially independent
and improve your life. You recognize that it’s not only about wanting
more, it’s about doing more to get it. And increasing your financial
literacy can help you accomplish your goals. Feel confident knowing
you have come to the right place for help: Rich Dad Education.
Every day, there are entrepreneurs building thriving businesses when

others fail, individuals making money in real estate regardless of
market direction, and investors making successful transactions in the
stock market. Why is that? What is it they know that you don’t know?
Are they just lucky? No, luck is for those who play the lottery. Financial
independence has nothing to do with luck, but has everything to do
with education.
LIFE LESSONS
Robert Kiyosaki has seen it proven throughout his life time and time
again. As you probably know, one of his most successful books on the
topic of investing is Rich Dad Poor Dad, which has been a New York
Times bestseller for nearly seven years. It is the true story of Robert’s
two fathers: his own dad, who was his Poor Dad, and his best friend’s
dad, who was his Rich Dad. The book is based on the decisions
Robert had to make regarding the varying philosophies of money
taught to him by both of his fathers.
As you build your financial literacy with us, you will be applying the
lessons learned in Rich Dad Poor Dad, so, if by chance you have
not read the book, please make it part of your educational track.
Additionally, you will be given an opportunity to gain specialized
knowledge that is far outside most people’s purview, so please
approach your education with focus and commitment. The number
one mistake investors make is they treat investing like a newfound
hobby. If you treat it like a hobby, it will pay you like a hobby. But if you
1
GET SMARTER WITH YOUR MONEY
treat it like a business, it can pay you like a business—and that’s far
more fun than any hobby.
SPECIALIZED KNOWLEDGE
Another reason obtaining specialized knowledge is so important

is for how it can set you apart and improve upon your returns. To
illustrate, we are all aware of people who have specialized in a
particular discipline. They have become an expert in that area and,
for their efforts, they have been rewarded financially. A commonly
cited example of this is in the medical field. Certainly, doctors have
a reputation of making a good living. But let’s take a closer look at
how some doctors differentiate themselves from others. For example,
who makes more money: a general practitioner or a heart surgeon?
According to PhysiciansSearch.com, the average salary for a doctor
in family practice was $147,516, but the average compensation for a
cardiovascular surgeon was $558,719 (as of December 2007). That is
a difference of $411,203 and over $4 million in 10 years. Why such a
difference? Because the heart surgeon has specialized knowledge.
He is more valuable. He is in higher demand. And he is compensated
accordingly.
It is that way with everything. The greatest asset of any professional is

his education. It’s how the pilot lands the plane. It’s how the attorney
wins the case. It’s how the salesman closes the deal. Education is
the great enabler. Education leads to action. And so it is with the
entrepreneur and investor: The education makes the money, just as
ignorance will lose it.
So, where did you get your financial education? One day your
parents sat down with you and showed you the value of a balance
sheet and income statement, right? No?
Well, you went to high school, right? You gained some valuable
financial knowledge there, didn’t you? Your teachers sat you down
and showed you what to look for in an investment. Not in high
school?
Well, you must have learned it in college then. They taught you about
cash flow and how to tell the difference between a good stock and
a bad stock. No, that didn’t happen either?
2
INTRODUCTION
You’re not alone. Unfortunately, this is the case for most of us. We have
relied on our education to teach us how to do things, but we have
clearly found that traditional education doesn’t prepare us to be
financially independent.
So what does? The difference between wealth builders and the

“average Joe” is they have taken the time to invest in their education.
They have personally sought out the financial literacy that has been
missing from their lives so they could apply it and benefit from it. They
have developed a plan for success and they have executed that
plan with commitment and drive.
HOW VS. WHY
In the teachings of Robert Kiyosaki, he discusses the “why” of

being rich. He discusses why the wealthy are able to maintain and
increase their wealth, and why their understanding of the difference
between assets and liabilities is crucial. But what makes this particular
education program so unique is that it will introduce you to the
“how.” Here, you will learn how to take positive steps toward financial
independence and how to apply Rich Dad’s principles to your
entrepreneurial plans.
It will take commitment on your part. If you are satisfied with

mediocrity, then read no further. To move from the state you are
currently in will take sincere desire and effort. If you are not willing to
invest your time in learning how to do what successful people do,
then you are wasting your time. But, if you are ready to open your
mind and commit to improving your financial literacy, prepare to
embark on an exciting adventure… one in which you will discover
opportunities for wealth building and financial paths that can be life
changing.
Again, you are to be congratulated for your decision to join Rich Dad
Education and for your commitment to think bigger… beyond where
you are now. We can’t wait to see how far you’ll go!
3
SECTION ONE: Starting Your Own Business
Starting Your Own Business
SUCCESS IN YOUR HANDS
There is no feeling like having the entrepreneurial spirit inside you

tapped and beginning to take steps toward making your dream of
business ownership a reality.
You are usually overwhelmed by the excitement and expectation

you feel. And there is the tremendous anticipation that you are truly
about to step out on your own and take control over your financial
future.
What an amazing time it is!
But as anyone who has ever ventured into business ownership

knows, it is also a time when you need to be prepared, enlightened,
educated, and ready to take the next steps.
You have to build a plan for your business and either stick with it as
you succeed or adjust it when you find circumstances warrant it. You
need to understand not only your potential to reach your goals, but
the path that will get you closer to them. And you need to find the
right balance between making time for your business objectives and
making time for yourself and/or your family.
After all, having your own business is not just about making money
and creating a secure financial future. It’s also about being able
to set your own hours and working conditions, and find quality time
for the activities and people you care about. And, it’s about the
satisfaction of knowing that by achieving your goals in business,
you’ll likely have a greater opportunity to achieve your personal and
financial goals.
SET YOURSELF APART
Not every business makes it. But not every business owner puts in the
time, effort, and attitude necessary to ensure that it does.
Some business owners face obstacles and get discouraged, while

others face obstacles and get inspired. Some think success just
7
happens, while others know they have to work for it. And some see
stumbling blocks, while others see stepping stones.
What sets one business owner apart from another? Things like
determination, a willingness to work hard, and an unshakable
entrepreneurial spirit. But one of the biggest differences between
those who succeed and those who don’t is preparedness… being
armed with as much business knowledge and strategies for success
as possible.
That’s why we’ve put together this section on starting your own
business, which can truly be one of the greatest ways to get smarter
with your money. Here, you’ll find business tips and strategies that can
help you not only start your business off on the right foot, but also
keep the momentum going.
ESTABLISHING YOUR PATH FOR SUCCESS
Of course, the first step in starting your own business is choosing which
type of business you’d like to be involved in. You have several options
available to you, including:
• Starting your own part-time business
• Starting your own full-time business
• Purchasing an existing business
• Buying a franchise
Each option comes with its own set of advantages and

disadvantages that must be taken into consideration. And which
type of business you choose will also depend on factors such as your
personality, your financial goals, the amount of time you can devote
to the business, the capital you have or can obtain, and the type of
control you want.
For some of you, the decision about which type of business to start
has already been made. But for those who are still considering which
8
way to turn, we want to offer a few tips that may help you select the
right business for you.
FINDING THE RIGHT BUSINESS FOR YOU
First, ask yourself some important questions:
• Do I have business experience?
• Do I have capital to finance my endeavor, project, or business?
• Am I determined, assertive, and persistent?
• Do I have good communication skills?
• What is my educational background?
• Am I creative?
• What are the strengths and weaknesses of my personality?
• What is my support system? Are friends and family supportive

of my goals? Will someone be joining me in this endeavor?
Next, make a list of all the strengths and weaknesses you can think of
that would help or hinder your efforts in starting your own business.
The reason you want to do this is because once you understand your
strengths and weaknesses, you can then do a better job evaluating
each business opportunity and your ability to make it a success. In
other words, you will compare the type of attributes, skills, education,
etc. involved in running a particular type of business against your list
of strengths and weaknesses to gauge whether it’s the right choice
for you.
This exercise may seem trivial, but remember that we all have
different backgrounds, circumstances (education, financial, personal),
and attitudes that come into play. What works for one person may
not work for you. And what sounds good at first may not sound great
once you’ve weighed all the factors. A simple and honest evaluation
of yourself can help you avoid making a very big business mistake.
9
Another thing you’ll need to carefully evaluate will be the types of

business opportunities available to you, such as starting your own
independent business, purchasing an existing business, or buying
a franchise. So, let’s take a look at some factors to consider when
evaluating these opportunities.
STARTING YOUR OWN INDEPENDENT BUSINESS
There are many potential benefits to starting your own independent

business, not the least of which is control over your business and the
money you make.
Starting a business from scratch can be a challenge, but one thing

that can help you get things started off right is to learn from those
who have started similar businesses. For example, you may want to
research a company or get mentoring from a business executive you
admire in the same field, evaluating and learning from the strategies
that have worked or not worked for them. What type of advertising
did they use and how was it placed? How were they positioned in
the market? How often did they change sales strategies or adapt to
the market as needed? How quickly did they grow?
You might even take a job at such a business to gain as much

information and experience as possible. Learn all the ins and outs of
the business so you can use this information to your future benefit. Or
tap into the experience you’ve already gained throughout your own
career to continue doing the same type of work you are doing now,
but with you as your boss.
Remember to use your list of strengths and weaknesses to help

you evaluate the potential of each business opportunity you are
considering. And always do your due diligence in researching the
type of business you want to start. Evaluate its potential to make
money, how favorable the market is for this type of business, the
competition you will encounter, the advantages and disadvantages
that may be involved, the amount of time you will need to devote to
it, and the type of capital that will be necessary.
10
PURCHASING AN EXISTING BUSINESS
When purchasing a successful existing business, there are obvious

benefits. For example, you can review useful historical information,
such as the company’s growth rate, operating costs, and business
revenues. You may even have access to research that shows what
advertising campaigns have worked best, how customer relations
have been handled, and the reputation the company holds in the
community. And you’ll have financial data about the cash flow the
business has generated. This background information can give great
insight into the potential for future success under your leadership.
Another option is to purchase poorly managed companies that

can be turned around with good management practices in place,
businesses that have great potential but haven’t had the financial
backing to help them reach it, or companies you can add products
or services to in order to increase cash flow.
And on that note, don’t forget you can always think bigger. For
example, why not make a business of seeking out and finding
mismanaged, undervalued small businesses? Buy them, turn them
around, and sell them at a profit. You could be enjoying the cash flow
they generate right up to the point of sale.
BUYING A FRANCHISE
For some, franchise opportunities are attractive because of the

name recognition and proven successes behind them. While these
opportunities have helped many individuals establish their own
businesses quickly, there are both advantages and disadvantages to
consider with franchises.
Advantages
• Most franchises have a tested, proven product. Therefore, you

don’t have to pioneer the business. Someone has already gone
through the trial-and-error process for you.
11
• Most franchises have a tested, proven marketing plan. Generally,

the franchisor will have statistics on location, quality, traffic counts,
and growth potential. With a good franchisor, you can project, to
a certain degree, the gross dollars that can be earned based on
past research and franchise history.
• Most franchisors give support and consultation to new franchisees.

This could be a big help for someone who has never been
in business before. Just be sure that the franchise you are
considering is a reputable one with solid financial banking and a
verifiable track record of performance that has franchise support.
• Franchisors often have an advertising plan in place. With well-

known brands or chains, advertisements may run frequently in
several markets. This can help bring in customer traffic to your
location without you having to choose marketing mediums or
work with the creative aspects of developing campaigns.
Disadvantages
• With a franchise, there is usually a pretty big up-front investment

required. You can spend anywhere from $25,000 up to hundreds
of thousands of dollars, or more, just in front money. Generally, the
franchisor must disclose to you exactly what is and isn’t included
in that up-front charge (such as the name, cost of location, or the
equipment necessary—many don’t include the latter two), but
you should be very careful to thoroughly investigate what you are
getting for your money.
• There have been cases of conflict in the franchise industry

that have resulted in greater regulation and protection for
those who purchase a franchise business. However, as with
any large monetary investment, you should still approach the
opportunity with scrutiny. Make sure you read all of the fine print
of the franchise agreement and other documents and know
exactly what you are signing. Also, since these are big dollar
commitments, you should have an accountant and an attorney
review any documentation. That doesn’t mean you are going to
let them decide whether the business decision is good for you or
not. Just have them point out the positives and negatives so you
can make your own evaluation based on the facts presented.
12
• It is important to note that although there is some history to

a good franchise, and in many cases, some very convincing
statistics, there are no guarantees of success.
• A franchise can be very limiting, particularly if you are the

creative type or enjoy developing and implementing new
business strategies. For example, if the franchisor has prescribed
methods of operation, you may have to strictly adhere to their
procedures. There may be policies about how and if you can
market the business and the type of advertising you can use.
And, your ability to expand the services and/or products of the
business will generally be limited by what the franchisor offers and
allows. Again, review your agreements in advance to be sure you
understand your limitations as well as your freedoms.
• Last, but certainly not least, is the consideration of royalties. With

your own business, you don’t have to pay a royalty to anyone.
But in a franchise, you pay a royalty (usually a percentage of
your profits) that is generally calculated on your gross profits.
Notice, that’s gross profits. This means the franchise gets its money
regardless of whether you make any money at all. Even if you lose
money, most franchise agreements still require you to pay a royalty.
GETTING YOUR BUSINESS UNDERWAY
Once you have chosen the type of business you’d like to own, the
next step involves working through several start-up procedures,
which will likely include legal issues, zoning, licensing, registering, etc.,
depending on the type of business.
For example, there may be times when you will need the services of
an attorney during your business start-up process.
Certainly, you may choose to handle many legal issues, such

as completing basic forms and getting licenses, copyright, and
trademarks without an attorney. However, you must determine your
comfort level in handling such issues before ruling out the use of
an attorney. This is important business, so consider making sure you
have all your bases covered by consulting with the appropriate
professionals.
13
To help you with some of the usual start-up procedures, we will close
this chapter with several checklists that can help you make sure you
are getting your business underway effectively.
14
LEGAL CHECKLIST
The checklist below addresses some of the local, state, and
federal issues you or your attorney may need to research for
your business.
Local
❏ Zoning, Licenses, and Permits—Since new businesses

will need a local business license in most communities,
you should check your community’s requirements. Also,
if you plan to work from home, you should check into
local zoning requirements for any special permits or ad-
ditional licenses.

Date Research Completed
❏ Registering a Business Name—If you operate a sole pro-

prietorship, you will need to register your business name.
In some states, you may be required to file a Fictitious
Name Affidavit with the Secretary of State. You may
also be required to file a notice in a local newspaper.
❏ Local Earnings Tax—If your community has a local earn-

ings tax, you should check on the filing requirements
with the appropriate agency.

15
State
❏ Registration—Partnerships, limited liability companies

(LLCs), and corporations are required to register at the
state level. Contact your Department of State for re-
quirements.

❏ State Taxes—State taxes may include sales and use, as

well as intangible and corporate income taxes. Check
with your state’s Department of Revenue to learn more.

Federal
❏ Federal Licenses—Your business will most likely not

require a federal license unless you operate a business
the federal government regulates. The federal gov-
ernment regulates certain businesses, such as those
involved in investment counseling, interstate transporta-
tion, meat preparation, drug or tobacco production,
and firearms. If you require a federal license, consider
consulting with an attorney to help you fill out the ap-
propriate paperwork and ensure you are complying
with any applicable laws.
❏ Federal Taxes—You will need an Employer’s Identifica-

tion Number (EIN) for your business. To obtain this num-
ber, you’ll be required to complete a Form SS-4. This
form and instructions for completing it are available
from the Internal Revenue Service (IRS) by phone at
1-800-TAX-FORM (1-800-829-3676) or by computer at the
IRS website at www.irs.gov.
16
START-UP CHECKLIST
The following start-up checklist can be used to help ensure
you have completed the necessary steps when starting your
business.
❏ Set aside space in your home for your business, or lo-

cate retail space if needed for your type of business.
Date Completed
❏ Check zoning regulations in your community for any

special permits or additional licenses that may be nec-
essary.
Date Completed
❏ Determine the entity of your business (sole proprietor-

ship, partnership, LLC, or corporation).
Date Completed
❏ Select and register your business name as required by

the business entity chosen.
Date Completed
❏ Obtain and file any necessary licenses, permits, and

registrations.
Date Completed
❏ Design and print your logo, business cards, and business

stationery.
Date Completed
17
❏ Develop your business plan.
Date Completed
❏ Establish a bank account for your checking and credit

needs.
Date Completed
❏ Set up your bookkeeping and accounting system.
Date Completed
❏ Purchase any needed equipment and supplies, such as

computer software and hardware, office equipment,
and general office supplies.
Date Completed
❏ Set up your telephone and mail services.
Date Completed
❏ Obtain the proper insurance.
Date Completed
❏
Other.
Date Completed
18
EXPENSE CHECKLIST
When starting a business, you should factor in the expenses
you’ll incur to get the business up and running. The following
checklist gives you some basic expenses as well as space to
add expenses unique to your particular business.
❏ Stationery and Business Cards:
Envelopes
Letterhead
Second Sheets
Business Cards
Other
❏ Business Registration:
Sole Proprietorship
Partnership
LLC
Corporation
Other
❏ Permits and Licenses:
Required Permits
Occupational License
Other
❏ Equipment and Supplies:
Equipment
Office Furniture
Office Supplies
Remodeling Costs
Other
19
❏ Other Expenses:
Insurance
Legal Fees
Telephone
Postage
Advertising
Printing
Shipping
Travel
Other
❏ Total Expenses:
Total
20
CHOOSING YOUR BUSINESS LEGAL STRUCTURE
As part of moving forward with your business, you will be choosing the
legal structure for your company. The choice you make will depend
on several factors, including how you plan to execute your business
strategies, who you plan to work with to accomplish your goals, and
what your immediate and future objectives are.
This decision is extremely important because the type of legal

structure you choose will affect your financial liability, the amount and
type of taxes you will pay, and the degree of ultimate control you
will have over the company. It will also affect your ability to attract
investors, secure loans, and otherwise raise capital for both your start-
up costs and your continuing funding needs.
THINGS TO CONSIDER
So what goes into choosing a legal structure?
First, think about who is actually making the decision about how to
structure the company. If you are starting the company by yourself,
you don’t need to take anyone else’s preferences into consideration.
But if there are multiple people involved with ownership interest, you
need to consider how you’re going to relate to each other in the
business.
Second, give great consideration to the issue of asset protection. The

legal structure of your business will have a direct impact on whether
or not you will be personally liable for your businesses debts. An
attorney can help you choose the legal structure that fits your asset
protection goals.
Third, ask yourself if your target customers may have a particular

perception about the legal structure of companies engaged in your
type of business. For example, if you are opening a restaurant, salon,
or dog grooming business, customer perception of the legal structure
of your business will likely be a non-issue. But if you are offering
professional services such as media buying, financial planning, public
relations, etc., your customers may perceive a company as being
21
more sophisticated and professional if it has the designation Corp.,

Inc., or LLC after the company name.
And fourth, you need to consider how your choice of legal structure
will determine how you and your company are taxed. Consulting with
a tax advisor can help you understand the tax implications of your
choice.
With these points in mind, let’s take a look at some of the specifics
associated with the four types of legal structures:
• Sole Proprietorship
• Partnership
• Corporation
• LLC
TYPES OF BUSINESS LEGAL STRUCTURES

Sole Proprietorship
A sole proprietorship is a simple, straightforward form of business

ownership in which the business and the owner are considered to
be one in the same. The owner is totally responsible for everything,
enjoying all the benefits of owning and managing the company, but
also accepting all the liabilities.
This fact is an important consideration when choosing to form a sole

proprietorship because it means you are personally liable for the
financial obligations of your business. In other words, it is possible that
your personal assets will be subject to credit collections and lawsuits
associated with your business activities.
Partnership
When two or more people decide to go into business and share in

the profits and losses, they may choose to form an association called
a partnership.
22
There are two basic types of partnerships and several more intricate
variations which your attorney or tax professional can discuss with
you.
The first basic type is a general partnership, under which each

partner is an agent of the partnership, each can bind the partnership
without the consent of the other partners, and each is liable for all of
the partnership’s debts.
It is very important that you clearly understand this fact: In a

partnership, if your partner defaults on a company loan, you are both
held responsible for the debt. Likewise, if you create the circumstance,
your partner is held accountable and could have his or her personal
assets attached to collections.
The second basic type of partnership is limited, which allows a

certain class of partners to limit their liability to the amount of their
investment, as long as they do not participate in the management
of the organization. For example, in a limited partnership, there will
be general partners who assume liability for the partnership and
manage the company, and there will be limited partners who are
essentially investors in the company.
These limited partners take a passive role in the company. They

invest their money in it, but they have no management control over
it. Therefore, they are not held liable for the business the way the
general partners are.
The Importance of a Partnership Agreement
Regardless of which type of partnership you choose, keep this

important point in mind: No matter how compatible you think you
and your business partner(s) will be, it’s a good idea to put your entire
agreement in writing. It is also advisable to seek legal counsel to draft
the most appropriate partnership agreement for your needs and to
protect your interests.
23
Corporation
A corporation is a separate legal entity (i.e., the business is separate

from the people who started it). It is owned by shareholders whose
liability is essentially limited to the amount of their investment.
A corporation can own property, incur debt, and is recognized by

the IRS. Additionally, having the legal structure of a corporation may
make it easier for you to raise capital for your business because
the formal nature of the business is sometimes more appealing to
investors and lenders.
Taxation Considerations
When forming a corporation, you must decide between being a C

corporation or an S corporation. The difference is a taxation issue, not
a structural issue.
In a C corporation, company profits are taxed at the corporate

level, then again at the personal level if profits are distributed to
shareholders as dividends and/or to employees in the form of a
salary. In other words, in general, corporations are taxed on their
own profits and then any profits paid out in the form of dividends are
taxed again to the recipient as dividend income at the individual
shareholder’s tax rate.
This double taxation is sometimes seen as a disadvantage in

incorporating. However, most small corporations seldom pay
dividends.
Of course, employees are taxed on their individual salaries, and

payroll taxes may also apply for the corporation.
The tax process of an S corporation is more like a partnership or sole

proprietorship because it allows you to “pass on” business profits and
losses to the partners’ individual tax returns. Thus, it avoids the double
taxation issue. However, to use this election, you must meet certain
IRS requirements regarding the class of stock issued and the number
of shareholders you have. There are also limitations on who can be
considered a shareholder. Your professional tax advisor can help you
determine if you are eligible.
24
Limited Liability Company

An LLC is a legal structure that offers many of the protections of a
corporation while enjoying the tax status of a partnership.
Some considerations regarding an LLC:
• In general, the owners of the LLC are not personally responsible for
the debts of the LLC. Liability is limited by state law.
• Members can participate in the operations of the business.
• LLCs allow the profits and losses to be passed on to the owners’

individual tax returns without taxing the business itself, thus
avoiding double taxation.
• The tax status of your LLC and certain requirements for operating
it will vary by state, so it is important to work with a professional tax
advisor who knows the rules and regulations of LLCs in the states in
which you will operate.
WHICH STRUCTURE IS RIGHT FOR YOUR

BUSINESS?
Is any one legal structure better than another? Not necessarily.
The important thing is to find the legal structure that is best for your
particular circumstances and the level of asset protection you need.
Do you need an attorney to set it up? That depends on you. There

are plenty of good do-it-yourself books and kits on the market, and
most of the state agencies that oversee corporations and LLCs have
guidelines you can use. Simply contact your secretary of state or the
state office that handles registering corporations in your area and
ask for any forms, information, and fee schedules they offer regarding
incorporating.
That being said, it is always a good idea to have a lawyer at least

review your documents before you file them, just to make sure they
are complete and that they will allow you to truly function as you
wish.
25
You may also want to consider the fact that expert counsel can
help you evaluate your choices more thoroughly, plan ahead for
contingencies, save you time trying to do things yourself, and advise
you on the available steps you can take to protect your interests
and assets.
DEVELOPING A BUSINESS PLAN
As any entrepreneur knows, succeeding in business takes thorough

planning, research, knowledge, goal-setting, and vision. And
that brings us to the next step in making your business a success:
developing a formal business plan.
Your business plan helps you take all your goals, knowledge, plans,
and expectations and translate them into a viable roadmap for
how you will set yourself apart from the competition and ultimately
succeed. It allows you to forecast what you expect from the business,
and in what timeframe, so you can keep yourself on course and
track your progress along the way. It helps you plan for and overcome
obstacles, avoid mistakes, and set your priorities. And, it can prove
to be a valuable tool by helping you gain respect in the financial
community and raise capital.
PLANNING FOR SUCCESS
Getting started writing your own business plan can be broken down
into simple steps.
First, you must organize and write down your thoughts and data. Then,
you simply put them into an outlined format that guides a reader
through the information and helps them understand your business
and the direction in which you plan to take it.
To assist you in formatting your business plan, you can find sample
business plans online that will steer you in the right direction. Just go
to your favorite search engine and type “business plan examples” in
the search box (use quotation marks as shown to keep the search
narrowed down). Sample business plans can also help you find the
26
right language to suit your business needs if you are unsure how to
phrase content in certain sections.
For it to be a successful plan, you will need to think everything

through. Outline your business plan from start to finish. Potential
investors will ask to see your plan, so you need to detail everything…
from your financial plans, to your management approach, to your
marketing concepts.
Investors want to see that you have the organization necessary to

start a business and see it through.
Formatting Your Plan
Your plan doesn’t have to be flashy; it’s far more important for it to
be concise, accurate, and neatly formatted. If you plan to show your
business plan to prospective investors or lenders, consider taking it to
a copy store and having it bound with a nice cover, perhaps with a
graphic to give it some eye-catching appeal.
Or, if you would like to take advantage of business planning software

tools, you can find excellent ones online that simplify the process for
you. Again, go to your favorite search engine and type “business plan
software” in the search box. There are business planning software
tools that will take you step-by-step through the development of
your business plan, with many of them allowing you to simply type
into a box what you want to say for each section and automatically
formatting the plan for you to print out.
Either way, be sure to use simple text and simple language. Just
describe your company and your goals in your own words.
Outlining Your Plan
The following offers a suggested outline for your business plan. It

reflects some of the most common business plan elements used.
Depending on your business type, legal structure, management

approach, and products or services, some of the items below may
not be part of your business plan, but many of them will.
27
Regardless, the main areas you will need to focus the most attention
on are the description of your company, how you intend to market
your business, and how you will manage your finances. Additionally,
place great importance on writing a good Executive Summary, as it
is the first section of your outline and may be the only thing people
read.
Start with a cover sheet as your first page. It should have the name,
address, and phone number of your business, as well as all the key
people who wrote the business plan.
Follow your cover sheet with your Table of Contents page. List the
major section titles of the plan and any subheadings under them,
referencing each with its corresponding page number.
Don’t get too hung up on the title for each section, as you will find
business plans often use alternative titles for some of the sections
below. Where this is common practice, we have included other titles
you might see used.
Your outline should end up looking something like this:
I. Executive Summary
II. Background of Company (sometimes referred to as

Company Overview or Business Description)
III. Target Market and Competition Research and Analysis

(sometimes referred to as Market Analysis or SWOT Analysis)
IV. Business Objectives
V. Description of Products and Services (depending on what you

are trying to accomplish with your business plan, this section
may be optional)
VI. Marketing and Sales Structure (sometimes referred to as

Marketing and Distribution or Marketing and Sales Strategies)
VII. Customer Service
28
VIII. Operational Team (sometimes referred to as

Management Team)
IX. Financial Data (sometimes referred to as Financials)
X. Appendix
Next, we’re going to define each of these areas for you with
descriptions of what is commonly included.
COMPONENTS OF A BUSINESS PLAN
Executive Summary
This is the most important part of your business plan. Readers will see
the Executive Summary before any other part of your plan, so it must
capture your reader’s attention to encourage them to read further.
Your Executive Summary should be a one- to two-page snapshot of

your business plan. Each paragraph should be only a few sentences
long.
First, state the current position of your business—basically, a very

general overview of your company. Next, describe your goals and
the strategies you will use to attain them. Include a description of
your business (what you sell/offer and how you sell/offer it). Last, list a
timeframe of when you think you will accomplish your goals.
Background of Company
Use this section to describe in detail your company’s history, your

products and/or services, and what type of business you are starting.
Describe the type of market you are in and what makes your business
different from the rest. Detail your location and any plans to expand
the business. Also, list any applicable licenses or accreditations that
you hold.
29
Here are some questions to ask yourself:
• Is my business a sole proprietorship, partnership, corporation,

LLC, or franchise?
• Why will I succeed in this market?
• What is the company’s ownership structure?
• What type of financial performance do I expect?
Target Market and Competition Research and Analysis
This is where you would place statistics about your business market,
demographics and profiles of potential customers, and an analysis of
your competitors. Ask yourself:
• What is the supply and demand for my product and/or

service? Is my market expanding or declining? How will I
capitalize on or combat this?
• Who is my target market? Research your customers. Who are

they? What are their demographics (ages, sex, etc.)? Where
are they located?
• Define your competition and how you compare to them.

You will see competitor analysis often referred to as SWOT
(pronounced “swat”) analysis, which stands for Strengths,
Weaknesses, Opportunities, and Threats. Basically, you
demonstrate that you understand what your strengths and
weaknesses are, as well as those of your competition, and you
outline the types of opportunities and threats you expect to
encounter. Keep in mind that strengths and weaknesses are
internal factors, while opportunities and threats are external
factors.
• Set up your pricing structure.
30
Business Objectives
Be realistic in defining your objectives. Investors do not want to see

outrageous expectations. Include your financial objectives as well as
your plans for operating procedures.
Mapping out your business objectives gives you the opportunity to

plan more thoroughly. You have less of a tendency to forget key
objectives and things you should have thought about beforehand
when you take the time to really think about where you are headed
and formalize your objectives in writing.
Description of Products and Services
If you have an extensive amount of products and/or services, you

can choose to detail them in a section of their own. If this is the case,
do not go into full detail in your company background about your
goods; instead, briefly touch on them. Then, address them fully in this
section of your plan.
Marketing and Sales Structure
Put together a plan for marketing and sales. Describe how you will
market your services and products, what media outlets you will
use, how public relations factors into your plan, and how your sales
process will be completed.
This section should clearly demonstrate that you have thoroughly

researched your product and market and that you are prepared to
capitalize on opportunities.
Keep in mind that in your general business plan, this is just a summary
of your marketing and sales approach. It is recommended that
you don’t let creating a summary keep you from additionally
creating a separate full-scale marketing plan that details a more
comprehensive, in-depth marketing and sales program.
Customer Service
Most companies depend on repeat business, and yours will likely

be no exception. Great customer service is essential to keep buyers
31
coming back. Briefly describe how you plan to provide and maintain
exceptional customer service.
Operational Team
A brief explanation of all key players is needed in your business

plan. Just write a short paragraph of each person’s position in the
company and their prior achievements in other business-related
fields. If applicable, you might also include how you plan to attract
high-level employees and manage the future personnel needs of
your company.
Financial Data
This section is about detailing how you plan to make money and
spend it. You should include:
• Budget—Include your assets and financing expenses.

Accounting and legal fees, payroll (if any), insurance costs,
licenses, supplies and equipment, advertising, etc. should all be
included.
• Pro-Forma Income Statement—This should include your future

projected revenues, sales costs, and operating expenses. This is
also commonly referred to as your “Profit and Loss Statement.”
• Balance Sheet—Include your assets, liabilities, and equity.
• Pro-Forma Cash Flow—List your projected cash flows from

operating activities and your cash used in investing and
financing activities.
• Break-Even Analysis—This is when your sales or revenues equal

your total cost or expenses. Also include the point where
your business can start making a profit. This is also commonly
referred to as the “Break-Even Point.”
• Return Projections/Ratios—Long- and short-term payables

and receivables should be calculated when determining your
break-even point.
32
• Assumptions—All assumptions (or projections) should be

backed up with financial data.
Make sure your numbers are accurate. If they are not correct, it
can instantly ruin your credibility. If it would make you feel more
comfortable, have your accountant help you with your income
statement, cash flow, and balance sheet.
Once your business starts to grow, you will need to expand your
business plan to include all past and present financial data as well as
projected plans based on that data.
Appendix
Include copies of all supporting documents at the back of your

business plan. Market research, personal financial statement(s),
licenses, and any loan applications should be included in this section.
If you are operating a franchise business, make sure you provide

all the documents and contracts from the home company in your
Appendix.
WRITING YOUR PLAN
Now that you have the basic outline for writing your business plan, the
next step is to actually write it. Take your time and think through every
section of your business plan so you end up with a detailed, accurate,
and inspiring roadmap for the success of your business.
To help you move forward with developing your business plan, we’ve
provided a few questions that should assist you in determining what
to write in each section of the plan. Ask yourself these questions and
develop your answers into paragraphs.
33
Executive Summary
Current Position
• What is the current position of your business?
• Are you still in development or are you preexisting?
• Where are you located and what is the area like?
• What kind of facility do you have?
• Do you have employees?
Goals
State how you plan to make your company grow.
• Do you plan to open a new store in the future?
• Is one of your goals to increase the gross sales of your existing

business?
• Do you want to open larger corporate accounts?
The goals included in your business plan should be broken down into
specific steps and deadlines for obtaining them. For example, you
may have the following goals as part of your five-year plan:
• Year #1—$100,000 Sales; $10,000 Net Profit
To obtain these goals, you need to have your plan broken down into
specific steps with deadlines for completing them.
34
The following example shows how you can organize these steps so
that you continue to move forward toward the annual goal on a
weekly and monthly basis.
• Month #1—Set up the business
o Week #1—Establish a business entity; calculate start-up

expenses; address all legal issues, including licensing
o Week #2—Write a business plan
o Week #3—Establish a business identity; determine a location
o Week #4—Set up accounting system; meet with an

accountant
• Month #2—Advertise the business and follow up on progress

and effectiveness
o Week #1—Attend industry-related events and meetings to

network; join local Chamber of Commerce; follow up on all
leads generated from networking
o Week #2—Start implementing advertising methodology (Will

you design print pieces or hire someone to do it for you? Will
you focus on direct mail or on newspaper campaigns?)
o Week #3—Test distribution methods with sales obtained to

date
o Week #4—Follow up on any items not completed during

month #1
Strategy
State the strategies you will use to reach your goals.
• Do you want to attract investors?
• Do you want to increase equipment volume?
35
• Are you looking to solicit local businesses for corporate

accounts?
Business Description
• What do you sell? Is it a product or a service?
• How do you sell it?
• Why is your business needed?
Schedule
Briefly define a timetable as to when you think your goals will be

accomplished.
Background of Company
History
Detail the history of the company.
• Who owns it? (Most likely you will be talking about yourself.)
• When did you (or do you plan to) open it?
• Why will you succeed?
Geographical Area
Describe the type of area where your business is located.
• What type of area is it? A tourist community? Rural? City?
• What is the population?
• Does the area have growth potential?
36
Ownership Structure
• What type of entity is it (sole proprietorship, partnership,

corporation, etc.)?
• Who owns the stock?
Major Market and Customers
• What type of market are you in?
• What makes your business different from the other businesses in

your market?
• Who are your customers?
Financial Performance
• What average annual growth do you expect?
• What are your total assets (minus liabilities) worth?
• What is your profit percentage and sales volume?
Accreditations and Licenses
• What accreditations do you or your business hold?
• What licenses do you or your business hold?
Target Market and Competition Research and Analysis
Supply and Demand
• What are the national trends in your market?
• How much demand is there for your product and/or service?
• Is your market expanding or declining?
37
• How will you take advantage of supply and demand and/

or market expansion? If applicable, how will you combat a
declining market?
Customers
• What are your customers’ ages? Sex? Occupations? Income

levels?
• Where are they located in regards to your business location?
Competition/SWOT Analysis
• Who are your competitors?
• How are you different from the competition? Do you do

something better than they do?
• How can you overcome weaknesses? Remember to think

beyond your own perceptions of how you rate against the
competition. Think also about how your competitors, customers,
and potential investors perceive you.
• What opportunities do you see before you? Are there growing

trends in the market you can take advantage of? Is there new
technology in your business market that you can use to set
your company apart?
• What obstacles do you need to overcome? How did your

competitors meet the same challenges? Will these obstacles
or your weaknesses, if not resolved, seriously impede your
success?
Price Structure
• What is your wholesale cost?
• How much more will you charge your customers (what will the
markup be)?
38
Business Objectives
How do you expect your business to succeed in each of these areas?
• Financial gains
• Investor returns
• Expenses
• Sales
• Marketing
• Employees
Description of Products and Services
Type of Product and/or Service
• What do you sell? Is it a product or a service?
• How will you distribute your goods/services? Do you have a

storefront? Do you work out of the home? Is your company
Internet-based?
Inventory
• If you sell goods, what is your inventory?
• How much inventory will you keep in stock?
Extended Plans
• Do you plan to expand your business to include other products

and/or services?
• What extended plans do you have for marketing and sales?
39
Image
• What kind of image do you want to put forth? Cheap and

reliable? Exclusive? Customer-oriented?
• What do you want to say about your business?
Advertising
Detail which mediums you plan to use to advertise your business.
• Television commercials
• Direct-response television
• Direct mail
• Newspapers
• Yellow Pages
• Radio
• Telemarketing
• Internet
Sales
Define your sales strategies.
• How will you attract customers?
• How often will you have a promotional sale?
• How will you attract repeat business?
40
Customer Service
Strategies
• How will you make your customers feel comfortable?
• How will you meet the needs of your customers after the sale?
• How will you keep in contact with your customers?
Operational Team
Key Individuals
• Who is/are the owner(s)?
• What is the background of each person? College degrees?

Business experience?
Staff Positions
• What is the hierarchy of your company (who reports to

whom)?
• What are the different divisions in your company?
• How many employees are in each division?
Financial Data
Assets
• What are your tangible assets (computers, fax machines,

furniture, etc.)?
• What are your intangible assets (trademarks, patents,

copyrights, etc.)?
41
Financing Required
As applicable, list the amounts for your:
• Rent
• Equipment
• Building modifications
• Inventory
• Overhead
Budget
• How much are your expenses? (List them.)
• How much revenue do you have or expect to have?
Income Statement
If you have a preexisting business, your income statement will be

based on current year results. If you are starting a new business, base
your projections on market surveys. Your accountant can help you
prepare your income statement.
Balance Sheet
If you have an accountant do your balance sheet, reference him

or her by saying, “Prepared by the accounting firm of (insert name)
based on the financial position of (insert date or a timeframe like “last
year”). Include:
• Current Assets (e.g., cash, accounts receivable, and inventory)
• Fixed Assets (e.g., equipment, building, and furniture)
• Current Liabilities (e.g., accounts payable, interest payable,

taxes, and payroll)
42
• Long-term Liabilities (e.g., mortgage)
• Net Worth (equity)
• Total Assets (total liabilities plus net worth)
Cash Flow
Chart your monthly cash flow for your business. List:
• Cash (cash you have on hand)
• Cash Receivables (sales, credit)
• Cash Payables (supplies, repairs, utilities and phone, advertising,

travel insurance, legal fees, rent, payroll, etc.)
Break-Even Analysis
What conditions need to be present in order for you to break even?
Return Projections/Ratios
• By which year do you expect at least a 20% return on your

investment? The third year? The fourth year?
• When do you expect a full return? The sixth year? The seventh
year?
Appendix
Include any supporting documentation you deem necessary. This

might include:
• Licenses
• Loan applications
• Advertising materials
• Articles about your company
43
FINANCING YOUR BUSINESS
Raising capital is the most basic of all business activities, but it’s not
always easy to do. In fact, it can be complex and frustrating. However,
if you devote the time to research and plan your financing strategies
effectively, you can find a variety of both traditional and creative
funding sources to raise the money you need. Some funding sources
to consider are discussed here.
PERSONAL SAVINGS AND RESOURCES
A primary source of capital for new businesses comes from the

owner’s personal savings or checking account and other personal
resources, such as profit sharing plans, retirement accounts, and the
sale of personal assets.
The primary advantages of using personal funds are you maintain the
control over the business and its activities and you reap all the profits
when your business takes off. The primary disadvantage is you could
be left with a lot of personal debt if things don’t turn out the way you
planned.
Particularly in the early stages of your business, you may need to turn
to your own financial resources for start-up costs. But that doesn’t
mean you can’t present your business idea and plan to outside
investors at this point. Just keep in mind that it can be difficult to
get investors to jump on board a new business venture. Things you
can do to improve your chances for getting investor funding will be
demonstrating you’ve done the appropriate research and having a
sound business plan prepared.
CREDIT CARDS
Credit cards are often used to finance business needs, but this
choice should be treated with caution. One way to limit credit card
spending for your business is to only use credit cards to fund revenue-
generating activities (e.g., using a credit card to fund a critical
marketing campaign or a business trip to meet potential clients in
person).
44
FRIENDS AND RELATIVES
Friends and family members may be willing and able to assist you by
loaning you money at low interest rates (or with no interest expected)
or by simply investing in your new enterprise.
This can be a great funding resource; however, it can also lead to

misunderstandings, so consider treating the transaction in a more
professional manner to protect the interests of all parties involved.
For example, in the early stages of discussion about borrowing money

from friends or relatives, be sure to discuss the expectations on both
sides:
• What are the expectations for repayment? Will you be paying

interest on the loan and, if so, how much? Are you going to pay
back the money in fixed increments or can the repayments
be linked to cash flow (a better option for you) as the business
grows?
• Is this money a “gift” with no expectation of repayment? If

so, is there the expectation that once your business is making
substantial profits, the relative or friend should be cut in on the
action? Do they think of the money as a loan you will repay or
do they think of it as having an “investment” in what you are
doing? Draw clear lines and set guidelines, especially if you
want to make sure there is the understanding that this is not an
“ownership interest” in the company.
• Will taking this money leave you open to scrutiny and input
about your business affairs?
It may be wise to follow some of the same practices you would if

you were dealing with a traditional lending source, such as having
a legal document drafted (often called a promissory note in these
circumstances) detailing the loan amount, the repayment plan, the
nature of the relationship, and the interest to be paid.
45
BANKS AND CREDIT UNIONS
With a sound business proposal, you may be able to secure a loan

from a bank or credit union. To help you find the right lending source
for you, consider seeking assistance from the following:
• An attorney or accountant who is familiar with your type of

business—Do they have any recommendations?
• A community bank—Often, they can be more creative with

loans and may have a clearer understanding of what your
business can do for the community if it is a locally owned and
operated venture.
• Other small businesses—Who do they use and feel comfortable

with?
• Your own personal research—Talk to different bankers and ask

questions. Do they seem familiar with your type of business and
receptive to what you need? Do they commonly make small
business loans? Does the banker you’re dealing with have
lending authority?
Keep in mind that when working with a bank or credit union to secure
a loan, you have to present yourself as trustworthy, a good credit risk,
and a professional who is prepared to deliver on promises. You may
also have to put up personal assets as collateral.
GRANT MONEY
Business grants may be available to you through government sources.

These grant programs are usually for specific types of businesses
or groups, such as minority-owned or women-owned businesses,
or businesses that are dedicated to helping low-income or elderly
individuals. To review some of the opportunities available, visit www.
sba.gov and see Grants under the Services tab, or visit www.grants.
gov.
46
ANGEL INVESTORS AND VENTURE CAPITAL FIRMS
Generally, these individuals and firms help expanding companies

grow in exchange for equity or partial ownership.
An angel investor is typically someone who has already been

successful in your type of business and wants to help guide a new
company on a similar path. You often get the benefit of both the
financial and mentoring resources they can provide.
They may also bring to the table industry contacts that can help spur
growth in your company, and they are usually interested in getting in
at the beginning stages of a company so they can have a stronger
influence on the direction it takes.
Venture capitalists are frequently private partnerships or firms that

invest capital in promising new companies with the expectation that
the investment will be long-term and that they will take on a high
level of risk, but with a higher level of reward for the investment. Note
that venture capitalists usually only invest in established firms, so this
resource may be better tapped as you experience growth.
For help in locating angel investors and venture capitalists, you can
type in “angel investor” or “venture capital” in your preferred search
engine.
HARD MONEYLENDERS
Hard moneylenders are often private individuals who offer financial

assistance in exchange for a cut of the profits in a business venture.
To help you locate them, talk to professionals in the markets your

business is associated with. They may be able to put you in touch with
people they know who invest in your type of business.
You can also network with professionals, such as accountants and

lawyers, who are frequently in contact with business clients that may
be looking to invest in new and growing companies.
47
Additionally, you may find potential investors in your newspaper’s

classified ads under the financial and business sections or in the
classified ad sections of publications geared toward your business
market.
PREPARING FOR YOUR COMPANY’S FUTURE
As all entrepreneurs know, getting your business up and running is

only the first step. Managing your business and keeping it profitable
takes time, energy, an entrepreneurial spirit, continued education,
and being adaptable to changes in your business market and the
economy.
Be prepared to devote the necessary time, effort, and money to keep

things moving, to keep your business on track, and to get you where
you want to go in the future.
BUSINESS BUILDING TIPS
Here are a few tips we’ll leave you with:
• It’s not enough to just build and attain wealth. The key is to
keep it by protecting it. We live in a litigious society, making
asset protection a necessity. You can consult with an attorney
to ensure you set up your business in the most appropriate
way for your needs and with the utmost attention to asset
protection.
• Remember that as your business grows and changes, your

need for asset protection may grow and change as well. Be
sure to occasionally review your situation with your lawyer to
see if you need to adjust the protections you have put in place.
• Develop and enforce company-wide standards for good

customer relations. Don’t be so busy with the marketing of your
business and the protection of its cash flow that you forget two
of the most important aspects of your success: how you and
your employees treat others and how the public perceives
your company.
48
• Establish good employee relations and outline company

expectations in an employee handbook. Your business can
be deeply affected by how your employees feel about their
jobs and their working environment, how they respond to
management and each other, and how they interact with
customers.
• Put your public relations, marketing, and business plans into

action. Plans look good on paper, but they need to be realized
to catapult your success.
• Secure any copyrights, trademarks, or patents that will help you

protect your business and its interests.
• If the business system you employ is working (supplying

a steady cash flow), then great. But keep in mind that
technology, society, and the economy are always changing.
Maintain an open mind about ways to improve upon your
current system. If you let your business get behind the times,
your cash flow won’t be far behind.
KEEP MOVING FORWARD!
To keep your business and its activities moving in the right direction,
actively seek information that will help you grow and prosper at
every step. Learn what you can about business management, asset
protection, tax savings, investing, marketing, business development,
employee relations, public relations, cash flow, financing, and sales.
After all, what you do with that information can make the difference
between just having a business that operates and having a business
that thrives.
49
Section 2: Investing in Real Estate
Investing in Real Estate
REAL ESTATE FUNDAMENTALS
Even when we are facing times of economic uncertainty

and fluctuations in the housing market, real estate still has the
potential to be a profitable investment opportunity for the well
prepared entrepreneur. For example, consider how these types of
circumstances can increase the number of foreclosure properties on
the market, provide opportunities to secure properties well below fair
market value, and create an influx of renters who must delay their
dreams of home ownership.
Savvy entrepreneurs build a solid foundation of real estate investing

knowledge so they can keep pace with changes in the real
estate market and the economy, adapt their investing strategies
accordingly, and take advantage of opportunities that arise. They
recognize that, regardless of market conditions, real estate investing
can help them reach their financial goals. In this section, we’ll explore
some of the ways it can do the same for you.
THE POTENTIAL BENEFITS
One of the things that makes real estate investing so attractive is the
fact that no matter where you live, you have the potential to make
money investing in properties. Even if your immediate neighborhood
isn’t a match to your investment strategies, you can bet there is a
community nearby where investors are turning properties into profits,
and you can do the same.
That’s just one of the many potential benefits of investing in real

estate. Let’s explore several others.
Generate Income
Real estate investing gives you the opportunity to hold properties

and generate positive monthly income—cash flow—by using these
properties as rental investments.
Investors can generate a steady residual income with rental

properties by charging more for renting a residence than the money
spent to keep the property. In other words, they charge rent that
53
exceeds what’s referred to in the industry as PITI: principal and

interest (mortgage payment), taxes, and insurance.
This can result not only in cash flow for general income purposes, but
also additional funds the investor can use to invest in more properties,
build retirement funds, and create greater financial independence to
enjoy now and in the future.
Profit Through Appreciation
With real estate investing, some of your profits will come from natural
occurrences in the market, such as appreciation (depending on the
overall trend in real estate values where you invest). But there is also
another form of appreciation that you can actively pursue with your
real estate investments: forced appreciation.
Forced appreciation is appreciation you forcibly build into the

property by fixing it up (such as making cosmetic improvements and
repairs) or even changing the way the property is used to make it
more valuable and profit-generating (for example, splitting a large
single-family residence into a rooming house or duplex).
This forced appreciation is also sometimes called forced equity

buildup or sweat equity since the instant increase in value it brings
to the property is often created by manual labor. Using forced
appreciation, you can increase your profits dramatically. Often, you
can start enjoying a return on this type of investment immediately,
even if you plan to hold the property long-term.
For example, if a duplex in decent shape is purchased for $80,000,

and it creates $650 per month in expenses and mortgage costs, and
rents for $500 per unit, you net a positive cash flow of $350 per month
($1,000 total per month received in rents on both units, less $650 per
month in costs to hold and maintain the property).
Now let’s say you evaluate the property and the things that need to
be done to put the duplex into excellent shape instead of just decent
shape. You also evaluate what similar properties that are in more up-
to-date shape are selling for and renting for in the neighborhood.
54
You find that a small investment of $2,000 in cosmetic improvements

to the property should raise the property value to $115,000. If you
make those improvements and sell the property immediately,
you could profit $35,000 less the $2,000 it took to make the
improvements—an instant profit of $33,000.
Moreover, let’s say your analysis shows that those same cosmetic
improvements will make the property more desirable for renters and
allow you to charge a comparable market rent rate of $650 per
month per unit for a total of $1,300 in rental income. Each month, the
forced appreciation you built into the duplex with just $2,000 will have
increased your positive cash flow by $300 per month. At that rate, it
will only take you three months of rental payments to pay yourself
back the money you invested in the improvements.
So let’s run the numbers and see just how good a deal this is. With
just $2,000 invested in forced appreciation, you will now have positive
cash flow of $650 per month instead of $350. You will also have the
peace of mind that if one unit in the duplex is empty for a short
period of time between renters, you will still be breaking even ($650 in
rent for one unit, less $650 in costs = $0). And better yet, you will now
have a duplex that is worth $115,000 instead of $80,000.
Enjoy Built-in Profits
Another great aspect of real estate is the potential to have built-in

profits. Savvy real estate investors learn how to buy properties for well
under their fair market value (FMV), which is the price an informed
buyer would likely pay for the property and an informed seller would
likely accept. This can allow the investor to instantly take advantage
of the built-in profit, or equity, in the property. Equity is the FMV of the
property, less any debt against that property, such as a mortgage,
second mortgage, or other type of lien.
Now the investor has the choice of immediately selling the property
and taking the profits of the built-in equity (because it was purchased
under FMV) or he can choose to hold the property and rent it.
If he chooses the latter, as the property continues to increase in value

and the mortgage debt continues to decrease, someone else will be
55
paying for the investor’s equity growth in that property by covering all
his costs of holding it.
Moreover, the equity in that property is available for the investor to

tap in order to finance additional investments.
Find Opportunities Even in Distressed Markets
Even in depressed markets, there are still great opportunities for

investing in real estate. In fact, the more educated real estate
investors are, and the more investing techniques and exit strategies
(the real estate techniques you use to exit a deal and make
your profits) they can employ, the more prepared they can be to
generate profits regardless of changes in the housing market or other
circumstances that have an impact on real estate opportunities.
For example, educated investors recognize that in depressed

markets, there tends to be an increase in foreclosures, so they focus
on purchasing foreclosure properties in those areas. Additionally,
they know that rental properties are in need in every type of market,
so they fill their portfolio with properties that generate monthly
cash flow. And they know that in many low- and moderate-income
neighborhoods, they can find rundown or distressed properties and
either rehab them for profit or sell them wholesale to another investor.
In short, educated investors are prepared investors. They have

learned that fluctuating market cycles don’t have to concern them
because regardless of what the market is doing, they are well armed
with the right knowledge and negotiating skills to react appropriately.
They can make money regardless of what the market is doing
because they know the right strategies to employ at the right time.
Create Your Own Business
Another appealing aspect of investing in real estate is that you can

easily turn your activities into your own business. If you have thought
about going into business for yourself, real estate investing can be a
great choice. It provides flexibility, allowing you to build and expand
your business at your own pace. You can work full-time or part-time,
be your own boss, and time things according to your schedule and
goals. And, it can be a good choice for starting a business with
56
limited risk and startup costs, but with the potential to still generate
substantial revenue.
Use Leverage To Your Advantage
One of the most appealing aspects of real estate investing is the

ability to use leverage. Leverage provides a way for you to control
large assets (properties) with little or sometimes even no money out
of your own pocket. It’s about using OPM, or other people’s money, to
help you make investments.
For example, you can work with a money partner who is willing
to help you with the financial side of real estate investing. These
individuals are often professionals, such as doctors, lawyers, and
accountants, who would like to invest in real estate, but who simply
don’t have the expertise or time to hunt for properties and close
deals. They rely on your real estate know-how, while you rely on their
fast access to cash.
Sometimes, even other real estate investors will be money partners.

They may be busy with their own investments, but have more money
to invest if they could just find additional properties. You can be their
eyes and ears, finding properties, negotiating deals, and splitting the
profits at a predetermined percentage, such as 50/50 or 40/60.
Just be sure that if you work with a money partner, you keep things
professional. Put your arrangement in writing and strongly consider
consulting with an attorney to ensure your interests are protected.
The point about leverage and real estate is that even if you only
have small sums to invest, you can increase your average annual
return dramatically because leverage can make your money work
harder for you. It helps you control property while letting things like
appreciation, equity growth, and cash flow work in your favor. And it
can free you up to secure properties you might otherwise have been
unable to secure because of costs or access to quick cash.
Easily Locate Potential Properties
Finding investment properties and opportunities is easy. With real

estate investing, opportunities are all around you. You can make a
57
simple effort, like driving through neighborhoods looking for For Sale
By Owner (FSBO) signs, or you can do everything from establishing
relationships with real estate agents to placing your own ads to
generate leads.
What’s nice to know is that regardless of the time you have available,
you can still find opportunities to meet your investment goals.
Employ Simple Marketing Tactics
Marketing real estate is not complicated. In fact, there are several

ways you can easily market your business. Everything from a For Sale
sign in the front yard of a home you have renovated to an ad or
direct mail campaign can bring in customers.
Some investors have netted thousands of dollars in profit on deals

simply because someone called them from a low-cost car magnet
ad on the side of their vehicle or from a flyer they posted on a
community bulletin board.
Receive Tax Breaks
None of the advantages we’ve discussed so far takes into

consideration the added and sometimes unexpected benefits of real
estate investing, such as tax deductions and the ability to write off
certain business expenses.
For example, the interest portion of mortgage payments is tax

deductible, which is one of the big incentives behind buying property
rather than renting it. And certain expenses can be deducted from
maintaining your business and managing your property, such as
gas or car expenses for driving to and from your rental properties,
maintenance costs, cleaning supplies, bookkeeping supplies, forms,
and administrative materials.
Of course, it is wise to consult with a professional tax advisor to be

certain you are not only receiving the appropriate tax deductions,
but that you are also paying the appropriate taxes associated with
buying, holding, and selling properties.
58
Help Others
Last, but certainly by no means least, with real estate investing,

there is the very real opportunity to help someone else in need. This
is particularly true when working with motivated sellers in financial
distress, but it can also apply to several opportunities in real estate. In
fact, there are many real estate transactions that can result in what
we call win-win situations.
What exactly is a win-win situation? Just like it sounds, it’s making a

deal where the parties on both sides of the negotiating table win.
For example, if an investor is able to make a profit from the purchase

and sale of a home in foreclosure while stopping foreclosure
proceedings and preventing a foreclosure from appearing on a
homeowner’s credit report, that’s a win-win. You can even help the
homeowner keep some of the equity he’s built up in the property,
equity he would surely lose in a foreclosure.
What are some other ways you can help? Consider someone who
has a distressed property because they live in another state and
they’re having a difficult time managing it long distance. You could
help alleviate that burden. What about the person who wants to take
a life-changing job in another state but must first sever their financial
ties to their current location by selling their home? What about the
landlord who’s tired of maintaining a property? Or the elderly couple
that needs assisted living because of health reasons, but must first sell
their home to pay for the expenses? There are many possibilities for
helping others through your real estate investing activities.
Take Full Advantage of the Benefits
Of course to take advantage of all these potential benefits of real

estate investing, you have to know your market, make wise investment
choices, and actively grow your business. The following are some tips
that can help you:
• Gain a thorough understanding of your market area. To help

you get to know your target neighborhoods, you can:
59
o Determine property values in your area. Read your local

real estate section to get a feel for asking prices. Talk to
real estate agents about average appreciation rates in
the area and study the MLS (Multiple Listing Service) to
determine what properties have actually been selling for
the last six months.
o Find out the average rate of rent for different types of

properties in your area.
o Identify which neighborhoods are “fringe” or “we care”

neighborhoods (areas that that were previously less
desirable, but are improving thanks to neighborhood
revitalization, Habitat for Humanity, government programs,
and families taking back their communities).
o Pay attention to the overall real estate market, but

particularly pay attention to what’s happening in your local
area.
• Evaluate deals thoroughly and accurately ahead of time.

Know that if you sold the property immediately, you have
enough built-in profit to make it worth your while. Or if you plan
to hold the property, be certain you can rent the property for
more than it will cost you to hold it.
• Do whatever you can to boost and accelerate the

appreciation process, such as making cosmetic improvements
and minor repairs or replacements.
• Develop relationships with key players in the industry, such as

lenders, real estate agents, other investors, contractors, and
building code officials, as they are all potential partners in your
investment strategies. These will be just some of the members of
your “power team.” Make it known to those in the business that
you are actively seeking new investment opportunities and ask
them to flag you to anything they find that fits your needs. Use
networking opportunities with power team members to boost
your knowledge about the business.
60
• Actively seek motivated sellers, as they will be a primary source

for your best deals. A good place to start is by reviewing your
local newspaper ads. Sometimes an ad for a property will
literally state “motivated seller” or “desperate” and take the
guesswork out of it for you. But you can also look for other
keywords and phrases in ads that usually indicate they’ve
been placed by a motivated seller or someone who may, at
the very least, be quite flexible. These words/phrases include:
o Price reduced
o Non-qualifying loan
o Must sell
o Retiring
o Corporate owned
o Owner transferred
o Illness forces sale
o Will consider all offers
o Bankruptcy
o Foreclosure
o Below market value
o Below appraisal
o Buying another home
o For sale by owner
o Nothing down
o Out-of-town owner
61
o Moving
o Will sacrifice
o Repossession
o Estate sale
o Ideal investment property
o Distressed property
o Distressed sale
o Divorce situation
o Owner financing
o Easy financing
o Terms available
o Assumable mortgage
o Take over payments
• Use advertising to bring deals to you. Some ways you can

market yourself and your business include:
o Sending postcards—Consider mailing postcards to owners

of properties you are interested in viewing. Perhaps you
have driven by the property and found it to be distressed
and you’d like to let them know you are an investor in the
area who would like to discuss the possibility of buying their
home. Additionally, you can check the MLS for expired
listings and other homes that have been on the market for
a long period of time (look for DOM, or Days On Market).
Mail a postcard to these homeowners, as they may be
growing tired of trying to sell their home and may be more
open to your offer to help.
62
o Using other direct mail—Consider sending a single-sheet

flyer or letter with your business card to the addresses
in apartment complexes in your target neighborhoods.
Discuss in your mailer the benefits of home ownership and
an example of the potential savings between renting vs.
owning. Provide your contact information and ask them to
hold onto your information in case they decide they’d like
to purchase a home in the future or lease with the option to
buy.
o Distributing your business cards—Hand out business cards

at every opportunity. You never know when you will find
someone who is looking to buy, looking to sell, or knows
someone else who is.
o Posting flyers—Post inexpensive flyers on community bulletin

boards and at grocery stores and other retail outlets in
your area (wherever there is a free opportunity to post
information). Remember that some condominiums, gyms,
clubs, and stores have bulletin boards where you can post
your information to gauge someone’s interest in selling their
property or buying one of yours.
o Using the Internet—If you are web savvy and would like to
have an Internet site to direct interested parties to, consider
building a website. You can either build one yourself or hire
a web designer (perhaps even a student taking a design
course in college) to put one together for you. It can be
a simple one-page site. It does not need to be elaborate.
However, it must provide up-to-date, useful information for
visitors and be regularly monitored. A website can be a low-
cost marketing tool that is well worth the time you put into
building and maintaining it.
• Learn what you can to open yourself up to new investment

opportunities and don’t be afraid to explore your options.
Consider the following:
63
o The more you know about finding appreciable properties,

purchasing them below FMV, and increasing their value
through small efforts, the more you can increase your
profit potential. Apply this same knowledge to purchasing
multiple properties and the potential profits can grow
dramatically.
o Make calls on properties and visit the ones you are

interested in. You don’t have to buy… you are just looking,
and learning as you go. With every property you visit
and every seller you come in contact with, you can be
improving your knowledge, communication skills, comfort
level, professionalism, negotiating skills, and more.
o Even if you’re not quite ready to buy your first property,

the practical experience you can gain by exploring
your market and your options beforehand can give you
a great head start. Who knows, maybe you will find the
perfect property and start investing a little sooner than you
planned. But regardless, the research you do now can go
a long way in helping you be ready for future investment
opportunities.
o Keep in mind the general rule of 100-10-1 that has worked

for others. The idea is to look at 100 properties and put
in offers on 10 (consult with an attorney to draft offers
that have appropriate escape clauses) to net one good
investment. This approach is worth the effort, not only in
helping you find a great investment property, but also in the
lessons you’ll learn as you gain experience making offers
and evaluating responses.
FINANCING YOUR REAL ESTATE INVESTMENTS
As you can see, real estate has many potential benefits. But how do
we get involved with investing in real estate if money is tight? Well,
regardless of your financial situation, the good news is there are ways
to invest in real estate that require little to no out-of-pocket expense,
as long as you know how to find those opportunities. And, there are
creative ways to uncover financing resources when you do have to
raise capital.
64
The following are just some of the possibilities for finding financial help
and/or lowering your out-of-pocket expenses.
HUD Homes
HUD (short for the U.S. Department of Housing and Urban

Development) is a government agency that was created to make
the dream of homeownership a reality for everyone in America.
One way it accomplishes this quest is by owning homes in many
communities throughout the U.S. and offering them at low prices with
attractive terms. These properties were deeded to HUD by mortgage
companies who have foreclosed on FHA-insured mortgage loans.
HUD homes may be single-family homes, townhomes, condominiums,

or other types of residences. Anyone who can raise sufficient funds
can buy them; there is no low-income criteria to meet. And many are
“fixer-uppers” or “handyman specials,” which can create an excellent
opportunity for equity growth and profit potential for savvy investors.
Purchasing a HUD Home
To purchase a HUD home, you have to work through a real estate

agent. It is usually easy to find a qualified broker in your area, as
many agents are eager to sell HUD homes, and some even directly
advertise the fact that they participate in selling HUD homes in the
newspaper’s real estate section.
When purchasing a HUD home, certain requirements must be met,

certain forms must be filled out and certain procedures must be
followed. However, if you go through the process correctly, you can
purchase a home at substantial savings. The real estate agent will
guide you through the entire process.
With HUD homes, there are no negotiations between the buyer and
the seller, the process is clearly laid out, the properties are sold “as-is,”
and bids determine the outcome.
65
The Advantages of Considering HUD Homes
There are several advantages to considering HUD homes, including:
• You don’t have to be an expert at negotiation, so if you are

just starting out in real estate investing, you don’t have to worry
if your negotiating skills sitting across from a private seller are
getting in the way of a good deal. You are giving sealed bids
to HUD through your real estate agent and are not in direct
contact with the seller.
• The asking price is clearly spelled out, so you can make

decisions quickly about the value of the deal for you. The initial
asking price of each HUD property is HUD’s estimate of current
fair market value, based upon an appraisal conducted by an
independent real estate appraiser and comparable properties
sold in the same area over the past six months. In some cases,
HUD may accept an offer that’s lower than the listed price, but
this depends upon market conditions, the length of time the
property has been on the market, and the type and amount
of bids received on the property. There is a designated “listing
period” for a HUD home, during which time potential buyers
will make their offer (place bids) on the home. In some cases, a
potential buyer may make an offer higher than the listed price
if they believe the market conditions warrant it or if the home is
particularly appealing and may be bid upon by several buyers.
• At the close of the bidding period, HUD responds promptly to

your offer. If it is accepted, the closing on the home will usually
occur within 30 to 60 days.
• You benefit from the help of the real estate agent in closing
this deal fast and usually without any broker’s fees, as HUD is
usually the one paying any commissions (when making a bid
on a HUD property, you can request in your bid that the real
estate agent’s commission be paid by HUD).
• HUD homes are easy to find. They are listed in the local MLS,
which you can talk to your real estate agent about reviewing,
and on the Internet at www.hud.gov.
66
• Because HUD homes are sold “as-is,” you can often find a
great, affordable deal on a fixer-upper (perfect for rehab
projects and wholesaling, which you will learn about
in a moment). Many HUD homes are located in good
neighborhoods, with rising values and profit potential available
simply by making some cosmetic improvements. And while
some HUD homes would be considered “handyman specials,”
many are in very good condition from the start, needing only
a few minor touches to bring them to move-in condition. HUD
does not warrant the condition of the property, but will give
you any information it has about the property to help you
make your decision.
• Down payments with HUD homes can be quite lower than

purchasing through private citizens. Sometimes, the down
payment can be 3%, or even less.
• Closing costs (the various fees your lender charges for

providing you with a loan) can often be picked up by HUD
if this is specifically requested in your sealed bid offering. So,
you can determine closing costs ahead of time and indicate
the specific dollar amount you want HUD to cover in your bid.
Additionally, sales commissions can be covered by HUD (up
to 6%), but this must be clearly spelled out in your bid as well.
Keep in mind though that if you request HUD pay closing costs
and sales commissions, these amounts will be deducted from
the bid amount you give and that net amount will be used to
determine the competitiveness of your offer against other bids.
Contract Assignments
A contract assignment can be a powerful way to make money

without actually purchasing property or coming up with money
out of your own pocket. It requires contract knowledge and good
negotiating skills.
Generally speaking, with a contract assignment, you include the

phrase “and/or assigns” after your name on the purchase offer/
contract, allowing you to transfer your right to purchase a property
to another party for cash where allowed by law (consult with your
attorney). The person you assign the contract to buys the property.
67
You just sell the contract for cash, profiting from your superior contract
knowledge and negotiating skills.
You will learn more about contract assignments in an upcoming

chapter on wholesaling.
Lease Options
With a lease option (a “rent-to-own” agreement), a home can be

purchased for little or even no money down. This makes lease options
particularly attractive to first-time homebuyers. However, lease options
can also be a useful tool for real estate investors, allowing them to
gain control over properties with limited expense and without having
ownership.
We’ll go into more detail about lease options and how investors use
them in an upcoming chapter on optioning properties.
Sources for Seed Money
Some investors will use their own assets, money from friends or loved
ones, money partners, or credit lines to finance or partially finance
their real estate properties.
If you need seed money, consider the following possible resources

and consult your tax professional before using most of these investing
money sources:
• Pension plan
• Friends and family
• Federal/state/local government grants and programs
• Life insurance policy
• 401(k) or IRA
• Personal bank loans
• Equity financing
68
• Money partners
• Seller financing (see below)
Seller Financing
Your best buys will likely come from motivated sellers. And the
presence of a motivated seller may also afford you a unique
financing opportunity: seller financing.
One example of partial seller financing was given previously in the

wraparound mortgage example, where the balance of the purchase
price (beyond the assumable mortgage) was financed directly by
the seller.
Additionally, some sellers will agree to finance the entire amount

of a sale. Sometimes this can be due to the fact that their property
is in such a distressed state that it may not qualify for mortgage
financing, which will exclude certain buyers from purchasing it. Other
reasons might include a desire on the seller’s part to accept steady
payments rather than a lump sum, perhaps to supplement retirement
benefits.
Some sellers may offer financing simply because they are in no

financial condition to continue making the payments on the
mortgage themselves and need to sell quickly. And some may have
paid off the home they are selling, but have assumed an excellent
mortgage rate on a new property that makes it more lucrative for
them to keep their cash liquid and use your payment to pay their
new mortgage.
Benefits of Seller Financing
Regardless of the reason behind seller financing, it does offer some

unique advantages, both to the seller and to the buyer:
Benefits for the seller:
• Possible tax savings through an installment sale
• Property sells quicker with flexible financing
69
• Seller might have specific, future money needs (college or

retirement, for example), that could be offset by the steady
stream of payments
• Seller may envision better use of the money through monthly

income rather than a lump sum that might be misused
• Seller could be assured of a specific yield on equity exceeding

many savings plans
• The loan is secured by a piece of property the seller knows very

well
• The seller is turning an equity interest into a possible higher

cash flow
• Longer period of constant payments
Benefits for the buyer:
• Generally, you can assume a lower interest rate
• You have lower closing costs
• You do not have to deal with a bank
• A prepayment discount can be figured in
• Generally, there is no credit check or income restrictions and

no indication of a loan on your credit report
• You can close quickly
• You can negotiate lower monthly payments
• Defer the down payment and use it for rehabbing the property
or purchasing another investment property
Now that we’ve discussed some of the fundamentals of real estate

investing, we will next discuss some of the investment strategies it
opens up to us.
70
WHOLESALING
Wholesaling can mean immediate money in your pocket. That’s

because in wholesale deals, you purchase a property for well under
FMV and immediately sell it to another investor who will fix it up if
necessary and make a hefty profit on the sale, hold the property for
rental income, or pursue whatever other exit strategy they planned.
Wholesale deals may be one of the first types of deals you will
make in real estate investing because there is such great potential
for making the quick cash beginning investors are looking for and
because it is a strategy requiring little expertise and upfront cash.
After all, when you wholesale a property, you are buying and selling,
not buying, fixing, and selling. You don’t need to get a loan to buy the
property. And you don’t need to do any work on the property.
In fact, you can simply put the property under contract and sell it to
a buyer without ever having purchased it. These wholesale deals are
made through contract assignments, where investors have put the
words “and/or assigns” after their names on contracts (where allowed
by law).
With a contract assignment, you negotiate a favorable contract on a

property and sell your right to buy that property to another party via
an option. In other words, you’re affording another party the option
to buy a property at the price and under the terms you successfully
negotiated.
FINDING WHOLESALE PROSPECTS
You can see that a big factor in making wholesale deals successful
is finding a property that can be purchased for significantly less than
FMV because you need to have room for your profit as well as room
for the other investor to make enough money on the deal.
This can make certain properties better targets than others, such
as properties in foreclosure, distressed properties needing cosmetic
improvement or significant rehab, and abandoned or condemned
properties. These can all be particularly good choices for wholesaling
71
because of the greater ability to negotiate significantly discounted

prices on them.
One way to find them is to advertise the fact that you’re looking for
properties to buy. In fact, as we mentioned earlier, advertising can
play a key role in bringing opportunities to you and in helping you find
deals before someone else does, regardless of the type of investing
strategy you’re employing.
Consider placing an ad in the local paper, penny-saver or local

shopper, explaining that you are a real estate investor who is looking
to invest in properties and will consider reviewing any property, in any
condition.
When someone calls your ad, be sure to ask questions so you know
up front if this is a property you are willing to consider based on
what you plan to do with the property. You want some information
before you personally visit the property because you don’t want to
waste time chasing leads that don’t have potential. Remember, just
because you placed an ad does not mean you are obligated to go
look at each and every property.
Some examples of advertising copy include:
• Do you own an unwanted home? Let’s talk.
• I buy houses. Immediate debt relief. Any condition considered.
• Behind on payments? Let me buy your home. Call today.
• Trouble with payments? Need to get out? I buy properties.

Quick offers.
• Investor seeks property. Any condition or area.
• I’ll buy your home fast!
• Tired of property management? I’m not! Sell me your rental

property.
• I want to buy your rental property! Don’t delay!
72
Of course, you will follow each with your appropriate contact

information and use only the variations that fit what you’re looking for
and are willing to do.
WHAT YOU SHOULD KNOW
While wholesaling properties doesn’t require much money, it does

require contract knowledge and strong negotiating skills. If you lack
either, you can consider taking real estate courses on the subject of
wholesaling and understanding real estate contracts. Additionally,
you can seek assistance from someone who is adept at working with
contract assignments.
Other things you should learn include how to: properly segment
your market; develop a database of potential properties; develop a
database of potential buyers; market your wholesale deals; locate
absentee owners; and develop key strategies that can help you
close quickly.
In addition, you should master several basic aspects of the

wholesaling business, including:
• Prescreening prospects—Distressed properties will be your

primary target. Therefore, you should learn how to both identify
and evaluate distressed properties. You should also understand
that a distressed property does not necessarily mean a deal is
good, but that it is a good start. Learn what to look out for so
you know when it’s time to move forward with a deal or leave
it behind.
• Determining market value—You need to understand the

importance of determining FMV (in this case, the property’s
value after repairs) to be a successful wholesaler. The real
estate agents on your power team can be key assets for
getting this information. Also, using comparable sales of homes
(the comps) in the same market area will help you determine
the FMV of the property if it were in good condition.
• Estimating repairs—This won’t be a successful venture if you do

not estimate repairs correctly. Knowing what a wholesale buyer
is going to expect in out-of-pocket expenses can help you
73
make and accept offers that leave enough profit on the table
for both of you.
• Making offers and counteroffers—You need to become

familiar with good negotiating and communication skills, learn
how to make offers and counteroffers effectively without
compromising your goals, and become adept with contracts.
When you are able to properly evaluate properties and their
need for repair, you will be better at “selling” your offer to the
homeowner and negotiating your price with the wholesale
buyer.
• Lining up buyers—Wholesaling is actually only partially

complete if you can find and negotiate deals, but you have
nobody lined up to readily assign contracts to. Building a
sizeable investor database to tap regardless of the type of
deal you are working on can help you move things forward
quickly and preserve your profit margins.
• Closing effectively—There are strategies you can learn to close

with no cash out of your pocket, including how to do contract
assignments and simultaneous closings.
REHABBING
Another real estate investment strategy is called rehabbing. When

you rehab properties, you make cosmetic improvements or repairs to
a property to bring it to its FMV.
The most common use of this strategy involves:
• Purchasing properties that are in distress, meaning they

need anything from minor cosmetic improvements (painting,
cleaning, curb appeal, etc.) to significant repairs (“handyman
specials”)
• Completing the rehab work
74
• Selling the property to end users, or employing any number of

exit strategies, such as renting or lease optioning the property
The great thing about targeting distressed properties is you stand

a good chance to purchase them for well below FMV because
the property has obvious need for improvement, the homeowner is
likely highly motivated, and the home won’t be attractive to a lot of
homebuyers, which limits competition for your offer.
Rehabbing is also a great strategy when an investor can see a

property’s potential use, not just its current use. For example, an
investor may find a large single-family residence and rehab the
property to change its use (where zoning allows), adding walls to
convert the property into a rooming house with the potential for high
rental cash flow. Or, an investor might find a large industrial property
in a downtown area that can be converted into highly desirable loft
apartments.
Another thing that makes rehabbing properties so attractive is

the fact that it can present a lucrative business opportunity for
entrepreneurs.
FINDING DISTRESSED PROPERTIES
Finding distressed properties to target for rehab projects can be

very easy. In fact, you may find several potential properties simply by
traveling through neighborhoods looking for them.
Things to look for include overgrown grass, a roof that needs some
repair, windows that are broken, paint that is peeling, landscaping
that is being neglected, an overall unkempt appearance, or the
obvious absence of an occupant.
Another potential target is a property that has been improperly

managed. Some of these properties may have been poorly
managed because the owner has purposely neglected their
responsibilities; however, other reasons can include less negligible
ones, such as:
• The owner attempted to act as a property manager and

simply found he or she didn’t have the time or resources to do
it well.
75
• Someone may be trying to manage it themselves to save

money, but lacks the skills to perform maintenance effectively.
• The owner may have moved away and is less involved

because of distance.
• The owner may no longer be able to physically care for a

property.
You can also search public records to learn which properties in your
area have been cited for code violations (e.g., unsafe conditions,
trash piled up, unkempt lawns, etc.) by city and county code
enforcement agencies. Since numerous citations are often an
indication that a property is in a distressed state, that a motivated
seller may be involved, and/or that an out-of-town owner isn’t
keeping up with a property, that information may lead you to a good
deal.
Access to public records can also help you find properties that
have been condemned or are vacant. Contact the owners of such
properties to gauge their interest in selling after you have looked into
the condition of the properties and your interest in purchasing them.
BE PREPARED
As you might assume, success with rehabbing properties relies

heavily on your ability to determine the FMV for the property you’re
considering (i.e., what your target property would be worth after
repairs are made) and your ability to calculate the repair and
holding costs needed to bring the property to move-in condition and
eventually sell it.
Professionals who can help you determine the appropriate figures

include:
• Real estate agents, who can provide guidance as well as

comps (short for Comparative Market Analysis) for properties
you’re interested in
76
• Professional property appraisers, who can provide you with an

appraisal (a much more in-depth valuation of the property
than the estimates provided by the comps)
• Professional home inspectors, who can tell you specifically

what needs to be fixed or replaced and who can help
estimate how much it’s going to cost you.
Becoming adept at projecting rehab costs and determining FMV

is one part of the equation. Another part is being able to launch
preemptive strikes against anything that has the potential to reduce
your profit margins.
Examples of what may cut into profits include mortgage payments

while you hold the property, so savvy investors try to sell their
properties quickly by lining up potential buyers before rehab work
is complete. One way they do this is by building and maintaining a
database of potential buyers.
Another strategy is knowing when to put a “for sale” sign on the

property to generate interest early. For example, you don’t need to
wait until you are through rehabbing a property to let real estate
professionals and your contacts know about it. Rehab time can be
time spent finding qualified buyers and speeding up the process to
quick profits.
Two other things that can cut into profits are real estate commissions
and closing costs.
To cut down on commissions, investors will try to negotiate lower

commissions with an agent before they ever list with them. They also
cultivate strong relationships with agents on their power team who
are willing to adjust their usual commission rates because of the high
volume of business the investor may bring them. Or, investors can
simply choose to work directly with sellers to keep commissions out of
the equation altogether.
As for closing costs, they employ strategies that help them pay
no closing costs or use their negotiating skills to split the costs with
another party.
77
DETERMINING IF THE DEAL IS RIGHT FOR YOU
If rehabbing properties interests you, but you are leery because

you’re not sure how to tell when a property needs too much fixing up
to make it a good investment, think about the following:
• Likely, you will rarely come across any properties in such bad
shape that they are beyond repair or consideration. The reason
is simple: If the property is in really bad shape, the owner may
be motivated to sell way below the market value of a similar
property that is in good condition and that can mean there is
enough profit on the table to make this deal well worth your
while.
• If you are dealing with an extremely low purchase price

because the property needs substantial repairs, you may end
up with more borrowing power for your repair or rehab loan.
• You have to determine what amount of work you are willing

and able to do yourself and what you will leave to others to
handle for you. Obviously, the more work you can take on
yourself, the more you may be able to lessen rehab costs.
And the more skilled you are in certain construction-related
projects, the more ability you may have to handle a property
that other investors might pass on. Additionally, how much you
like rehabbing properties will come into play. Perhaps you relish
the idea of finding a seriously distressed property and turning
it around. Regardless of who actually does the work, you love
to see the fruits of manual labor, participate in revitalizing
neighborhoods, and take on challenges. All of these factors
may change your perspective of the difficulty of a project and
your ability and desire to tackle it.
• You can train your eye to recognize the difference between

cosmetic distress and serious problems. A building might be so
neglected that you’re afraid it’s going to fall down around you.
But, in reality, a few trips to the dump, a fresh coat of paint, and
some cleaner and disinfectant may revive the property to FMV.
78
However, since that doesn’t mean you won’t come across deals
that aren’t worth pursuing, here are few things to watch out for (and
possibly overcome):
• Structural damage—Outside, look for a dramatic lean in any

direction. Inside, look for floors slanted toward a corner of the
house. These are indications of a possible foundation problem.
Before you reject the property, call in several contractors and
get free estimates on repairs, then use that information to
negotiate a better price and determine if the deal is still worth
it.
• Termite damage—Termite damage usually scares off investors,

but termites can take up to 10 or 15 years before they do
irreparable damage. Sometimes replacing the bad wood and
exterminating the termites can take care of the problem. You
can bring in a termite inspector to help you assess the situation.
• Roof damage—Always examine the roof. You might also

ask several roofers to do it for you. Pick their brains until you
become proficient enough to do your own evaluations. Roofers
make money by selling you a roof, so keep that in mind as you
consider their recommendations. If it looks as if the roof will
need replacing in the near future, calculate that into your offer.
If you are holding the property long-term, perhaps you can
set enough money aside from your home improvement loan
and let it accumulate interest until the roof starts leaking; then,
replace it.
• Major plumbing—It is important to turn on all the faucets, flush

all the toilets, and make sure all the drains run freely. One of
the most common ways plumbing can become a problem is
in older buildings with galvanized and/or cast-iron plumbing.
After years of use, this type of pipe collects sediment that
builds up and causes a loss of water pressure and stopped-up
drains. Drain snakes and chemical draining solutions may be
able to remedy the problem.
79
• Furnaces—In larger multi-unit buildings, you may have one

furnace that heats the entire building. Be sure it operates
efficiently or that the cash flow you receive from the building
will support the furnace bill. Get a heating and air-conditioning
contractor you trust to do the evaluation for you.
Generally, these are the areas that could create major expenses if
there is a problem. But in most cases, roofing, plumbing work, and
heating units need major repairs or replacement only every 20 to 25
years, so problems with them are the exception, not the rule. However,
it’s always good to do a thorough evaluation.
THE IMPORTANCE OF HOME INSPECTIONS
This is where a home inspection can prove invaluable. Home

inspections can be very important in purchasing any property,
but they can be particularly important when you are looking at a
distressed property to rehab. One reason is because it’s very easy
to get swept up in a good deal and a property that you expect to
make you large profits post-rehab. But you can’t let your enthusiasm
keep you from doing your due diligence.
Ensure that you are fully aware of the true needs of a home to bring
it to move-in condition by building a relationship with a professional
home inspector and having the properties you deem worthy of
investment checked for any hidden problems. A minor investment
now can save you from making a potentially huge mistake later.
Home inspectors primarily focus on the structure, construction, and

mechanical systems of a house and can make you aware of the
types of repairs that will be needed. They check the safety and
soundness of the home and can find things you did not see.
An inspector can also provide the approximate cost to repair

any issues found with the electrical system, plumbing, insulation,
ventilation, water heater, air conditioning, heating, water source and
quality, presence of pests, foundation, doors, windows, ceilings, walls,
floors, and roof. It is also good to have an inspection for the presence
of a variety of potential health risks, such as radon gas, asbestos,
mold, and problems with the water.
80
Some key things that you can have looked at during a home
inspection include:
• Foundation—What is the structural integrity of this property?

Are there cracks in the walls, shifting of the foundation,
problems with moisture?

• Roofing—What is the current condition of the roof as well as its
estimated life?
• Exterior and Interior Condition—Does the property need repairs

to the exterior or interior? For example, are the floors level? Do
doors and windows open and shut properly? Are there sources
of draft? Is there evidence of previous or current water leaks?
Are attached structures such as garages and decks soundly
constructed and in good condition?
• Electrical—Are electrical systems up to code? Are there any

potentially dangerous conditions with the electrical system?
• Plumbing—Is there evidence of leaks or hidden water issues?

Is there a problem with the water pressure or the plumbing
system in general? Is everything working properly and draining
properly? What condition are the pipes in?
• Heating and Cooling—How old are the heating and cooling

systems and have they been properly maintained? Are they
functioning properly? Is hot or cool air properly distributed
through the house? Is the system powerful enough to support
the size of the home? Are there any potential problems on the
horizon?
• Appliances—If appliances are going to be included in

the property, how are they working? Is everything properly
connected? Are there any potential hazards like frayed wires
or poor hook-ups?
As you can see, an inspection can uncover some very interesting

and potentially dangerous or potentially costly concerns. It can be
one of your most powerful evaluation tools and one of your most
powerful negotiating tools as well. A prime example of an out clause
81
in a contract, for example, is an inspection clause. If serious problems

are found, this out clause can help you avoid a big mistake, let you
negotiate a more favorable price based on the cost of repairs, or
specify that the seller must fix the problem(s) before you purchase the
house.
OPTIONING PROPERTY
You’ve probably heard about options being used in the stock

market. With stocks, an option gives an investor the right, but not the
obligation to buy a stock. But you can also use options strategies in
real estate.
An option in real estate is very straightforward. Essentially, you agree

on a minimum of three things with the seller when you put together
your lease option agreement. These include:
• The amount you will be putting down as consideration, which

makes the contract legal and binding
• The date by which the option must be exercised
• The purchase price you will pay if and when you exercise your
option.
If you do not exercise your option to purchase the property before

the expiration date, the seller gets to keep your option consideration
money.
USING OPTIONS IN REAL ESTATE
There are many ways to use options in real estate.
For example, real estate investors will use an option to hold onto
a property in anticipation of future appreciation. They know the
potential of the area and want to lock in at today’s value.
82
Other investors will get an option and sell the contract to another
investor via assignment of contract (like a wholesale transaction),
making a tidy profit in the process.
Others will use a lease option with a tenant/buyer (you may be more
familiar with the term “rent to own”) to allow someone who might
otherwise be unable to get into a home start putting money aside to
toward purchasing a property.
And others will use a sandwich lease option, which is purchasing a

lease option and then turning around and selling the same property
using a lease option. This technique gets its name from the fact that
you are “sandwiched” in between two lease options, one with you as
the buyer and one with you as the seller.
NICE HOMES IN NICE NEIGHBORHOODS
One of the things that makes lease optioning attractive to many

investors is the fact that you don’t have to be looking for distressed
properties or in distressed neighborhoods to find them. Lease options
can work well in all types of neighborhoods, including those with nice
homes in great condition.
You can find them simply by looking for FSBO ads in newspapers,
looking at properties on the MLS, and talking to real estate agents
about expired listings, where the homeowner may be extremely
motivated because the property is taking longer to sell than
expected.
You can also advertise that you are looking to purchase properties
quickly. Some examples of advertising copy include:
• I’ll buy or lease your house within 48 hours or tell you why no
one else will.
• I’ll buy your home today! Don’t make another payment!
• I buy real estate. Little or no equity? No problem. Cash or terms.
• House not selling? I have a solution.
83
Of course, once you have control of a property you want to lease

option, you can then use advertising to find your buyer. This may be
through a simple newspaper ad that reads something like: “Looking
for a home? Have credit issues? We can help. Lease to own with us!”
As we mentioned earlier, you can also market directly to apartment

owners who may want to purchase a home, but aren’t sure how
to go about it just yet. A well targeted direct mail campaign that
compares the benefits of owning vs. renting and explains how you
can lease to own rather than simply throwing away money to a
landlord can help you find prospects.
BENEFITS AS THE BUYER OR SELLER
Lease options can benefit investors in a variety of ways, including:
• You gain financial leverage with a lease option, controlling a

potentially profitable home (even an expensive one) with very
little of your own money and without actually owning it.
• Many of the properties you’ll consider for a lease option would

normally require 10 to 30% of the purchase price down. The
option consideration money you use to control the property
is small compared to the property’s value and the costs that
would have been involved had you secured a loan.
• You can walk away from the contract if the property value
goes down.
• You have increased buying power. You can get into a lease
option with as little as $10 consideration money when you
have a motivated seller who needs debt relief.
• You won’t have the property showing up as a debt on your

credit report. This, in itself, can free you to do other types of
transactions without this particular investment creating an
adverse effect on your debt-to-income ratio.
• The money you save can be used for other investments.
84
When you’re the seller in a lease option contract, you can also
benefit in several ways. These include:
• A lease option can help you sell the property quickly. This can
be particularly beneficial in areas that are experiencing “a
buyer’s market.”
• You can ask top prices and get them.
• Lease options can be profitable even in highly desirable

neighborhoods and with properties that need no work.
• You can stipulate in a lease option contract that the tenant/

buyer is responsible for maintenance (e.g., anything under $500
is their responsibility). This frees you from the general property
maintenance you would have with a traditional tenant in a
rental property.
• You collect non-refundable option consideration upfront. If the

tenant/buyer doesn’t exercise his or her option, you get to the
keep the option consideration money.
• You remain on the deed and maintain all the tax benefits of
ownership.
And when you use sandwich lease options, the benefits can be
even greater, particularly because you get all the benefits of
having a lease option contract with a tenant/buyer, but have
the added benefit of potentially getting paid three ways on
just one property:
• You receive a non-refundable deposit collected from your

tenant/buyer.
• You receive monthly income from the difference between your

payment (what you pay the seller, from whom you purchased
a lease option) and what you receive from your tenant/buyer
(the person who purchased a lease option from you)
85
• You receive money at the back end from the difference

between the agreed upon purchase price you negotiated
with the seller and the purchase price you agreed to receive
from your tenant/buyer.
FORECLOSURES
As you are aware, a foreclosure results when a creditor seizes a

homeowner’s property and forces the sale of that property because
a debt isn’t being paid. The debt was secured by using the property
as collateral for the loan, so if the homeowner defaults on the loan,
the lender has to take back the house to recoup their loss and sell it
to the highest bidder.
The common factors resulting in foreclosure tend to be job loss, cash

flow issues, and personal issues that most people can identify with
because they have experienced their own level of crisis at one time
or another.
For example, was it a costly divorce that wiped out a homeowner

financially or the inability to pay for the home when one spouse’s
income was no longer in the picture? Has the death of a loved one
created a need to sell or are heirs trying to sell a family’s estate? Did
a medical crisis arise that created a financial burden? Did someone
lose their job or become disabled? Did an elderly couple have to
move into a nursing home and leave their house behind?
Even uncontrollable and often unforeseeable things such as the

dramatic changes in the housing market we’ve seen in recent years
or changes in interest rates can lead to foreclosure.
For example, sellers in a buyer’s market often find it takes much

longer to sell or rent a home than they planned and they can quickly
fall behind on their mortgage payments. And even if they can sell
the home, simply trying to sell it for the amount they owe on it can
become an impossible task and that can lead to foreclosure.
Additionally, just think of all the homeowners who jumped at

adjustable rate mortgages on their properties when rates were at
86
an all-time low. Those low “ARM” rates as they’re called, encouraged

some people to buy houses that were beyond their reach, to accept
a payment that was just barely affordable for them, or to purchase a
home when they weren’t financially ready.
Perhaps those adjustable rates have now increased and they find
themselves making payments on homes that have no equity or even
have negative equity (owing more to the bank than their house is
worth). When money gets tight, many of these homeowners simply
give up and let the bank take back the property. Some are just
frustrated because they can barely pay the mortgage, let alone
pay it on a property that isn’t building equity. And some just find
themselves completely strained financially and have no other choice
but to default on their loans.
Even something as simple as a rise in property taxes can mean the

difference between someone being able to pay for their home and
being forced to leave it.
Circumstances like these have led to a dramatic increase in the

number of foreclosure properties available and a profitable reason
for real estate investors to focus on them.
Educated investors have learned how to turn these unfortunate

circumstances into win-win situations. They know how to negotiate
effectively with both homeowners and lenders to purchase
foreclosure properties at discounted prices. They offer solutions that
help homeowners save their credit and they have the ability to make
purchasing foreclosure properties a rewarding experience for both
sides of the negotiating table. In short, they know how to create win-
win situations. And so can you!
CREATING WIN-WIN SITUATIONS
To illustrate the type of win-win situations you can create, let’s take a
look at an example of a potential win-win on a foreclosure property.
You place a car magnet ad on your vehicle that reads “Stop Your
Foreclosure” and lists your phone number. One day, you get a call
from someone who thinks they are about to get a foreclosure notice.
87
They are behind on their mortgage payments and they don’t see a
way out. They saw your ad and thought you might be able to help.
You meet with the homeowner and the house is nice. It’s in a good
neighborhood with a lot of potential for rental income. You want to
purchase the house and hold it as a rental property to generate
monthly cash flow for your other real estate investments.
The owner tells you he has a medical problem that resulted in costly
medical bills and he needs to move in with family members to get
appropriate care.
After you research the area, compare the home to similar properties,
and verify the information the homeowner gives you, you find that
he owes $30,000 on a home that is easily worth $150,000. The home
values in this market are increasing about 5% each year.
The homeowner has $20,000 in medical bills to pay. He wants to

make back some of the equity he’s built in the home and pay off
his mortgage and his medical bills. He would like to sell it to you for
$75,000. That still leaves you with an incredible profit margin and a lot
of instant equity in the home, so you agree to it.
You secure a loan for the $75,000 purchase price, which was not
difficult at all for you because the loan-to-value ratio (LTV) looks so
good to the bank. You have helped the homeowner save his credit,
clear his mortgage debt, cover his medical bills, and have money to
move in with family members.
You rent the property for more than you pay in mortgage costs,
insurance, and property taxes, giving you a cash flow of $100 per
month.
After receiving five years of rental income, and with the market
growth staying steady, you decide to sell the home, which is now
worth over $191,000. A homebuyer offers you $185,000 for a cash sale
and a quick closing. You agree.
You made $1,200 per year in cash flow on the property through rental
income and a profit of $110,000 at the time of sale, for a total profit
on this one property of $116,000! That was sure worth the money you
spent on that car magnet ad!
88
Now, let’s do one more. Let’s look at a deal on a foreclosure property

that not only benefits the homeowner and the investor, but someone
else in the process as well. A win-win-win, if you will. We’ll leave the
figures out and keep it simple.
Let’s say a homeowner receives your direct mail piece about how
you may have solutions that can stop her foreclosure. She calls to tell
you about her situation. You think you can help, so you schedule a
meeting.
You learn what you can about the property and the seller’s
motivation. She tells you her husband died a few months ago and
she has been unable to keep up with the mortgage payments. She is
three months behind.
She’s lived in the house a long time and has a great deal of equity
built up. It would be a shame to lose her house, hurt her credit, and
lose all that equity she and her husband worked so hard to build. She
needs a fresh start somewhere else and wants to move to where her
grandchildren live.
You work out a deal with her where you will lease option the home
from her. You will bring the loan current, stop her foreclosure, and
make monthly payments to her that cover her mortgage, taxes, and
insurance so she is free from the debt of the home.
You will purchase the house at a discount, but she will get a fair price
for her home, giving her back some of her equity.
You lease with the option to purchase this home in five years. You
then turn around and lease option the home to a buyer who is
having trouble qualifying for a conventional loan, but who is a good
credit risk. He simply does not have enough credit history to qualify
with a traditional lender. He pays you a monthly rental payment that
is more than what you pay the original homeowner, so you get some
monthly cash flow from the property.
Your lease option gives him the option to purchase the property in
two years.
89
After two years, he is ready to purchase the property from you so

you let him while you finalize your purchase of the home from the
original homeowner. She makes some of her equity back and had her
mortgage paid for her for the past two years. You made cash each
month while renting the home to someone else those two years and
you made a good amount of profit selling the home to your buyer
for more than the price you paid. And your buyer got into a home he
would otherwise been unable to get. That really is win-win-win.
It’s easy to see there can be many ways to create win-win scenarios
in foreclosure situations. The more information you have on hand, the
more strategies you can employ. The more strategies you can employ,
the better choices you can make about which technique will give
you the most profit and provide the most help to others.
That’s why learning all you can about the foreclosure investing
business, the laws in your state concerning foreclosures, and the real
estate techniques to make the most of your foreclosure purchases is
so important.
THREE UNIQUE OPPORTUNITIES FOR PROFIT
To help get you started and to help you determine your interest in
participating in this exciting investment opportunity, let’s take a look
at the three main phases of the foreclosure process that you will
come across, each with its own opportunity for profit.
When most people talk about foreclosure, they are referring to a

particular point in the overall foreclosure process, or one of the three
phases, if you will.
For example, a homeowner falling behind on his house payments is

usually someone in the first phase of foreclosure, before the auction.
If you envision a group of people at the courthouse bidding on a
property, that’s the second phase of foreclosure, at the auction. And
if you envision a family being forcibly removed from their house by the
authorities, that’s the third phase of foreclosure, after the auction.
Let’s look at each phase a little more closely.
90
Phase 1—Before the Auction
When you hear someone say they are “in foreclosure,” they are likely
referring to being in the first phase of the foreclosure process, before
the auction. This phase is called preforeclosure. Buying properties in
the preforeclosure phase can provide some of your best investment
opportunities for a number of reasons.
For one, it’s where you are most able to help the homeowner avoid
a bad mark on their credit and get on with their lives and where
you will most likely be able to purchase the property without a lot of
competition and with the most profit potential.
Secondly, it’s where you stand a really good chance of buying the
property way below market value, making an immediate profit
because of the equity built up in the house and because the price
you negotiated is far less than what you can sell the property for.
You can accomplish this either by working with the homeowner to

get a discounted purchase price or by negotiating a short sale with
the lender, a powerful strategy where you negotiate with a lender to
take a discount on the amount owed for the property.
And third, you may find working in this phase attractive because you
can purchase a preforeclosure without having great credit or without
having much money to invest. In fact, you may not even have to
get a loan to obtain a preforeclosure. That’s because there may be
times when you will just need to cover the fees and back payments
needed to cure the loan and stop the foreclosure, making a great
deal for you. And you may even work with a money partner who will
cover the costs to cure the loan and then split the profit with you
when you sell the property.
Phase 2—At the Auction
The second phase is at the auction, when the property is put up for
sale to the public.
91
Procedures will vary by state, but a typical procedure for an auction

would involve:
• A scheduled time for properties to be sold
• A clerk announcing file/case numbers and their status (solved,

available, etc.)
• Announcement of the case and/or property description and

asking for bids
• Bidding starts
• Winner emerges
• Property is bought and paid for at the courthouse or other

location of the auction
Be sure you know the rules and regulations for foreclosure auctions
where you live before you plan to buy this way. You want to know
how much you have to come up with on the day of the auction,
what kind of deed you will get, and if there is a redemption period
applicable in your state.
It’s also strongly suggested that you visit the courthouse and watch
several auctions first. You can learn much about the process this
way and it can help you get comfortable with the atmosphere and
procedures.
You may even try to get to know some of the other individuals at the
foreclosures. Bankers, lawyers, agents, investors, and title company
representatives will sometimes be in attendance, all excellent
contacts for investors.
Phase 3—After the Auction
The third phase is after the auction.
The bank has a minimum offer they can accept on the property. If
that minimum wasn’t reached at the time of the auction, or if the
property simply didn’t catch the interest of bidders, the bank takes
92
the property back. Banks usually call these foreclosure properties on

their books REO properties (real estate owned properties).
Having this property sitting on their books doesn’t look good for them,
so they want to sell it. However, they’ve incurred a lot of legal and
administrative costs getting this property back. And now they may
not be as inclined to discount the property to you or as willing, as they
may have been earlier, to negotiate a short sale.
But don’t dismay, because this is still a phase where you can have
a positive return on your investment. It all depends on factors such
as how willing the bank is to work with you, how long they’ve been
holding the property, and whether or not they’ve already listed it with
a real estate agent and have commissions to pay on the sale.
Which Phase Will You Focus On?
If you’re not sure which phase interests you, a great place to start is in
the preforeclosure phase. In this phase, there is more flexibility in the
number of solutions you can offer and you have the greatest chance
of helping the homeowner out of a bad situation.
However, since each phase of the foreclosure process can provide

you with an excellent channel for profit, it begs the question: Why
not consider becoming an expert in all three phases of foreclosure,
leading to a wider range of opportunities and potential profits?
PROPERTY MANAGEMENT
Property management can be a highly profitable business, allowing

you to make money while taking advantage of the tax breaks
associated with holding rental properties. It is a strategy that can be
beneficial to real estate investors in many ways.
First, you can let your property’s equity build while someone else pays
the mortgage, then enjoy the appreciation and rate of return when
you eventually sell the property.
93
Second, you can structure deals to give you instant weekly or

monthly cash flow. That money can be used to fund other investment
opportunities, provide you with disposable income, help you pay
credit obligations, and build your retirement portfolio. In fact, one of
the biggest draws of property management is the potential for cash
flow. For many investors, the monthly income generated through
property management does more than just supplement their current
income; it replaces it.
And third, the effort you make is up to you. If you want to handle
property management part-time, you can use resident managers
to help you manage the property. If you want to handle it full-time,
you can hold one income-producing property or a whole portfolio
of them and do the management yourself. And if you don’t want to
be involved in property management at all, but still want to enjoy the
benefits of cash flow, you can always hire someone else to manage
your properties for you.
DEVELOP YOUR PROPERTY MANAGEMENT SKILLS
Critical to your success with property management will be having a

thorough understanding of property management as a business and
developing the appropriate skills and attitude to handle it effectively.
You need to understand the responsibilities of managing properties
as well as when to delegate those responsibilities. You have to know
the rental and vacancy rates for your area so you can determine
potential cash flow accurately. And you need to build a solid
reputation among your tenants and the rental community.
The following are some key areas you can master to make property
management a profitable part of your portfolio.
Recognizing a Property’s True Potential
The big draw of property management is, of course, the cash flow:
Being able to generate a monthly income that helps you supplement
or replace your current income and gaining access to cash you can
use for your other investments are primary benefits.
Especially because rental properties can provide cash flow for all
kinds of entrepreneurial pursuits, it would be wise to keep property
94
management in the back of your mind even if it isn’t a primary

investment strategy for you right now. After all, you may come across
a great deal, and through proper evaluation, find that the returns you
can get from using the property for income-generating purposes far
outweigh the profit you can expect by simply selling it outright. This
is one reason why it is important to learn how to properly evaluate
properties and uncover their true potential.
For example, if you can negotiate a great deal on a single-family

home, it can provide good one-time profit potential if you sold it to
a homebuyer or offered it wholesale to another investor. However,
what if the home was in an area where rental properties were in
high demand and the average market rental rate exceeded your
expenses for holding the property? You could be looking at a much
more lucrative opportunity if you rented the property, at least for now,
and took advantage of its positive cash flow.
Another way you might end up exploring property management

is by making a great deal on a large single-family home that you
determine is a perfect candidate to be remodeled and segmented
into a rooming house. Instead of making profit from the sale or rental
of the property to just one individual or family, what if you could
convert it into a four-unit rooming house, giving you four weekly
rentals to draw income from?
The point is to keep an open mind about property management and

about your exit strategies for the properties you consider. No matter
what your initial thoughts are on a property, remember to evaluate its
potential for cash flow. Is holding onto the property and allowing it to
provide positive cash flow the better option? Is this the time to start
adding rental properties to your portfolio?
Knowing When to Delegate
Once you have accumulated several rental properties or are growing

more successful in other areas of real estate investing, it may be time
to consider hiring a professional property management company
or assigning resident or house managers to help you manage your
properties. Perhaps you’ll find your time is far better spent on other
tasks, such as securing additional properties. When that’s the case,
here are some of the options available to you for delegating the
management of your properties to someone else:
95
Using Property Management Companies
If you look for a property management company, you may find that a
smaller company is your best option. The larger companies are usually
staffed by hourly employees and have so many properties to look
after that yours might become neglected. But a smaller company
may devote significant time to making the relationship work as they
build their own business and need your referrals. Additionally, these
smaller companies are often owned and managed by people
who truly enjoy property management and that can certainly be
reflected in their work.
That doesn’t mean a large company is not a good choice. It just

means that you need to keep your options open to help you find
someone who truly enjoys taking care of your properties and is like-
minded about delivering quality, professional results. Frankly, this is why
so many investors start off managing their own properties. They figure
no one will take better care of their property than they will. That’s fine
as long as you recognize when it’s time to put your talents to better
use.
Using Resident Managers
When you have multi-unit properties of good size, consider

delegating responsibilities to a resident manager, someone who will
live on the property for a reduced rate (if the property is small and
the tasks are light) or for free (if the property is large and the tasks
require full-time attention).
For example, a resident manager could collect rents, show vacancies

to prospective tenants, answer prospective tenant calls, handle
janitorial and general maintenance issues, provide landscaping
services, clean the pool, monitor outside lighting, spot potential
security issues, and meet with outsourced workers if the resident
manager doesn’t handle certain tasks (such as monitoring the work
of landscapers or pool cleaners and accompanying pest control
workers on the property if pest control is provided).
96
Using House Managers
Rooming houses can be profitable, but they require more hands-on

or time-intensive property management than traditional multi-units.
This is partly because the tenants will be more transient, so vacancies
will be more frequent. And it is partly because there are common
rooms in rooming houses that will require more attention from you.
However, you can establish rules ahead of time with tenants and
have written rental agreements to help keep issues at a minimum by
outlining the rules all tenants must follow.
For example, tenants should be required to pick up after themselves

in common rooms and their own rooms. They should clean up any
kitchen or bathroom messes they make, leave common rooms the
way they found them, dispose of any trash in their rooms promptly,
and agree to be responsible for any repairs or damage they cause
beyond any normal wear and tear on the property.
They should also adhere to rules about giving proper notice to

vacate (for example, a 7-day notice when renting weekly), paying
rent on time, and providing a deposit (for example, to be returned
five days after they vacate if all rules have been adhered to).
Because of the maintenance aspects of a rooming house, having a

house manager to enforce the rules will be particularly valuable. The
house manager can make sure the kitchen is kept clean and that all
the bathrooms are cleaned at least once per day. They should also
enforce the rules about cleanliness in these areas since their job is to
function as a manager, not a maid.
The manager can also be given extra duties if they’d like the work
and you have built trust in them. For example, they could handle
vacancies for you or maintain the outside of the property by cutting
the lawn, cleaning up any trash, etc.
The responsibilities in a rooming house are part-time only, so usually a

break in the weekly rent (for example, a $25 to $30 rent charge per
week instead of $65 to $85 per week) is sufficient. If they handle more
work for you than general upkeep, you could figure in a higher break
in the price.
97
Obviously, the person you select needs to be of strong character and

have a personable attitude. Find someone with good leadership
qualities and a strong work ethic and you’ve got a winning
combination for lowering the time you’ll need to devote to this type
of property, while enjoying the high cash flow it provides.
Staying on Top of the Rental Market
Critical to your success in property management will be your

knowledge of the rental market in your community.
Know the average rental rate of units that are similar to properties
you are considering purchasing. For example, if a single-family, 3/2
home is renting for $750 per month and you make a great deal on a
foreclosure home, bring it to move-in condition, and spend $500 per
month to hold the property, that’s $250 in positive cash flow you could
make each month. Later, you can sell it and still enjoy the profits from
the sale. But in the meantime, you have an extra source of income, as
well as a property that lets you enjoy the tax breaks associated with
owning and managing a property.
To keep on top of the rental market, research rental ads in the

newspaper, periodically ask your real estate agent for the latest rental
rates, and network with property managers in the area.
You also need to know the vacancy rate for your area as you will
have some periods of time where rental units will be vacant. To help
you prepare for this and to figure it into your calculations, contact a
real estate agent or property management company to learn the
average vacancy rate for properties in your area.
Building a Good Reputation
Do what you can to keep the vacancy rates low for your properties.
Maintain the property in good working order, make certain the
appearance of the exterior as well as the interior remains appealing,
set rents at a comparable market rate, provide decent furnishings
(if applicable), and build your reputation as a fair and conscientious
landlord.
To help you accomplish that last task, promptly respond to tenant
98
needs and treat tenants with respect. Visit the property regularly to
make sure tenants are living up to your expectations and that no
special maintenance is required (a multi-unit building will require
more visits than single-family homes since there are more tenants
involved). Your main objective for visiting the property regularly is
to catch small problems before they escalate. Additionally, your
presence and vigilance in making the property as nice as possible
will go a long way in building a positive relationship with your tenants
and keeping them long-term.
Finding Great Tenants
One of the biggest fears some investors may have about property
management is they envision having to deal with difficult tenants,
nonpayment, and collection problems. While there are some
troublesome tenants in this world, there are a great many more
excellent tenants who pay their rent on time, take care of someone
else’s property as if it were their own, and don’t cause neighbors or
landlords any trouble. So, learn how to find the right tenants and treat
them well.
What type of tenant are you looking for? Someone who is looking
for a long-term lease, who can offer you references, and who has a
good credit history, a stable work history, and adequate income.
Ask for and confirm full details from prospective tenants up front. This
includes name, phone number, current address, employer, references,
bank references, current and previous landlords, driver’s license
number, Social Security Number, and date of birth.
Be sure you have rental application forms ready and get permission
to do a credit and background check to limit your risks (there
are companies that can conduct these types of checks for you).
Additionally, require a sufficient security deposit (one that a tenant
would not want to walk away from), asking for both the first and
last month’s rent in advance, and have fees established for late
payments.
Just remember when screening potential tenants that you must

always comply with applicable fair housing regulations. Be sure to
become very familiar with such regulations or consult your attorney
99
prior to beginning the screening process to ensure you are in

compliance.
TREAT IT LIKE A BUSINESS
One thing you have to be prepared for in property management is to

treat it like a business.
It will be unfortunate and inevitable that some tenants will hit hard
times and that some will be hard to deal with. However, you have
to maintain the primary focus that your goal here is to make money.
And just like any other business, there will be times when you have to
separate professional needs from personal feelings. In other words,
don’t let friendships get in the way of your business agreements with
your tenants. You can exercise good judgment and you can be
flexible in rare circumstances, but if you have trouble with a tenant or
if someone isn’t paying their rent on time, there is someone else out
there who can fill that room or unit just as easily.
No matter what you feel personally toward a tenant, the bottom

line is you have made an agreement to provide them with a safe,
comfortable, clean place to live and, in return, they have made an
agreement to pay you for it and treat your property with respect.
The landlord/tenant relationship is a two-way street. You both are
agreeing to certain expectations and you both have an obligation to
live up to those expectations.
If both parties simply do what’s expected of them, there should

be few, if any, problems, making the fear of renting out property
largely an irrational one. But if that agreement is broken, learn from
your lesson, move on, and find a new tenant. You will become
better at judging character as you go along. Just be sure to always
have agreements and deposits in place to help offset any errors in
judgment you make.
BE PREPARED
Especially if you are going to hold numerous single-family rental

properties or even a few multi-unit properties, you will want to get
advanced training in property management. There are many
strategies to learn that will help you keep your costs low, manage
100
your property better, limit hassles and mistakes, retain good tenants,
and make property management one of the best paths on your
entrepreneurial journey.
COMMERCIAL PROPERTIES
Investing in retail/commercial properties is an exciting real estate

investment option that requires sound knowledge of the industry and
advanced investment skills.
This classification of investment properties includes buildings that are

used for office space, retail stores, and service providers who offer
everything from tax preparation to automotive repair. Just think of all
the stores that rent space along Main Street in your town or in your
nearby strip mall. Or consider the types of buildings where attorneys,
doctors, dentists, accountants or real estate agents work.
PROPERTY TYPES
While all of the above properties fall into the retail/commercial

property classification, there are four main property types that fit this
category. They include:
• Retail
o Regional shopping centers
o Community malls
o Neighborhood malls
o Strip centers
o Free-standing retail stores
• Industrial properties
o Warehouses
101
o Large manufacturing buildings
o Research and development parks
o Industrial parks
• Office properties
o Low-rise
o Mid-rise
o High-rise
• Residential investment properties
o Multi-plexes
o Apartment buildings
o Condominium buildings
IT’S ALL IN THE INCOME
A significant difference between residential and commercial property

investment is that commercial/retail property value is determined
primarily by the income it generates. For example, a 30,000 square
foot shopping plaza with a 50% storefront vacancy rate will generally
sell for substantially less than the cost of an identical shopping plaza
that is fully rented to business tenants.
This type of situation can result from several factors, such as landlord
or tenant neglect, a glut of similar properties in a particular market,
poor property management, structural or mechanical problems
within the building, and landlord financial problems or lack of
ownership interest. So key to making a smart decision about whether
or not to invest in this type of property is determining why the
vacancy rate is so high and then structuring your business plan/
strategic plan and purchase offer accordingly.
102
As you can see, to determine the value of a property, you’re going to

need to know at what rate space is currently being rented, as well as
what space is available now and will be available in the near future.
Ask yourself:
• Do you know the occupancy rate for retail space or office

space?
• Do you know the price per square foot?
• Are landlords offering rent incentives?
• How many new units have been permitted?
• Do you know where to find the answers (e.g., commercial

realtor, city/county planning and zoning)?
UNDERSTANDING COMMERCIAL CALCULATIONS
To help you determine the value of a commercial property and the

type of cash flow it can generate, you will need to understand several
commercial calculations and become familiar with the paperwork
associated with those calculations.
For example, the following is a sample Property Profile.
(image on next page)
103
E
PL
M
SA
104
The following is a sample Annual Property Operating Data (APOD)

Statement.
E
PL
M
SA
105
And this is an example of a cash flow analysis of a property.
E
PL
M
SA
Some of the calculations you will want to be familiar with include:
• Gross Rent Multiplier

• Net Operating Income
• Cap Rate
Gross Rent Multiplier
The Gross Rent Multiplier (GRM) is a ratio that is used to estimate the
value of income-producing properties. To calculate the GRM, you will
need two figures: the sales price for the property and the total gross
rents possible for its units.
The GRM is a rough estimate calculated from market data or

supplied by the buyer/investor. It is based on first year rental income
106
and takes the gross monthly income for the year, before expenses,
and divides it into the sales price. Here is how you would calculate GRM:
GRM Calculator
Investment Value
–––––––––––––––– = GRM
Annual Rent
GRM x Annual Rent = Value
Example calculation:
$850,000 Asking Price

–––––––––––––––––– = 8 GRM
$112,200 Annual Rent
To get a 6 GRM x $112,200 Rent = $673,200 Offer
In the example calculation above, the asking price was $850,000

and the buyer offered $673,200. The seller countered and the buyer
agreed on $700,000. $700,000 divided by the rent of $112,200 equals
6.24, stated as a 6 GRM.
Once you know the GRM for your area, you can perform a quick
calculation to know if the asking price is reasonable, and to compare
multiple properties quickly. The lower the GRM, the better the deal.
Net Operating Income
Net Operating Income (NOI) is the property’s gross income for the
year, less its operating expenses. It is calculated as follows:
Potential Rental Income

- Vacancy & Credit Losses
+ Other Income
= Gross Operating Income
- Operating Expenses
= Net Operating Income
107
But keep in mind what constitutes an “operating” expense. The

following cash outlays are NOT operating expenses:
• Debt service (interest and principal)

• Reserves for replacement
• Cost recovery (depreciation)
• Charitable donations
• Income taxes (but real estate taxes ARE)
Cap Rate
Direct Capitalization
Investors use direct capitalization to determine investment value.

Appraisers use direct capitalization to determine market value. And in
some areas, the county property appraisers use financial statements
to assess the value of a commercial property. If the property owner
has submitted a financial statement for assessment purposes, that
financial statement may be available at the assessor’s office.
IRV Formula for Direct Capitalization
108
The formula shown indicates the importance of knowing the income

of the property in order to calculate the rate or value. As the chart
shows, you can divide the income by the rate in order to determine
the value, or you can divide the income by the value to get the rate.
Investment Value by Direct Capitalization
The following is an example of how you would calculate your

investment value by direct capitalization.
Income $112,200
- Vacancy/Credit Loss (7%) $7,854
= Gross Operating Income (GOI) $104,346
Gross Operating Income $104,346

+ Operating Expenses $39,492
= Net Operating Income (NOI) $64,854
NOI $64,854
/ (divided by) Purchase Price $700,000
= .09 Cap Rate
The Cap Rate is a decimal (percentage), but it is always quoted

as a whole number. The Cap Rate represents the percentage of
the purchase price that is covered by the NOI. Therefore the higher
the CAP rate, the better the deal. If you are planning on acquiring
financing for your building in this example, you almost need a Cap of
10 in order to have positive cash flow.
Cap Calculations
NOI / Sales Price = Cap
NOI / Desired Cap Rate = Offer Price
109
LEARN MORE
This is just a brief overview of the opportunity to invest in commercial

properties. If this is an investment strategy that appeals to you, you will
want to seek advanced training in the subject matter. Things to learn
will include:
• Different types of commercial properties
• The class system for rating commercial buildings
• Finding and securing deals
• Financing deals
• Types of leases
• Commercial lease clauses
BUILD A KNOWLEDGE BASE
As you can see, there are several real estate investment strategies
(we haven’t covered them all) available to you. These are just
highlights of the opportunities that are available with more
education. Learning how to use each of them to their fullest
advantage can help you expand your investment portfolio and
create revenue for other entrepreneurial pursuits.
One simple way you can start building your knowledge base is to
make a stop at a large bookstore or visit a large bookseller online.
Take your time browsing the selections available on real estate topics
and choose books that specifically address the direction you’d like to
head in real estate investing, such as any information you can find on
rehabbing homes and property management. Having these books
on hand can be great reference sources when you need them.
Additionally, consider reading books and magazines that motivate

and inspire you about being in business for yourself or about real
estate in general and refer to them often to help you maintain your
110
enthusiasm and drive. You can also gain a great deal of information,
motivation, and inspiration from others who share your interests
and your passion for real estate. Consider joining your local real
estate investment club and taking advantage of other networking
opportunities that put you in contact with the people and professions
associated with real estate.
There are also many specialized courses available that are

designed to help investors take full advantage of the real estate
market’s potential. For example, if you find the idea of offering lease
options appealing, you can purchase books, courses, or audio and
presentation packages specifically developed to teach you more
about this one subject area.
You can also visit online sources where you can find tips and tricks of
the trade. Even government websites have information to help you,
like free information about what to look for in a home inspection,
which can help you when researching various properties. And there
are online and traditional sources for researching legal and tax
information, developing negotiation skills, working with bankers and
creditors, and finding financial resources.
Additionally, you can get valuable hands-on training that can help
take your education to the next level. For example, you can seek
formalized training, such as taking advanced courses—online, in
classrooms, or over the telephone—that provide in-depth training on
real estate investing, growing and managing your business, locating
and securing investment funding, protecting your assets, marketing
your properties, and more.
111
Section 3: Investing in the Stock Market
Investing in the Stock Market
THE STOCK MARKET
As an entrepreneur, you will explore many avenues for not only

generating wealth, but preserving it. After all, beyond the financial
goals for your business, you’ll have personal financial goals set for
yourself, such as what you want your retirement to look like and how
you will plan for and maintain a secure financial future.
One option you have available to you is investing in paper assets,

e.g., the stock market. Perhaps you’ll invest aggressively and use
day trading as a means for building wealth. Perhaps you’ll invest
moderately and look at trading as a way to create supplemental
income. But even if your tolerance for investing in the stock market
fluctuates with the state of the economy, and you’re not ready
to take advantage of what the stock market offers, you need to
recognize the value of having a solid understanding of how stock
investing works. That’s because even people with no immediate
plans to put their money in the stock market directly, do so indirectly
with their 401ks, pension plans, and profit sharing plans. Someone,
somewhere is directing their money for them or they are, themselves,
making choices about which funds they’ll put their hard earned
retirement income into.
These are decisions that should never be taken lightly. But especially
in these tough economic times, with the future of Social Security
unknown, and increased pressure on individuals to take responsibility
for their own futures, it is more important than ever to be informed
about not only where your money is going, but how your money is
growing. Education in stock market investing can help.
So, let’s explore stock market investing in this section, beginning with
an overview of the stock market and a discussion about how stocks
are organized on the exchanges.
AN ORGANIZED VENUE
Generally speaking, the stock market is an organized venue where

buyers and sellers meet to buy and sell stock. You might think of it as
being similar to a farmer’s market. While a farmer’s market is made
up of various stands or booths where goods are bought and sold, the
115
stock market is made up of different exchanges where people meet

to exchange stock for money.
Historically, if someone wanted to trade shares in a company, they

would physically take the paper certificate of shares to an exchange
to buy or sell them. But you can imagine that as more people
became involved in trading, it grew increasingly obvious that not
every buyer and seller could fit into one location and find someone
else interested in buying their stock.
This is how brokerage houses got their start. Brokerage houses keep a
place on the exchange and trade the stocks on behalf of their many
clients.
BROKERAGE FIRMS
In fact, if you want to trade stocks on an exchange today, you

must trade through a broker. A broker is an individual or business
who trades securities for another individual or entity. Therefore, any
individual or business that acts as an agent in securities transactions
should be registered as a broker.
Brokers should also be registered with the U.S. Securities and

Exchange Commission (SEC). Brokers registered with the SEC
must comply with certain requirements, including submitting to
Commission and SRO (Self Regulatory Organizations) examinations,
fingerprinting, participating in the lost and stolen securities program,
maintaining and reporting certain information, and following certain
guidelines when using electronic media.
Types of Brokers
There are three main types of brokers:
• Full service broker—This broker offers investment advice and

gives you data needed to make investment decisions. Full
service brokers offer a variety of products, which may include
stock, bonds, annuities, and insurance, as well as investment
advice and research. Fees vary among full service brokers and
the actual broker handling the transaction is paid mainly by
commissions.
116
• Discount broker—This broker allows you to make all the trading

decisions. A discount broker usually has fewer products than
a full service broker and does not offer investment advice or
research. Generally, they charge lower fees than a full service
broker and the actual broker handling the transaction is usually
paid a salary. They make their money based on volume.
• Online broker—This broker allows you to make your own trades

and manage your own account online (many discount brokers
also offer online brokerage services).
The first two above are traditional brokers.
With a traditional broker, you open a brokerage account, deposit

money into it, and then have your broker buy and sell your shares as
you direct. This usually takes place with you calling and placing an
order directly with your broker, who then calls you back to let you
know your order has been filled.
A full-service broker acts as a representative for you, researching

stocks, and advising you on which ones you should buy, sell, or hold
in your portfolio. Because you rely on this broker to do the work for
you, commissions can be high and the fees vary between brokers or
brokerage firms.
On the other hand, with an online brokerage firm, you actually act as
the broker. You open an online brokerage account, deposit money
into it, do the research on stocks, determine which stocks you want to
buy or sell, and place your own orders online.
Because you do all this work yourself, the fees are much less, with
many companies offering online trades for under $10 each. Such
low-cost fees have opened the door for many more investors to
participate in stock investing and have given many individuals the
ability to finally take full control over their investment activities.
If you do decide to work with a financial planner or stock broker

assisting you, call on several of them and interview your prospects. Ask
about their credentials, investment strategies, the range of services
provided, and any fees charged. The following are examples of the
types of questions to ask a potential financial planner.
117
• What type of services do you provide (advice on cash

management, budgeting, tax planning, investment strategies,
estate planning, insurance needs, etc.)?
• Will you be working with me or will my account be handled by

someone else?
• What is your financial planning approach (conservative,

aggressive, etc.)?
• What are your credentials?
• What is your educational background?
• What professional certifications do you hold?
• How do you stay current on your training, education,

credentials?
• How many years of financial experience do you have?
• Are you a fiduciary (fiduciaries are held to higher ethical

standards than non-fiduciaries)?
• Are you a Registered Investment Advisor (RIA) or an Investment

Advisor Representative (IAR)?
• Do you have any disclosures on your NASD or insurance

compliance records (you want your financial planner to have
a clean compliance record)?
• Do you provide a free initial consultation?
• Will I receive written statements? How often will I receive them

(monthly or quarterly)?
• Can I see sample plans that you have executed for other
clients (anonymous, of course)?
• What type of fee structure is involved?
• How are you compensated?
118
Additional questions to ask a prospective financial planner can be

found on the SEC website at http://www.sec.gov/investor/pubs/
askquestions.htm.
STOCK SYMBOLS
Stock symbols, also called ticker symbols, are letters used to identify a
stock or a mutual fund. Many are acronyms of the company’s name.
For example, the General Electric Company is listed on the New
York Stock Exchange (NYSE) under the ticker symbol GE. In another
example, the ticker symbol for the Ford Motor Company is simply the
letter F on the NYSE.
Stock symbols for every publicly traded company are available to all
investors. Each exchange lists the companies on the exchange and
their stock symbol on their website. Additionally, the stock symbol will
be included in the company’s prospectus in the stock section.
THE EXCHANGES
There are several stock exchanges where stocks, bonds, and mutual
funds can all be bought, sold, and traded in the United States and
worldwide markets. We’ll briefly introduce you to the four major
stock exchanges next, including the NYSE, the National Association
of Securities Dealers Automated Quotation System (NASDAQ), the
American Stock Exchange (Amex), and the Over-The-Counter Bulletin
Board (OTCBB).
The NYSE
The New York Stock Exchange (NYSE) is the premier listing venue for
the world’s leading large- and medium-sized companies, and is the
largest and most liquid cash equities exchange in the world. You can
learn more about the NYSE and other exchanges offered by NYSE
Euronext by visiting www.nyse.com.
The NASDAQ
Listing more than 3,000 companies, the National Association of

Securities Dealers Automated Quotation System (NASDAQ) is the
largest U.S. electronic stock market. Listed companies include
119
leaders across all areas of business, including technology, retail,

communications, financial services, transportation, media, and
biotechnology. To learn more, visit www.nasdaq.com.
The NYSE Alternext US
The NYSE Alternext US (formerly, the American Stock Exchange, or

Amex, until its acquisition by NYSE Euronext on October 1, 2008) is an
electronic exchange that offers trading in a wide variety of equities,
options, and ETFs. It is one of the largest options exchanges in the U.S.,
and offers trading across a full range of equities, options, and ETFs. To
learn more, visit www.nyse.com.
The OTCBB
The OTCBB is a regulated quotation service that lists over-the-counter

(OTC) equity securities. Generally, an OTC equity security is any
equity that is not listed or traded on NASDAQ or a national securities
exchange. To learn more, visit www.otcbb.com.
THE ORGANIZATION OF STOCKS
Now that we have learned a little bit about the major stock
exchanges, let’s take a look at how the broad list of stocks on those
various exchanges is organized.
Sectors
The first category in which stocks are organized is called sectors.

Sectors are typically broad divisions of the companies that make up
the market. The following are examples of sectors:
• Basic Materials
• Capital Goods
• Conglomerates
• Consumer Cyclical
• Consumer/Non-Cyclical
120
• Energy
• Financial
• Healthcare
• Services
• Technology
• Transportation
• Utilities
As we examine the performance of the various sectors, it can give us

an indication of where money is flowing in and out of certain areas
of the market. For example, if we are bullish (meaning we believe the
market is going up), we will look for the best performing sectors. When
we are bearish (meaning we believe the market is going down), we
will look for the poorest performing sectors.
Sectors are further divided into industries.
Industries
An industry will fit within a sector and is more specific than the sectors
in which they belong. For example, the technology sector is divided
into the computer hardware, computer software and services,
electronics, Internet, and telecommunications industries.
Industry Groups
Industries are further broken down into industry groups, which are
even more specific and narrow in their focus. For instance, if we
took the Internet industry, we could break this down into industry
groups such as ISPs (Internet Service Providers), Internet software
and services, etc. Similarly, if we took an industry such as insurance,
we could break this down into industry groups such as accident/
health insurance, insurance brokers, property/casualty insurance, life
insurance, and surety/title insurance.
121
It is important to mention that not everyone agrees on what the

makeup of sectors, industries, and industry groups should be. Dow
Jones and Standard & Poor’s are just two examples of highly
respected market research and tracking firms that have both set
up their own market organization standards. You will notice some
discrepancies as you compare information between various
institutions, as they may differ in their definitions of what constitutes a
sector, industry, or industry group. It is also common to see all of these
categories labeled simply as sectors.
Indexes
Finally, you will also see indexes (or indices). An index is made up of
a collection of stocks whose value is a benchmark for the overall
movement of a particular type of stock. In other words, an index
provides a timely statistical measure of the types of stocks included
within it. The idea is that what’s happening with these carefully
chosen stocks is generally representative of what’s happening within
the market as a whole (e.g., if a technology index is performing well,
technology stocks are performing well).
There are many statistical indexes to help investors follow the short-
term and long-term progress of stocks traded on all of the world
markets. All of the indexes are mathematical composites of the
market’s activity on any given hour of each trading day.
Investors use the performance of these indexes to help them

determine whether or not the value of the stock they own will be
heading either up or down. Over time, the numbers generated by the
indexes can provide even a beginning investor with a general picture
of the market’s overall performance. This can be a very useful tool in
determining which stocks to purchase. In fact, when most people talk
about how “the market” performed, they are actually talking about
an index.
To give you an example of what kind of market information indexes

seek to provide to investors, let’s take a look at the Dow Jones
Industrial Average (DJIA).
Following the DJIA is one way to gauge the performance of

the overall stock market. And with today’s age of financial
122
independence and millions of people directing their own investments,

it is a critical market tracker. That’s because self-directing investments
would simply be unimaginable without providing a simple way for the
ordinary investor to follow the broad market.
This is what the DJIA makes possible. It provides a convenient

benchmark for comparing individual stocks to the course of the
market and for comparing the market with other indicators of
economic conditions.
The 30 stocks in the DJIA are all major players in their industries, and
their stocks are widely held by individuals and institutional investors.
They include*:1
Company Name Ticker
3M Co. MMM
Alcoa Inc. AA
Altria Group Inc. MO
American Express Co. AXP
AT&T Inc. T
Bank of America Corp. BAC
Boeing Co. BA
Caterpillar Inc. CAT
Chevron Corp. CVX
Citigroup Inc. C
Coca-Cola Co. KO
E.I. DuPont de Nemours & Co. DD
Exxon Mobil Corp. XOM
General Electric Co. GE
General Motors Corp. GM
Hewlett-Packard Co. HPQ
Home Depot Inc. HD
Intel Corp. INTC
International Business Machines Corp. IBM
Johnson & Johnson JNJ
JPMorgan Chase & Co. JPM
Kraft Foods Inc. KFT
1
Stocks listed on the Dow Jones Industrial Average as of January 6, 2009, www.djaverages.com
123
McDonald’s Corp. MCD

Merck & Co. Inc. MRK
Microsoft Corp. MSFT
Pfizer Inc. PFE
Proctor & Gamble Co. PG
United Technologies Corp. UTX
Verizon Communications Inc. VZ
Wal-Mart Stores Inc. WMT
Walt Disney Co. DIS
* As of January 6, 2009. This information is subject to change. For the

very latest information on the components of the DJIA, please visit
www.djaverages.com.
Using such large, frequently traded stocks brings a very important

element to the DJIA (and, therefore, to the investor who is watching
its movement): timeliness. At any moment during the trading day,
the DJIA is based on very recent transactions, which means it can
provide critical up-to-date information for investors.
THE ROLE OF THE ECONOMY IN THE

STOCK MARKET
Important to understanding the stock market is understanding how

the economy and the stock market are connected. In fact, the
economy and the stock market can be so intertwined that economic
trends or news can immediately influence stock prices.
Even if you just think of it in the simplest of terms, you can see why. For
example, think about what happens when someone unexpectedly
loses a job and an entire income stream is eliminated from a family’s
budget.
The family has to immediately make cutbacks to survive. Certain

luxuries are eliminated and there is less money going out the door
because times are tight. Later, when a new job is found, things may
return to normal. The family might resume its old spending patterns,
or spending patterns may increase if there is more money flowing in
from the new job than there was from the old job.
124
Well, when the overall economic outlook is poor (as it is during these
tough economic times), it can seem like the whole country is one big
family missing an income stream.
For the most part, everybody makes cutbacks. If interest rates are
higher, property taxes have risen, jobs are scarce, the cost of living is
increasing, inflation is rising, a recession is occurring, or even if there
is just a general feeling of fear or apprehension (such as when the
country is at war), people react. And one of the first ways they react is
often to stop certain spending habits.
As people stop spending, the overall economic forecast can

become bleak and can soon have a direct effect on the earnings
and profits of many companies in various industries. In turn, those
lowered expectations and returns can have a trickle-down effect,
lowering the stock prices of those companies and eventually having
an impact on an entire segment of the market or on the market as a
whole.
To summarize, stock prices are typically going to reflect what is

perceived to be happening with the economy. If the economy is
growing, you might expect to see stock prices and the stock market
moving higher. If the economy starts to falter, you might expect to see
the market and stock prices move lower. But that’s just one way in
which the economy and the stock market are linked.
Another way they are linked is through the actions of the Federal
Reserve. To illustrate, think back to times when the Federal Reserve
announced interest rates would rise or lower. Do you remember
how the stock market seemed to react to that news? Was there a
corresponding dramatic fall in stock market prices or a corresponding
dramatic increase in the number of trades made that day?
Because the economy tends to move in a cycle, understanding

that cycle and the effect it can have on the stock market and stock
prices is essential to forming your assumptions about the market’s
direction and, ultimately, the stock investment choices you will make.
It will also be important to have a basic understanding of the

major factors that can influence that economic cycle and trigger
economic news, such as interest rate changes, greed and fear, and
key economic indicators like the Gross Domestic Product (GDP).
125
We’ll discuss the importance of understanding and monitoring these

factors and sources in this chapter.
ANALYZING ECONOMIC NEWS
Whether you are just a casual observer of the news or someone

who always monitors television channels devoted to stock market
tickers and investment news, you will eventually hear news about
the economy. Invariably, this economic news will tell you something
about the state of the economy in general, the threat of inflation, the
rise or fall of the stock market, whether companies hit their expected
earnings in a given time period or not, or the general attitude of the
population in relation to the economy.
Much of what you hear or read will be critical information in helping

you form assumptions about the general direction of the stock
market and the subsequent actions you might need to take with
your investments. As you have just learned, this is because economic
news, whether good or bad, can have a powerful influence on the
movement of stocks.
News Sources
To help you keep on top of economic news, you can turn to as many
news sources as you are comfortable with, such as television stations
devoted to financial news, financial newspapers and magazines, and
the Internet.
If you make use of online financial news sources, consider sticking

with well-regarded sites from top names in the business or the online
sites of top financial newspapers.
Additionally, you can maximize your search efforts and minimize

your search time by using sites that segment stock news into various
categories, such as hot stock news, market movers, expert picks, or
key developments. You can also use keywords to retrieve important
breaking news stories. For example, some keywords to look for include
earnings, split, buyout, strategic alliance, merger, upgrade, and
downgrade. All of these words are associated with news items that
move stocks.
126
To illustrate, let’s take a look at these example keywords for a general

review of how this type of news might come into play in sending a
stock price falling or rising.
• Earnings—Think of earnings like a company’s report card.

How well did that company perform during the past quarter?
When a company announces its earnings, it may be a good
indicator of the need to buy or sell, depending on the figures
reported.
• Stock splits—More often than not, when stocks split, the stock
price will move up.
• Upgrades/downgrades—Upgrades and their counterpart

downgrades occur when a stock market analyst comes out
and either upgrades the stock from one level of interest to
a higher level or downgrades that stock from one level of
interest to another. For example, an analyst may upgrade
a stock and put a “buy recommendation” on it, which can
increase the price of that stock as investors get wind of the
recommendation. A downgrade can result in the stock price
going down.
• Alliances, mergers, and buyouts—Look for news about

alliances and mergers (when a company partners with other
companies in an effort to become more successful) and
buyouts (when a company has been purchased by another
entity). After announcing a merger, alliance, or buyout, the
stock prices of the companies involved can move up or down,
depending on the specifics.
Keeping Things in Perspective
When evaluating economic reports and news, you will need to keep
the information you get in perspective at all times.
127
Ask yourself:
• Does the economic news you are hearing reflect a possible

trend in the overall economy? What are key economists and
other major players in the financial community saying about
such matters? Do the news items or opinions reflect your own
feelings and research?
• Does the news affect the industries or companies you have

your investment dollars behind?
• Does the news tell you about inflation or the general direction
of the stock market? Is the news different than what the market
expected or what stock analysts projected? Is it different from
your own assumptions?
• Do you need to take action based on the news you’ve heard

or read?
In other words, you need to maintain control and objectivity when

you hear someone else’s opinions or advice about investing, or when
economic reports seem to suggest taking action. What’s right for
one person may not be right for you. What fits with someone else’s
objectives may be too risky or too conservative for you. A hot tip may
get cold rather quickly. And taking action now may be critical or may
be poor timing.
This is one reason why many investors become as educated as

possible about the stock market and stock investment strategies
and theories. When news reports are filled with speculation, opinions,
fear, optimism, pessimism, or even conflicting viewpoints, their own
personal knowledge about the subject matter and their ability to
evaluate economic reports, stock market activity, and company
projections for themselves can help investors keep their emotions
in check and prepare them to make more informed investment
choices.
UNDERSTANDING THE IMPACT OF INTEREST RATE CHANGES
The goal of the Federal Reserve is to maintain slow, steady, sustainable

growth, while fighting off inflation and avoiding a recession. To do this
128
effectively, the Federal Reserve will typically adjust interest rates and
adjust its monetary policy.
For example, when the economy heats up and is growing too fast,
the Federal Reserve will typically raise interest rates to slow things
down. When the economy cools off and is faced with a possible
recession, the Federal Reserve will typically lower interest rates to
stimulate growth.
This isn’t an easy concept for everyone to understand, so let’s look at

it another way to further clarify.
By controlling short-term interest rates, the Federal Reserve will try

to slow the economy down or speed it up based on its outlook and
forecasts for inflation and growth.
If the economy grows too fast, there could be the threat of inflation.
Remember, the Federal Reserve wants to see slow, steady, and
sustainable growth. If the economy grows too quickly, it probably
won’t be able to sustain it. So, as the threat of inflation increases, the
Federal Reserve will generally raise rates to curb inflation. Ideally, the
economy will contract in reaction to this move and bring its growth
level to a steadier, sustainable pace.
Likewise, when the economy contracts, economic growth slows,

or when the threat of inflation is low, the Federal Reserve will
generally lower interest rates in order to stimulate the economy
(lowering interest rates can entice individuals to take on loans to
purchase houses, spend money for education, buy cars, make home
improvements, etc.).
One drawback to all this lowering and raising of interest rates is that
each action tends to start the whole process over again. If you lower
the interest rate and the people start spending, the economy may
grow too fast again, resulting in the decision to raise the interest rate.
If you raise the interest rate and people start to overreact, you can
end up putting a halt to economic growth, resulting in the decision to
lower the interest rate again.
That’s why this process is often referred to as the liquidity cycle, or

the boom-bust cycle. Like the ebb and flow of the tide, what the
129
economy is doing and how the Federal Reserve responds is all in

an attempt to keep things flowing smoothly. And at the bottom of
one wave may be the start of a new wave. This is illustrated in the
following diagram.
The lesson here is to remember the Federal Reserve’s goal as you

monitor the stock market. If the Federal Reserve is significantly raising
or lowering interest rates or offering strong guidance about what can
be expected moving forward, it will usually reflect where the country,
on the whole, is in this liquidity cycle (i.e., how the economy is being
perceived).
By monitoring the Federal Reserve over the course of time and

becoming more aware of how its actions can affect the stock
market, you can place yourself one step ahead of other traders.
KEEPING GREED AND FEAR IN CHECK
Very often, greed and fear will lead to booms and busts in the market.
The professionals on Wall Street drive stock prices in accordance with
130
where they currently view the economy and corporate earnings. This
helps explain the volatile nature of the market. It also provides some
understanding of how there can be a general state of optimism or
pessimism about the stock market and how that can be reflective of
the general state of optimism or pessimism about the economy.
Having a better understanding of the economy and its cycle and

keeping economic news in perspective can help you keep your own
greed and fear under control.
Emotional Intelligence
A critical component to elevating your financial IQ will be learning

to control your emotions. In fact, emotional IQ is the foundation of
financial IQ. High emotional IQ simply means you have control over
your emotions and can use emotions to make your life better.
Money can be a very emotional subject. Many people argue and

fight over money. The emotion of fear is the primary reason many
people cling to job security and low-paying jobs. They may be
terrified of investing because they fear failing or losing money.
Even the emotion of joy can cause financial problems. When people
come into a large sum of money such as a bonus, or an inheritance,
or lottery jackpot, they may go out and get deeper in debt or
squander their windfall. They buy a big house and nice cars and their
friends and relatives may come begging, hat in hand.
A lot of money, as well as the lack of money, can cause emotional

problems. That’s why emotional IQ is an essential part of financial IQ.
Stop Playing Not to Lose
Rich Dad would say, “The reason so many people are financial losers
is because they play not to lose. They do not play to win. The biggest
failures I know are people who have never tried.”
In the real world, there are winners and losers. What’s important is
how you react to your losses. In fact, winners are defined by how they
handle their losses.
131
Winner Learn From Mistakes
Many people either lie about their mistakes, or deny they made a
mistake, or pretend they never make mistakes.
In school, we are taught that the person who makes the most
mistakes loses. Yet in the real world, the people who make the most
mistakes—and learn from their mistakes—are the real winners. That’s
because the key to success is to make mistakes and be humble
enough to learn from those mistakes.
MONITORING KEY ECONOMIC INDICATORS
Last, but not least, to keep an eye on growth and the underlying
health of the economy, you can track the trends and levels in a few
key economic indicators:
• GDP—As the barometer (indicator or measurement) of the

nation’s total output of goods and services, Gross Domestic
Product is the broadest of the nation’s economic measures.
• PPI—The Producer Price Index, released monthly by the U.S.

Bureau of Labor Statistics, represents the measure of change in
wholesale prices. The index tracks the prices of foods, metals,
lumber, and oil and gas, in addition to other commodities, but
doesn’t include services.
• CPI—The Consumer Price Index, also know as the cost-of-living

index, is the index that measures the prices of a fixed basket of
goods purchased by a consumer. This figurative basket includes
food, transportation, shelter, clothing, medical care, and
entertainment, among other items. It is also used to determine
cost-of-living increases in pensions and wages.
Keeping a watchful eye on these key indicators, along with your other
market research, can help you make more informed decisions about
your stock investment choices.
132
INVESTING STRATEGIES
Now that you have a general understanding of the stock market and
how perceptions, company news, and economic news can have an
effect on it, let’s discuss several investing strategies you can apply to
help you choose your stocks and monitor your progress.
DETERMINE HOW YOU WILL TRADE
If you plan to invest in the stock market, one of the first things you
want to consider is how you will do it.
You have the option of turning to investment advisors and firms that
monitor the stock market for you, recommend when to buy and sell
certain stocks, offer investment funds that match your needs, or can
help guide you toward retirement plans and investment strategies
that suit your objectives.
You even have options about how much you want those advisors
or firms to be involved with your trading practices. For example, you
can open online brokerage accounts that are simply established to
facilitate your orders quickly and easily without a broker counseling
you about your decisions. You can have your portfolio custom
managed by professionals. Or, you can choose to invest in bundled
funds that suit your risk tolerance, are monitored by a fund manager,
and free you from the daily monitoring of your investments.
But likely, you are expanding your investment knowledge and

confidence level with this material because you want to handle your
trading activities yourself, making your own decisions based on your
own research and forecasts. We are happy to play an integral part
in that education. It can be very exciting to learn new strategies that
allow you to adjust to changing market conditions and to feel the
personal satisfaction of taking control over your financial future.
But regardless of what level of personal involvement you have in your

trades, we want you to recognize the importance of developing a
solid understanding about how stocks are analyzed and chosen.
Certainly, this information can help you feel confident about making
your own choices, but it can also help you evaluate whether or not
133
outside sources are giving you competent service, truly addressing

your objectives, and making selections that fit your risk tolerance.
We want to see you succeed. And the bottom line is the more
knowledge you have about investing in the stock market, the more
easily you can evaluate if the choices you or your broker are making
are the right ones for you.
DEVELOP A KNOWLEDGE BASE
As part of a progressive education track, you will want to learn:
• The four key principles investors employ every day in the

marketplace
• The four-step investing process that applies the four key

principles and helps you make informed choices
• How to read financial information
• The seven rules of investing
Let’s discuss those now.
APPLY SOUND PRINCIPLES
The following four principles are the ones savvy investors use every
day to give them an edge in the marketplace. They are:
1. Tools—To be successful in the stock market, you must have

access to certain tools that will allow you to capture
information for the overall market as well as individual stocks.
2. Education—You must have a certain level of education or

knowledge. This knowledge needs to include both how to
utilize the tools, as well as how to interpret the information they
provide to make more informed investing decisions.
3. Conviction—Beyond the proper tools and education, it is also

necessary for you to have a sense of conviction, including the
determination and confidence that you can succeed.
134
4. Application—And finally, you must also have a methodology to

apply what you have learned effectively and consistently.
FOLLOW AN INVESTING PROCESS
The foundation of the four key principles can be transformed into an

investing process that involves these four steps:
1. Make a market forecast (assess the broad markets).
2. Analyze your prospects (conduct fundamental analysis).
3. Make the trade (use technical analysis to determine your

timing).
4. Track your progress (establish a trading discipline that includes

establishing rules you will adhere to and keeping a trading
journal that helps you manage your portfolio).
Let’s explain and expound upon each of these four steps next and
discuss the types of things you want to be able to ask yourself (and
answer!), or confidently consider, with each step.
Make a Market Forecast
You want to start by making a market forecast, which basically deals

with what we discussed in the previous chapter. It’s about taking
a look at the overall economy, economic news, and the overall
direction of the stock market and using this information to help you
make informed decisions and determine when to buy, hold, or sell.
Is the stock market bullish (going up) or bearish (going down)? What
is happening in the broad markets (i.e., monitor the major indexes,
such as the DJIA, NASDAQ, and S&P 500)? What does this information
tell you about the likely direction in which the market and certain
sectors (such as energy, financial, healthcare, transportation, and
technology) and industry groups are headed?
To illustrate the importance of market forecasts, consider what

happens in the market when everyone is basically of the same
opinion. A clear example of this is the events of September 11, 2001,
135
which led to a prolonged downturn in the market fueled by almost

universal skepticism. When the majority of market participants share
the same opinion about the markets, the markets tend to move in
what is termed a “trend.” Understanding what trend the market is in
can prove invaluable.
Another reason market forecasts are important is they help you

keep your investment choices grounded in reality. You don’t want
to get so caught up in a personal assumption about a certain stock
or in your fondness for a certain company that you neglect to look
at the overall market and fully, faithfully evaluate how and why this
particular investment fits with your overall investment goals and is the
right move to make at this time. Making a market forecast can help
you keep your emotions in check.
Bullish and Bearish Forecasts
Simply put, to make money in the markets, you need to buy low and
sell high. It doesn’t matter if you’re using stocks or options, or trading
shares in IBM or pineapples; you need to buy low and sell high.
If you think the markets are going up in general (you’re bullish on

the markets), then you would naturally look for stocks that you would
expect to rise so you can buy low and sell high.
However, that’s only one-third of the stock market equation. As

we all know, the markets don’t just go up… they go sideways and
down, too. The good news is that’s okay for educated investors who
have learned a variety of investing strategies that can bring profits
regardless of market direction. You can learn the same strategies. That
way, when you think the markets are falling in general (you’re bearish
on the markets), you can find stocks that you think are going to fall
and apply strategies to make that work to your advantage.
Conduct Fundamental Analysis
When you purchase a stock, that stock represents ownership. If you

buy a share of a company, it’s like acquiring a tiny sliver of that
company.
136
Think of it as ownership in the most literal sense: You get a piece of

every desk, contract, and trademark in the place. Better yet, you
own a slice of every dollar of profit that comes through the door. Of
course, the more shares you buy, the bigger your stake becomes. And
in essence, you tie your fate to that company, for better or for worse.
When you think of it that way, it’s easy to see why you don’t want to
make your stock purchase blindly. Instead, you need to determine
what makes the company tick, not base your decision on intuition (I
“know” this company) or speculation (this was a “hot pick” last week
in the news).
You need to understand the company and its true state of finance
and direction. How successful is this company and what drives its
success? Does the management team effectively steer the company
in the right direction? Does this company manage its money well?
Conducting what is called a “fundamental analysis” of the company

behind the stock can help you get the answers.
The logic behind fundamental analysis basically says: If a company

has good fundamental strength, then long-term prospects for the
stock are also likely good, therefore, this stock is a good opportunity.
In other words, fundamentally strong stocks have a built-in reason to
expect them to rise in value. The companies behind them are making
money, consistently reporting profits, and experiencing sustained
growth. Their futures look promising.
So, how do you determine if a company is fundamentally strong?
For one, you evaluate the products of the company. Does the
company produce goods or services that people want (i.e., is there
high demand for what this company is offering)? Does the demand
for this product or service outweigh supply in the market (which could
be an indicator of potential growth) or is the market saturated with
companies producing the same type of product (and maybe doing
it better)?
Also, evaluate the company’s profitability. Does the company have

strong current and projected earnings (a company’s earnings are at
the heart of fundamental analysis)? Is there a pattern or consistency
137
in the earnings growth that could indicate it’s a strong company you
might expect to sustain growth in the future?
You’ll also want to determine how the company stands up to its

competition. Whether a company has a competitive edge or a
proprietary product, competition will usually quickly adapt and put
pressure on future growth. Most industries will eventually end up
with clear leaders. You want to make sure that the company you’re
considering is positioned well and stands to profit from its competitive
advantage. Furthermore, you want to make sure the company is able
to adapt and maintain its competitive edge.
Additionally, you’ll want to know the management of the company

because, generally speaking, the management team makes the
business decisions that either create earnings growth or fail to do so.
Who is in charge of the company’s daily operations? How qualified
are they to handle this important responsibility? Historically, how
effective has the management been? Has the management team
set expectations or estimates for growth that they have then met or
exceeded?
Basically, you are looking for companies that are running their
businesses and executing their business plans in an effective manner.
They pay close attention to increasing revenues, but even more
attention to containing and managing costs effectively. They invest
back in the company in areas such as research and development,
but they never do so blindly. Everything they do, every dollar they
spend, is done with an eye towards improving their bottom line and
sustaining their growth.
What type of information will you seek about a company to help you
with your evaluation?
Earnings Per Share (EPS)
EPS is calculated by subtracting a company’s expenses from

revenues to get total earnings, then dividing that number by the
shares outstanding. In other words, EPS is a reflection of net profit.
Suppose a company sells $1 million worth of widgets in a year. They

have revenues of $1 million. If it costs them $900,000 to create that
138
$1 million in sales, then they have earnings of $100,000 left over after
expenses. This is the profit of the company and theoretically the profit
that the shareholders of the company have made. So, if there are
100,000 shares of stock in the company, then each share has made
$1 in profit for the year. Therefore, the EPS is $1.
EPS is the bottom-line driving force for a company and one of the
most watched figures on a company’s financial statement. In fact,
you will likely find that when a company reports financial information,
the stock lives or dies with the EPS figure. However, don’t just look at
the EPS. Compare the company’s current EPS to historical values
to help you determine whether or not the company has been
successful in growing profit over time. In other words, what is the
company’s earnings growth trend?
Since a company can do some creative accounting to raise

earnings temporarily through one-time cost-cutting measures or one-
time sales of assets, etc., a rule of thumb is to look for the revenues
to be growing consistently for the past three years. It also helps if you
can find a company whose most recent year of earnings is growing
faster than the past three-year average, which is an indication that
the company is growing even faster now than it has in the past.
However, keep in mind that just because a company has strong

earnings, it doesn’t mean it’s time to buy that stock today. All
you’re looking for is a pattern or consistency in the earnings growth
that could indicate it’s a strong company that you can expect to
continue to grow in the future.
Price-to-Earnings Ratio (P/E Ratio)
When you purchase shares in a company, you are essentially buying

the earnings that those shares represent. If one share of stock costs
$10 and the company makes $1 per share, then you have paid 10
times earnings. This is known as the P/E ratio (price of stock divided
by EPS). This number can give you a sense of whether the stock is
undervalued, overvalued, or fairly valued.
Obviously, as the earnings of a company rise, then the implied value

of that company rises, too (the more you make, the more you’re
worth). The faster and higher the earnings are growing, the more one
139
is willing to pay for earnings and the higher the P/E ratio will be on a
company. Therefore, it’s not necessarily a bad thing to have a high
P/E ratio on a company if the company has a high rate of growth or
if the company has had a traditionally high P/E ratio. However, note
that a higher P/E ratio typically involves a higher risk investment.
Price-to-Earnings Growth Ratio (PEG Ratio)
The PEG ratio builds upon the concept of the P/E ratio by including
the company’s growth rate (it is calculated by dividing the current
P/E ratio by the annual EPS growth).
Lower PEG ratios usually point to undervalued companies in similar

fashion to the P/E ratio. However, while the P/E ratio is a relative
concept, meaning that it is only useful in terms of comparative
analysis, the PEG ratio takes us further by comparing the P/E ratio to
the company’s forecasted growth rate. Therefore we might find that
a company with a low P/E ratio and a high growth rate may be a
more attractive investment than a company with a high P/E ratio and
a low growth rate.
Another distinction of the PEG ratio is that you can compare the PEG
ratio of companies in different industries. Since growth is growth, and
investors want growth, the PEG ratio is a useful bottom-line tool that is
applicable in any industry.
Market Capitalization
How big is the company? Market capitalization is a measurement of

the total number of shares outstanding multiplied by the price per
share. It is used to define whether a company is categorized as a
small-cap (less than $1 billion), mid-cap (between $1 billion and $5
billion), or large-cap stock (greater than $5 billion).
If a company has a low market cap, you may face liquidity problems,
meaning there are not enough investors to ensure there will be
buyers when you want to sell. Or if a company has too large a market
cap, earnings growth can create a challenge in keeping all the
investors happy.
140
Shares Outstanding
How many shares of the company’s stock are currently held by

investors (whether company officers, company employees, or
the public in general)? You’ll likely find this figure on a company’s
balance sheet under the heading “Capital Stock.” It is used in
determining market capitalization and EPS.
Float
The float is calculated by subtracting the shares outstanding by the

number of shares held by insiders. The float indicates how many
shares are available for sale in the stock market. This can be an
important measurement to determine how much of the company is
privately held, as well as to measure the liquidity of a stock.
Revenue Growth
As we mentioned earlier, earnings are at the heart of fundamental

analysis. Earnings are a function of two parameters: revenue (or sales)
and expense. All things being equal, a company must either increase
revenues or cut expenses to increase profitability, and there is a limit
to how much it can cut expenses.
As an investor in the company, you want solid “top-line” growth, or,

in other words, you want strong revenue as well as earnings growth.
A trend of increasing revenue growth generally reflects strength in
the company’s ability to keep business growing. Companies that
can grow their revenues and earnings consistently in an aggressive
fashion will usually reflect that aggressive growth in their stock price
as well, so this can be a good way to screen for aggressive growth
stocks.
Debt-to-Equity Ratio
This ratio is calculated by dividing a company’s total debt by the

total number of shares outstanding, and is a variation from zero
and above. This is an important measurement that can help you
determine how the company is capitalized (i.e., the degree to which
a company uses debt to finance its operations), thus identifying highly
leveraged companies.
141
Return on Equity (ROE)
ROE is a reflection of management effectiveness. ROE is calculated

by dividing earnings for a one-year period by the shareholder equity.
This measurement can give investors a sense of the management’s
ability to effectively build cash from existing assets. In simple terms: For
every dollar the company has to work with, how much do they get
back?
Where to Find Fundamental Information
How do you get this type of information? You can get it from several
different sources, including your broker, your own online research, and
financial news sources. You can also get it through the following:
• A company’s prospectus—A prospectus is a formal written

document that provides all the material information about the
investment offering of a particular company. It is the primary
sales tool of the company that issues the securities (called
the issuer) and brokers or dealers that market the offering for
the issuer (called the underwriters). The prospectus provides
detailed, precise information about a specific securities
offering and it is also a legal document that is written to
protect the issuer and underwriters. It serves as written proof
that you were given all of the material facts as they are set
out in the prospectus. For that reason, you must understand
the disclosures being made to you, and that all other sources
of information are consistent with the content of disclosures
contained in the prospectus. Make sure that you are given a
copy of the prospectus before you decide to invest and, by
all means, get help in reviewing the prospectus if you feel you
need it.
• A company’s annual report—Annual reports contain basic

information about a company’s finances. You can obtain
annual reports from a broker, the company, or from the
company’s website.
• A company’s Form 10-K—This form includes detailed data

such as audited balance sheets, historical stock performance,
earnings, and other information. You can get this form from
142
the company’s public relations office or any number of online

trading sites.
• Analysts’ reports—Many investing sites provide analysts’ reports.

You can also visit the websites of almost all companies that sell
stock to find the financial data you need.
It’s About the Likelihood of Growth
There are two important things you need to remember about

fundamental analysis:
1. Just because you have identified a fundamentally strong

company, it does not mean the stock will go up automatically.
This is about determining the likelihood of the stock rising. These
companies have a built-in reason for their stocks to go up.
Their fundamental strength, sound business principles, careful
application of spending, and sensible money management
have given you a greater reason to believe in their stock’s
ability to rise.
2. Although it is a critical component of your overall evaluation,

fundamental analysis alone isn’t a reason to buy a stock. But it
does give you a good fundamental basis for putting that stock
on your radar and then using technical analysis, which we’ll
describe next, to determine if it’s the right time to buy it.
Use Technical Analysis to Determine Your Timing
Basically, technical analysis is about knowing when to make your

trades… when to buy, when to hold, and when to sell. It involves
looking at the stock charts of a company to identify trends and
patterns which can act as indicators to investors regarding where
the company stands at that moment. For example, is there support
or resistance? Is there an uptrend or a downtrend in the value of
a stock? Are the trends or patterns giving you “buy signals” or “sell
signals”?
In other words, technical analysis is the discipline of forecasting future

price based on the study of current market action. One of the basic
tenets of technical analysis is the efficient market theory, which states
143
that everything that is known about a company is reflected in the

current price.
Technical analysis also holds to the theory that price moves in trends.
If you think about a trend as people deriving signals from the actions
of others and then following suit, you can see how this might apply
to how a trend gets started in the stock market. For example, when a
stock is highlighted on a major media outlet, many people take that
information as a signal they should buy the stock. When this happens,
you will often see buy orders begin to line up on the screen and the
prices for the stock begin to creep higher. The chart is reflecting the
start of a buying trend.
Savvy investors use this information to their advantage. They carefully

study charts in search of trends that develop time and time again.
They believe history repeats itself in the market. So, if they can
recognize historically documented patterns, such as trends, early
enough, they can potentially profit from the expected movement
(i.e., predict a trend is approaching or about to stop and take
action). We will discuss trends and other important technical patterns
further in the next chapter.
Expand Your Understanding
To make the most use of technical analysis, you will want to

become familiar with technical patterns, such as trends, support
and resistance, and volume, and what these patterns reveal to
investors. Additionally, you should understand the importance of using
indicators, such as the Moving Average, which can help you predict
price movement.
Establish a Trading Discipline
This step in the investing process is about developing a trading plan

and executing the plan with discipline and consistency. It’s about
defining your investment goals and keeping your emotions in check.
And it’s about developing and adhering to rules that fit your risk
tolerance so you can make investment choices that don’t keep you
up at night, wringing your hands with worry about the actions you’ve
taken.
144
Keep a Trading Journal
One of the most important parts of this step is keeping a trading/

investment journal. Why? Well, as we just said: History has a way of
repeating itself. Obviously, if we’re going to repeat history, we want
to repeat our successes, not our failures. We want to learn from our
mistakes so we can avoid them in the future. If we keep track of the
reasons we entered a trade, we can create rules that help us avoid
taking the same actions if it was a failure or repeat the same actions
if it was a success.
Your trading journal should consist of at least the following about

each trade you make:
• The thought processes you used to enter the trade
• Any technical and fundamental evidence or insights that

compelled you to act
• The net outcome of what you did
Every time you experience a trading loss, you should be tearing the
trade apart with a critical eye. Ask yourself, “Exactly what did I see
in this trade that compelled me to get in? What went wrong? What
could I have done better?” Armed with the knowledge of what went
wrong, you can then make a personal trading rule to help prevent
you from making the same mistake in the future.
Establish Trading Rules
The trading rules you establish should not be treated as guidelines.

They are rules in the truest sense of the word and are there to help
protect you. Check your list of rules before you enter any trade to
make certain you have considered all aspects of the trade.
To help you get started drafting your own list of rules, here are some
examples of rules investors have adhered to in order to make the
most of their trades:
• Use stop losses—This should be your number one rule. When

you buy a stock, it is because you expect it to do something.
145
If it doesn’t do what you expect, then there has to be a point

where you say, “It is more important to me to keep my losses
small—to manage my risk/reward—than to be right!” This is your
stop loss point. You determine and set your stop loss point (the
price at which you want your order to be triggered or entered
to the market) before you ever enter the trade, and then you
keep it! Do not allow emotion to convince you to widen a stop
after you are in a trade. Stop losses help you cut your losers
and keep your winners.
• Trade with the trend—We mean the trend of the market, sector,
and stock. Sure, it sounds like a simple rule, but it’s an easy one
to forget. Most of the time, when we’re ready to enter a trade,
we’re familiar with the trend for the stock. After all, that’s usually
what attracted us to it in the first place. But checking the
trend of the stock isn’t enough. We also need to consider the
trend of the industry group and market sector. This is important
because the degree of influence an industry can exert upon
a specific stock may surprise you. For example, bad news from
one company can end up driving down the price of other
stocks in the same industry group, even though the bad news
was restricted to just that one company.
• Always have an exit plan—When is “good enough” really good

enough? Sometimes we need help recognizing when we
should be happy with our profits and get out. And sometimes
we need to be able to act quickly if the trade starts to go
against us. Having an exit plan in place before you ever get
into a trade and sticking to it can help. It can save you from
paralyzing indecision when you need to move quickly, and it
can help you keep your emotions in check when it’s time to
take your profits.
• Prepare for company announcements—Life is full of surprises,

but we want to make sure that our investments are as free
as possible from the kind of surprises that tend to make us
lose money. Fortunately, there are specific announcements
that are easy to plan for, such as a company’s quarterly and
annual reports. Watch the news for your stocks and mark your
calendars to indicate when you expect announcements to
be made. A quick bit of research to identify the fiscal year end
146
and reporting periods for a stock can go a long way towards

preparing you for the unexpected.
• Watch for patterns in news that will likely have relative effects
on the stock market—For example, whenever the Chairman
of the Federal Reserve speaks, reverberations are usually felt
in the markets. If the chairman were to hint at an increase in
interest rates, ask yourself if the stocks you are currently trading
could be influenced by this news and watch the reactions of
the market. Make sure you have stop losses in place prior to
any announcements.
• Review your positions nightly—If you want to build profit

potential, you simply cannot afford to ignore your investments.
Develop a nightly routine, including checking the chart of
your holdings. Look for signs of change and be mindful of the
technical charts or news items that would direct you to sell
your positions. This is also a great time to review and adjust
the placement of your stop losses. Armed with information
regarding your positions, you can submit orders for action the
next morning.
Stock Do’s and Don’ts
One more way you can be disciplined about your trading activities
is to consider the following list of do’s and don’ts when considering
and/or trading stocks:
Do’s:
• Recognize that you aren’t in control of the management of

stock investments. You’re investing in the management of the
companies.
• Maintain meticulous records of all transactions. If you work

through a discount broker, be sure you’ll get a year-end tax
statement.
• Be careful when buying “best picks”; they may be one-time

performers or overpriced due to popularity.
147
• Perform your due diligence. Review corporate prospectuses,

watch stock indexes, and read business periodicals to help you
make informed decisions, hone your financial intelligence, and
keep abreast of economic trends. Many companies post their
balance sheets online for easy access. Mutual funds are happy
to send you their prospectuses. And there are good periodicals
available at your library or bookstore, such as Barron’s, Forbes,
the Wall Street Journal, and Kiplinger’s that can help you boost
your financial literacy.
Don’ts:
• Never invest in a company without reviewing its financial status,

prospectus, and SEC reports.
• Don’t give your broker the authority to trade without your

approval.
• Don’t be afraid to disagree with a broker’s strategy or stock

pick. At the same time, you should think twice before ignoring
the advice of a broker who has always steered you right.
• If you’re picking stocks yourself, consider limiting how many you

invest in at one time. Remember, you’re the one who has to
track them.
• Don’t sell low in a slump only to turn around and buy high.
Avoid transactions through panic; keep your emotions under
control.
• Unless you have keen investor skills, don’t switch back and forth
between stocks trying to catch the next wave.
• It’s best not to buy stocks beyond your risk tolerance. Do you
know what your risk tolerance level is? Take the simple risk-
tolerance quiz at the end of this chapter to get an idea of
where you stand now.
148
HOW TO READ FINANCIAL INFORMATION
As you conduct your research to determine which stocks are right

for you, it will be important that you know how to read the financial
information you will find in listings from traditional and online sources.
For example, let’s take a look at how the financial information for a
company may appear on the NYSE and identify what the numbers
represent.
• In a typical NYSE listing, the first two columns usually show the
previous 52-week high (abbreviated as HI) and the previous 52-
week low (abbreviated as LO). These figures give you a quick
comparison of the stock’s trading range for the past 52 weeks.
• The third column is the company’s name in abbreviated form

and the fourth column is the company’s stock symbol that it
uses to trade under on the exchange.
• The fifth column shows the most recent annual dividend

(abbreviated as DIV). The next column is usually shown as YLD%
and represents the percentage return of the dividend to the
closing price.
• The seventh column is the P/E ratio (usually abbreviated as PE).

This is the ratio of the closing price to the last reported annual
EPS.
• The next column may have VOL or VOL 100s and tells you the
volume of shares traded in hundreds of shares.
• The next three columns show the previous day’s activity for
the stock shown as the high (HI), the low (LO), and the closing
(CLOSE) price for the day.
• The column that lists the net change between that day’s
closing price and the previous day’s price is usually last and
abbreviated as NET CHG.
149
It is important to note that not all newspapers carry the stock

symbols; some use the abbreviated name. Bold-face is used to
highlight those stocks that have changed five percent or more from
their previous closing price. Underlines are used to show those with
large changes in volume compared with the issue’s average trading
volume.
The major indexes and individual stock quotes are listed in local daily
newspapers and in the major financial newspapers such as The Wall
Street Journal or The New York Times.
You can also find stock quotes online from financial reporting
websites, index websites (e.g., nasdaq.com, nyse.com, and otcbb.
com), and some brokerage websites.
COMMIT THE SEVEN RULES OF INVESTING TO MEMORY
Before launching yourself as an investor, you should commit the

Seven Rules of Investing to memory. If you follow these rules during
your journey, they can help keep you on the straight and narrow path
toward comfort and security.
• Rule 1: Know what kind of income you have to work with. Are
you dealing with earned, portfolio, or passive income?
• Rule 2: Convert earned income into portfolio income or

passive income as efficiently as possible. This will not only put
your money to work for you, but also increase the chances that
your funds will grow. For example, an investor might purchase
a multi-family home, live in one unit, and rent out the others to
cover the debt service, or rent out all the units for a positive
cash flow, investing the profits in securities. A good advisor can
tell you how to handle investments in ways that maximize tax
efficiency.
• Rule 3: Purchase securities with positive returns. Obviously,

securities are bought to serve as assets, yet some securities lose
value and become liabilities. While no investment is risk-free,
the educated investor will more often than not buy securities
that provide a good return on investment.
150
• Rule 4: Become your own best asset instead of your own

liability. A good investor buys undervalued securities in a bear
market or lucrative real estate in foreclosure. A bad investor
locks in losses on a stock by panicking in a market slump.
An educated investor is emotionally neutral when making
investment decisions.
• Rule 5: Be prepared for anything; don’t try to predict what

will happen or when. Investing is a skill, not a science. The
Zen swordsman disciplines body and mind to counter any
blow spontaneously; he does not anticipate the moves of
an opponent, for that impedes his ability to react. Likewise,
professional investors know they cannot control the real estate
or stock market, let alone the global economy. Instead, they
train themselves to be financially intelligent, to think confidently
and creatively when opportunities or problems arise.
• Rule 6: Learn to trust that, when a good deal presents itself,

the funding will be close behind. Sophisticated investors
know a moneymaking deal when they see one, and nothing
generates financial backing like the prospect of success. The
opposite also holds true: If respected investors are all rejecting
a deal, an investor should heed the red flag.
• Rule 7: Know how to evaluate risk and reward. There is risk in

every investment, but risk is a relative term. An investor who
can understand a company’s financial statement, evaluate
a business system, or take the pulse of the stock market has
a greater chance of buying an asset than a liability. Since
risk is often directly proportional to reward, anyone who
hopes to become wealthy must be able to invest more
aggressively than someone who’s content to be secure. The
more financially educated you are, the better you are able to
evaluate and minimize your risk.
151
Risk-Tolerance Quiz
What is your risk-tolerance factor? Answer the following questions:
_____ Do you consider your mortgage your best investment?
_____ Do you regularly invest in your 401k but flinch at the thought
of buying stock?
_____ Do you avoid buying stocks during a market downturn?
_____ Do you regard real estate investing as a high-stakes gamble?
_____ If you have $2,000 to invest, do you put it in a CD without

considering that it might earn more interest elsewhere?
_____ Are you hoping that Social Security will provide a safety net
for your old age?
_____ Is starting your own business a prospect you would never

consider?
_____ If someone you admire asked you to enter into a business

partnership that had potential, would you flat out reject
the offer?
_____ Are you fearful of losing your job because of the income loss?
_____ Do you stay awake at night worried about losing your job
because you think you don’t have the skills to find another?
If you answered yes to all these questions, your risk tolerance is

woefully low. Rich Dad would define low risk tolerance as the riskiest
result of all, since you’re relying on your savings, employer, and
government to take care of you. If you answered yes to only five,
your risk tolerance is average. If you answered no to all, congratula-
tions—you have the stomach for risk that could someday bring you
riches.
Remember, without some risk, there can be little reward.
152
TECHNICAL PATTERNS
To use technical analysis to its fullest potential, an investor needs to

be able to recognize and understand four technical patterns: trend,
support, resistance, and volume. So, for our final chapter on investing
in the stock market, we will describe these four key patterns that can
help you determine the proper timing for your trades.
TRENDS
The concept of trend is the most important topic to understand in

technical analysis. A trend is an indicator of the “general direction”
of stock prices. Investors can use trends as a gauge to know when to
buy and sell… basically, trading in the direction of the trend.
Charts used in this book are courtesy of EduTrader™ software.
There are three types of trends:
1. Uptrend
2. Sideways trend (“trendless”)
3. Downtrend
153
Uptrend
An uptrend is characterized by higher lows and higher highs. It is

established by drawing a trendline that connects the lows (referred
to as reversal points).
The following is an example of an uptrend:
The more often the price bounces off the trendline in the direction of
the trend, the stronger the trendline becomes.
The longer and flatter the trendline is, the stronger it becomes.
The steeper a trendline becomes, the more difficult it is to sustain

because, if it continued, it would result in extreme stock prices. In
other words, steep trendlines will typically be broken rather quickly
and abruptly, so you will usually not rely on them to hold up as you
make your overall forecast.
154
The following is an example of a steep trendline:
Sideways Trend (“Trendless”)
A sideways trend is established by connecting the highs with the

highs and the lows with the lows. Trendless or flat stocks typically move
in a sideways pattern, and it is not uncommon for them to have high
price points and low price points that match.
When a stock exhibits this type of price pattern, it is commonly

referred to as channeling (these times of sideways movement are
also referred to as consolidation). Channeling stocks can assist you
in making your forecast. However, you must keep in mind that these
stocks are not going to stay in these channels forever. At some point,
they will break out and move higher or lower.
155
The following is an example of a sideways trend:

Downtrend
A downtrend is characterized by lower highs and lower lows. It is

established by drawing a trendline that connects the highs (referred
to as reversal points).
The following is an example of a downtrend:

156
The more often the price bounces off the trendline in the direction of
the trend, the stronger the trendline becomes.
The longer and flatter the trendline is, the stronger it becomes.
The steeper a trendline becomes, the more difficult it is to sustain.
Price Moves in Waves
Of course, one might argue that price movement is a random

variable, meaning no one can predict what prices will do in the
future. And minute to minute, that may be the case. But if you plot
every buy and sell transaction on a stock chart, you can begin to see
that price actually moves in waves.
First, there is a buying wave, which is just an imbalance of buyers and

sellers where more buying pressure pushes prices higher. Then, there
is a selling wave where there are more sellers than buyers and the
selling pressure pushes prices lower.
The trend takes into consideration the peaks and valleys of these
price waves. By comparing the pattern of the waves’ peaks and
valleys, you gain a sense of the general direction of the stock price.
Your understanding of how stock prices trend and your ability to
identify those trends will help you coordinate your buying or selling
decisions with the majority of traders in the market. In a sense, you
ride the wave, buying when an uptrend begins, and selling when you
reach a peak and a downtrend begins.
SUPPORT AND RESISTANCE
Support comes at the end of a selling wave. It is commonly defined

as the price level or zone where stock buyers outweigh stock sellers
(i.e., demand for a stock overwhelms supply). This change in supply
and demand stops the decline and pushes the price of the stock
higher.
Resistance comes at the end of a rally or buying wave. It is defined

as the price level or zone where sellers overpower buyers, demand
decreases, and the stock price falls. Thus, the resistance level stops
the advance of the uptrend.
157
Price Action (The Impact of Support and Resistance)
Support and resistance are like the floor and ceiling of a stock,
signifying the key moment where the forces of supply and demand
meet. Prices are determined by too much supply (down) or demand
(up), so as demand increases, prices advance and as supply
increases, prices decline. When supply and demand are equal, prices
move sideways.
Traders use these areas of support and resistance to help them make
their forecasts.
In making your forecast, use past areas of support (floor) and

resistance (ceiling) to predict where a stock’s price will stop falling or
rising. A stock will commonly move between these areas of support
and resistance as it moves up, down, or sideways. It may help to think
of it as similar to an elevator moving between floors.
Most technicians acknowledge that technical analysis is not an exact

science; therefore, these support and resistance areas are viewed
158
as zones rather than specific price points. Extending these zones of

support and resistance can assist you in predicting where a stock’s
price may stop moving up or down in the future.
Recognizing Areas of Support and Demand
Support represents the point where demand outweighs supply. Logic

states that as price declines toward support and gets cheaper,
buyers become more inclined to buy and sellers become less
inclined to sell.
The more often the price hits this area and moves back up, the
stronger this floor or support becomes.
Your ability to recognize these areas of support can help you make
your forecast and find better entry points into a stock.
159
Resistance represents the point where supply outweighs demand.

Logic states that as price ascends towards resistance and becomes
more expensive, sellers become more inclined to sell and buyers
become less inclined to buy.
The more often the price hits this area and moves back down, the
stronger this ceiling or resistance becomes.
Recognizing these areas of resistance can help you make your

forecast and provide better exit points out of a stock.
Resistance Becoming Support and Support Becoming

Resistance
Commonly, after a stock has experienced resistance at a certain

price and then manages to break above that resistance point, it will
then find support at that level.
The same concept applies for support. Once a stock falls below
a level of support, it would be anticipated that as the stock
approaches that level, it would be met with resistance in the future.
160
When a stock falls below support or breaks above resistance, those

zones or areas will generally represent future resistance or support.
This information can help you in making your forecast.
Magnified Move after Breaking Resistance

161
After a key level of resistance is broken, it is common for a stock to

experience a magnified move to the upside. Typically, the more often
and longer this area of resistance is confirmed before the breakout
occurs, the more exaggerated the movement becomes, especially if
the breakout is accompanied by higher than normal volume (we will
discuss volume in a moment). Understanding upside breakouts can
assist you in making your forecast, so you can take advantage of this
movement when it occurs.
Magnified Move after Breaking Support
On the other hand, after a key level of support is broken, it is common

for a stock to experience a magnified move to the downside.
Typically, the more often and longer this area of support is confirmed
before the breakout occurs, the more exaggerated the movement
will become, especially if the breakout is accompanied by higher
than normal volume. As with understanding upside breakouts,
understanding downside breakouts can help you with your
forecasting and give you the opportunity to take advantage of these
types of movements in a timely fashion.
162
VOLUME
Volume is the total number of shares traded (both bought and sold)
over a given period of time. It provides valuable information about
the current interest in a stock, including whether or not there is more
or less interest than normal in the stock.
Volume is displayed as a histogram. Each vertical bar represents the

total number of shares traded during that period.
When the vertical bar is black, it means the closing price was
higher than the previous period’s closing price. When it is red, it is
demonstrating that the close was lower than the previous period.
Volume’s primary function is to demonstrate the conviction of a

stock’s movement, and to confirm the current trend. When volume
is not confirming the trend, a divergence is forming. Divergences are
early warning signs that a change may be coming.
163
Volume can also be used as a confirmation tool. When prices trend,

the volume increases as more and more traders take interest in the
stock. Thus, an investor can use increased volume levels to confirm
price movements.
164
Section 4: In Closing
In Closing
IN CLOSING
We hope you have found this guide to be a useful tool in helping you
explore potential investing opportunities and develop your financial
IQ. But we also hope you will not stop here. We encourage you to ac-
tively expand your financial intelligence, taking advantage of every
opportunity to grow your knowledge base and, ultimately, take what
you learn to gain greater control over your financial future.
This is an important directive for anyone, but it is positively critical for

you. That’s because financial intelligence is the lifeblood of the en-
trepreneur. It’s how business owners and investors get paid (the more
financially intelligent you are, the more money you can make). It’s the
tool savvy individuals use to grow wealth. And it’s what helps you cre-
ate solutions when you are faced with money problems.
In fact, a well-developed core of financial intelligence can help you

figure out how to earn more money, build security for retirement, af-
ford the things you desire, and protect the things you have. It can also
help you filter financial advice, make more informed investment deci-
sions, minimize your tax liability, and develop more profitable business
ventures. In short, developing your financial intelligence is critical for
not only what it can help you achieve, but also what it can help you
avoid.
So, cultivate your financial intelligence. Learn the basics of economic

history, accounting, taxes, investing, and building businesses to create
the foundation of your financial literacy. Open your eyes, ears, and
mind to information that’s all around you (a wealth of information
can be found in financial magazines like Forbes, newspapers such as
the Wall Street Journal, the business page of your local newspaper,
and financial news broadcasts on television and the radio). And be-
come financially intelligent in these five key areas:
• Making more money
• Protecting your money
• Budgeting your money
167
• Leveraging your money
• Improving your financial information
This guide has been a good place to start. Use it to help you deter-
mine the investment paths you would like to pursue and become
more knowledgeable about. Then, seek out the mentors, business
relationships, funding resources, and educational opportunities that
will help you turn your entrepreneurial dreams into reality.
And remember: Today’s entrepreneur faces exciting opportunities

as well as tough challenges. But armed with unwavering determina-
tion and strong financial intelligence, there is a world of possibility just
waiting to be explored. So, don’t miss a single opportunity. Get out
there and explore!
168
Section 5: Glossaries
Glossaries
GLOSSARY OF COMMON BUSINESS-RELATED

TERMS
A
Accounting—Recording and bookkeeping financial transactions in
terms of money and numbers.
Accounting Period—Financial statements are calculated for a

specific period of time (a month, quarter, or year).
Accounts Payable—What your business owes to creditors and

suppliers for goods and services received.
Accounts Receivable—The amount of monies due to you by

customers for goods delivered or services rendered.
Accrual Accounting—An accounting system where income is

realized when earned, not when received; expenses are recorded
when incurred, not when paid.
Accrued Payroll—Money due to employees for work already

completed.
Accrued Payroll Taxes—Employment taxes due to state or federal

government sources for work already completed by employees.
Appraisal—Opinion or estimate of the value of something.
Assets—Items of value that the company owns.
Audit—A verification of financial and accounting records conducted

by a professional, such as an accountant, or a regulatory agency,
such as the Internal Revenue Service.
Automatic Data Processing—Processing data by computer and

electronic accounting machines.
171
B
Balance Sheet—A financial statement that displays your assets and
liabilities at a point in time and reflects the net worth of the company.
Bankruptcy—The voluntary condition where a business or insolvent

person cannot pay the debts owed to creditors and therefore
petitions for bankruptcy or is put in bankruptcy by creditors.
Beacon Score—A score on your credit report that is used to

determine your creditworthiness.
Bond—A promise by a third party to repay a principal and interest if

another party does not make payment.
Book Value—The base liquidation value of a company (assets minus

liabilities, not including any intangible assets).
Break-Even Point—The point at which the volume of sales equals the

total cost.
Business Plan—A document from a company’s management

team that details a comprehensive plan that clearly describes the
proposed past, present, and future objectives for the business.
C
Capital—Goods used to make income. Also, the assets of a business
minus its liabilities (or “net worth”).
Capital Asset—Property and equipment held for long periods of time

that cannot easily be turned into cash.
Cash Accounting—An accounting system where income is realized

when collected, not when earned; expenses are recorded when
paid, not when incurred.
Cash Discount—An incentive or discount offered to a buyer if the

debt is paid early or within a certain amount of time.
172
Glossaries
Cash Flow—The amount of money left over after all your expenses
and finances are paid for a certain period of time (month, year, etc.).
Caveat Emptor—Latin term meaning “Let the buyer beware” (i.e., the
buyers make purchases at their own risk and should examine items
before taking possession of them).
Charge-Off—An uncollectible accounts receivable balance. Also

known as a “write-off.”
Collateral—Property or other assets of value offered as security for a

loan.
Collateral Document—A legal document stating what you are

offering as collateral.
Compound Interest—Interest that is added to the principal amount

and the original interest accumulated.
Consolidation—When two or more companies are combined into

one under a new name. Note: Not to be confused with merger, which
occurs when two or more companies are combined under the name
of one of the companies and no new entities are formed.
Consortium—A group of organizations or companies that invest a

large capital amount in activities that an individual member of the
group could not fund on their own.
Contingent Liability—A liability that depends on a future event that

may or may not occur.
Contract—A written agreement between parties where each agrees

to certain terms.
Corporation—A business organization granted a state charter that

separates the entity from its owners.
Costs—The expenditure of resources necessary to bring a good or

product into existence.
173
Credit Rating—A profile of a customer used to determine the

customer’s potential for prompt payment of debts.
Credit Report—A history of repayments on past liabilities.
Current Assets—Assets that could be converted to cash within one

year’s time. This includes things such as the money you have in
checking and savings accounts, the marketable securities held by
your business (stocks, bonds, and other investments), your accounts
receivables (the money your customers and clients owe you), and
any inventory you have on hand.
Current Liabilities—What you owe, payable within one year’s time. This
includes accounts payable, accrued expenses such as salaries and
payroll taxes, notes payable, and any other debts that have a due
date within less than one year’s time.
Current Ratio—This figure (total current assets divided by total current

liabilities) is used as an indication of the current financial strength of
a business (e.g., whether or not the company can service its current
debt).
D
Debenture—An unsecured debt that is not backed by collateral. It
allows the holder to receive the principal and interest installments
based on the integrity of the borrower.
Debt Financing—Financing where you or your business receive a

long-term loan (by selling bonds or notes) that must be paid back
according to a predetermined schedule and interest rate.
Debt/Worth Ratio—Total liabilities divided by tangible net worth. Also

referred to as the leverage ratio. It is an indication of the amount of
money contributed by creditors in relation to the amount of money
contributed by the owners.
Default—Failure to repay a loan or otherwise meet a term or

contractual obligation due.
174
Glossaries
Depreciation—A decline in the value of equipment and property

due to physical deterioration, time, or the advancement of new
products.
Divestiture—Sale of a company or change of control to another

group.
E
Earning Power—The ability of a company to turn a profit.
Employee Stock Ownership Plan (ESOP)—Stock in a company that is

allocated to its employees over time.
Employer Identification Number (EIN)—An EIN is a taxpayer

identification number issued by the IRS and used to identify the
tax accounts of employers, certain sole proprietors, corporations,
partnerships, trusts, estates, and other entities.
Enterprise—Another word for a business or a collection of

establishments owned by one company.
Entrepreneur—A person responsible for starting and managing a

business.
Equity—Measure of ownership in a business.
Equity Financing—Selling a portion of your company in the form

of common or preferred stock to outside investors, thus giving the
investor the right to share in the company’s profits without the
obligation of repaying the funds.
Equity Partnership—A limited partnership that provides start-up

capital to businesses.
Establishment—One unit of a business, located separately from its

parent enterprise or as a stand-alone.
175
F
Factoring—The selling of accounts receivables to another firm at a
discounted rate.
Fair Market Value—The price at which an educated buyer would buy

and an educated seller would sell a business.
Financial Reports—Reports such as income statements, cash flows,

and balance sheets that are used when documenting the financial
aspects of your business.
Financing—New capital given to a business, usually via a loan.
Fiscal Year—An accounting period consisting of 12 months.
Fixed Assets—Assets that are used to operate the business and

produce revenue, but are not for sale. Examples would be office
furniture, office equipment, company vehicles, and machinery.
Fixed Cost—A cost that does not vary with the volume of sales or
production.
Flow Chart—A graph using symbols to chart the analysis of a

problem.
Franchise—A business entered into that has a predetermined plan

and product line.
G
Generally Accepted Accounting Principles (GAAP)—Accepted
accounting procedures and rules established by the Financing
Accounting Standards Board (FASB) that have helped to standardize
financial reporting.
Goodwill—An intangible asset that is based on a company’s

reputation with the buying public, its vendors, and community
relations.
176
Glossaries
I
Income Statement—Also referred to as a Profit and Loss Statement.
This type of financial statement summarizes your total net income
(or loss). This is calculated by subtracting your expenses (e.g., payroll,
advertising, and insurance) from your income (e.g., revenue, sales,
and interest).
Incubator—A facility that houses several new businesses and

encourages entrepreneurship. They share common services such as
meeting rooms, phone systems, and accountants, and are usually in a
technology-related field.
Independent and Qualified Public Accountants—Accountants are

considered independent when they have no personal interest in
the client’s business. They are considered qualified when they hold a
license to practice or have worked as a public accountant for five or
more years and are accepted by the Small Business Association.
Industrial Revenue Bond (IRB)—A bond issued by the government to

a private user to finance the construction of commercial facilities that
serve the public.
Innovation—The creation of a new idea, product, or service.
Insolvency—Borrowers are considered to be insolvent when they

cannot currently pay a financial debt due.
Intangible Assets—Non-physical assets that have usually been

developed over time through creativity, research, and effort. They
include things such as the value of patents, brand equity or brand
name recognition, consumer goodwill, trademarks, copyrights, and
research and development.
Inventory—A list of the raw materials, goods, merchandise, supplies,

and finished as well as unfinished products a company has on hand.
Investment Banking—When an institution purchases and sells

securities and issues funding for businesses, but does not accept
deposits.
177
Invitation for Bids—Soliciting offers following government rules and

regulations, but not restricting any bidders by asking for specific
requirements.
J
Job Description—A detailed listing of the tasks performed for a
certain job, including duties, training, and any physical demands.
Job Sharing—An employment situation in which two people share

the tasks and hours of one job instead of two individual positions.
L
Lease—A document signed to get temporary use of a property.
Lending Institution—An institution, such as a bank, that issues loans.
Leveraged Buy-Out—To purchase a company using mostly borrowed

money.
Liabilities—In terms of financial liability for a business, this is what the

company owes. In terms of general liability, this can refer to any type
of obligation or debt (financial, legal, or otherwise).
Lien—A claim or encumbrance on another’s property asserted in

order to secure payment upon a debt. For example, when securing
a loan, an encumbrance can be placed on the property until the
property is sold or paid for.
Liquidation—The selling of company assets to pay off creditors, debt,

and shareholders.
Liquidation Value—The estimated proceeds (net of liabilities) that

would result from either a normal or forced sale of the company’s
assets if sold (without selling the business itself).
Liquidity—How quickly an asset could be sold and converted into

cash.
178
Glossaries
Long-Term Liabilities—Debts that are payable more than one year

from the date of the balance sheet.
M
Marginal Cost—The cost associated with the production of one more
additional unit.
Markup—The difference between the cost to retailers and what they

actually charge the consumer.
Merger—When two or more companies are combined under the

name of one of the companies. No new entities are formed. Note:
Not to be confused with consolidation, which occurs when two or
more companies combine into one under a new name.
Multi-Level Marketing (MLM)—Offering commission to distributors who

sell your goods or services.
N
Net Worth—Assets minus total liabilities and debts. It reflects the
business owner’s equity in the company.
Notes and Accounts Receivable—Money owed to a company for

goods purchased by credit, often involving liquidation.
O
Obligations—A duty owed to another; any debts requiring present or
future payment.
Outlays—Cash payments for loans and costs pertaining to them.
Overhead—The continuing expenses of a business not directly

related to production (e.g., rent and insurance).
179
P
Partnership—Two or more people who manage an unincorporated
business. They share profits, losses, assets, and liabilities.
Patent—The right to make, use, or sell/license an invention you

created for a specified time period. You must file an application for
patent rights with the United States Patent and Trademark Office
(USPTO).
Product Liability—A type of liability that applies to sellers and

manufacturers of goods.
Profit and Loss Statement (P & L)—An income statement that shows
earnings, expenses, and net profit.
R
Ratio—Relationship of one item divided by another item within
financial statements.
Request for Proposal—Solicitations by companies to bidders for a

proposed plan of action to solve a specific problem.
Return on Investment (ROI)—The income that an investment returns.

Profit based on the funds spent to reach it.
S
Sole Proprietorship—An unincorporated business owned by one
individual.
Standard Industrial Classification Code (SIC)—A 4-digit number used

to identify a business and its activities. The 4-digit code identifies
the sector-specific industry that a company is a member of. The
first two digits identify the broad industrial sector (such as SIC code
37, Transportation Equipment) and the last two digits identify the
company’s specialty within this broad sector (such as 3716, Motor
Homes).
180
Glossaries
Surety Bonds—A pledge used to back a company if a firm does not

complete a contract.
T
Tax Number—A number used by a business so that it does not have
to pay sales tax on goods and products bought at wholesale.
Turnover—The ratio of annual sales to average inventory of goods per

fiscal year.
U
Undelivered Orders—The amount of goods that have been
purchased or have an agreement to purchase that have not been
given to the consumer as of yet.
V
Valuation—The appraisal or perceived value of a business at a
specific point in time.
Variable Cost—Costs that do not stay consistent based on the output

level of production of goods and services.
Venture Capital—Money given to a new, promising business with

growth potential.
W
Workers’ Compensation—A state-mandated form of insurance
covering workers who suffer job-related injuries or illness.
Working Capital—Money available to the business to finance current

operations and grow (current assets minus current liabilities equals net
working capital).
181
GLOSSARY OF COMMON REAL ESTATE

INVESTMENT TERMS
A
Addendum—Clauses that are added to the end of a contract which
supersede what is written in the contract.
Agreement of Sale—A written signed agreement between the seller

and the purchaser in which the purchaser agrees to buy certain real
estate and the seller agrees to sell upon terms of the agreement.
Also known as contract of purchase, purchase agreement, offer and
acceptance, earnest money contract, or sales agreement.
Amortization—A gradual paying off of a debt by regular periodic

installments which pay principal and interest over a specified period
of time.
Annual Percentage Rate (APR)—The effective rate of interest for a

loan per year.
Appraisal—An opinion or estimate of the value of a property at a

given date.
Appreciation—Increase in value of a property.
B
Broker—An individual or firm which acts as an intermediary between
a buyer and seller, usually charging a commission.
Buyer’s Market—Market conditions that favor buyers (i.e., there are

more sellers than buyers in the market).
C
Cash Flow—The amount of cash derived over a certain period of
time from an income-producing property. Also, cash receipts minus
cash payments over a given period of time.
182
Glossaries
Certificate of Title—An opinion rendered by an attorney as to

the status of title to a property, according to the public records.
This certificate does not hold the same level of protection as title
insurance.
Clear Title—A marketable title, free of liens and legal questions as to

the ownership of the property. Most lenders require a clear title prior
to closing.
Closing—The act of transferring ownership of a property from seller

to buyer in accordance with a sales contract. Also, the time when
a closing takes place. Also, the process of signing the documents to
transfer property.
Closing Costs—Expenses incurred by the buyer and seller in a real

estate or mortgage transaction over and above the price of the
property.
Closing Statement—The settlement statement that discloses all of the

financial information of the transaction (including all costs) for the
buyer and seller.
Cloud on Title—An outstanding claim or encumbrance that, if valid,

would affect or impair the owner’s title.
Collateral—Assets pledged by a borrower to secure a loan or other

credit, and subject to seizure in the event of default.
Commission—The fee charged by a broker or agent when selling real

estate.
Comparative Market Analysis (CMA)—A comparison of sales prices of

similar properties in a given area for the purpose of determining the
fair market value of a property. Also referred to as comps.
Consideration—Anything of value given to induce another to enter

into a contract.
Contingency—Conditions which must be satisfied before the buyer

can close the purchase of a property.
183
Contract—A binding agreement between competent parties to do

or not do certain things for consideration.
D
Deed—A written document by which title to real property is
transferred from one owner to another.
Deed of Trust—Used in many states instead of a mortgage to secure

the payment of a note.
Defective Title—Any recorded instrument that would prevent a

grantor/seller from giving a clear title.
Depreciation—Decline in the value of a house due to wear and tear,

obsolescence, adverse changes in the neighborhood, or any other
reason.
Disclosure—Statement of fact(s) concerning the condition of the

property for sale and the surrounding area.
Due on Sale Clause—A clause in the deed of trust or mortgage that

states that the entire loan is due upon the sale of the property.
E
Earnest Money—A deposit made by a buyer of real estate towards
the down payment to evidence good faith. This money is typically
held by the real estate broker or the escrow company.
Encumbrance—A legal right or interest in land that affects a good or

clear title and diminishes the land’s value.
Equity—The property value minus what is still owed, such as loans or

liens against the property.
Escrow—An account held by the lender into which a homeowner

pays money for taxes and insurance.
184
Glossaries
F
Forbearance—A lender’s postponement of foreclosure in order to
give the borrower time and an opportunity to make up for overdue
payments.
Foreclosure—A legal sale of property forced by the lender when the

borrower defaults on the mortgage loan.
For Sale By Owner (FSBO)—A property for sale that is not listed with a
real estate broker and therefore will not be listed on the MLS.
Free and Clear—A property that has no liens. See Clear Title.
I
Income Property—Real estate that generates rental income.
L
Lien—A claim against the property for the payment of a debt,
judgment, mortgage, or taxes. A lien must be satisfied when the
property is sold.
Lis Pendens—”Lawsuit Pending.”
M
Market Value—The highest price that a buyer would pay and the
lowest price a seller would accept on a property. Market value may
be different from the price a property could actually be sold for at a
given time.
Mortgage—A written legal agreement that creates a lien against a

property as security for the payment of a debt. Also, a loan to pay
for real estate that usually includes interest rates and a payment
schedule.
185
Mortgage Lender—A lender that specializes in originating, selling, and

servicing loans. They generally sell their loans to investors, but may
continue to service them.
Mortgage Broker—An individual or company which brings borrowers

and lenders together for the purpose of loan origination, but which
does not originate or service the mortgages. They are paid a fee by
the borrower or the seller at the closing.
Multiple Listing Service (MLS)—A group of brokers joined together in

a marketing organization for the purpose of pooling their respective
listings. In exchange for a potentially larger audience of buyers, the
brokers agree to share commissions. The listings are pooled by using a
computerized network.
N
Note—A legal document that obligates a borrower to repay a
mortgage loan at a specified interest rate during a specified period
of time or on demand.
Notice of Default—A formal notice to a borrower declaring that a

default has occurred and that legal action may be taken.
O
Option—In the case of real estate, the right to buy a property at a
specific price within a specific time period.
P
PITI—Abbreviation for principal, interest, taxes, and insurance, which
may be combined in a single monthly mortgage payment.
Promissory Note—A signed legal document that acknowledges the

existence of a debt and the promise to repay it.
Public Sale—An auction of property that is open to the general

public.
Purchase Agreement—See Agreement of Sale.
186
Glossaries
R
Real Estate Broker—A licensed individual who arranges the buying
and selling of real estate for a fee.
Real Property—Land including trees, minerals, and any permanent

fixtures attached to it.
Realtor—A real estate professional who is a member of the National

Association of Realtors.
Refinance—Obtaining a new mortgage loan on a property already

owned, often to replace existing loans on the property.
S
Sales Agreement or Sales Contract—See Agreement of Sale.
T
Tax Lien—Lien for nonpayment of taxes
Tax Sale—Public sale of a property at an auction by a government

authority as a result of nonpayment of taxes.
Time is of the Essence—Legal phrase in a contract requiring all

references to specific dates and times noted in the contract be
interpreted exactly.
Title—A legal document establishing evidence of ownership.
Title Insurance—An insurance policy which protects the insured

against loss arising from a property ownership dispute. Title insurance
policies are typically obtained for the buyer and the lender.
Title Report—A document indicating the current state of title. The

report includes information on the current ownership, outstanding
deeds of trust or mortgages, liens, easements, covenants, restrictions,
and any defects.
187
Title Search—An examination of the public records to determine the

ownership and encumbrances affecting the property.
U
Unencumbered Property—Real estate with free and clear title.
W
Warranty Deed—A deed which guarantees the title from the seller to
the buyer.
Z
Zoning—Areas may be zoned to specify use of a property (e.g.,
residential, commercial, and agricultural). These zoning ordinances
are normally enforced by the city or the county.
GLOSSARY OF COMMON FINANCIAL

INVESTMENT TERMS
10–K—Annual report required by the SEC each year. It provides a

comprehensive overview of a company’s state of business. It must
be filed within 90 days after fiscal year end. A 10-Q report is filed
quarterly.
12b-1 Fees—The percent of a mutual fund’s assets used to defray

marketing and distribution expenses. The amount of the fee is stated
in the fund’s prospectus.
A
Analyst—Employee of a brokerage or fund management house who
studies companies and makes buy and sell recommendations on
their stocks. Most specialize in a specific industry.
188
Glossaries
Annual Report—Yearly record of a publicly held company’s financial

condition. It includes a description of the firm’s operations, and its
balance sheet and income statement. SEC rules require that it be
distributed to all shareholders. A more detailed version is called
a 10-K.
Asset Allocation—Segments of a portfolio invested in different

investment types.
Average—An arithmetic mean of selected stocks intended to

represent the behavior of the market or some component of it.
Example: Dow Jones Industrial Average.
B
Basis—The price an investor pays for a security plus any out-of-
pocket expenses. It is used to determine capital gains or losses for tax
purposes when the stock is sold.
Bear—An investor who believes a stock or the overall market will

decline.
Bear Market—A prolonged period of falling stock prices, usually by

20% or more.
Bear Raid—A situation in which large traders sell positions with the
intention of driving prices down.
Bull—An investor who thinks the market will rise.
Bull Market—A market which is on a consistent upward trend.
Buyout—Purchase of a controlling interest (or percent of shares) of a

company’s stock.
C
Call Option—An option contract that gives the holder of the option
the right (but not the obligation) to purchase, and obligates the writer
to sell, a specified number of shares of the underlying stock at the
given strike price, on or before the expiration date of the contract.
189
Capital Gain—When a stock is sold for a profit, it’s the difference

between the net sales price of securities and their net cost, or original
basis.
Capital Loss—When a stock is sold at a loss, it’s the difference

between the net cost of a security and the net sale price.
Cash Dividend—A dividend paid in cash to a company’s

shareholders.
Cash Flow—In financial investments, cash flow (sometimes called

cash earnings) is earnings before depreciation, amortization, and
non-cash charges. It is sometimes called funds from operations by
real estate and other investment trusts. The cash flow of a company
is an important indicator to investors of the company’s ability to pay
dividends.
Common Stock—Value of outstanding common shares at par, plus

accumulated retained earnings. Also called shareholders’ equity.
Confidence Indicator—A measure of investors’ faith in the economy

and the securities market. A low or deteriorating level of confidence is
considered by many technical analysts as a bearish sign.
Confidence Level—The degree of assurance that a specified failure

rate is not exceeded.
Confirmation—The written statement that follows any “trade” in the

securities markets. Confirmation is issued immediately after a trade is
executed. It spells out settlement date, terms, commission, etc.
Corner a Market—To purchase enough of the available supply of a

commodity or stock in order to manipulate its price.
Coupon Rate—In bonds, notes, or other fixed income securities, the

stated percentage rate of interest, usually paid twice per year.
Current Yield—For bonds or notes, the coupon rate divided by the

market price of the bond.
190
Glossaries
D
Day Order—An order to buy or sell stock that automatically expires if
it can’t be executed on the day it is entered.
Derivative Security—A financial security, such as an option, warrant,

right, or future, whose value is derived in part from the value and
characteristics of another security, the underlying security.
Distributions—Payments from a fund or corporate cash flow.
Dividend—Distribution of a portion of a company’s earnings, cash

flow, or capital to shareholders, in cash or additional stock.
Dividend Reinvestment Plans (DRPs)—Plans offered by many

corporations for the reinvestment of dividends, sometimes at
a discount from market price, on the dividend payment date.
Many DRPs also allow the investment of additional cash from the
shareholder. The DRP is usually administered by the company without
charges to the holder.
E
Earnings—Net income for the company during the period.
EBITDA—Stands for Earnings Before Interest, Taxes, Depreciation, and

Amortization.
Equity—The value of the common stockholders’ equity in a company

as listed on the balance sheet.
Exchange—The marketplace in which shares, options, and futures on

stocks, bonds, commodities, and indexes are traded.
Execution—The process of completing an order to buy or sell

securities.
Exercise—To implement the right of the holder of an option to buy (in

the case of a call) or sell (in the case of a put) the underlying security.
191
F
Fund Family—The management company that runs and/or sells
shares of the fund. Fund families often offer several funds with different
investment objectives.
Futures Contract—Agreement to buy or sell a set number of shares of

a specific stock in a designated future month at a price agreed upon
by the buyer and seller. The contracts themselves are often traded on
the futures market. A futures contract differs from an option because
an option is the right to buy or sell, whereas a futures contract is the
promise to actually make a transaction.
G
Good ’Til Canceled—Sometimes simply called GTC, it means an
order to buy or sell stock that is good until you cancel it.
H
Hedging—A strategy designed to reduce investment risk using call
options, put options, short selling, or futures contracts. A hedge can
help lock in existing profits. Its purpose is to reduce the potential
volatility of a portfolio by reducing the risk of loss.
High Price—The highest same-day price of a stock over the past 52

weeks, adjusted for any stock splits.
Holding Company—A corporation that owns enough voting stock in

another firm to control management and operations by influencing
or electing its board of directors.
I
Industry—The category describing a company’s primary business
activity. This is usually determined by the largest portion of revenue.
Initial Public Offering (IPO)—A company’s first sale of stock to the

public.
192
Glossaries
Insider Information—Relevant information about a company that has

not yet been made public. It is illegal for holders of this information
to make trades based on it, no matter how the information was
received.
L
Limit Order—An order to buy a stock at or below a specified price or
to sell a stock at or above a specified price.
Low Price—The lowest same-day price of a stock over a certain

period of time.
M
Market Capitalization—The total dollar value of all outstanding
shares. Computed as shares multiplied by current market price. It is a
measure of corporate size.
Market Order—An order to buy or sell a stock at the going price.
Money Market Fund—A mutual fund that invests only in short-

term securities, such as bankers’ acceptances, commercial paper,
repurchase agreements, and government bills.
Mutual Fund—An open-end investment company that pools

investors’ money to invest in a variety of stocks, bonds, or other
securities.
O
Objective—In the case of mutual funds, the fund’s investment
strategy category as stated in the prospectus.
Option—A contractual agreement between two parties that gives

one of them the right, but not the obligation, to buy or sell shares of a
stock at a specified price on or before a specific date in exchange
for a market premium.
193
P
Preferred Stock—A security that shows ownership in a corporation
and gives the holder a claim, prior to the claim of common
stockholders, on earnings and also generally on assets in the event
of liquidation. Most preferred stock pays a fixed dividend, stated in a
dollar amount or as a percentage of par value. This stock does not
usually carry voting rights.
Premium—The price of an option contract, determined on the

exchange, which the buyer of the option pays to the option writer for
the rights to the option contract.
Price—Price of a share of common stock on the date shown. Highs

and lows are based on the highest and lowest same-day trading
price.
Put Option—An option contract that gives the holder the right to sell
(or put), and places upon the writer the obligation to purchase, a
specified number of shares of the underlying stock at the given strike
price on or before the expiration date of the contract.
S
SEC—The Securities and Exchange Commission, the primary federal
regulatory agency of the securities industry.
Secondary Market—A market that provides for the purchase or sale

of previously owned securities. Most trading is done in the secondary
market. The NYSE, as well as all other stock exchanges, the bond
markets, etc., are secondary markets.
Series—With options, it is all option contracts of the same class that

also have the same unit of trade, expiration date, and exercise price.
With stocks, it is shares which have common characteristics, such as
rights to ownership and voting, dividends, par value, etc.
Settlement Date—The date on which payment is made to settle a

trade.
194
Glossaries
Shares—Certificates or book entries representing ownership in a

corporation.
SIC—Abbreviation for Standard Industrial Classification. Each four-

digit code represents a unique business category, such as all those
companies involved in manufacturing.
Stock Dividend—Payment of a corporate dividend in the form of

stock rather than cash. The stock dividend may be additional shares
in the company, or it may be shares in a subsidiary being spun off to
shareholders.
Stop Order—An order to sell a stock when the price falls to a

specified level.
Strike Price—The stated price per share for which underlying stock
may be purchased (in the case of a call) or sold (in the case of a
put) by the option holder upon exercise of the option contract.
W
Watch List—A list of securities selected for special surveillance by a
brokerage, exchange, or regulatory organization. Firms on the list are
often takeover targets, companies planning to issue new securities, or
stocks showing unusual activity.
Y
Yield—The percentage rate of return paid on a stock in the form of
dividends, or the rate of interest paid on a bond or note.
195
notes
196
NOTES
notes
197
notes
198
NOTES
notes
199
notes
200
© 2012 Rich Dad Education. All Rights
© Reserved. The Rich
2008 – 2009 Rich Dad
Dadword mark andLLC.
Education, logos
Allare owned
rights by Rich XXXXXXXXX
reserved. Dad Operating
v1Co.,
6-09LLC and any such use is under license.
Rich Dad Education and Learn to be Rich are trademarks of Rich Dad Operating Co., LLC. 12RDE0325 9-12

12RDE0325 GetSmarterWithYourMoney

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

12RDE0325 GetSmarterWithYourMoney

Uploaded by

Copyright:

Available Formats

NOTICE

Rich Dad Education

DISCLOSURE FOR FORECLOSURE AND EQUITY SHARING TECHNIQUES

The Foreclosure Training course or foreclosure content presented in

There are currently a growing number of states that have enacted

DISCLOSURE FOR FORMS

All forms contained herein are provided for educational purposes

SECTION 1: STARTING YOUR OWN BUSINESS. . . . . . . . . . . . . . . . 7

Success in Your Hands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Establishing Your Path for Success. . . . . . . . . . . . . . . . . . . . . . 10

Choosing Your Business Legal Structure . . . . . . . . . . . . . . . . . 21

Developing a Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Financing Your Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Preparing for Your Company’s Future . . . . . . . . . . . . . . . . . . . 48

Real Estate Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Commercial Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Build a Knowledge Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

The Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Brokerage Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

The Role of the Economy in the Stock Market. . . . . . . . . . . . 124

Investing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Technical Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

SECTION 4: IN CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

SECTION 5: GLOSSARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Glossary of Common Business-Related Terms. . . . . . . . . . . . 171

Glossary of Common Real Estate Investment Terms. . . . . . . 182

Glossary of Common Financial Investment Terms . . . . . . . . 188

Congratulations on your desire to increase your financial IQ. The fact

Every day, there are entrepreneurs building thriving businesses when

Another reason obtaining specialized knowledge is so important

It is that way with everything. The greatest asset of any professional is

So what does? The difference between wealth builders and the

HOW VS. WHY

In the teachings of Robert Kiyosaki, he discusses the “why” of

It will take commitment on your part. If you are satisfied with

SUCCESS IN YOUR HANDS

There is no feeling like having the entrepreneurial spirit inside you

You are usually overwhelmed by the excitement and expectation

What an amazing time it is!

But as anyone who has ever ventured into business ownership

SET YOURSELF APART

Some business owners face obstacles and get discouraged, while

ESTABLISHING YOUR PATH FOR SUCCESS

• Starting your own part-time business

• Starting your own full-time business

• Purchasing an existing business

Each option comes with its own set of advantages and

FINDING THE RIGHT BUSINESS FOR YOU

First, ask yourself some important questions:

• Do I have business experience?

• Do I have capital to finance my endeavor, project, or business?

• Am I determined, assertive, and persistent?

• Do I have good communication skills?

• What is my educational background?

• What are the strengths and weaknesses of my personality?

• What is my support system? Are friends and family supportive

Another thing you’ll need to carefully evaluate will be the types of

STARTING YOUR OWN INDEPENDENT BUSINESS

There are many potential benefits to starting your own independent

Starting a business from scratch can be a challenge, but one thing

You might even take a job at such a business to gain as much

Remember to use your list of strengths and weaknesses to help

PURCHASING AN EXISTING BUSINESS