“I was too weak to defend, so I attacked!” General Robert E. Lee talking about the battle of Chancellorsville.
The Global Financial Crisis (GFC) hit Australia in late 2008. My financial situation was precarious; I felt weak. But, the Australian response to the crisis was to lower interest rates to record lows. And, rents in Alice Springs were at record highs. This made for an excellent investment environment. I’d never seen such good numbers. In early 2009, you could buy a residential property in Alice Springs and it would be postive cash flow from day one. I was excited. So, even though I felt weak, I took Robert E. Lee’s advice and attacked!
Financial Issues
In late 2008, I was feeling pretty low from a financial vantage point. Here’s the laundry list of issues:
• High interest Rates. I was forking out money every month to keep my residential portfolio afloat. Even thought I was on a special deal with the bank where I got .7% off the variable rate, but it was still a negative cash flow situation. I had a substantial line of credit so I wasn’t in any danger of financial collapse. But, I have never liked to see more cash going out than coming in.
• Business Venture on the Rocks. We thought we could make a go of a failing business. But, it was too far gone and despite our efforts to make it profitable, it didn’t work. The only saving grace is the building came with the business. The building is what attracted me to the deal in the first place. So, we then offered the entire building up for rent. Even though it’s a nice building and in a nice central location, we hadn’t been able to find a tenant. It had been vacant since Jun. The cash flow situation was bad.
• I hated my job. I was working a rotating shift schedule. Twelve hour shifts. Two mids then two days. It was degrading. After all these years of working my way up to a decent position as an aerospace engineer, I was now back at the bottom. Essentially, an entry level shift worker. Granted, I made the decision to accept this position because that’s all they had on offer. But, I felt within a relatively short time I could work myself up to a much more agreeable position. But, not long into my two year contract, I could see it wasn’t going to happen. And, I could see I didn’t want any part of it. I would describe the work environment as “toxic.” It was a job where there are too many people and not enough work. If I told you we were working on a government contract, would that surprise you? Anytime you have a work environment where people don’t have enough to do, you have problems. I knew I had to get out. But, my finances were not such that I felt bold enough to just walk away. By the way, that’s just an excuse. Yes, I’m guilty of making excuses!
Look Out! Here Comes the Global Financial Crisis (GFC)
Then something happened. Something they called the Global Financial Crisis (GFC). Apparently, the whole world was facing the biggest economic meltdown since the great depression. I wouldn’t have known unless I watched the television and read the newspapers.
The GFC had virtually no negative impact on my personal financial situation. Why would it?
Employer Retirement Plan
I had very little invested in my employer based retirement plan, commonly known as a “401k” plan. I never believed in the 401k plan anyway. I just put money in it to get the company matching dollars. Even with the matching dollars, I still had doubts about this type of investment as follows:
• Too much government control; they could change the rules at will anytime.
• Too much dependency on someone else to make me wealthy.
• Too little control over the investment.
• Had to wait too long to access money.
Basically, my feeling is the 401k is not for the investors, it’s for the owners of the funds. I felt uncomfortable putting money in my 401k plan. But, I did anyway. Not enough to get me worried. It represented a very small part of my net worth.
Mutual Funds
I had some money invested in mutual funds which included Individual Retirement Accounts (IRA). Again, not enough to matter in my overall financial picture. I could lose it all and it wouldn’t have much impact on my wealth. So, the drop in my mutual fund values didn’t bother me. And I viewed these mutual funds the same as the 401k plan; a rip off. The only people who make money in mutual funds are the fund owners. So, I’m all for mutual funds; if you’re an owner. But, if you just an investor, then mutual funds are not the way to go. Anytime, you hand money to someone and say, “make me rich”, it’s a bad investment. I’ve done it. I know. It’s never worked for me.
Real Estate.
Our property investments were all doing well. In Australia, generally, the values were increasing as well as the rents. The two properties in Florida were doing alright as well. Their values had decreased but they were still attracting the same rent. Therefore from a cash flow perspective they were fine. And, since we bought these properties so long ago, the decrease in value – due to the GFC – was not significant. For instance, our two properties were probably now worth about $140,000 on the market. Two years ago they would have fetched over $200,000. But, we only paid less than $100,000 for each. So, in a crunch, we could still sell these properties and make money. Even in these “bad” economic times.
GFC – A good thing?
For me personally, the GFC was a good thing. Here’s why. The mortgage lending rates dropped to historical lows. But, at the same time, people were generally scared to jump in the “investment waters.” They were all busy listening to the negative financial news. This made for a very nice investment environment. There were some good deals out there but people were afraid to move. Therefore, I was able to secure a few good deals before people started to realize it was ok to invest. I saw the opportunity and pounced.
Short Window of Opportunity
I knew the window for action may be short lived. And it was. After a few months of low interest rates and rising rents, people started to catch on and a buying frenzy took place in town (Alice Springs). This started to happen in about March 2009. Houses were selling for higher than asking price. Bidding wars were taking place. Houses were getting snapped up before the “For Sale” sign went up. The most popular price range fell around the $400,000 mark. Any house in this price range became part of the feeding frenzy. This was mainly due to the government first home buyer’s incentive program. Most people could afford this price range. The higher priced homes were not as susceptible to the feeding frenzy market and therefore offered better value and a lot more negotiating room. Two of our acquisitions were in the high $400,000 range and therefore offered better negotiating room and a lot less competition from other buyers.
Prior to the GFC, I was having my own financial crisis. But my crisis had nothing to do with the GFC. Mine was self induced. And I knew it. When I arrived back in Australia from a 2 year work contract in the UK, I was financially independent. I just didn’t know it. I still had a JOB mentality. I was still addicted to the paycheck. I didn’t understand my financial situation well enough to know I could just walk away from the JOB.
One of my biggest obstacles was figuring out what I would do if I left my JOB. It was easier to just keep working. Just keep getting the paycheck. Just keep piling up the money. Inertia was holding me in place. It was not easy for me to make the decision to break free. It’s as if the pain of the JOB was bad, but not bad enough for me to leave. The JOB was doing me massive long term harm; lowering my self esteem, my self confidence, my ability to produce gainful results. Is it worth it to give up so much for a paycheck? I started asking myself, “What’s quality of life worth to me?”
I wanted the security of a paycheck but the adventure of an entrepreneur. I’m coming to the conclusion you can’t have both. It wasn’t until I let go of the JOB that the entrepreneurial juices really started to flow. It wasn’t until I left my JOB that I started to think much more creatively and realized I could have a better – more financially rewarding – lifestyle than when I was working at a JOB; especially a JOB I disliked so much. It’s when I left my JOB that I started to see the opportunities more clearly. It wasn’t until I left my JOB that I truly realized I didn’t need a JOB.
So, I wanted to be free from the JOB but I wasn’t willing to let go. I had the financials to do it. But, I wanted more. I wanted more security. I wanted a safe bet to make the transition almost seamless. I wanted guarantees.
Sorry, that’s not how it works. There are no guarantees. Sometimes you just have to go with your gut and what you feel is right. I avoided this path and it cost me. I knew I should leave my JOB condition but I was too scared. Because I was too scared and was seeking security over everything else I was susceptible to the “greed” bug. You know the one – get something for nothing? I was looking for a home run. One swing and it’s over the fence. I was looking for the knockout punch. I wanted a backup income that was so big it would make walking away from the JOB trivial. Again, I wanted a guarantee. I was thinking with a JOB mindset and it cost me.
The problem with the homerun or knockout strategy is it left me open to getting hammered. Just like the boxer who’s looking for the one big knockout punch. He keeps taking the big swing but that’s just the time when he’s open to the counterpunch. And often times the boxer who keeps throwing the knockout punches ends up getting knocked out himself.
When you’re looking for the “big deal” you can make judgment mistakes. You can overlook critical data and make a bad call. And just as the big deal can make you a ton of money, it can also cost you a lot too if you’re wrong. It’s called punting.
I was hungry to make deals. I was desperate to exit the “job” world. But, I also wanted the easy guaranteed exit. So, I made some financial mistakes; mistakes that lead me away from my goal of financial independence. One of these mistakes was the business venture mentioned above where I sank a lot of cash but was getting no return. I still had to pay the interest on this invested money. I was servicing this debt but getting no return. Another was a large cash investment in a stock market venture. The investment crashed to less than a quarter its original value. I guess this is where the GFC got me; my stocks went down with everyone else’s. If I had just patiently adjusted my portfolio – organized/streamlined my loans – and avoided jumping into risky ventures, I would have been set. But, that’s not how my story goes. I had to learn the hard way.
During 2007, prior to my personal financial crisis, I did make a couple of investments that turned out to be very good. At the time I didn’t know it but now they look like brilliant moves. These investments were in the “old faithful” – residential real estate. I’ll talk about these in other articles. They’re not a part of this story.
So, in late 2008, the GFC finally hit the shores of Australia and the response was to lower the interest rate to historical lows. One day I was paying close to 9% interest, the next it was down to below 5.5%. If you run the numbers, you’ll see how significant this drop can be to cash flow. In my case I went from negative cash flow every month to a multi-thousand dollar monthly income!
My first reaction to this news was to talk to my mortgage broker. He made a clever suggestion. Get all the properties valued then fix all the loans at the current interest 5.3% interest rate. The final result was 4 property loans fixed for 3 years and 3 equity line of credit accounts totaling $900,000 with a zero balance. By the way, when the new loans came up for settlement, the interest rate had dropped. So, the final interest rate was 5.12% fixed for three years. Things were looking up.
My next move was to attack. Yes, I felt weak financially. I was having trouble getting my head around my poor business investment judgment. I was concerned about having to work another 10 years in a job I hated. But, I sat down and looked at the numbers. The numbers told me this was a great time to buy. A great time to add to the portfolio. And, weak or not, I had to do it if I could find a way. I didn’t have to look far. But, I didn’t jump at it straight away either. I had to let the situation develop and get the courage to go forward. That’s the beauty of real estate, it’s slow moving, just my speed. But, like everything, there’s a window of opportunity and the window doesn’t stay open forever. Eventually, you must take action. I knew this.
In the next few articles I’ll share with you the “attack” phase of early 2009.
Story continues … Read Part 2.