Creating Space (The Financial Athlete #23)

“Space is the breath of art.” – Frank Lloyd Wright

Lengthen the spine to create space in the spine. Creating space within the body is essential to yoga.

Can an investor “create space” to lengthen his returns? Yes, just stay liquid – keep cash on the side!

Everyone knows to buy low and sell high. What everyone doesn’t know is that in order to buy low, you must stay liquid. During market downturns, you’ll hear investors say, “Prices are dirt cheap. I wish I had the cash to buy now!” The prices are so low partly because there aren’t enough people with money to buy the assets. Their money is stuck in other stocks with beaten down prices or in illiquid assets such as real estate.

Another common way to create space is by leverage (loans). Typically, real estate investments are made possible only with loans. Only take on a loan for a real estate investment as an incorporated entity or LLC (Limited Liability Company) to limit liability to the property.  If you are asked to sign a personal guarantee, don’t.

Interestingly, bankers do not accept paper assets (i.e. stocks, bonds) as collateral. Never borrow for the purpose of buying paper assets even if you think you have an uncanny ability for stock picking. Buying a stock with personal debt is financially dangerous; buying it on margin is even more financially dangerous. If your investment fails, the loan is still due.

Leverage is your friend when the inflow of cash produced from property exceeds the outflow of cash for interest and other expenses. Of course, there is no guarantee of on-going positive cash flow. For example, an anchor tenant in your commercial property may leave. Therefore, build a substantial reserve of cash to prepare for a drop in inflow of cash.

Be prudent about the source and terms of financing. First choice should be competitive, long-term, fixed rates available for residential real estate.

Never take on credit card debt to raise cash, even if tempted with zero interest for a period of time. Credit card debt should be paid off monthly. If you do not have the discipline to do this, then close your credit card accounts.

Pair discipline with leverage. Otherwise, eventually the results will be disastrous.

(Disclaimer: All blog entries are for educational use only.)

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2 Responses to “Creating Space (The Financial Athlete #23)”

  1. space » Blog Archive » Creating Space (The Financial Athlete #25) Says:

    […] Peggy . Excerpt: Another common way to create space is by leverage. Often, real estate investment opportunities are not possible without borrowing money. But beware of leverage’s double-edged sword. If your investment fails, a personal loan is still due … […]

  2. Principles of Joseph Pilates (The Financial Athlete #130) « Pasta Man Vibration Says:

    […] more on flowing movement, see “Creating Space” #25 and “The Yin and Yang of Pitching” #22 and Beyond the Bottom Line #126 and […]

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