The Ten Roads to Riches

by Ken Fisher

  Folks continually scream of continued tax demands from sunny Cali.15 My friend Grover Wickersham, himself a lawyer, who helped advise on and edit this and my previous book, left California eons ago for London. He and his wife became UK citizens and had a child, Lindsey, born there, now nine years old. Only in 2008 did California stop hassling him for income tax. He will never move back. Nor will others.

  Economists Arthur Laffer and Stephen Moore noted that of California’s over-25,000 seven-figure-income families, “more than 5,000 left in the early 2000s.”16 Where to? The top 10 states with positive inflows from 1997 to 2006 included no-tax states Florida, Texas, Nevada, and Washington. That’s where you want to go. Or Tennessee, which taxes only dividend and interest income. Arizona, Georgia, North Carolina, South Carolina, and Colorado fill out the top 10, all with fairly low tax rates (as shown in the Table 9.1).17 And they came from where? Mainly from high-tax New York and California. In 10 years, New York lost 2 million people! And California lost more than 1.3 million net.18 But it’s the higher-income people leaving, not the poorest. As a land baron, follow the money. Better yet, get there before the money does.

  Best Land Baron States

  For further guidance on where to baron, look at net domestic migration of productive people over 10 years. Go to the inflow states.

  Table 9.1 Best Land Baron States

  States with Highest Net Population Inflow, 2005–2014

  State Net inflow

  Texas 1,353,981

  Florida 834,966

  North Carolina 641,487

  Arizona 536,269

  Georgia 406,863

  South Carolina 343,700

  Colorado 315,015

  Washington 286,312

  Tennessee 281,998

  Oregon 195,898

  States with Highest Net Population Outflow, 2005–2014

  State Net outflow

  New York 1,468,080

  California 1,265,447

  Illinois 669,442

  Michigan 614,661

  New Jersey 527,036

  Ohio 375,890

  Louisiana 230,747

  Massachusetts 156,861

  Connecticut 153,918

  Maryland 145,560

  Source: Arthur B. Laffer, Stephen Moore, and Nathan Williams, “Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index,” American Legislative Exchange Council (2016), Washington, DC.

  But wait—as a new land baron, you’re not building ritzy properties for the wealthy, right? True! But if top income earners flee, economic prosperity sags, as do property values, rental, and lease incomes. Said simply, the higher the proportion of rich people in an area, the better it will be for land barons. Follow the money.

  In conclusion, veer from the places losing jobs and toward those gaining them. Seek properties no one wants that can be bought cheaply but you can monetize quickly. Lever and pull more money out than you put in and fast, but don’t sell or flip. Hold on and use the increasing cash flow from your property to borrow and buy more, repeating the formula endlessly. Keep building cash flow and levering. Keep finding investors to fund down payments in exchange for a part of your action. You’re a scout, an entrepreneur, a builder, a buyer, a borrower, a planner, a salesperson, a monetizer—and all that makes you a land baron.

  BARON BOOKS

  Those are the broad-stroke basics. Learn more from these books meant for folks wanting a strategic approach to a land baron career.

  Real Estate Investing for Dummies by Eric Tyson and Robert Griswold. The Dummies books have silly titles but give good guidance for beginners—and lead to even more good reading. Eric Tyson is a friend, is trustworthy, and has your interests at heart. And Wiley publishes the For Dummies series! What more could you want? Read this one first.

  The Wall Street Journal Complete Real-Estate Investing Guidebook by David Crook. The Wall Street Journal people put out easy, fast reference books. This is no exception.

  The Complete Guide to Financing Real Estate Developments by Ira Nachem gives you the nuts and bolts for getting financing. It also walks you through creating a detailed pro forma so you can find investors and not anger them later. It’s a textbook-style book and pricier, but you can buy it used most places online.

  Maverick Real Estate Investing by Steve Bergsman. This one shows more about how the biggest names did it. It isn’t great for folks wanting prescriptive advice, but with the right expectation, you’ll enjoy it. Once you’re done with it, move on to Bergsman’s Maverick Real Estate Financing—great for land barons ready to make bigger deals.

  The Guide to Being a Land Baron

  Learn to love leverage. Debt isn’t bad. It’s good! You can’t make decent land baron returns unless you lever up. Get over your fear or get on another road.

  Monetize it. Find a good value no one wants, and trump them by filling it with tenants. If you can see value no one else does, you get a good price. And by filling it with tenants, you immediately have cash flow and leverage for your next deal.

  Don’t fool yourself. Even experienced homebuyers fool themselves about returns. There’s considerable cost in owning real estate, and it cuts into your return.

  Don’t be a flipper. I don’t care how many people you know who made a “killing” buying foreclosed properties and flipping them. Don’t do it. Bankruptcy and foreclosure are great, but flipping is inherently a short-term game and a dead-end road.

  Find a vibrant market. You don’t need to build/own in an affluent market—too expensive for beginners. You just need an area likely to remain or become prosperous. It’s easy to know—look for business-friendly communities with low taxes.

  Create a pro forma. You can’t get investors without a business plan, and you can’t do anything very big without investors. Your pro forma is the alpha and the omega. Take a class to learn how to create one or buy software online.

  Know thy code. Before you build or buy, know what arcane building codes and zoning regulations you’ll be hit with. Plan ahead for attacks by your town commies to cut down on costly delays.

  Have a reality TV show, get good at Twitter, and run for president. You can make money without TV—and keep more of it without running for office, never mind serving—but the Donald would surely say there’s no fun in that. What good is money if you never have fun?

  NOTES

  1. National Association of Realtors, Average Single-Family Existing Home Price, as of April 2016.

  2. “The Forbes 400 2016,” Forbes, http://www.forbes.com/forbes-400/list/#version:static (accessed October 11, 2016).

  3. Department of Housing and Community Development, State of California, “Median and Average Home Prices and Rents for Selected California Counties,” http://www.hcd.ca.gov/hpd/hrc/rtr/ex42.pdf (accessed May 20, 2008).

  4. Federal Housing Finance Board, “National Average Contract Mortgage Rate,” http://www.fhfb.gov/GetFile.aspx?FileID=4328 (accessed May 20, 2008).

  5. City Data, “San Mateo County, California (CA),” http://www.city-data.com/county/San_Mateo_County-CA.html (accessed May 20, 2008).

  6. Ibid.

  7. Associated Press, “Ex-Billionaire Tim Blixseth Refuses Order to Account for Diverted Cash,” Oregon Live (April 30, 2016), http://www.oregonlive.com/pacific-northwest-news/index.ssf/2016/04/ex-billionaire_tim_ blixseth_re.html (accessed September 15, 2016).

  8. Edward F. Pazdur, “An Interview with Tim Blixseth, Chief Executive Officer, The Blixseth Group,” Executive Golfer, http://www.executivegolfermagazine.com/cupVII/article3.htm (accessed May 20, 2008).

  9. Ibid.

  10. “The Forbes 400 2016.”

  11. Alan Finder, “Koch Disputed on a Benefit to Developer,” New York Times (January 16, 1989), http://query.nytimes.com/gst/fullpage.html?res=950DE5D9133FF935A25752C0A96F948260&sec=&spon=&pagewanted=all (accessed May 20, 2008).

  12. Steve Rubenstein, “Ex-Armory Turns into Porn Site,” San Francisco Chronicle (January 13, 2007), http://www.sfgate.com/cgi-bin/article.cgi?
f=/c/a/2007/01/13/BAG0INI8PD1.DTL (accessed May 20, 2008).

  13. Eliot Brown, “Tech Overload: Palo Alto Battles Silicon Valley’s Spread,” Wall Street Journal (September 13, 2016), http://www.wsj.com/ articles/tech-overload-palo-alto-battles-silicon-valleys-spread-1473780974 (accessed September 15, 2016).

  14. Nathan Donato-Weinstein, “Exclusive: Irvine Company’s Mission Town Center in Santa Clara Is Dead, for Now,” Silicon Valley Business Journal (March 16, 2016), http://www.bizjournals.com/sanjose/news/2016/03/16/exclusiveirvine-companys-mission-town-center-in.html (accessed September 15, 2016).

  15. George Andres, “For Tech Billionaire, Move to Nevada Proves Very Taxing,” Wall Street Journal (July 17, 2006).

  16. Arthur B. Laffer and Stephen Moore, “Rich States, Poor States, ALEC-Laffer State Economic Competitive Index,” American Legislative Exchange Council, Washington, DC (2007), http://www.alec.org/am/pdf/ALEC_Competitiveness_Index.pdf?bcsi_scan_23323C003422378C=0&bcsi_scan_filename=ALEC_Competitiveness_Index.pdf (accessed May 20, 2008).

  17. Ibid.

  18. Ibid.

  10

  THE ROAD MORE TRAVELED

  Like boring, predictable paths? The sure and steady way could be yours.

  The least sensational, but most reliable, road to riches is saving linked to good investment returns. This is very American—the Calvinist catechism, rooted in Judeo-Christian values of virtue. Frugality and industriousness do pay. This road is wide enough for anyone with a paycheck. It has spawned thousands of how-to books over the decades, ranging from Suze Orman to The Millionaire Next Door.

  The first step is saving. Fact: Some folks just can’t—regardless of income. Some make half a million a year and blow it all. Some are naturally frugal. Some folks can improve. Others never will. But saving is a must here.

  Step two is getting OK, but not phenomenal, investment returns. The magical power of compound interest assures even the lowliest part-time garbage collector can do this if he or she saves a few thousand a year. Forbes list? No. But anyone can be a multimillionaire.

  Note: A million isn’t much anymore! A million invested well kicks off about $40,000 a year in cash flow (see why later)—not enough to feel rich. But it isn’t a stretch to hit maybe $10 million-plus with an OK job and discipline. This road isn’t sexy. Frugal isn’t known for sexy! But the good news: This road doesn’t require degrees—or even high school (but education helps with better- paying jobs). This is the exact reverse of the road less traveled. It is the road more commonly traveled to riches.

  INCOME MATTERS

  Earn more to save more—easy as that. Garbage collectors can’t save as much as a doctor may. That doesn’t mean doctors save more—they’re notoriously bad savers—but the possibility is there. Find a job in a well-paying, relevant field you like. If you’re in a sinking industry, get a different job. If you live in a low-paying geography, move. Where? Preferably to Texas, Florida, or Washington! All have no state income taxes and in 10 years will have more better-paying jobs than high tax states. (Read more about why some states are just better, and others worse, in Chapter 9.)

  In any career, consider the cost/benefit payoff. How long must you go to school and intern? Is it worth it? Review Chapters 1 and 7 on sectors likely to become or remain relevant. Some may bristle and say, “But you should do what you love!” Yes, but like Marilyn Monroe would say—my goodness, doesn’t it help if what you love pays a lot, too? If your passion is truly social work, teaching kindergarten, or quilting—fine. Then focus on frugality. It can be done! I have clients who were postal carriers, teachers, cops, and so on. They did it. Frugal!

  The Job Hunt

  Whether starting your career or farther along, read What Color Is Your Parachute?, the classic by Richard Nelson Bolles. First published in 1970, this annual publication helps determine what exactly you want/need from a career. Maybe you find you don’t want riches at all! You may land a high-paying job, but if you’re miserable, you won’t stick with it.

  Do what you love—but it’s better if what you love pays really well.

  OK! You know what you want to do—now find a firm paying better than its peers. Ignore job-hunting online blogs and chat rooms. They’re patrolled by job hunters knowing nothing about the firm and disgruntled current and former employees with motivation to mislead. I know a guy whose son told me he gets all his job-seeking tips from chat rooms. I haven’t figured a graceful way yet to tell the father his son is an idiot.

  Instead, think like a private equity manager. Pick up the Wall Street Journal and read about your target industry. Find folks you know in the industry. Interview them. They’ll have insight and likely help with interview material—and have the skinny on who pays what. An added benefit: When you ask people for advice, you appeal to their ego. Now, they’re invested and want to help. If they help you land a job, that’s great for you and an ego boost for them!

  Making the Pitch

  A job hunt is just a sales pitch—you’re the product. You must sell on every road! The better you sell, the faster you get a bigger paycheck. Get Guerrilla Marketing for Job Hunters 3.0 by Jay Conrad Levinson and David Perry. Ignore its nonsense about “outsourcing” being a problem. Overall, it’s a good job-hunter’s book. Also, The Job Search Solution by Tony Beshara has unique and helpful insights.

  Post your resume on Monster, Indeed, LinkedIn—all those places. But that’s not enough. You must sell. Network. Call firms that aren’t hiring and request an informational interview. Have lunch with friends of friends and friends of friends of friends. Ask what they do. Find it fascinating. Ask them for help. Don’t forget, you need a good, professional resume, so read The Elements of Resume Style by Scott Bennett.

  A job hunt is a sales pitch. Perfect yours to get more offers.

  Before you interview, practice with a friend. Don’t volunteer personal information. Talking personal stuff is (1) creepy and (2) turns off your interviewer. To ace an interview, leave your personal stuff at home.

  Once you get the job, you’re not done. Keep selling yourself. See yourself as a ride-along or potential CEO (read those chapters for tips on being a well-compensated standout). You may need to choose—will you go deep as a specialist, or broad as a manager? Both can pay well, but in your field one may pay better. Never stop researching and selling yourself. Maybe you don’t want to work this hard—your choice, but the more you earn, the more you can save. And the more you save, the more your money works for you and the richer you get on this road.

  SAVING GRACE

  How much should you save, realistically? Pick a retirement age, then calculate what you need. A financial calculator or Excel helps. (If you’re afraid of either, ask a teenager’s help.) Figure how much you want by date X. Is $2 million enough? $10 million? (Much above that and you need a really high-paying job or another road.) Will you need more or less income (inflation-adjusted) than you need now? Will your kids be done with school and life be cheaper? Can you skip the vacation home to save more? Or travel? What about other income sources? Some advisers suggest you assume 70 percent of your income postretirement. No! It’s all personal—some need more, some less. Pick a number in today’s dollars—be a touch generous to be safe. Then, adjust for inflation for date X.

  But how? Easy, even if the following formulas look scary. Basically, you assume an inflation rate. Then, pick a time in the future—say, 30 years. Then, calculate how much inflation increases the value of money today (i.e., compounding interest). To do it, use this formula:

  For those who’ve forgotten their statistics, FV is the future value—how much a dollar today will be worth later after compounding interest does its trick. PV is present value—money today. R is the interest rate—what we’re using for inflation. n is the number of years between now and then.

  To live on $100,000 in today’s dollars, figure how much that is in 30 years with inflation averaging 3 percent. Multiply $100,000 by 1 plus 3 percent, raised to the power of 30. Use Excel (it has an FV shortcu
t) or a calculator:

  Four Percent?

  I’ve said you generally shouldn’t take more than 4 percent from your portfolio annually if you want your money to last as long as you do. But don’t stocks have a 10 percent long-term annual average? Maybe, depending on the period you check. Doesn’t that mean you can take up to 10 percent yearly? Nope—not unless you want to run out of money really fast.

  Stock returns are wildly variable year to year—and extreme returns are far more “normal” than average returns, as shown in Figure 10.1. Big down years are more rare than you think, but you’ll live through a few of them. If you take 10 percent during a big down year, you must make up not only the big downswing, but you’ve put yourself an additional 10 percent in the hole. Over time, that can add up.

  By running a simple Monte Carlo simulation (find one at http://www .moneychimp.com/articles/volatility/montecarlo.htm), you’ll find annual distributions of 4 percent or less give your portfolio the best chance of lasting at least as long as you do.

  Figure 10.1 Average Returns Aren’t Normal .

  Source: Global Financial Data, Inc., and FactSet; S&P 500 Total Return, 12/31/1926–12/31/2016. May not sum to 100% due to rounding

  You need about $243,000 (more if you assume higher inflation). But how much must you save to get there? That’s easier. For your portfolio to last as long as you do, you generally shouldn’t take more than 4 percent in cash flow each year. So divide $243,000 by 4 percent to get $6,075,000. So go save $6 million.