This is going to be an unusual class in the Live Rich series because here I am going to talk mostly about my own experience. The reason? Owning your own business and owning rental properties are decisions that are not similar to decisions about stocks, bonds and mutual funds. Frankly, everyone who wants financial independence is going to need to understand investing, including people who will choose not to invest in traditional ways. But not everyone is an entrepreneur, and most people probably shouldn’t be landlords. Further, if you aren’t going to start your own business, you really don’t need to learn about entrepreneurship.

But the fact remains that business ownership is the fast track to financial independence. And in the interests of staying honest, I need to be clear that I never could have attained financial independence without starting my own business. I wish I could tell you that I started my own business because I could clearly see that the potential benefits outweighed the risks, but that would be a stone-cold lie. The truth is, I got lucky, and sometimes it’s better to be lucky than it is to be smart.

I started my own business in 2009. Why? Well, I had just quit working for my aunt as a financial adviser. It was the depths of the Great Recession. No one, and I mean no one, was hiring financial advisers. I did not believe that I would be capable of landing a job in my field. I started my own business because I couldn’t find a job.

I’m not making this up.

On craigslist I saw an post by Curtis Erickson. He was advertising an opportunity for someone who wanted to start a business doing taxes and providing financial advice using passive strategies. He had an office for rent, and he claimed he could show the person who took the opportunity how to increase assets under management even in a downturn.

I didn’t even know how to do taxes yet. But I knew that I wanted to be able to combine tax and financial advice, because many wealthy people said that they were frustrated with financial professionals who knew nothing about taxes. So, I decided to start my own business from nothing.

I lost money my first year. I had real nightmares for the first time since my high school days. If I had known how stressful that first year would be, I never would have started my own business. I wouldn’t have had the guts. And in fact, if necessity hadn’t forced me to look for alternatives when I couldn’t find a job, I never would have started my own business. But I had the good luck to be unemployed during a time when no one would hire me. That may seem like a strange definition of good luck, but it’s what happened to me.

I also would not have achieved financial freedom as soon as I did without buying a house in Seattle with 5 bedrooms, 3 full bathrooms and two full kitchens. I rent out most of the house to my friends. I rent to them at well below market rates, and I still end up paying very little myself for my own house.

And why did I buy that house? Simple. Rents kept rising so fast in Seattle that I finally figured out that I would be better off buying as long as I could rent out some of the rooms. Hey, at least the mortgage doesn’t go up 15% every year like rents out here do. It was necessity, or at least perceived necessity, that drove my decision.

So I had no intention of becoming a business owner, and I had no intention of becoming a landlord. But let’s be clear before moving on. If I had not started my own business, I never would have achieved financial freedom. If I had not become a landlord, I certainly couldn’t have achieved financial freedom quickly.

So here are the questions that matter to you. Should you purchase rental properties? Should you start your own business?

And the answer is: I’m not sure. I can definitely say that bad real estate investments have ruined many people. And so have failed business ventures. So these are not simple questions. In order to try to answer them, I’m going to continue with my story.

Before starting my own business, I had been tangentially involved with the world of finance since 1999. In 2003, I started working with my Aunt long-distance. She owns a financial advisory in Wisconsin. By 2004 I was full-time with her, mostly writing articles and researching financial and business strategies. I started creating and teaching classes in 2005 or 2006. In 2008 I briefly lived in Appleton, and my Aunt allowed me to work through every step in the process of bringing in a client.

The most effective way she had found of bringing in new clients started with teaching continuing education classes at the local community college. Some of the people who took those classes would sign up for a free consultation. Then, out of that group, there would be a few that needed a financial adviser. I taught the classes, met with the clients, and even signed on new clients.

Meanwhile, I had been participating a lot in the Bogleheads forum. I was often answering investor questions and dealing with pretty complex issues. That participation eventually led me to becoming a published author when the rest of the Bogleheads decided to write a book on Retirement Planning. I co-wrote one chapter. That status as a published author helped enormously when I left Wisconsin and came back to Seattle to start my own business. The book was my primary entry into getting classes of my own at community colleges here, and I also got a few of my first clients from my reputation on the Bogleheads forum.

When I left my Aunt’s firm, I already had experience, an idea of how to bring in clients, and knowledge of what works and doesn’t work in advisories. I had a network of other advisors that I could go to for information and encouragement, because through the Bogleheads forum I had met a few other advisors who had a similar investment philosophy.

On top of all that, I had other entrepreneurs as mentors. My father’s best childhood friend, Charlie Sahadi, ran an importing company in Brooklyn. (The store, Sahadi’s, is still there, and still selling fantastic food.) I had met a successful sole proprietor in Seattle who did economic research for a living. He gave me one of the two good pieces of advice I got about starting my own business. “Make sure you get a nice office, because you’re going to be spending a lot of time there.” The other good piece of advice? One word, from the wonderful Bill Schultheis: “Listen.”

The most important thing I learned in my first year as a financial advisor is that I needed to learn how to listen.

So when I started I had all sorts of advantages, but on the other hand I didn’t know how to run a business and I didn’t know how to do taxes. So I hooked up with Curtis Erickson. I learned from him how to do taxes but, more importantly, I learned what it takes to be successful. I saw him take risks, change course quickly when those risks didn’t work out, celebrate when they did work out, swallow his ego, negotiate with employees and contractors, and stick to an overall vision. And in the early years, I wouldn’t have made it without being able to do some contracting with Curtis and other CPA’s to help them with overflow tax work.

The truth is that despite all the advantages I described in my story, I still lost money my first year. And I barely made it after that. It was about four years in before the business really became comfortably successful, and remember, I don’t spend money. If I wasn’t exceptionally frugal, I’m not sure what would have happened.

Here’s why I’m relating this story to you. When you look at my story, and you ask yourself about starting your own business, what advantages do you see that you have? What disadvantages? How prepared are you for the sort of failures I experienced? Who will you partner with? And who will teach you what you still need to learn to succeed?

Now let’s move on and talk about how I became a landlord. Even when my business was easy, my living situation was not always easy. For a long time I simply rented my own apartment. It was the cheapest place I could find in Seattle. It was isolating and lonely, but it was certainly easy. When I realized that I shouldn’t be living that way any more, I moved into a house with my friend of 20 years and some other friends. That was still easy.

Then, the house next door opened up. At that time I was having a lot of fun with my dance crew, and I thought about how cool it would be if we rented a house together. Well, it was fun. But…there were a lot of things I didn’t know about the crew we had at the time. Like, the fact that one of the people in my crew would descend into a serious depression, stop making any money, and eventually have to get kicked out of the house while owing me a little over a thousand dollars–money that I will certainly never see again. Like the fact that one of the couples who moved in would have a domestic altercation that would leave the neighbor’s yard covered in trash and our street swarmed with police. Like the fact that not every renter cares about basic stuff like, oh, you know, not damaging the house and not putting giant holes in the wall.

I shudder to think of how badly I would have screwed things up if my first home was also my first experience trying to put together a household of renters. Yikes. Without that experience of learning how important it is to screen and choose your tenants, I really doubt that I would be recommending that anyone become a landlord. Being a landlord is a lot harder than it looks.

Are my experiences broadly applicable?

The questions of business ownership and rental ownership are not broadly applicable in the way that most investing questions are, because you cannot diversify the risk. So I have to go by other peoples’ experiences. And from other peoples’ experiences, I would say that my experience is broadly applicable. But of course the real question is, are the experiences I had and the lessons I learned applicable to you?

Let’s deal with the question of whether or not you should start your own business.

What are the signs that someone is going to succeed at starting a business? First, they know their strengths and weaknesses. And they have clear plans about how to exploit their strengths and deal with their weaknesses. They have experience dealing with risk, with conflict, with factors not being under their control. Or, they are at least partnered with people who have such experience. They are good at spotting talent and able to set boundaries. They have realistic ideas about financing their business, a clear plan on how to market it, and experience in either the field they are entering or experience starting businesses.

Let’s go into more detail. The following list of seven attributes and abilities is common to successful entrepreneurs according to Amy Wilkinson, who spent 5 years interviewing 200 of America’s leading entrepreneurs. My own experience doing taxes and financial planning for successful business owners confirms each of these attributes, so I can stand by this list.

First Attribute: Successful entrepreneurs are driven.

They don’t merely work hard. They work hard but also work smart and do so when no one else is watching. When you start your own business there will be times when you are the only one who knows whether you truly put in the effort you needed to in order to succeed. Will you do it?

Second Attribute: Successful entrepreneurs maintain a clear long-term vision.

What is going to keep you going when things get really hard? Where is your intrinsic motivation going to come from? What is the “why” that is going to drive you, even when you are tempted to become comfortable and complacent? What is the vision that will inspire you even when you are successful, and part of you wants to just stay on that plateau?

You’re going to need to believe deeply in what you are doing or in the problem you are solving. Either that, or you are going to have to combine business and passion in such a way that you are completely consumed by the product or service you are creating and providing. And if you want to get other people on board, you will need more than just a belief. You will need to be able to communicate that belief as a long-term vision that will inspire others, too.

Third Attribute: Successful entrepreneurs are able to spot gaps in the market place.

They can see what isn’t being done. I don’t care if we’re talking about a guy starting a barely profitable taco stand or Steve Jobs. To succeed, they have to be able to see where there is a need is that is not being met.

Ask yourself these questions. What are other people not doing, that you could build from the ground up? What is being done in one place that could be translated into a new market, and fulfill a need that is currently being ignored? Or, how can you integrate things that other people see as being contrary in order to solve a problem that people will pay to have solved? Are there problems that you wish you could just make disappear? If you would pay someone to make a problem disappear, chances are someone else will pay you to make that same problem disappear for them. Now you just have to figure out how to make that problem disappear, how to scale up the problem solving, and how to let the world know about your solution.

Better get to work.

Fourth Attribute: Successful entrepreneurs are generous, especially with small favors.

Most successful business people want to see others succeed, even in their own field. They do small favors for people, make introductions, open doors, give advice. They are willing to share their knowledge and act as mentors. One thing that Amy Wilkinson points out that I really notice now is how technology, in particular social media, makes our behavior more and more transparent. It’s easier and easier for people to find out how we act. This is something you should be thinking about almost all the time.

Fifth Attribute: Successful entrepreneurs collaborate.

They get the right partners. They don’t just have a couple of very close friends–they also have good circles of “weak” friendships. You know, if your social circle is too homogeneous, you are going to miss out on opportunities and develop a distorted view of your own strengths, weaknesses and even desires.

To be successful as a small business owner, in particular, you must know how to negotiate and how to build personal loyalty. I would add that you’ll need to know, or quickly learn, how much to trust people, and who you need to simply use to get what you want.

Sixth Attribute: Successful entrepreneurs change quickly.

You have to be able to admit when you are wrong. And you had better get comfortable being uncomfortable. You will constantly have a choice between your ego and success. Make your choice now.

Seventh Attribute: Successful entrepreneurs fail smart.

They know how to “guess and check” and do so on a consistent basis. It’s better to try something and fail than it is to do nothing, because you are going to get information from that failure that you will eventually need in order to succeed.

You will need to take risks, and some of them won’t work out. As a result, you’re going to need to know how to take small risks that won’t wipe you out, and you will need to learn how to learn from the failures. Warren Buffet has a famous quote, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” But of course, in investing and business, you will lose money. It’s impossible not to. The real rule number one is: Don’t get wiped out.

So with that in mind, remember that you can start with a side business. The internet has made low-cost failing easier than ever. The barrier to just get started as a business owner has never been lower. And there’s another interesting thing about starting a business–it’s equal opportunity in a way that seeking a job isn’t. You don’t have to look or act a certain way. You just have to get out there and do it.

Now I am evangelical about the need to start new businesses. As a result, there is a strong possibility that I am overwhelmingly biased. But starting a business is absolutely the fast track to financial independence. That’s just how it is. So I would strongly encourage every single person who reads this to look into whether entrepreneurship might work for them.

Now, on to being a landlord. Here are the most important steps to success.

Step 1: Finding, screening and selecting applicants.

Nothing is more important than getting renters who will pay you on time, won’t destroy your property and won’t cause you legal headaches. This is the number one question you should be asking yourself when you consider whether to purchase rental properties. Do you have confidence in your ability to select good renters?

Step 2: You must have liquidity.

This step is not optional. Things break. People move out. Vacancies happen. If you don’t have liquidity you are going to find yourself deep in stress with not much to show for it.

Step 3: You must be good at selecting the property and negotiating the price.

Step 4: No partners and no management companies.

Most people who use management companies end up regretting it. The problem is that management companies take so much of the profit that you are better off just investing in mutual funds. And management companies don’t have much incentive to keep costs low, which ends up reducing the profit even before they take their cut. You can make money off of a property with a management company, sure, but as an investment it just doesn’t make sense when compared to a diversified investment portfolio.

Also, from extensive personal experience and the experience of everyone I’ve talked to, I’m going to give you some flat-out advice. Don’t go into the landlord business if you need to partner with extended family or friends to make it work. It won’t. There are so many decisions that need to be made, down to nitty-gritty details like whether to replace or merely clean a carpet. Having multiple owners just provides multiple opportunities for miscommunication and resentment. Stay away.

Step 5: Know the law.

Step 6: Know good tradesmen and handy men.

Remember when I mentioned keeping costs low in a previous step? Here is the primary way landlords get drained of their capital. They pay too much for repairs, for cleaning, and for the sorts of regular services a property needs. You are miles ahead of the game if you know how to keep a house up, to say nothing of the fact that if you can fix houses yourself you can find the genuine bargains that will turn a real profit.

Step 7: Being a landlord is a business.

That means you’ve got to treat it as a business. You have to raise the rents to keep up with inflation and taxes. You’ve got to report everything correctly on your taxes. You have to be able to keep the books. People often refer to rental income as “passive” income, and yes, it is, but it’s still a business! And it’s a business that isn’t easy for everyone.

Alright, to conclude this section I’m going to offer anyone who is interested the opportunity to talk with me about starting their own business. If you have read this and would like to ask questions about anything you see here, please feel free to email:

SpendSmartLiveRich@gmail.com

Best wishes everyone! The world needs more entrepreneurs, which means the world needs you to be an entrepreneur. And I can tell you that nothing prepared me for how hard it would be to succeed as a business owner, but at the same time, nothing could have prepared me for how sweet that success was when I finally achieved it.

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