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Exclusive: Jody Tallal on why he prefers to be a land banker vs. land developer

In previous columns, we have been discussing investing in pre-development land, and I have explained the different category of land investors. As I continued my research on investing, I realized that not all returns on investment are equal. Making, say, 20 percent a year on an investment was just part of the true yield equation.

Let me explain. If I make 20 percent a year on a stock portfolio and it takes me four hours a day to plot, follow and trade my portfolio, that is not the same return as if I made 20 percent a year in rental houses and spent only four hours a week managing them. In addition, that would not be the same as if I owned warehouses that only required four hours a month to manage and made the same 20 percent.

With pre-development land, it requires only a few hours of my time a year to manage. I could do a rain dance on the property several hours every day, but that is not going to help its value.

If I acquired my investment property properly, it is going to do whatever it is going to do because of the influence of major market dynamics around it that are outside my control. Therefore, it requires very little of my time to manage, and I am available to acquire and manage much more of it and/or do other things with my time.

If I were to shift my role from land banker to land developer, that means I now have to incur a substantial amount of development debt with personal liability. It additionally means I have to become responsible for day-to-day operational commitments of real estate development.

Because my objectives are that of a pure investor, this extra bit of profits of continuing on from land banker to developer just does not justify or parallel my goals. Please do not interpret this to mean I feel being a developer is inappropriate; it is just that I feel each person needs to determine to what investment camp they wish to belong, and then try to stick to it.

After you have decided on your objectives and strategies, the next step in my real estate acquisition matrix is to identify specific investment criteria. In other words, what kind of land, price, location and terms are you looking for?

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There is an old adage in real estate that says, “The three most important factors in selecting the best property are:

1. Location;

2. Location; and

3. Location.

Nothing has ever been truer when it comes to making a profit in land. “Location” is foremost in importance. Therefore, it is a very important element of our matrix. In my opinion, it is much better to have the primary future corner at a major intersection in a hot market and pay 150 percent of fair market price today than to have a back parcel, irregularly shaped, down the way and only pay 75 percent of the market. The prime corner will make more money every time.

Since land is non-income productive, your only yield comes from appreciation. Since investment return is a product of holding cost, holding period and gross profits, time is one of the key elements.

If a property doubles in value in one year, you make 100 percent growth; if it takes two years to double, you make 50 percent a year; 3 years, 33 1/3 percent per year; etc. The primary corner will usually be the first to develop. Usually, it takes at least another year for the second-best corner to develop. Additionally, it is not uncommon to see the worst of the four corners sit idle for 3-7 years past the development of the first. Therefore, can you see how important being the first to develop is?

The timing of your future sale is a product of your property’s location. Therefore, I try to select the best property with the fewest development flaws.

The next element in the matrix we have already briefly covered. It is the need to be surrounded by major developers and big league investors. I call these people major players. Major players can make an entire market area happen.

As an example, back in 1977, I saw a section of land in far west Plano (north of Dallas, Texas) at the intersection of Preston Road and FM 544. It was more than 20 years away in the Plano development guide back then before the city intended to bring sewer lines to this area. Subsequently, all the property in this area was selling for $5,000 an acre, because it was merely farmland.

The Hunts owned one corner, Sears Roebuck the 110 acres across the street, and several other major players were also in the immediate area. These landowners got together, put up approximately $350 an acre each for the property they owned in the area, ran sewer lines from the plant to service each of their properties – and then donated it all to the city of Plano. Bingo. In one move, property in this area went from $5,000 an acre farmland, 20 years away from development, to $40,000 an acre prime development property. If a group of disjointed Joe speculators owned the majority of the land in this area, they would have had to wait 20 years for something to happen.

In my next column, we will discuss negotiating the best terms to produce the highest yield on your investment.

The real estate philosophy that worked for me

Exclusive: Jody Tallal explains power of snatching up the ‘going home’ corner

In my last column, we began discussing a special real estate acquisition matrix I developed. Part of this matrix’s purpose is to determine which type of real estate investment philosophy best applies to you. In the last column, we covered the first type of three categories of real estate land investors: the real estate speculator.

The second type of real estate land investor is where I found my investment home. It is the camp I call “Predevelopment Land Bankers.”

When I first analyzed land investing in the early 1970s, I realized almost all land investors were playing as speculators. Once I disqualified land speculation for myself, I was somewhat disillusioned. I had already determined the land was what made my wealthiest client wealthy, but my first preview revealed only these speculative opportunities. Then I found a second group of players who made big profits virtually every time they bought. In the Dallas real estate market where I lived, back then these people were Ross Perot, the Hunt brothers, Bob Folsom, Trammell Crow, etc.

This group was not speculating; instead, they bought large tracts of land that if left alone would remain undeveloped for many years. Then, because of their influence, money, political contacts and organizations, they physically enhanced the land. They might pay for and build sewer plants that were not in the city’s plans for the next 20 years and then donate them to the city in exchange for zoning; or they may build important infrastructure, roads, etc.

In other words, they bought the property as raw farmland and through their efforts changed it to development property and made all the profits for doing so. Quite often, they then also made the final profits by physically building the actual structures on the property.

I felt that this was great; they hit a home run every time. There was just one small problem, however. I did not have Ross Perot’s money or Trammell Crow’s contacts.

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Then it dawned on me: If I put my boat in their harbor, when their activities raised the tide, my boat would rise right alongside theirs. My plan ultimately became quite simple. Find two or three major developers who have already started their developments, wait for them to finish zoning and the development of the infrastructure and then actually kick off their projects. If I found one major development over here that was underway with 10 percent of the rooftops (homes) in place, and another over there with 15 percent of its Phase 1 in a 4-phase project completed, if I then followed the traffic patterns from those subdivisions to the workplace, I would always come to a major underdeveloped intersection. It was undeveloped because you cannot develop retail space until you have enough rooftops to support it. In fact, this intersection was still usually three to five years away from having the demographics needed for development.

I then determine what is called the “going home” corner (the corner people passed on the way home from work) and would try to buy that one. The reason for buying the going home corner is that is where people will want to stop on the way home to pick up what they need. Therefore, that corner should also be the first to develop.

Granted, because of the new major activity and publicity in the area, the speculation had already occurred a long time ago on that corner. Therefore, its price was no longer 5, 10 or $20,000 an acre, but instead 40, 80 or $120,000 an acre. In addition, all of the true real estate speculators were now three hilltops over the next horizon looking for the next hot area.

Now remember, it is still 3-5 years before the demographics in this area could justify retail development. It has been these types of tracts I bought because I knew in just 3-5 years, what I bought for $2-3 per foot would be worth $6-8 per square foot or more. Additionally, taking a piece of land from $3-8 per foot in a 3-5-year period can produce some very handsome returns. If we got lucky, it all happened quicker.

With this system, I knew when the first subdivision was finished in three years and the other in four years that the demographics from these would create the demand for my property to be developed. Therefore, I let the big boys make my properties usable by their developments, and it worked repeatedly.

The final camp or type of real estate investor is that of the land developer. They are the ones who are the real user of the land. They turn it from dirt to a finished product, which can generate income.

The land developers’ profits are the smallest of the three groups, but the most predictable. This is because they are more in control of their own fate.

I have often been tempted to continue from pre-development land banker to land developer, but in the final analysis have decided against it. The reason is not that it is not a profitable area, but that it does not meet my personal investment goals. Being a land developer is a hands-on business that requires full-time work staying on top of the development. On the other hand, as a pre-development land banker, I have managed a $150,000,000 portfolio of land investments, part-time, with the help of a real estate broker and property manager.

In my next column, we will explore why all returns on investment are not equal.


Exclusive: Jody Tallal discusses ‘checklist’ that must be completed to move forward

In the next several columns, I am going to explain a Real Estate Acquisition Matrix I have developed over the years. It is the criteria and requirements my years of study, research and experience have shown me should exist in every transaction.

I treat this matrix like a checklist, and I will not buy a piece of property unless every item on this list is checked off. I feel about my checklist like a pilot should feel about the pre-flight checklist provided by the aircraft manufacturer for his plane. Every time he gets to the beginning of the runway, he is supposed to carefully run through this checklist.

Obviously, if not everything in this checklist is working properly; he should abort his takeoff and return his plane to the hanger for repair. If he ignores the problem and takes off anyway, he is courting disaster. This does not necessarily mean he will crash if he takes off; it just means his odds of having a problem have been substantially increased. I treat my real estate acquisition checklist with the same respect. If 90 percent of it is there and some items better than normal, but I cannot get that last 10 percent negotiated; I pass on the investment.

My averages of acquisitions to attempted negotiations are approximately 1 out of 50. Granted, I spend a lot of time to produce nothing, but since it is my economic life with which I am gambling, it has to be 100 percent to pass.

One of the biggest mistakes I have seen people make when trying to buy land is becoming emotionally involved with the tract. Maybe they want it because they used to pass it as a child, or their rival competition is bidding against them. Whatever the reason, it is a kiss of death to become emotionally involved with a piece of land. I can truly say that as an investor, I have never seen a piece of land I simply had to have.

If you stay completely objective, you will never have to worry about the trap of rationalization. When a tract does not fit your checklist, simply drop it and move on.

When negotiating to buy or sell a property I have a little practice that operates on the “It’s my Football Theory.” Remember the child when you were a kid who, if he did not get his way, took his football and went home. I am very much this way when it comes to negotiations. When I am buying, if I do not get my price, terms, etc., it is my money, and I can go look elsewhere until I find somebody else who wants to play by my rules. Likewise, if I am a seller, if I do not get what I want, nobody can twist my arm and make me sell.

In other words, once you truly understand this theory, you realize “Nobody has anything you have to have.” If it is not absolutely right, move on until you find something that is.

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If you arm yourself with this philosophy, you will have already significantly increased your odds of success and reduced you chance for failure. Therefore, when negotiating an acquisition determine your bottom line before you make your first offer.

The next step in the matrix is to determine you land-acquisition philosophy. I like to look at this in terms of “What do I want to be when I grow up?”

I break land buyers into three distinct camps. All are quite different and have their own points of merit, and each investor needs to decide which is best for him or her.

First comes the land speculators. They are the risk takers, but also make the most money in the real estate game when they are successful.

A land speculator plays hunches. He or she tries to determine the next area where the big real estate developers are moving before they themselves know. If the speculators call it correctly, they get very rich; sometimes seeing land values jump from $5,000 to $40,000, or even $60,000 an acre in just a few years. However, if they miss, no bigger headache exists in the investment world, because it takes years and lots of holding expenses to figure out you were wrong. I have always had a lot of trouble with being in this camp personally.

I feel that one would have to be very egotistical to try and out guess the likes of a Ross Perot, Trammel Crow or Jerry Jones. They are truly experts and have incredible research staffs that spend tremendous amounts of time determining where they are going next. In addition, as you probably have guessed, they do not broadcast that fact prior to their acquisitions, which are usually done in the most secretive manner to prevent rapid price increases during their accumulations phases.

No, unfortunately, I do not feel qualified to compete with these experts, their money and research. Therefore, I disqualified land speculation for my own account, even though the profit potential is quite attractive.

In my next column, we will discuss the other two types of land investing philosophies with the hopes of giving you enough information to choose which type of philosophy is best for you.

Investing 101: Impact of rent on land values

Exclusive: Jody Tallal reveals how to determine whether property investment is worthwhile

In the past couple of columns, we’ve discussed the benefits of investing in raw, predeveloped land and how to determine the true value of a tract of land. Now, let’s look at the impact all of this has on commercial undeveloped land values. Land values are a floating variable within the fixed development equation.

Let me state that again because it is very important: Land values are a floating variable within the fixed development equation.

For example, if a developer wants to earn a 10 percent total return on his investment, he would simply take the projected net operating income, or NOI, from the proposed project and divide it by his desired yield to determine the project’s maximum projected development costs. This process allows us to determine exactly what the land is worth as part of that project.

Let me demonstrate. Assume that the net operating income for a new proposed development is projected at $500,000 when this project is 95 percent occupied. If we divide the $500,000 net operating income by the desired 10 percent return, the developer then determines that he can justify spending up to $5 million building this project. Therefore, he knows his maximum budget for everything must be less than $5 million.

Total development costs for any project can be broken down into three different categories. First, there are the soft costs such as architectural fees, loan brokerage points, building permit fees, interim financing costs, etc.

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Next, there are the hard costs of the development, such as, concrete, steel, lumber, electrical, plumbing, windows, doors, labor, etc. Finally, there is the cost of the land.

Since the hard and soft costs are relatively fixed, based on a competitive market, the variable in this equation becomes what we can justify in paying for the land. In other words, if the hard costs of this project are projected to be $3 million and the soft costs to be $1 million, then the land’s value is the remaining $1 million of the $5 million development costs.

Now let’s see what happens when rental rates dramatically increase in a short period, say from $12 to $18 per square foot for office rent. This type of dramatic increase is what occurs at the beginning of most real-estate booms because during the bust, as things stagnated, rent likewise declined as well.

What’s the direct impact a 50 percent increase in rents will have on land values? Will the value of land rise an equal 50 percent? Let’s use our little formula to see.

If our net operating income in the above illustration was based on rents of $12 per square foot, which then subsequently increased to $18 per square foot (over a two-year period), then the net operating income would grow from $500,000 to $750,000.

Now, if we take the exact same project but use $750,000 as the projected net operating income, let’s see what happens:

The $750,000 NOI is divided by the same 10 percent desired investment yield, which now produces a new total development cost of $7.5 million. In other words, the developer under these new income projections will now see this project as capable of supporting a $7.5 million development price tag. However, since neither the hard nor the soft costs should have escalated very much, the remaining variable in this equation is land value.

So using the same factors as before, we can determine the effect that a 50 percent increase in NOI will have on undeveloped land values. If we take a $7.5 million project and spend $3 million in hard costs and $1 million in soft costs, that means the true value of the land is the remaining $3.5 million. Like I said earlier, land values are a floating variable within the fixed development equation.

The land value in this example, therefore, has increased from $1 million to $3.5 million (a 350 percent increase) due to an increase in NOI of only 50 percent.

Now understanding this concept, let us assume we want to buy a tract of pre-development land as an investment that’s three to five years away from being ready for development. We can then project its future value based on today as explained above and then discount that price backward based on our projected holding time, plus what we would like to earn on our money in this investment. This will establish a purchase price that we can pay, hold the property for the anticipated time and still meet our desired investment yield.

Now, what if you find a tract that meets your goals, but the seller of that tract wants a higher price than you can pay? What if all the comparable recent land sales prices in that area are higher than your established price? What if other speculative investors have already raised the value of all land in this area past your desired comfort level? Then I go back to my philosophy that dirt is basically worthless until it can generate income, and it is safer to pass on this opportunity.

If the development market has determined a maximum purchase price for the land based on the above illustration and I cannot buy a piece of property at the discounted determined price, hold it for the necessary time and still generate my expected return, I’ll pass on this investment opportunity.

Quite often, investors develop a fury of land speculation that heats up land prices well in excess of today’s true value. This is called the greater fool theory: “I am going to pay more than I know it is worth because this market is so hot I can find a bigger fool to sell it to and make a profit.” When this happens, these inflated prices don’t raise the real value of the land. That usually means that sometime in the near future, someone is going to get burned.

This is where the contrarian philosophy will serve you well because it will allow you to enter the market when it is ending a bust and all the other investors are still too scared to participate and then sell into the boom that follows as everyone is trying to get into the game. In later columns, I’ll explain more about how to read cycles so you can do this.

Determining the true value of that raw land

Exclusive: Jody Tallal explains how to evaluate potential future income streams

In my last column, we started a discussion about investing in real estate and how raw pre-development land was in my opinion the best option. I also promised that in this column we would discuss how to understand the true value of land.

One prime method the majority of land investors use to establish the value of a tract of land (or any real estate for that matter) is by comparing other comparable sales. I personally have found this method an easy trap in which to get snared when used as the exclusive method of valuation.

Granted, I do look at other comparable land transactions in making my analysis, but it is not my principal tool. If you are going to use comparable sales, allow me to share a few observations. First, do not compare asking prices of other tracts around you. They are usually inflated because of the pride of ownership. What everyone is asking is not near as important as what has sold and to whom.

Sales of comparables can be useful in negotiations if you fully research your comparable: who was the buyer; what were the terms; and what is the zoning for the tract. If the buyer is McDonalds, Home Depot, or Ross Perot, its sale is probably a good indication of true market value. Such buyers do extensive research prior to making an acquisition. On the other hand, if the buyer is Joe Blow syndications and his merry group of investors, take it with a grain of salt. Many investor groups buy stories, concepts and pretty illustrations that sometimes have nothing to do with real future value.

The best method I have found to determine value is to determine the future best use of the land. You can best determine the future ultimate value of land once you first understand that land is worthless until you can put something on it that generates an income stream. The capitalization of that income stream denotes its ultimate true value.

If a tract is farmland and will not have usable utilities for at least 20 more years according to the nearest city’s plan, I do not care how many speculators like its location or freeway frontage, or whatever – to me this land is farmland for a long time to come. Since time is a very important part of the investment-return equation, you have to factor into this process how long it will be before a tract of land can produce revenue.

In the above example, farmland’s value can be determined by its potential productivity. If it can generate $200 an acre, if you want a 10 percent return, then its worth is $2,000 an acre.

If, however, the farmland becomes surrounded by development, utilities arrive and you can divide that acre into 4 lots and sell them for $50,000 each, then you can calculate your development costs and build in your profits to determine the land’s true future value.

In the above example, farmland’s value can be determined by its potential productivity. If it can generate $200 an acre, if you want a 10 percent return, then its worth is $2,000 an acre.

If, however, the farmland becomes surrounded by development, utilities arrive and you can divide that acre into 4 lots and sell them for $50,000 each, then you can calculate your development costs and build in your profits to determine the land’s true future value.

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Once land becomes scarcer and the population density increases around it to the point it can be zoned and justifies multi-family development, then the value for the same acre of dirt magnifies again. This is because you can now rent that foot of ground monthly and create a continuous stream of income. That income stream when capitalized at the desired rate of return determines its value.

If the acre happens to later end up as a corner intersection with a high traffic count and the acre can be zoned retail, its value changes once again. The reason is because now instead of a one-time rent per month like apartments, you can sell products from that same square foot of land, over and over again several times each day, generating higher profits.

Finally, once you have land in an area that is so densely populated, you can justify building on the same square foot into the air over and over again, you have reached land’s ultimate value: a high rise development. Its value again will be determined on the amount of net revenue that can be generated from rents, so that will be greatly determined by how many stories high can be successfully developed.

Let us go back to our original premise that dirt is worthless. If a piece of land is ultimately going to be developed as a shopping center, then you can gauge its ultimate value by determining what major developers have just paid for shopping center land they are currently developing. Once you determine this, you can work backwards to determine a fair value today. Simply anticipate the projected period for this tract to fully mature to prime development status, and then calculate your desired return. Using this approach, you can arrive at what you are willing to pay today.

In my next column we will look at the impact that all of this has on commercial undeveloped land values.



Exclusive: Jody Tallal explains significance of knowing ‘science’ of risk vs. return

In my next several columns, I am going to be discussing real estate as a potential investment vehicle. More specifically, how to invest in raw land.

Back in the early 1970s, I began analyzing my clients’ investment portfolios, and it readily became apparent to me that no matter what size income a particular client might have, or where they choose to invest it, prior to my assistance, most of the time they ended up losing a significant amount of what they invested. It did not seem to matter much whether they invested in stocks, gold, oil, cattle, or genetic research in Brazil – they all seemed to fail the vast majority of the time over the long haul.

Occasionally, however, I would see a client whose investments were worth several millions of dollars. It was not until after several years of additional research I realized that all of those clients had one thing in common. Each of these clients had made principally all of their money in real estate investments – more specifically, Raw Predevelopment Land.

Many times, it seemed to occur quite by accident. I remember one case where a client had bought a couple hundred acres of farmland north of town to get away on the weekends. Then several years later, a country club bought the land adjoining his. His land immediately jumped from $1,000 an acre to $25,000 an acre, and he was an instant multi-millionaire. In other cases, it was apparent my clients had a predetermined plan to buy property in the line of future growth. Regardless, I felt it more than coincidental that this pattern was present.

It was at this point I decided to start studying different actual land investments, in an attempt to differentiate the good transactions from the bad. It was my objective to identify potential areas of risks and try to develop methods to remove those risks, without affecting the industry-wide chance for return.

I began my own investments in real estate in 1973. My first couple of investments did not work out as well I had thought they would; but I studied them and learn what I did wrong. By 1975, things were working out much better. In fact, by 1985, I had produced 46 programs for me and my clients. By 1985, 33 of these properties had sold. The average rate of return received by my clients was 63.8 percent per year, and this was net of my fees. These properties were acquired for $25 million and were held an average of 3.5 years. They were later sold in excess of $50,000,000, and all 33 of the programs were profitable.

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One thing I learned in the process of successfully investing in land was that to maximize profits you need to adopt a contrarian philosophy. The reason is because real estate runs in well-defined cycles of booms to busts to booms again. The difference in real estate cycles when compared to, say, stock market cycles is that they are elongated and take years to develop. I will cover more real estate cycles and how to read them in later columns.

What I want to demonstrate in this series of columns is a strategy that proves that land investing is a science and by understanding that science, you can substantially reduce the risk while maintaining extremely high returns. This is done primarily through using a negotiation matrix I developed which will be share throughout this series.

Experience gives the 20/20 hindsight needed to see the irrational, invisible side of the investment world; or to put it another way, experience allows us to ask the irrational question that are invisible to the purely intellectual mind.

Real knowledge is the key that makes the wealthy land investors wealthier and over the long run keeps transferring the assets of the average novice investor to them. I found this lesson very important to recognize as I entered the land-investment maze.

I learned that there is one important thing that must always be done first before the negotiations start. That is to set out your bottom-line criteria in advance of your first offer. Now, most people feel that their bottom-line investment criteria are simply to make as much money as possible. Maybe that is right and maybe not.

What are your true objectives? How much risk are you willing to take? Are you a speculator, land banker, or developer? What is the bottom-line value you are willing to assign to the dirt, and what is the probable upside potential?

These questions have to be answered before you should make you first offer. I learned after my first real estate crash, which was in 1975, that dirt was basically worthless. You could not eat it, build out of it, or create anything else in value from it; and, in an illiquid depressed market, you cannot sell it.

Therefore, how do you determine its future value? We will cover that in my next column.


Exclusive: Jody Tallal has 13-question quiz to determine how much chance to take

In the past several columns, we have been discussing putting price tags on each of your long-term financial goals, so you can reduce those to a monthly price tag just like your home or car payments. In this column, we are going discuss investment philosophies.

Your risk tolerance

This column is not designed to offer advice as to which investments are best. Instead, I will cover several investment philosophies that should help you find your way through the investment maze.

A good first step before making any investments is to understand how much of a risk taker you are. The test below has been designed to help you determine where you fall on the risk tolerance scale.

The value of understanding your propensity for risk is the same as understanding any aspect of your personality. Knowing that you have a tendency for jealousy, for example, does not mean you should never put yourself in a position where you might feel jealous. It means that whenever those feelings occur you know it is normal for you – it is a part of how you are wired. It does not mean you will never feel jealous. It simply gives you some degree of freedom to feel that way and continue with whatever you are doing.

The same is true with investment risk. If you are to achieve financial success, even if you are very conservative, you will have to put your money in places where it can be productive; and sometimes that may feel risky.

Similarly, if you are a gambler, you may have to force yourself to use some restraint, especially when pursuing short-term goals. That may feel boring, but it is usually not wise to take excessive risks when you do not have the time to ride out financial downturns.

Your risk-tolerance factor

Dorothy W., a 61-year-old widow, lies awake nights worrying about how she is going to manage when she retired. With limited savings, a small company pension and Social Security, her retirement income would be meager indeed.

Therefore, in a moment of panic she invested her available cash in a limited real estate partnership a friend mentioned. If she is lucky, the investment will pay off and improve her financial situation.

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However, Dorothy still lies awake. Now, she worries about her investment; knowing the risks associated with it. If she lost a portion of it, that would mean she would have even less to live on in retirement than originally expected.

Are you a play-it-safe investor? Or, are you willing to take a few risks for a potentially greater financial gain? The short quiz below will help you decide what propensity you have for risk tolerance.

1. On a trip to Las Vegas, you lose $150 playing the slot machines. You:

a. Get another $50 worth of quarters, hoping to recoup part of your loss.

b. Go sightseeing and forgo the casino.

c. Keep playing, but plan to stop when you have lost another $150.

2. The aphorism that best describes your attitude toward life is:

a. The early bird catches the worm.

b. No pain; No gain.

c. A bird in the hand is worth two in the bush.

3. A friend who is a stockbroker calls with a hot tip. You are most likely to:

a. Say you are not interested.

b. Pull out your checkbook.

c. Ask for more information.

4. You park most of your cash in:

a. Money market funds.

b. Bank savings accounts.

c. Certificates of deposit.

5. You win a contest sponsored by your local radio station and have a choice of three prizes. You take:

a. An all-expenses paid trip to a resort.

b. $1,000 in cash.

c. 100 shares of stock in the radio station.

6. You spend a rainy Sunday afternoon with:

a. Monopoly.

b. Chess.

c. A crossword puzzle book.

7. Your son persuades you to buy stock he says is a winner, but three months later you have lost $1,000. You:

a. Sell the stock and cut your losses.

b. Do nothing and hope the price will rise again.

c. Buy more shares (the price is so low!).

8. You are thinking about buying a house in Florida to rent out, then eventually retire to. You tell the real estate agent to look for:

a. A large house that needs some work in a good neighborhood.

b. A small, well-maintained house in an established neighborhood.

c. A large house located in an up-and-coming neighborhood.

9. You have developed a way to take the calories out of cakes and cookies without affecting the taste. You:

a. Sell the patent to General Foods for $1 million.

b. Try to raise the money to setup a company to produce the new product.

c. Accept a position with General Foods managing the division that markets the new product.

10. Your attitude toward managing your pension money is:

a. I want my investments to grow faster than inflation.

b. Beating inflation is less important than preserving income and capital.

c. I will risk some income for a chance to beat inflation.

11. The bill for your weekly groceries comes to $285, and you have $300 in your wallet. You pay for the groceries with:

a. A check.

b. Cash.

c. A credit card.

12. You would put a $75,000 pension plan lump-sum payout into:

a. A mutual fund that invests in government securities.

b. A high-yield certificate of deposit in a shaky Savings and Loan.

c. A blue-chip stock fund.

13. On a cross-country trip, you would eat lunch in:

a. A restaurant recommended by the guidebook.

b. A restaurant belonging to a national chain.

c. A place the locals say is the best in town.

Now add up your score using the scoring key provided below. The top row of number across represents each question’s number and the letters down the left side represent your answers.

If you scored below 19, you are conservative by nature. If you scored between 20 to 32, you are willing to take a chance or two. If you scored 33 or more, you are aggressive by nature. Remember, you should try to select investments that fall within your personal risk tolerance level so you do not lose sleep over them.

The above quiz is reprinted from “Financial Success: A Guidebook to Your Financial Future” by Joseph Tallal with permission from Carole Gould.


Exclusive: Jody Tallal explains how to save money on insurance costs

In last week’s column, we covered how to create a retirement plan and began a discussion of how to cure a negative cash flow should your newly identified investment goals’ costs create one. I defined three processes for curing a negative and covered the first one in that column. Therefore, in this column, I will cover the final two.

Saving on insurance

The second process for curing a negative cash flow is reducing insurance premiums. Insurance is a category of expenditures where overspending is very common. I recommend you look at all areas of your insurance needs by developing a Personal Security Formula as discussed in much greater detail several weeks ago in my columns on this topic.

As a brief review, the Personal Security Formula creates a system of defenses that will eliminate all vulnerability in your long-term financial planning.

For most people, there are five areas of vulnerability:

1) Death of the main breadwinner.

2) Disability of the main breadwinner.

3) Major illness of a family member.

4) Casualty loss – home, car, personal possessions.

5) Personal or business liability lawsuit.

Each of these areas of vulnerability can and should be covered by insurance.

Determining life insurance needs

The only way to determine how much life insurance you really need is to assume that your family’s main breadwinner died last night. If that happened, you would find that there are four main financial problems that would need to be solved:

1) Estate Liquidity

2) Survivorship Income

3) Special Obligations

4) Liabilities

Estate liquidity

Estate liquidity pertains to all the expenses immediately related to death, including estate taxes, probate fees, attorney fees, accounting fees, appraisal fees, funeral costs and last expenses. Since you can now leave almost $5.5 million estate-tax free to your heirs ($11 million if you are married), a good general rule of thumb is to allow for $50,000 worth of expenses or 6 percent of the net estate, whichever is greater.

For larger estates, please see an attorney specializing in estate planning.

“Billionaire Cab Driver: Timeless Lessons for Financial Success” is an easy-to-read financial primer from a man who revolutionized the personal financial management industry. Jody Tallal’s latest book offers timeless lessons for financial success, no matter your occupation, salary or personal savings

Survivorship income

How much of the main breadwinner’s income would you want to replace should that person die prematurely? The chart below will help you come up with a close estimate of how much you would need to invest at 8 percent in order to provide an annually inflating income stream. It is based on a survivorship income need of $1,000 a month. For higher levels of income, simply multiply the figure by the appropriate multiple. For example, if your spouse is 45, you would like him/her to have $2,500 a month in survivorship income, and you are using an inflation rate of 6 percent, multiply $298,286 by 2.5. Your survivorship income need is $745,715.


Special obligations

This category includes such items as a college fund for your children. If you were to die before they enter college, you could ensure that they will have enough money to go to school by factoring that need into your life insurance. Here is a simple way to run the calculation. Long-term CD rates tend to mirror the inflation rate. Therefore, if you had a sum of money large enough to cover today’s cost of tuition bills and you invested that amount in a log-term CD, it would keep pace with inflation. The only problem is that the money earned in the CD is subject to tax and inflation is not.

So here is what to do: Take the total current cost to fulfill this education goal and divide the reciprocal of your tax bracket into that number (i.e., if you are in the 15 percent tax bracket, divide by .85; if you are in the 28 percent tax bracket divide by .72; and if you’re in the 33 percent tax bracket divide by .67).

For example, if you wanted to provide today’s equivalent of $36,000 in college assistance and you are in the 33 percent tax bracket, divide .67 into $36,000. The answer is 53,731. You should allow for $53,731 in life insurance proceeds to cover the cost of your children’s college education fund.



The main breadwinner’s salary is required to pay for such items as the house mortgage and car payments. If that person dies, you may want to have enough life insurance money to pay off such items entirely. Therefore, ask yourself if the main breadwinner in your family died, which liabilities would you want to be able to payoff’?


Totaling your life insurance needs

Now add up the various categories to determine your total life insurance needs:

In next week’s column, we will discuss term verse whole life insurance, and when each is the best solution based on a specific need.


Exclusive: Jody Tallal explains how to figure out amount to set aside each month

In my last column, I showed you how to calculate the cost of and plan for the accomplishment of your financial goals, including help children/grandchildren with their college expense. In this column, we will discuss the process of successfully building your retirement fund.

Determining today’s cost of building a retirement fund is far more complicated than determining today’s cost of a college fund. This is because it is crucial that you calculate the ongoing effects of inflation into and through retirement in order to guarantee the development of a successful, secure retirement. Below I will attempt to give you the basic tools to do this for yourself.

Building an accurate retirement plan normally requires complicated algorithms that require a computer. If you find the process described below too complicated, or wish to be able to model different inflation and invest yield scenarios, I have made my personalized financial planning software available here.

If you build a retirement nest egg that provides just enough interest income to meet your needs in the first year of your retirement, you would not have anything left over to invest in order to offset future inflation after that. Therefore, based on the Rule of 72, discuss in a past column, 14 and a half years into retirement, assuming inflation ran at 5 percent average, your standard of living will be cut in half.

The two charts below will give you an idea of how much you need to set aside each month to build a retirement fund that will provide you with enough income to offset the effects of inflation. It was developed a number of years ago by the accounting firm of Coopers & Lybrand and appeared in U.S. News and World Report, but it is still one of the best tools I have seen without computer software to develop a retirement plan. Please note that this chart assumes an inflation rate of 4 percent, so if you want to project something different, you will need to use the type of financial planning software discussed above.


“Billionaire Cab Driver: Timeless Lessons for Financial Success” is an easy-to-read financial primer from a man who revolutionized the personal financial management industry. Jody Tallal’s latest book offers timeless lessons for financial success, no matter your occupation, salary or personal savings

Can you afford your goals?

Between this and last week’s columns, you now know the cost of each of your financial goals, including a college fund and retirement. You have broken them down to monthly payments you can start making today to ensure their accomplishment. However, one question remains: Can you afford the payments? Because if you do not pay for future goals like retirement and children’s college, they will be forfeited just like if you stop paying the payment on your home or car loans.

To find out, go back to your budget (covered in this column) and plug in these new expenses for you long-term goals. Do not be alarmed if this gives you a negative cash flow, as this is common. The reason is that you have added new burdens on your budget that are very necessary. If you find this to be the case, below you will discover where to find the extra money to meet your goals.

Curing a negative cash flow

There are three steps to reversing a negative cash flow:

1) Re-evaluate any advance payment schedules you have set up for your debts.

2) Cut your insurance costs.

3) Use “The Back-down Compromise” option.

I will discuss No. 1 above in the remainder this column, and address No. 2 and No. 3 in next week’s column.

Reevaluation of advance payment schedules

Many of us have been taught that it is best to pay off debts as soon as possible. That is good advice if you have high-interest credit card debts, or you have enough money to invest for your future and can still accelerate the payoff of your debt. However, in many cases, especially if you are making accelerated payments on your home or car and that is causing a negative cash flow, it is not such a good idea.

Do you remember our earlier discussion in this previous column about the importance of time? It is crucial that you start setting aside money for your goals today. Accelerating debt payments to the point where you do not have enough money left over for your goal payments is not a good idea.

If you are trying to pay off your home or car early and you have a negative cash flow, going back to the original schedule will free up money for your other goals.

In next week’s column we will explore how to use No. 2 and No. 3 above to cure the remainder of your negative cash flow.


Exclusive: Jody Tallal shares chart used to calculate monthly amounts to be saved

The best way to take a long trip is to break it down into smaller trips, determining how far you can travel each day. If you take the trip one day at a time, focusing only on that day’s goal, you will easily make it to your ultimate destination.

That process is called the science of navigation. Applying this same process to the accomplishment of your financial goals will turn seemingly impossible objectives into smaller, easy-to-understand steps.

In last week’s column, I showed you how to make the cost of your goals more accurate by factoring in the effects of inflation. Now let us break them down to monthly costs you can start paying today just like you do with your house and car payments.

Knowing this cost, and of course paying it, should give you tremendous peace of mind. Not only will you have reduced the seemingly abstract cost of large future financial goals to a cost you can understand and afford, but you will also be taking the proper steps to ensure the accomplishment of those goals.

Determining today’s monthly cost of your goals

Below is a chart titled The Price Tag Chart, which will help you calculate how much you need to invest each month to achieve each of your goals. The Price Tag Chart shows how much money you will have accumulated after taxes at the end of the period indicated, if you invest $100 a month, assuming various annual returns. Results for other amounts can be calculated as fractions or multiples of $100. The table assumes that the investment is made at the beginning of each month.

In last week’s column, we used an example of needing to save $67,000 over five years for the down payment to buy a condominium. Let us use that as an example now using the Price Tag Chart below to see how this is done.

“Billionaire Cab Driver: Timeless Lessons for Financial Success” is an easy-to-read financial primer from a man who revolutionized the personal financial management industry. Jody Tallal’s latest book offers timeless lessons for financial success, no matter your occupation, salary or personal savings

First, pick an interest rate you believe you could earn on money invested for this goal. If you feel you can get 10 percent on your money, follow the 10 percent column down to where it meets the five-year column and you will find $7,808.

Then divide the required $67,000 by the $7,808 found in the chart and the answer is 8.581. Multiply this by $100 and you will see that a monthly investment of $858.09 at 10 percent growth over five years will develop the $67,000 you need.

Therefore, here is how to calculate today’s monthly cost of each of your goals:

  1. Start with the future cost of each of your goals as calculated at the end of last week’s column;
  2. Select a rate of return you feel you could achieve on money invested for the goal;
  3. Using the chart below, follow the interest column down to where it meets the number of years you have to meet your goal;
  4. Take that number and divide it into the future cost of your goal;
  5. Multiply that number by $100 and you have the monthly amount you need to invest at the interest rate you selected to meet your goal.


Now fill in the Monthly Costs for Goals chart below for each goal you have using the process above.


Calculating the costs of college

Helping children or grandchildren pay for college is a very common goal. It is a bit more difficult to calculate the price tag for this goal because college costs continue for four or more years, giving inflation more time to complicate matters.

The worksheet below will give you a good idea of what you need to invest in order to meet future college expenses. It is based on the following assumptions:

  1. Your child/grandchild will enter college at age 18;
  2. He/she will attend college for four years;
  3. Costs will grow by 7 percent annually;
  4. Your investments will earn 8 percent a year after taxes;
  5. While you are paying for college out of the fund, you will continue to save and your fund will continue to earn 8 percent annually.


1) Today’s cost of college. _________________________

(Call the college you would like your child/children to attend.)

2) Estimated future cost of 1st year of college.________________________

(line 1 times factor from column A in the College Multipliers chart below)

3) Amount that you would like to provide. ___________________________

(If you would like to pay the full amount, enter the number from line 2. If you would like to pay half, multiply line 2 by .5)

4) Estimated total future cost of your goal. ___________________________

(line 3 times 4.44)

5) Estimated amount you need to invest annually. ______________________

(line 4 times factor from column B in the College Multipliers chart below.)

6) Estimated monthly cost._____________________

(divide line 5 by 12)

The chart below contains the College Multipliers needed to complete the form above