While you are making the rounds of the stores looking at the similar products, this is an opportunity for you to do some other research that will get you ahead of the game when you are ready to market your invention. Take a small pad and a pen with you and write down the name and location of the manufacturers of similar merchandise. You will find this information on all products that are offered for sale. It will be on a sticker or a hangtag or stamped somewhere on the item. These are the companies that will be your marketing targets later if you plan to license your product for royalties.

Or, they will be your competition if you plan to build a business around your invention. Either way, it will be to your advantage to know as much as you can about these companies that manufacture products similar to your invention. If your invention is something that is not specifically a retail item, such as a medical invention that would be sold through specialty outlets, you will need to track down those specific outlets and catalogs (perhaps with the help of a medical professional) in order to search in that area. However, if you have developed such an invention, chances are excellent that you are already familiar with those specialized outlets.

If your invention is in a field that is a specialized area in which the products are not found in the usual retail outlets, you may need assistance from professionals in that industry during your research or development phase. Be sure to have each person who assists you to sign a non-disclosure document for your files.

The rating agencies provide the most accurate data on historical default rates. Based on their data, empirical studies by Wilson  Saunders  and others suggest that default rates tend to be higher in recessionary periods. As might be expected, default rates usually peak at the end of recessions and fall when the economy is expanding. A closer look at history shows that default rates reached their highest levels in the 1930s, peaking at 9 percent in 1932. Since then they have never come close to that level. From 1940 to 1970 they were extremely low, hardly ever exceeding 1 percent. Moody’s themselves note that in the 1973 recession, the default rate was close to zero because only the best issuers had been able to access the capital markets in the previous years. In the early 1990s and at the beginning of the new millennium default rates rose significantly, reaching their peak at about 4 percent. Thus, the default cycle has mirrored the business cycle very well in the past 15 years. Yet one difference is not reflected in this figure. On a dollar-weighted basis, the 2002 default rate for speculative grade issuers was nearly twice as high as in 1991, causing painful losses for many investors.

Furthermore the 2002 default rate for US investment grade issuers reached more than 1 percent on an issuer-weighted basis and almost 3 percent on a dollar-weighted basis. This is substantially above the 30-year average of the investment grade default rate, which is about 25 basis points. Clearly, investment grade defaults are supposed to happen very infrequently.

Gross income is the total amount of money the property will bring in in a year, including rent, laundry income, garage rentals, vending sales, and anything else. This is often referred to as the “gross scheduled income” or GSI.

Although determining the GSI should be a pretty straightforward matter, one issue sometimes arises when the current owner has underrented some or all of the units. This is a surprisingly common issue with smaller units, for many passive investors get happy with a certain, reliable level of profit and don’t want to risk rocking the boat by attempting to raise rents.

How is this issue handled? Typically, appraisers will make an allowance for market rents, while bankers don’t; and investors look for underrented properties, for they can mean lower sales prices but potentially higher profits down the road.

The last method of appraising real estate value is called the “capitalization of income” approach. This method determines a building’s value based on its profitability. In the real world of ap praising, different methods of valuing property are used for different types of buildings. With single-family homes, the comparative method is used most often. The reproduction cost method is usually employed for specialized properties (like a church) and for new construction. But for investment property of multiple units, the capitalization of income method is best.

This is probably the most difficult of the three methods to use properly when valuing income property, but actually it is the preferred method. Here’s how it works:

For starters, it might help to think of capitalization rates as interest rates. When you put money in the bank you ask, “Whatinterest rate will I get?” Capitalization rates are the same thing. Let’s assume you have $10,000 in a savings account, and at the end of the year you earned $500 in interest. The following formula will show your interest rate:

Interest earned – Amount invested = Interest rate

Or plugging the savings account numbers into the equation, we get:

$500 / $10,000 = 5%

As a financial planner who spent the first part of my career helping people save and invest money, this opportunity cost is the single scariest. It is not just a missed opportunity that you’ll someday kick yourself for, snap your fingers, and say “Aw Shucks!” Rather, it’s an opportunity cost that will determine the day-to-day existence of possibly one third of your entire life. I’m talking about retirement.

Now, a good percentage of you reading this book will say something along the lines of “retirement is so far away that I’m not worried about it” or “I’ll worry about retirement when I get out of debt.” But, the key thing I want to pound into your head is that retirement planning is monumentally less painful the earlier you do it. In fact, if you wait until 15 to 20 years before retirement to start planning, you may not be able to pull it off.

Why is it such a big deal? Well, the biggest problem is that people are living longer and longer, and our employers and Social Security system are giving us less and less. In fact, it is very possible that you might retire at age 65 and live to be close to 100 years old. That means that 35 years, or one third of your life, will be spent without income from a job. If you are hoping Social Security is going to cover even the majority of that, think again.

I don’t mean to scare you, but rather hope to give you some major motivation for moving forward. Just like my wife kept her eyes on that little sailor outfit during delivery, you need to keep your eyes on retirement as you try and decide what to do with each and every penny of your income and expenses.

If you buy a fully leased commercial property at a fair market price, you are going to have to wait for inflation to increase the value of your rentals and thus the capital value. Alternatively, if you buy a property that has some vacant space, with some rents that are below market, rooftops that are underutilized, storage space that is not leased, and a host of other features that you can do something with, then you can exchange your ideas, thoughts, energy, and enthusiasm for huge chunks of capital value very quickly. In other words, you are an extremely important factor in the real estate you acquire.

Another way of expressing this is to say that when I buy a property, it is a different property from when you buy it. Physically it is the exact same property, but since the ideas that I bring to the table are likely to be different from the ideas that you bring to the table, the property itself ends up being different.

Whether you like it or not, you end up being part of the equation. That is why the more ideas you have in your head, the more value you add. That is how I came up with another signature statement:

The most valuable piece of real estate is the six inches, give or take an inch or two, between your right ear and your left ear. What you create in that space determines your ultimate wealth and happiness.

While in general we have a lot of control over our assets, we have relatively little control over our liabilities. In many parts of the world, it is impossible to fix the interest rate on your mortgage for more than a handful of years. Where you can, make sure you fix the interest rate!

One of the huge advantages of the real estate market in the United States relative to many other countries is that it is possible to obtain mortgages—even 30-year mortgages—where the interest rate is fixed. I am astounded at the number of investors who choose not to fix the rate. For the sake of perhaps a 0.5 percent lower initial interest rate, they are willing to risk interest rates going through the roof in the future. It is a folly not only committed by legions of otherwise sane investors, but also aided and abetted by armies of mortgage brokers who no doubt get a better commission on loans that turn out to be more lucrative for the banks.

Furthermore, you should avoid any requirement for a personal guarantee on any real estate loans. The reasons are twofold.

First, a real estate investment should stand up on its own two feet. The risk of having a personal guarantee is that it may be called up, and you would be forced to pay off principal on a loan taken out by an entity with limited liability. Signing a personal guarantee, of course, breaks this liability fire wall.

The second reason why you should avoid any personal guarantees is that when you apply for future loans, banks will often ask for a list of your contingent liabilities—these are liabilities that may end up on your shoulders. The more items in this list, the more reluctant a bank will be to lend you any money.

• Are there internal issues—such as civil unrest, a repressive government, a history of military intervention in political matters, an upsurge in religious fundamentalism, racial hostilities, pervasive distrust of foreigners—that may make the country unstable in your lifetime or in the lifetime of those whom you may hope to someday benefit from your investments?
• Are there corruption issues—national or regional government corruption or failure to prosecute those engaged in nefarious business dealings? Did you consult Transparency International’s corruption perception index (www.transparency.org) to get up-to-date information?
• Are there external issues—such as border problems with neighboring countries, influxes of immigrants or refugees, overt or covert threats of terrorism—that may make the country unstable?
• Are there foreseeable ecological concerns—pollution, deforestation, overfarming, water and/or food shortages, not to mention the increasing anxiety about the possible effects of global warming, particularly on coastal areas—that may make the country’s economic future less desirable?
• Are there societal and cultural changes—religious or tribal strife, large immigrant populations, increasing disparity between rich and poor, underfunded or collapsing educational systems—that may make the stability of the country’s overall future less predictable?