Will These Companies Change The Way We Learn?

When I set out to write an article about the future of education, I had no idea how deep the rabbit hole went. I graduated from Binghamton University in upstate New York in May, 2007. In the short time since I donned a graduation smock, the grades and accomplishments which landed me a spot at one of the best SUNY schools then wouldn't even get me a second look from the admissions board today. Having aspirations to create an Entrepreneurial University, as an alternative to traditional degree paths, I have been a keen observer of educational trends in America. What disturbs me is how much emphasis has been placed on changing the administrative and testing aspects of education, but fresh ideas, approaches and technology are rarely talked about in mainstream media.

My initial thoughts were about the status quo; universities with billion dollar endowments don't really have any incentive to change the way that education happens, and public schools are caught up in a tide of politics and budgetary concerns. As a result, traditional degree paths can be woefully inadequate in preparing graduates for the workforce. Jobs lost in the last recession are not likely be replaced with the same type of jobs, as corporations must be scissor lean to compete. The playing field is constantly evolving. More and more, an entrepreneurial mindset, personal branding and individual accomplishments will set successful applicants apart. I decided to test these presumptions by talking to the founders of several firms that are facing the challenges of an educational culture that is in dire need of some fresh thinking.

A better way to study?

For Becky Splitt and Christopher Klundt, founders of StudyBlue, mobile technology comes first. Their main objective is a seamless experience across every device that a student might use to view their concise, one topic centric, user generated note cards. Students have been jumping at the opportunity to create content on this free service, with over 50 million note cards and counting. 1.4 million people are studying and learning collaboratively, and the trend is not slowing down. Many would agree that what's most important about college is not so much rote memorization, but learning how to learn. Becoming a lifelong learner is a noble and underserved pursuit in todays workforce. StudyBlue helps create one large study group, hacking the information, breaking down problems to their simplest elements and putting them back together in the most cohesive way possible. This is of incredible value to both job seekers and entrepreneurs, whose analytical skills in synergy can create a much better understanding of complicated concepts among those using the service.

To keep the content relevant and current, users are allowed to rate notecards. Students concerned about privacy can decide not to share their notes. Becky was kind enough to show me this enormous database in action, sorting by relevance of topic, and further by how many people rated the content or 'liked' the content that was pushed to the top. “There isn't a lot of junk or fluff. Students are here for a serious pursuit of knowledge, and take this seriously.” says Christopher. StudyBlue got started in Wisconsin in the June of 2009 with a $2MM funding round, later securing $3.6MM in the summer of 2010. The founders are staying focused on growing and improving their service, choosing to keep their heads down as opposed to shouting from the rooftops. The strategy is paying off, as seen by their explosive growth. “I just wish I had something like this when I was in school,” one educational expert has said. A student in an Organic Chemistry lab can pull out their phone, search for the relevant topic, take a picture or video, use voice control to interact with the information, and keep up with their learning in an interactive way. The content is immediately available to all their devices through the cloud, and can be shared throughout the StudyBlue community. “Teachers can browse the notecards to see how well the concepts are being grasped, and pivot in real time.”, says Becky.

What about the high cost of tuition, textbooks, and student debt?

Colin Barceloux initially just wanted to make some cash on the side by selling 'no value' textbooks online to students at other schools. He came to see the potential for rentals in this space, and founded BookRenter.com in order to bring his vision to the world. “The high costs don't come from the university or the bookstore, they come from the publishers and wholesalers”, says Colin. “Students spend over $10 Billion per year on textbooks, so we thought that with the size of the industry, coupled with the leverage of the internet, we really had something.” When asked how iBooks might affect the industry in the future, he makes a great point. “Consumers will continue to move into digital media in droves, provided that they have the final buying decision. The benefits in access, distribution, and cost are easy to understand. Unfortunately, students are told what the approved content is by professors, who are given content by the big five publishers, so the changes are slow to happen.” BookRenter has become a major distribution network for publishers, a channel for tens of millions of dollars in inventory. “Students used to feel helpless, having to shell out thousands of dollars per year for textbooks they would likely use only once, sell back for 25% of the value, and see them being sold to the next year students for 75% of the regular price. Now with textbook rentals, there is finally another option.”

What really worries people who are finishing school and coming into the workforce today is their assumed debt load. Some say there might be an education bubble brewing, creating far more qualified prospects than spots to fill. With fewer jobs, and more debt, students choose to stay in school longer, compounding the problem. “Since 2002, the costs of educating yourself at a university have nearly doubled.” Uri Pomerantz, founder of Bright Frontier Financial says. His firm is currently working with banks and qualified lending candidates to rework the student debt equation, to allow for more creative financing options for higher education. His track record, and how quickly he articulates and executes ideas, are impressive. He goes on to paint a picture of a trillion dollar student debt cloud that hangs over people during what should be the most exciting and hopeful time in their lives. “We can also help recent graduates in non intuitive ways, such as helping them raise their credit scores and pay less over the life of a loan.” Echoing some of the ideas of Ramit Sethi and Robert Kiyosaki, Uri and I discuss the finer points of financial education and how many graduates know very little about money. “Those early years after college can make or break your financial future, people need to learn good investment habits and start building an asset base that will sustain them, instead of hoping to have enough money when retirement rolls around.”, says one expert. “Students should also be focusing on investing in themselves and their earning potential, but having more degrees may not be the answer. You really need to be increasing the number of tools in your entrepreneurial toolbelt.” Uri hopes to enact some real, lasting change in the way education is financed. While still in its beginning stages, this firm will be one to watch.

For those who want to create and sell content, an often overlooked asset, look no further than Graphicly, the latest brainchild of Micah Baldwin, who has been a serial entrepreneur since the age of 11, and is also responsible for the Follow Friday hashtag (#FF) on Twitter. Graphicly allows content creators to share a portfolio, ebook, presentation, app, music or any other project on multiple distribution platforms for one low price. In the relentless pursuit of creating a personal brand, students can use Graphicly to make some money and gain some notoriety from their work. “We aim to be one stop shopping for those who want to deliver their content across multiple relevant channels”, says Baldwin, “It seems like a no brainer that people shouldn't have to log in and upload items to the Kindle store, then iTunes, then Android. It should all flow seamlessly, and not cost a lot.” The result is an impressively powerful and easy to use platform, that could be a much needed source of revenue for a student or budding entrepreneur who is still just getting started, or an alternate route in publishing for a professional author or musician.

A more effective job hunt?

Andrew Maguire of InternMatch wants to help students avoid the shotgun approach to the internship search process, firing dozens of resumes at prospective employers. Finding an opening with a firm is only half the battle. You have to get their attention, sell yourself to them, and get them to give you an offer. InternMatch educates students on every step of the process; helping them put their best foot forward for the employers they find most compelling. “The typical listing model, where companies post a blurb that stays up for 30 days, makes it difficult for students to differentiate between internships, so it’s hard to customize an application. Employers hate generic resumes and cover letters.” says Maguire.

“We help companies to showcase the unique culture of their internship programs through rich content. Students want to get a feel for the people they’ll be working with, the office environment and the valuable learning experiences taking place. ‘Campus Hubs’ allow companies to interact with students year-round and gives content control to recruiters,” he continues. “Students need a way to connect with prospective employers that is highly personalized. Access to Campus Hubs gives students the opportunity to engage with employers through video, photos, social media, and Q&A so they can get a strong sense for whether or not there’s a good fit before applying.

The 'catch-22' is that applicants need the internship to get experience, but experience is needed to get the internship, and ultimately the job. InternMatch encourages students to learn about exciting companies earlier in their career, so they can start to create a freelance portfolio tailored to the companies where they ultimately want to work, showing initiative and passion for what they will be doing. If you don't show some aptitude with the tools you will be using in the real world, how can you expect a company to hire you to do that for them? “You need to be blogging, tweeting, working on projects, and generally getting your name out there, so that when a company looks for you online, you're everywhere.” Campus Hubs are their primary source of revenue, and InternMatch charges companies for access to the polished candidates they create as a result of their educational efforts. They work with over 180 schools nationwide and growing. “Our services are free for students, and always will be. No one should be denied great tools and career opportunities because they can’t afford them.” says Maguire.

But what about those that seek an entrepreneurial education?

Too long has the entrepreneurial path been seen as an all or nothing approach, characterized by high risk and huge rewards for the few successes, and little attention paid to the droves of failed startups that litter the Silicon Valley landscape. Incubators, such as Dave McClure's 500 Startups, Y Combinator, and several others are beginning to bridge the all or nothing gap. “Not everyone has to look at a startup as Mark Zuckerburg or Bill Gates dropping out of Harvard and creating a company that changes everything”, says one analyst. “There can be a happy medium where budding, hungry entrepreneurs can learn the skills they need to make it without risking everything.” Many experts say that an alternative career path for those hungry dreamers, for whom the traditional educational model may not resonate, will be a great driver of success and create many more jobs in the economy than traditional institutions.

Steve Blank , legendary entrepreneur and professor, who teaches at Berkeley and Stanford, shares his thoughts: “We can't just think of startups as smaller versions of big companies.”, he says, when asked about what he thinks has been lacking in previous efforts to teach entrepreneurs. He is hopeful for the future, however. “We think we may have cracked the code. The key lies somewhere between a curriculum designed to teach entrepreneurs what they will need to know in the founding of their company, and having mentors available as resources.” He continues, “We certainly can't guarantee the success of a startup, but overall we can help them succeed more often, by teaching them how to bootstrap, iterate quickly, fail cheaply, and by giving them access to people who have been in their shoes already.” Online education is another component that will continue to grow and become more relevant, as better teaching tools become widely used. “I think the things that we are doing are going to surprise a lot of people, and the world shouldn't count America out when it comes to innovation. We are seeing signs of a new American Renaissance”, says Blank.

As a result of my research for this article, I was bombarded with information, keen insight and hopeful possibilities for the future of education in America. Talking to these entrepreneurs about their successes, and where they see things going, was a truly humbling and eye opening experience. But in the end, I was already looking to be wowed. In the real world, it comes down to a marketing and awareness problem. Sadly, even though there are products and services that can solve many of the problems inherent in the current educational model, if they don't come to the attention of the people in position to enact the changes, then educational reform is dead in the water. Awareness of the problems, and possible solutions, brought to the attention of those with the means to enact change, is a great first step toward overcoming the challenges in education today, and securing a bright future for those currently writing the next chapter in our history.

Brad Hart manages a small, focused fund that invests based on technological trends, among other strategies. In his spare time, he can be found traveling, writing and consulting with entrepreneurs and charities. Born and raised in New York, he splits his time between New York and San Francisco. 

This article originally appeared on fnBlog and has also been made available on Forbes.com

Brad holds no positions in any of the companies mentioned in this article.

Will 3D Printing Change The World As We Know It?

 Sorry for the formatting issues!

You're out in the middle of the Pacific Ocean on a container ship,
chugging through a confused sea on a great circle course to the San
Francisco sea buoy. You've been running the ship's slow speed diesel
engine hard to meet a deadline. The vibration is reverberating
through the hull gently trembling you to sleep when, without warning,
the sound stops. Minutes later, the Chief Engineer calls to inform you
that the PLS Dosage Pump supply valve has failed and your ship is now a
seriously overpriced pontoon, until you can get the part to fix it. As

Captain, you don't know what a PLS pump is, but from the grumpy tone of

the chief's voice, you are sure he doesn't have a spare or any way of
making the complicated part in the ship's machine shop. Your shipment
will be delayed, money and resources will be lost and the office will
be asking for answers.

But what if you could make that replacement part yourself?

Welcome to 3D printing. A vessel's computers may one day have a
database of 3-Dimensional CAD (Computer Aided Design) images of each and every part on the ship, from nuts to bolts, all the way up to complex engine parts. If any of these should fail, the printer could have a suitable, made-to-spec replacement in a matter of minutes to hours.

"3D printing has the potential to change everything" says a former ship engineer. First used in the late 1980's, this technology has been called Rapid Manufacturing, a term coined by inventor S. Scott Crump who later went on to start Stratasys [NASDAQ:SSYS]

Conversely, it can be called additive manufacturing or stereolithography, which are more complicated terms for similar technology created at about the same time by 3D Systems [NYSE:DDD] founder Charles 'Chuck' Hull. While both companies have traded publicly for a decade or more, the technology has gained traction in recent years and has launched both companies into an organic growth spurt, prompting acquisitions and strong numbers from both companies, with little to no debt. While these companies are the leaders in market cap, the entire publicly traded market cap for 3D printing companies is comparatively small, roughly 2 Billion USD. Many companies that work in this space are privately held.

Today, 3D Printers have evolved to make a variety of objects using a laser

or extruder (the material output part of the printer, best described as a futuristic hot glue gun) that move along an X, Y and Z axis to build an object in three dimensions, layer by layer, sometimes only microns thick at a time, depending on the desired resolution of the object. This method eliminates a lot of wasted materials, as any leftover powdered substrate can be immediately used on another project, alleviating the need for injection molding, setup costs,

cutting, sanding, drilling and having scraps of material left over, as is common with traditional manufacturing methods. The most impressive part: economies of scale cease to be an issue as costs for single parts become standardized in relation to the costs of the material being used.

But the most stimulating possibility of this technology is unlimited

customization. If you don't like a feature of the part or object you
are creating, simply tweak the CAD drawing to include your improvement
and print another one. Don't know how to use CAD? Try Google Sketchup

for easy design in three dimensions, or download the drawings straight
from the manufacturer.

Parts for machines, Parts for people?

This technology is not simply for modeling and prototyping, either. TV personality Jay Leno reportedly uses a 3D printer to make custom and hard-to-find parts from scratch for his collection of classic cars. Entrepreneurs in almost every imaginable space have been using these printers in a myriad of ways, and the trend is speeding up. Organovo,
a San Diego based firm headed by CEO Keith Murphy, has high hopes for
the future and has forwarded this tech as a medical tool with surprising speed. “We currently produce organic tissues grown from cell samples, which can be used as a human analog for pharmaceutical drug discovery and development. The printing process can take as little as 12-24 hours. This can allow for more relevant results and less animal involvement than traditional research methods.” Murphy says. Organovo was recently listed on the OTC market under the ticker [OTCQB:ONVO] “We started out in late 2008 and received $3 Million in angel investment. Since mid 2011, we have doubled in size, and recently secured another $8 Million in private funds, in conjunction with the public listing”, Murphy states.

One day companies like Organovo may be able to simply harvest a grown adults' stem cells from a blood draw, use a specialized 3D printer to build an organic, polymeric scaffolding in the shape of the organ or tissue that needs to be replicated, and literally grow a kidney, heart,
lungs, within a matter of days or weeks. In theory, pluripotent stem cells can be
harnessed safely from the intended transplant recipients, without
damage to any unborn fetuses. They offer patients no chance of organ
rejection due to their self origin, and bypass the need for endless
waiting lists where patients may never find themselves at the
top before it's too late. Imagine a world where replaceable organs were available to
everyone who needed one. It may be coming faster than you think.

What about our wounded service men and women, returning from conflicts
abroad, who have tragically lost limbs in service to our country? The

cost of a high quality artificial limb replacement, when parted out, has been quoted in the 6 figure range. They are mostly ill fitting, take a while to manufacture and have to attempt to be customized using standardized parts; overall a poor replacement for a lost limb.

Bespoke Innovations, headed in San Francisco by Scott Summit, has been creating some of the most elaborate and functional prototypes for artificial limbs using 3D printers. These limbs will come out of a printer completely functioning and assembled, sometimes with many intricate moving parts and using various materials, all with a
cost parity of about $5000-$10000. Their ease of use, customizability and
functionality, coupled with a relatively low price point, are most
definitely a step up from their predecessors. Mr Summit, despite his busy schedule, was kind enough to share a ton of great information during my research for this article, and his expertise will show throughout. “3D Printing was initially a solution looking for a problem. With any world changing technology, it only matters once it actually does change the world”, he says. When a technology comes along and can do something better, faster and cheaper... all of a sudden you find yourself wondering how we ever got along without it. The military is rumored to use 3D printers for resupplying parts in for fighter jets the combat theatre, and since it costs so much to send anything that weighs a lot into space, NASA and the Singularity University are reportedly planning to use 3D printers for future space missions. “It used to be that resupply was the Achilles Heel” says Summit. “But now you can make the parts remotely as needed, eliminating the need for inventory. On the moon, for example, you could use a naturally occurring substrate such as Silica, which is commonly found on the surface there. All you need is a binding agent.”

My D'oh Face

My personal interest was piqued years ago when I met with a friend and fellow
entrepreneur in Boston. That evening, in Beacon Hill, Jesse Waites
started rattling off the merits of 3D printing. I was dumbstruck.
He was convinced that this technology was a game changer, and his
enthusiasm sent me down a rabbit hole of investigation. I'm not
alone. Even Richard Branson, rebel billionaire and head of the Virgin Empire, couldn't help but have his interest piqued when we spoke about 3D printing at a fundraiser in Miami Beach, yet the investing public remains generally clueless to its potential. Some people seem to 'get it' right away, but on a frequent basis I'm confronted the same question uttered with a furrowed brow and questioning glance; "Why would anyone use this?"

An even more disturbing question I frequently hear is "What's the
short term potential?" At an investor meeting held at the New York
Stock Exchange last May (3D Systems was originally listed as TDSC on the NASDAQ but was moved to the NYSE under its current ticker DDD ), a room full of analysts asked very short term, profit-driven questions, refusing to see the future gold mine in front of their eyes. "Who would buy this?", they ask. "Why would anyone want to create objects

themselves?" Are these the same type of people who welcomed Bill Gates'
visionary shift from hardware to software with questions like "Who is going to
buy a disk of one's and zero's?"

The better question today, especially with a fully functional plug and

play 3D printer called the cube (only $1299) being launched by 3D

Systems in the near term, is "Who isn't going to buy this?" One development
that may shed some light on that question is already clear. The world's leading source of
illegal downloads, the infamous website Pirate Bay, has already jumped

on the bandwagon with downloadable physical object models, called

Physibles, and hopes to keep 3D files available to the masses. But
some are hoping for a legally sanctioned alternative that avoids copyright issues. One expert in 3D printing said "An iTunes-like model could be profitable for digital distributors, because once you can download a coffee maker, or print out a new set of kitchen utensils on your personal 3D printer, who will visit a retail store again? Other ripples in manufacturing may follow, leading to the question 'Could the cheap trade deficit with China be solved with 3D printing, by bringing more manufacturing back to the US'?” This remains to be seen, but experts agree this idea is within the realm of possibility.

The Possible Negatives

Some are hoping that 3D printers will eliminate the need for
warehouses and spare parts store rooms, but 3D Printing is not a silver
bullet. One expert on 3D printing says "You still need the
ingredients. What happens when the part is load bearing and subject to
high pressure and high temperature environments? What if the part is
made of exotic material you don't have in stock? A plastic or metal
part might work on a temporary basis, or not.”

What about the ability to replace large parts or ones built of a mix of materials? What if a complicated part needs to be manufactured by two different types of 3D printers? Perhaps a printer with multiple heads, designed to print with multiple materials simultaneously, is the answer. These are questions which the industry still needs to figure out, but also where the plot thickens.

Self Replicating Machines

While many exotic materials have yet to be tested, current 3D printers
can make parts from the most widely used of today's materials. Plastic
and PVC all the way up to Aluminum and Titanium parts can be printed,
and printers can even print themselves. That's correct. A printer is

capable of printing a functioning copy of itself, and in the future this capability could be
harnessed for a myriad of purposes. Want to build a base on Mars, but

need to reduce the cargo from bulky parts to raw bulk material? Send a
signal to a single printer hundreds of thousands of miles away with instruction to print
10 or 100 or more printers of various types, to build out bases,

equipment, rovers, shuttles, whatever. Perhaps raw materials are, as in to the moon scenario, already available there, alleviating the need to send substrate with the machines. Cities under the ocean? Why not? Maybe your desires for
mass customization don't involve extraterrestrial or underwater
excursions. What if you want to simply build a house? Click the link
to see a trailer for a documentary about an Italian engineer doing just
that. Additionally, Summit points to other firms using G.I.S. (Geographic Information System) data in conjunction with 3D printers, to make houses that are structurally perfect for their location. This experimental technology, called 'Contour Crafting', may soon be able to be used in a country such as Haiti to rebuild homes to withstand future earthquakes for a fraction of what a construction company could conceivably charge.

Coming soon to a dentist office near you, 3D printed dental implants. A startup in SF is working on this problem right now. Bone cancer giving you trouble? How about this woman in Belgium who, at the ripe young age of 83, just recently got a 3D printed jaw replacement? If you wanted to make a 3D printer yourself as a hobbyist, and you have some engineering background, you can even put one together yourself, called the RepRap Mendel.

But what about marine transportation? It's clear that, if this technology is adopted on a large scale, the balance of cargo will shift from container vessels
back to bulk cargoes, but that might not be the limit. John Konrad, a
former ship captain and expert in marine transportation says "Ships
could conceivably become manufacturing plants. Install a bank of 3D
printers aboard ship and the vessel could pick up raw materials
overseas and begin manufacturing products during the voyage to the
United States."

With engineers and scientists currently doing amazing things around the world with this technology, an endless article could be written about the possibilities, but I think one thing is clear: 3D printing, while still just hitting its stride, will impact the future in unimaginable ways. "We are going to live in a world where anyone can create and customize, and iterate with blinding speed." says one financial expert. I believe that he's right, and I can't
think of another technology that has so many implications for new

industry. The possibilities are endless, and opportunities are coming fast and furious. “It's like drinking from a fire hose right now.”, says Summit. Just like the Industrial Revolution, the assembly line, the advent of the internet and the Social Media phenomenon, this will be a

game changer. I encourage you to wipe the dumbstruck look off your
face (don't worry, I've been there) and learn as much as you can. Tell
others. This technology cannot be allowed to remain in the hands of a select
few who are already in the know.

Brad Hart manages a small, focused fund that invests based on technological trends, among other strategies. In his spare time, he can be found traveling, writing and consulting with entrepreneurs and charities. Born and raised in New York, he splits his time between New York and San Francisco.

This article has been made available on AnonymousExploits.com (Brad's personal blog) GCaptain.com, and Forbes.com

Disclosure: Brad Hart is currently long DDD, SSYS and ONVO.

Renting Vs Buying, And When To Invest... The 1% Rule And #NYC Real Estate

Deciding whether to rent or buy is an age old question, and one that leaves many people confused and misguided.  Many people are ill prepared to deal with their emotions about the subject and make decisions with clarity. Financially, it is one of the biggest decisions you can possibly make, so making a purchase decision without some key bedrock financial understanding is akin to going into a gunfight with a water pistol.

When do I rent and when do I buy?

Many people hinge their success in life on owning a home. They are convinced that renting is just "flushing away money" and that home ownership is a right and a privilege that every American deserves. They leverage themselves to the limit, and end up with a 30 year mortgage that, even at today's low interest rates, will have them paying for that house twice over by the end of the term. In NYC, with its high property values, an average middle of the road home can easily go for a cool $1,000,000. By the end of the loan, at 5% interest (if you can even get a loan for that low a rate) you will end up having paid $1,932,588 for said home.

"But I'm building equity, right?" Actually, not as much as you think... Sure, you have the initial 20% down payment that you put into the property to secure the loan, in this case $200,000 (as banks typically want at least 20% plus excellent credit to consider a loan right now) but what happens if you need to sell and the market is down? You have effectively lost equity. Many people who bought at the top of the market in 2007 are now underwater on their loans, they effectively have negative equity. Even if they sell, they will still owe the bank, which leads many of them to be foreclosed upon, walking away from their homes and forfeiting not only their sunk capital but their credit rating. In fact, if you look at and play around with the amortization chart/schedule calculator here, a few things become clear. Firstly, most of the interest is paid in the first half of the loan schedule, in fact, you pay more interest than principle for each payment in the first 193 months of the life of the loan. That means that after paying diligently for more than 16 years you have only paid down about a third of the actual principle balance of the loan. The first year, your payments are comprised of about 83% interest, toward the last year they get as low as 3%.

Now lets look at a rental scenario for a comparable property. Since property values are so high in Manhattan, you can typically rent for about half of what a property would go for should you decide to buy... Using nice round numbers, a $1,000,000 carries a $5000/Month price tag (its actually usually more when you factor in maintenance, insurance, taxes, upkeep etc) when a similar apartment can usually be rented for about $2500 a month, where the landlord pays for maintenance, insurance and taxes. If your dishwasher breaks and you own the place, guess who foots the bill... exactly, it's you. Again, these are rough numbers, you can figure out a more precise scenario for your given situation, this is just to illustrate a point.

Now lets look at two people, Renter Randy and Buyer Betty. They have the same amount of cash and the same income, lets say they are equally qualified to purchase or rent the same properties. Buyer Betty puts down her $200,000 down payment on her $1MM property and pays $5000 a month plus all of the aforementioned extras for her 'owned' apartment, but builds very little equity in 15 years. In that same time, Renter Randy decides to take that $200,000, plus the extra $2500 a month ($30,000 a year) he saves and wait for dips in the market to buy index funds. Even passively purchasing equities at regular intervals, based on the performance history of the S&P 500 and adjusting for inflation, Renter Randy can expect an 8% per year return on his investment over time. We use a savings calculator to and an amortization schedule to figure out where each is at the end of this first 15 years.

Buyer Betty, who started out with a $200K down payment and paid diligently for 15 years, only has built about up to about $456,929 in equity, including her initial down payment, and still has another 180 months (15 years) of payments to go before she pays the remaining balance of the loan ($543,071). During this time, she has paid to maintain and fix up her home, as well as insurance and other extras that come with being a diligent homeowner. Not to mention that she is glued to one place... A renter can pick up and change scenery whenever they feel like. A home can take months if not years to sell, and you lose on commissions, lawyers, and all the hidden extras that come with a home sale.

Renter Randy, however, despite "flushing" his money away on rent, has diligently been investing his initial $200,000, plus the $30,000 per year he has saved by not buying, and spending the extra monies left over-- which were not spent on dishwashers, maintenance, insurance, taxes etc-- on vacations. His annual rate of return has been at least 8% after inflation, and he now has turned his initial $200,000 into a cool $1.3 Million. He can now use this money to buy a place outright, or if he is now in love with renting, as he should be, continue to rent and live off the interest. He now has options, which are much better than obligations.

Now I know what you are thinking, Betty not only built equity, but her property has probably appreciated some too in that same time frame. Perhaps, but as we have seen in the housing crash in 2008, you can't count on appreciation. Its a lazy and dangerous way to invest. A seasoned investor knows that cash flow is king... the only good investment, or true asset, is one that puts money in your pocket. Betting on appreciation is akin to gambling. The debt she secured is also a huge liability.

There are some scenarios when it does make sense to buy instead of rent, but typically home prices in major cities such as New York preclude this from happening. Luckily, after many years of keeping my ear to the ground on real estate as an agent and also an investor, I have learned a very easy rule to quickly determine not only whether it is better to rent or buy in a particular area or market, but whether or not an investment will potentially be cashflow positive, which is what a sophisticated investor should be interested in.

The 1% Rule... A home that you can rent monthly for at least 1% of the purchase price (at current interest rates) will typically be cash flow positive, assuming the maintenance is not extensive.

Now if you apply this to your $1MM home, there is nothing on the market that you can purchase for $1MM and rent for $10,000 per month. A $100,000 home going for $1,000 a month in rent is not unheard of, and in fact is a more common scenario around the country. If you would have to pay $1500 a month to rent a place that costs $100,000 to buy, you are actually saving money by purchasing the home, even when you take interest into account. If you are renting it out, the cash flow would typically be positive. This gives you options.

REO's (Real Estate Owned) are typically very cheap compared to the open market, and hard negotiations coupled with motivated sellers can produce amazingly cheap deals. REO's are simply homes that the bank owns but cannot collect on. They have foreclosed, put it up for auction, but still have no buyers. These homes are essentially toxic assets, they still have to pay for the taxes and other lawful obligations, but are usually not allowed to collect rent, as most places have laws that preclude banks from making money any other way than from lending. A bank does not want to be a landlord anyway, they want to make money by borrowing cheaply and lending money at higher interest rates.  What this means for an investor is that you can usually come in with a lowball offer and pick up these toxic assets cheaply, then fix them up and rent or sell them. 

If you choose to build a rental portfolio, which in my personal experience is more headache than its worth, you should always be sure that in almost every scenario that you are cash flow positive. You should be consistently clearing at least 8% cash on cash return, and building equity at a favorable rate. There is still a lot of friction in this business model, and high overhead. Bad tenants, bad property managers, maintenance, taxes, insurance, and lawsuits (some are just unavoidable, no matter how good a landlord you are) will all eat into your profit and cause undue stress. Buying established blue chip dividend stocks when they are on sale is my personal preference for excess cash. They are reasonably liquid, and if your timing is good, go on sale much more often than homes. Also, no maintenance, no headaches, and long term capital gains taxes are very low when compared to earned income. You simply have to have an eye for a bargain and keep tabs on your companies performance. Index funds are even less maintenance, you get inflation protection, dividends, and liquidity benefits. Or you can simply build low friction high yield cash flow businesses. Ask me for more info on this. 

I understand this is grossly simplified, but I hope this helps at least see the bigger picture. If you have any specific questions please feel free to drop me a note, or better yet, do some of the math and see for yourself. I used the Mortgage Calculator App from SVT software and CreditKarma.com for the mortgage calculations and amortization schedules respectively, and the SaveCalc App (pictured above) for the compound interest calculations.