Monthly Archives: September 2017

The Real Estate Investing Rule To Follow: Buy Utility, Rent Luxury

Rent Luxury, Buy Utility as a real estate investorPart of the reason why I bought a smaller house in 2014 was because I wasn’t willing to rent my own house for the market price at that time of ~$8,500/month. The price to rent my house had grown from about $5,000/month when I first bought it in 2005. If I had a couple kids and a penchant for throwing tons of money away on rent, then maybe I would have stayed.

To optimize my finances, I figured the best thing to do was to buy a new house more suitable to my house-spending desires (~$5,000/month max) and rent out my old house at market to those willing to pay $8,500/month in rent. This way, economic waste is eliminated, and everybody is happy.

Conduct the same mental exercise with your existing home. If you haven’t rented in a while, you may be surprised by how much your primary residence can command for rent in the open market. The cost of living in your home isn’t the actual money you are spending to live there. The actual cost is the opportunity cost of not renting it out at market rate.

Let me share with you why it’s important to follow the real estate investment rule of Buy Utility, Rent Luxury (BURL) if you want to maximize your lifestyle and your net worth.

Buy Utility, Rent Luxury (BURL)

A common rule a savvy real estate investor follows is to pay no more than 100X the monthly rent as the purchase price. In my example, an investor wouldn’t pay more than $900,000 for my now $9,000 a month rental house.

That said, it’s IMPOSSIBLE to follow this rule when buying in expensive cities such as New York, San Diego, LA, and San Francisco. Even finding properties priced at 150X monthly rent is extremely difficult to find. Why? Because there is excess demand looking to buy property for lifestyle and capital appreciation. Housing becomes more than just basic living expenses, it becomes a luxury option. A Honda Civic takes you around just fine, but some people like to buy classic Ferraris.

I’ve chosen to live and remain in San Francisco because I believe it offers a great combination of wealth creation and lifestyle. The average temperature is in the low 60s, six-figure jobs are a dime a dozen, consulting opportunities are endless, it’s picturesque, the food is amazing, there’s tremendous diversity, and there are plenty of outdoor activities thanks to the topography. San Francisco is amazing, which is why it’s so expensive.

I’d love living in Hawaii, but it lacks a robust domestic economy. With tourism as its main industry, the economy is subject to the whims of others. Unless you are a doctor, lawyer, or entrepreneur in Honolulu, there just aren’t many six-figure jobs. You need to already be rich or have a location independent business to comfortably afford a sweet home.

Rent Luxury Example

Rent Luxury, Buy Utility

Rent this

Although spending $9,000/month ($108,000 a year) on rent sounds expensive, it’s actually good value since you need to spend roughly 303X the monthly rent (25.25X annual rent) to buy my house at market price ~$2.7M. The 100X – 150X monthly rent rule gets blown out of the water.

Even if you owned the $2.7M home outright, you’d still have to pay $33,000 a year in property taxes ($2.7M X 1.2%), $2,500 a year in insurance, and around $5,000 a year in maintenance costs. Meanwhile, your $2.7M could earn a 2.5% annual rate of return risk-free = $68,500 for a total cost of roughly $109,000 if you had no mortgage. 

But the reality is that most homebuyers only put down 20%. Let’s say a buyer put down 27% and got a $2M mortgage at a 3.5% interest rate. His annual mortgage interest cost would be $70,000 on top of $33,000 in property taxes, $2,500 in insurance, $5,000 in maintenance = $110,500. Then you must bake in the opportunity cost of not getting a 2.5% risk-free return on the $700K and you get $17,500. The total gross cost of ownership is therefore $110,500 + $17,500 = $127,500 after putting 20% down. 

Obviously, renting for “only” $108,000 a year versus owning for $127,500 a year is a financially cheaper option if you don’t include the tax benefits, not to mention the benefits of less maintenance stress. The only way the owner comes out ahead is through principal appreciation and tax deductions. The problem most people have is coming up with the 20% downpayment. Meanwhile, getting approved for a mortgage is much more difficult post financial crisis.

Buy Utility Example

Buy Utility, a Raymondvilla, Texas lovely home

Buy this

Now let’s look at Midwest properties. There are actually $100,000 properties that can earn you $1,000 a month in rent. An $80,000 mortgage at 3.5% after putting down $20,000 only costs the homeowner $359.24/month or $4,310.88 a year. Add on $200 a year in property taxes, $1,000 a year in maintenance, and $500 a year in opportunity cost for not earning a 2.5% risk-free return on the $20,000 downpayment costs only $6,010/year to own compared to $12,000 a year to rent.

If you live in the Midwest, you need to be a buyer of real estate since it’s cheaper and you can cash flow immediately. Capital appreciation is slow compared to coastal city property, but that’s OK because the income generation is so much higher if you begin to accumulate rentals.

So why doesn’t everybody just buy all the Midwest property they can? It’s partly because many people in the past believed that in order to buy Midwest property, you had to live in the Midwest. It’s natural to want to be able to see and manage the property you want to own. Given half the country lives in the coastal cities, half the country focuses on accumulating coastal city real estate. But now, you can surgically buy specific Midwest property through real estate crowdfunding, which is why I’m so bullish on the space. This is financial arbitrage at its finest.

The solution for half the population living in expensive coastal cities such as SF, NYC, LA, San Diego, Boston, Washington D.C. and Honolulu is to therefore rent where you are and buy in the Midwest and South to maximize income and net worth.

What Determines Luxury And Utility?

We can qualitatively say without prejudice that coastal city living can be considered Luxury living while non-coastal city living can be considered Utility living. Who doesn’t want to be near the ocean, see the ocean, fly direct to other countries, eat a wide assortment of food, be constantly entertained, and take advantage of the highest concentration of job opportunities? There’s a reason why expensive cities are expensive.

But of course, non-coastal city people will balk at this classification given there’s so much non-coastal city living has to offer too. There’s something great to be said about a slower pace of living, much lower costs, and lots of space. We’re all biased for where we currently live or where we come from. Therefore, the easiest solution to determining what defines Luxury and Utility is to utilize objective math.

According to data compiled by Zillow, the national Median Price to Rent Ratio is around 11.44 (see dotted horizontal line below). Therefore, we can say the higher a property is valued above 11.44X annual gross rent, the more it is considered Luxury and vice versa.

If we use one standard deviation to determine the Luxury and Utility Median Price to Rent Ratio, the breakpoints are roughly 13.3X and above for Luxury and 9.6X and lower for Utility. In other words, roughly 68% of homes in America trade within 9.6X – 13.3X annual gross rent, which makes renting or owning a wash.

As you can see from the chart, San Francisco (Zillow includes Contra Costa and Alameda counties) trades at a Median Price To Rent Ratio of 20.51X, way above the 13.3X ratio I’ve determined to equal Luxury. However, my rental home trades at 26X annual gross rent, therefore, I should consider selling the property.

Rent Luxury, Buy Utility Financial Samurai

Luxury = 13.3X Median Price To Rent Ratio Or Higher

On the flip side, check out properties in Raymondville, Texas with a Median Price to Rent Ratio of only 5.2X. In other words, the median $60,000 house commands almost $1,000/month in rent ($60K / 5.2 = $11,538/year) . In other words, in just 5.2 years, you can have your renter pay back your entire property assuming you took out a 100% mortgage!

Raymondville, Texas clearly is considered Utility, and a savvy real estate investor should be buying Raymondville property all day long if their job market remains stable. The problem is that access to the market hasn’t really opened up yet. Not to worry though, since there are literally hundreds of other towns and cities with properties that trade below the 9.6X Utility classification ratio if you look at the RealtyShares platform.

Rent Luxury Buy Utility

Utility = 9.6 Median Price To Rent Ratio Or Lower

The Optimal Investment Lifestyle Combo

Of course, real estate is a very personal situation for each individual. We live where we want to live mainly due to our families, friends, and jobs. Not everything is about money. But given this is a blog about ways to optimize our finances, a savvy real estate investor should seriously consider my advice of Renting Luxury, Buying Utility.

Here’s a scenario I’ve been pondering now that I’m in the second half of my life. I want to be closer to my parents and live it up like a boss before I die.

For the sake of dreaming big, there’s this sweet 5 bedroom, 5 bathroom, 6,400 sqft new construction home in Honolulu with a killer view asking $6.95M. Think how many sweet blog posts I can write from the pool! Let’s say the real price is $6.2M since it’s been sitting for a while. Based on a 25X Median Price to Income Ratio, this means I can rent the house for approximately $248,000 a year or $20,500 a month. $20,500 is a lot of money, but think about how much rental income $6.2M can earn in Raymondville, Texas.

First, check out this picture and short video highlighting the $6.2M property. I’m happy to throw a pool party for readers who want to stop by and hang.

Rent Luxury, Buy Utility

Financial Samurai reader pool party anyone?

If the $6.2M was deployed in Raymondville, Texas, I could theoretically earn an insane $1,192,307 a year in gross rental income since the annual gross rent to price ratio is only 5.2X. After spending $248,000 a year living in a sweet home in Hawaii, I’d still have $944,307 left over in cash flow if I followed my rule of Renting Luxury, Buying Utility.

Seriously, the last thing I want to do is own a humungous house with tons of ongoing maintenance to deal with. But renting it is a different story. Besides, I don’t have $6.2M laying around!

Here’s a shortcut to decide whether it’s better to rent than to buy. The chart shows the share of homes in each city that can be rented out for more than their monthly expenses according to Zillow’s database. Of course, you just can’t buy every single property above the rental profitability line. You must still carefully run the numbers and do your due diligence.

Where it's best to be a landlord than an owner

Source: Zillow analysis of Zillow Rent Zestimates and Mortgage Payments, Property Taxes, Insurance and HOA Dues.

The opportunities are plenty to buy cash flow generating properties around the country. Specialized REITs and the rise of real estate crowdfunding companies are making this move easier today. You just need to figure out what type of real estate portfolio mix you want.

For 15 years I’ve been 100% long luxury growth markets. Now I’m shifting towards a balance of growth and income (utility) because valuations are stretched in San Francisco and I don’t have a job.

If you can remove emotion, pride, and prejudice from the equation, you should be able to maximize your lifestyle, cash flow, and net worth. Ready to BURL?

Update 9/28/2017: I decided to follow my own advice and sell my San Francisco rental home for ~30X annual gross rent and reinvest $250,000 of the proceeds with RealtyShares so far. I plan to invest another $100,000 – $300,000 by the end of the year in real estate crowdfunding to diversify my real estate holdings and target a 10% annual return. I’m currently still long a SF primary residence, a SF 2/2 condo, and a Lake Tahoe 2/2 vacation property. 

The post The Real Estate Investing Rule To Follow: Buy Utility, Rent Luxury appeared first on Financial Samurai.

Develop Your Sphere Of Influence To Achieve Financial Independence

Work on enlarging your sphere of influence. My first understanding of the power of influence came as a 21 year old at 1 New York Plaza, New York City. During a job interview with a sales trader at Goldman Sachs, I remember him telling me the most frustrating thing about his job was that as soon as GS showed up in the queue to buy, the stock would instantly move higher.

His job was to buy stock for an institutional client at the lowest price possible. But because GS was the most powerful investment bank at the time (perhaps still is), other traders would instantly try and front-run a GS order.

The thinking always went like this: If GS is selling, we should probably sell as quickly as possible because they probably know something we don’t know and vice versa.

Due to the constant front-running, algorithmic trading and dark pools were created to obfuscate large buyers and sellers. When there was simply too much stock a fund wanted to offload, an investment bank would act as a principal, buying the stock at a discount in hopes of selling off the stock to other clients at a lower discount. With enough discretion, taking such risk often paid off. But sometimes, the bank would get slaughtered due to loose lips. 

The Power Of Influence

Nowadays, the most common example of influence lies in an announcement that XYZ famous investor took a stake in ABC stock. For example, whenever Warren Buffet says he bought something, you can be sure the stock will jump several percentage points. The only way you can really get an edge is to buy Berkshire Hathaway stock.

None of us will ever be as influential as Warren Buffet, but over time, we can all develop our own sphere of influence.

The easiest way to develop influence is do something and succeed over and over again.

For example, after you’ve done 1,000 successful eye surgeries, you will become the leading eye surgeon in the land. You will be invited to conferences, be able to direct research funding, and receive a steady stream of clients. Your influence will enable you to raise prices, create courses, license your name, and get rich in the process.

If you’ve done 25 surgeries, and botched five of them, nobody will ever want to see or hear from you again.

Develop expertise through consistent execution and patience.

Influence Can Come From The Smallest Idea

Although a lot of folks from all over come to Financial Samurai to learn more about personal finance, this site is really tiny in the grand scheme of things. I don’t expect to influence the world, especially since I’m an unemployed nobody.

I only expect to help the 3% of you who actually take my advice. That’s right. Based on conversion metrics, roughly 97% of you read something and never take action. That’s cool, because it just means something isn’t painful enough for you to do something about it.

Because I like to check out open houses, on average I speak with three real estate agents every week. I always ask the real estate agent at least three things: 1) How do you think the market is doing versus this time last year? 2) Where do you think the market is heading over the next 12 months? and 3) Where is the best place in the city to buy?

To my surprise, over the past several months, more than half of the experienced real estate agents have told me the western side of SF is the best place to buy. They pointed to Inner Sunset, Parkside, and Golden Gate Heights as the primo neighborhoods to make the most amount of money.

Several even listed reasons why Golden Gate Heights is the best area which sounded eerily similar to the reasons given in my post published in 2014 called, “The Best Place To Buy Property In San Francisco Today.”

Then one realtor handed me a flier with this chart below. It’s Redfin’s 10 hottest neighborhoods in the ENTIRE country to close out the year 2017. Notice anything funny?

The 10 hottest neighborhoods for 2H 2017

There are around 150,000 neighborhoods in America and 119 neighborhoods in San Francisco alone. What are the chances that Golden Gate Heights, a tiny neighborhood, would even make the list? My guess is less than 0.1%.

When I Googled,”the best place to buy property in San Francisco,” I found my article in the #1 or #2 spot of the results. So I asked all the realtors whether they had heard of Financial Samurai before, and all of them said yes.

Ah hah! It’s seems that three years after I made a strong argument for Golden Gate Heights, Google now agrees with the argument, many realtors now agree with my thesis, public company Redfin agrees, and now a herd of new buyers agree.

In fact, just the other day, our local paper republished a post originally published on Business Insider about Golden Gate Heights.

Golden Gate Heights featured in SF Chronicle and Business Insider

http://www.sfgate.com/technology/businessinsider/article/The-next-hottest-housing-market-in-America-is-12224612.php

I might not be able to influence the world with my tiny site, but I have been able to influence the population looking to buy real estate in San Francisco. In turn, this influence has helped improve my net worth given I’m long a panoramic ocean view home in Golden Gate Heights.

Who said the only way to make money blogging is through online advertising? My biggest mistake was not buying two GGH properties before the mass media and real estate companies decided to agree.

Will they give me credit for the thesis I made in 2014 they are now claiming as their own? Of course not. But it doesn’t matter because what I care most about are the results. The author of the Business Insider article graduated in 2013 and came to SF in 2015. So from her perspective, GGH is an incredible revelation.

Achieve Financial Independence With Influence

The most important place to grow your sphere of influence is at work. Do what you say you will do in a professional manner for a long enough time and you will get paid and promoted.

Once you’ve developed a solid track record at work, develop influence with your clients and competitors. If your clients all believe in you, then you can go anywhere and your clients will follow. The more you are respected and feared by your competitors, the more they will want to poach you for bigger bucks and a larger role.

To really scale your influence, establish a presence online. Compared to offline reach, online reach is unlimited. I could have tried to meet every single realtor in San Francisco to make my Golden Gate Heights pitch in person, but that would have taken forever and expended too much energy. Instead, I simply spent a few hours typing a post, then let the internet do its thing.

Once you develop influence you can scale your influence into any number of things:

  • Consulting
  • Public speaking
  • Building a business
  • Creating a subscription newsletter
  • Managing other people’s money
  • Selling your own product
  • Selling other people’s products you believe in
  • Getting other companies to hire you away for big bucks

With so many new ways to make money beyond your day job, your financial worries should decrease, if not disappear altogether. Achieving financial independence is only a matter of time.

Key Points Of Influence

* Influence must be earned through repetitive successful outcomes.

* You will only gain influence if you do what you say you will do.

* Providing an opinion when you have no skin in the game is pointless.

* The stronger your brand, the longer you can make your influence last.

* Once you gain influence, you can leverage your influence in many different directions.

* You’re only as relevant as your last result.

* You can skip the long slog of developing your influence by joining a firm that already has influence. However, you might always feel like an impostor piggy backing off your firm’s reputation.

Related:

When To Sell Real Estate: Every Indicator To Consider

For A Better Life, Be The One Percent In Something, Anything

How To Build Passive Income For Financial Independence

Readers, how would you rate your sphere of influence? Are you using your influence to help others? How has your influence enriched your life?

The post Develop Your Sphere Of Influence To Achieve Financial Independence appeared first on Financial Samurai.

Investing Is The Ultimate Case Of FOMO

Investing is the ultimate case of FOMOFOMO stands for Fear Of Missing Out. The term is usually reserved for those who spend everything they have to buy the latest thing or experience without any regard for their financial future. FOMO is what drives people to go into revolving credit card debt, making credit card hawkers rich, and their slaves poor. FOMO is the main reason why people are unhappy, even if they are living better than 99% of the world.

Those who refuse to save for retirement justify their spending by saying, “you can’t take it with you.” It’s true. No matter how much gold you bury in your grave, your spirit takes nothing physical with it.

But after starting my investment tracker series, I’ve come to realize that investing may be the ultimate case of FOMO. Spending all your money on useless things doesn’t even come close. Let me explain why in three reasons. 

Investing Is The #1 FOMO

1) Everybody is getting rich, so must I.

After violently correcting in 2008, the S&P 500 has been up every year since January 1, 2009. For the first four year, I, along with plenty of skeptics had our doubts about the recovery. The markets were simply recovering what they lost. But when the S&P 500 and other indices started breaching their pre-financial crisis highs in early 2013, the fear of missing out began to take hold.

It no longer felt as good to have money locked up in a 4.1% yielding CD. Instead, it was all about daring yourself to go maximum long stocks and real estate. Cash and CD savers were falling behind. I stopped seeing myself on the platform patiently waiting for the train. Instead, I was starting to run after the train as it began pulling away.

Even if you’ve reached a financial level where you don’t really have to worry about money again, you won’t feel good if you see other people growing their wealth faster.

For example, you could have a $10 million net worth grow by 5% one year, but you’ll start feeling FOMO if you see someone with a $500,000 net worth grow by 20% during the same time period. Instead of being happy with making $500,000 doing nothing, you’ll start feeling bad you didn’t make $2,000,000 taking the same amount of risk! Crazy right?

It’s only when your peers earn a similar or worse return will you be satisfied with your performance. Even if you only made a 1% return, if your peers made a 0% return you’ll feel happier than making a 10% return if your peers made an 11% return.

Investing FOMO is the only way to keep up with the rich. Otherwise, you’ll be on the wrong side of the wealth gap as it continues to widen.

2) The fear of never being free while you’re still healthy.

The older you get, the more fear you’ll worry about never being able to get out of the rat race. You start asking yourself, “is this all there is to life?” You’ll also start resenting your job and the people you see more than your family every single day. It’s natural after doing the same old thing over and over again. As a result, you’ll start kicking your savings and investing into high gear so that you might one day be able to engineer your layoff and live life on your own terms.

Those who are more aware are able to quantify their purchases, not only in after tax dollars, but in terms of time. For example, buying a $300,000 more expensive house because it has one more bedroom you’ll never use equals at least 10 more years of work if you only save $30,000 a year.

No rational person would choose driving a Porsche and buying a mega mansion if the cost was a 20 year delay in achieving financial freedom. Stretching your finances every month is a stressful way to live.

Investing FOMO gives you hope that you’ll one day enjoy your freedom while still being able to walk, talk, and live pain-free.

3) The fear your children will have a worse life than you. The amount of <35 year old angst about student debt, stagnant wages, underemployment, and unaffordable home prices is overwhelming. You don’t want your kids to turn out the same way.

The more in tune you are with the way the world works, the more you realize the importance of investing for your children’s sake. The top 1% – 0.1% have garnered the lion’s share of gains over the past several decades because they’ve been active investors in appreciating assets. The trend will continue as family dynasties are being formed to ensure that generation after generation of kids will have every single advantage in life.

Rising Inequality

Investing is one of the main ways to make sure your children don’t end up further and further behind. If you don’t invest, your sons or daughters will have a much harder chance of getting into a prestigious university or getting a sweet job because the spots will all be taken by kids of wealthy parents who buy their children’s way into everything. When there are 10 applicants for one spot that all look a like, the tie-breaker often comes down to money or connections.

Not only am I investing the majority of my income every month so that my son can have more options by 2035, I’m also working hard at building contingency plans, just in case he doesn’t do well in school, is discriminated against based on his race, gets into an accident, and I can’t compete in terms of donations and connections.

For Those Who Lack Investing FOMO

How do you do it? I’ve struggled with trying to manage my fear of failure for a very long time. I always felt pressure not to be a disappointment to my parents because I got into so much trouble during high school. But I’ve finally realized at the age of 40, everything will be OK after not having a job for almost six years. The fear in your head is usually worse than reality.

Parental FOMO has revived my motivation to stay as fit as possible and generate as many contingency plans as possible. I’m truly envious of those of you who are able to spend freely, eat whatever you want, and not worry so much about your future and your children’s future. I wish I could let go and just kind of wing it. Please tell me your secret.

But unfortunately, I keep getting shown how the future works because I’ve had the opportunity to go behind the scenes. I’d much rather NOT know that my friend’s son got into XYZ school because of a $1 million donation or that my other friend’s daughter got a job at PYQ investment bank because they are private wealth clients with over $30 million in assets with the firm.

I’m stuck in a world where so many people I know are extremely successful thanks to stupendous careers, amazing businesses, and savvy investments. That’s the problem with living in cities like San Francisco, Manhattan, Hong Kong, or London. They seem to attract the most gung-ho type of people.

Their success naturally pushes me to do more. but I think it may be a good idea to move out of San Francisco to focus more on enjoying life and less on trying to get ahead. At first, getting to know extremely successful people was a novelty. Now, I often wonder, why are they STILL working when they could spend time with their kids or make a difference in other people’s lives who have way less.

FOMO Reduction Plans

I took the first step of FOMO reduction by leaving Manhattan in 2001 to come to a more balanced San Francisco. NYC is the greatest city on Earth, but it will eat you up and make you miserable if you aren’t careful.

Then in 2014, I moved out of the wealthy north side of San Francisco to a middle class neighborhood on the west side of the city. It feels great living next to plumbers, grocery store managers, house painters, and retirees.

In the next five years I plan to take a larger step in FOMO reduction by moving to Hawaii, where there is a tremendous focus on family. San Francisco has one of the lowest children per capita in the country, and I think it would be nice to raise a family in a family friendly environment.

Until then, I plan to keep on aggressively saving and investing the large majority of my cash flow because investing FOMO is hard to quit!

Other Thoughts On FOMO

* FOMO may be a big reason why many delay having children.

* Children change everything when it comes to being financially responsible. There’s no other option but to get your act together once you have someone with zero earnings power and little knowledge depend on you for 18 years.

* You may feel better living in a middle class neighborhood than in a rich neighborhood. In rich neighborhoods, your neighbors are always doing some type of remodeling. They also tend to drive more expensive cars, go on fancier vacations, and send their kids to private schools.

* You may experience FOMO reading personal finance sites like mine. If so, take a break, and focus on your goals. They are the only ones that matter.

Related:

Do You Want To Be Rich Or Or Do You Want To Be Free? 

One Of The Biggest Financial Mistakes A Retiree Can Make

Investment Strategies For Retirement Based On Modern Portfolio Theory

Readers, do you have investing FOMO? If not, why not? Do you believe investing is the greatest FOMO there is? How do people successfully go through life without feeling the need to invest? All indications say that most people don’t like their jobs, wages are stagnating, college degrees are depreciating, and globalization and technology are hurting job growth in America.

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One Spouse, Two Cars, Three Houses, Four Jobs

What's the ideal number for each thing to lead a wonderful life?There’s a simple personal finance mantra everybody should consider following: one spouse, one car, one house, one job. The idea is that if you stick with one of everything, you’ll maximize its usage, minimize extraneous expenditure, and live happily ever after.

We get in trouble when we want too much.

But one of everything can get quite boring. Thus, the divorce rate is ~50%. The average car ownership is six years. The median home ownership is seven years. And the average person job hops every three years.

I want to review each item to see what’s truly ideal. I suspect the answer is different for everyone. Feel free to share your thoughts below.

How Many Of Each Is Ideal For A Wonderful Life?

Spouse: I only have one spouse, and plan to only have one spouse. We met when we were in college and have been together ever since. Now that we are business partners and parents, the stakes are way too high to split now! If we divorced, we’d have to waste money on lawyers, go through some serious financial forensic analysis, get another place to live, and share custody of our son.

Verdict: One spouse is ideal.

Cars: For my entire life, I’ve either had no car or just one car. With the invention of ridesharing, I’ve often wondered about having no car. But having no car won’t work because it would be a PITA to install a baby seat and bring a stroller every time we had to go somewhere.

But for nine months, we had two cars because I actually bought Moose, my current family car in December 2016. Our baby was due in Spring and I wanted to get a larger vehicle before he was born. Sometimes babies are born early, and the seller offered a reasonable price.

Two cars felt like a complete waste of money, but because the Honda Fit was a $235/month business expense, it wasn’t costly. Further, we have plenty of free parking right outside our house, which is a rarity in a city like San Francisco. I mostly still drove Rhino except when taking the little one to the doctor’s office.

Once I returned Rhino, I felt lighter. It was a relief not to own him anymore because he had a lot of starter problems (will show a video in a future post). Further, it was nice knowing I was not financially responsible or liable for him anymore. Calling the auto insurance company to drop coverage was a happy moment.

Verdict: one car is ideal + a ridesharing account per adult.

Houses: Owning your own house feels awesome. There’s this magical feeling you experience that nobody tells you when you get the keys. Owning one rental property feels pretty darn good too. It’s nice knowing your tenants are paying your mortgage and that eventually, you’ll own the property free and clear to earn a nice cash flow. A vacation property can be great if it’s relatively close by and you use it for at least four weeks a year. But after three properties, if you have a job and a family to take care of, things start getting more difficult to manage.

I thought I’d enjoy owning four properties consisting of a primary residence, two city rentals, and one vacation rental/property. But after three years of managing three properties at the same time, I finally had enough after my son was born. If I had perfect tenants, I wouldn’t have minded holding onto three rentals. But I knew renting out a house in the Marina district (infamous for being a homogenous party neighborhood in SF) near a busy street would only attract a group of 4 – 6 male roommates and not the stable family I was looking for.

Verdict: Two properties, one consisting of a primary residence and a rental property to be truly long real estate. It’s much better to vacation all over the world and rent instead of always going back to the same place.

Jobs: According to the Bureau of Labor Statistics, the average person has worked 10 different jobs before 40. Sounds high, but it makes a lot of sense if we are counting all the jobs one has held in their lifetimes.

Before graduating college, I had four jobs. After graduating college, I had two jobs, three corporate consulting jobs, and my own business. What do you know. That makes 10 jobs for me too. I felt like I stayed at my last full-time job for two years too long. I should have joined a bucket shop for a big two-year guarantee and then quit. But if I did, I would have left a severance package equal to five years of living expenses on the table so I guess things kind of worked out.

Verdict: Five jobs after college. The first job is to learn. The second job is to earn. The third job is to take a big step up in pay and responsibility. The fourth job is to explore a new field because you’re sick and tired of the old one. The fifth job is to take another gargantuan leap in pay or find your retirement job where you can just chill out, like one of the thousands of people who work at a massive corporation. During these job transitions, I hope to goodness you’re working on a side-hustle as well.

A Wonderful Life Is What You Make Of It

I hope everyone can find a partner or a best friend to experience all of life’s highs and lows. My luckiest break really was getting an e-mail from my wife senior year in college wondering why I had skipped Japanese 101 class. Or maybe the real lucky break was having the foresight into thinking if I took Japanese 101 senior year, I could meet a girl just like my wife. After all, I could have taken any 101 class because I already had enough credits to graduate. Ah hah! Talk about predicting the future.

I’d consider giving up all my money to be in college again. But I wouldn’t trade my family for the world. Since reliving the past is impossible, we just have to make the best of the present. One spouse, one car, one house, one job is good advice. But it’s worth shooting for a little more if you have the courage.

Here are some other profiles I can think of:

The Monk: No spouse, no car, no house, no job.

The Minimalist: Maybe a spouse, no car, no house, a boring job that doesn’t pay well.

The Digital Nomad: Likely no spouse, no car, no house, a lifestyle business that requires cheaper living abroad.

The Early Retiree: A working spouse, a car, a couple houses, lives off spouse, investments, or side business.

The American: Onto their second spouse, two cars, rents, a soul-sucking job.

The Ultra-Wealthy: Onto their second or third spouse, three or more cars, five or more properties, runs a business that will never let them be free even though they have all the money in the world.

Readers, what do you think is the ideal number for each item and why? Which profile do you fit? 

The post One Spouse, Two Cars, Three Houses, Four Jobs appeared first on Financial Samurai.

Achieving Healthy Smile From Cosmetic Dentistry

smileYour smile is one of the first physical attributes people notice about you; shouldn’t you make it stand out? Cosmetic dentistry can help you achieve that healthy, beautiful smile that will turn heads!

To obtain a beautiful smile and maintain your excellent oral health care, it is imperative that you find a dental professional you trust. Ask for recommendations from friends and family, and do some research on the doctor. Check the dentist’s accreditations and affiliations, as well as his or her expertise. Visit the dentist’s website and if you are looking for a cosmetic dentist, view the gallery of patients before and after their procedures to see samples of the doctor’s work, and schedule a free consultation, if available. Make sure to ask questions to ascertain whether or not this dentist is the one you want to work with. Once you have settled on your dental professional, the next task is determining the cosmetic procedures necessary to achieve your desired result.

Need a little confidence boost? Teeth whitening is an easy, relatively inexpensive way to change the look of your smile. Have stains from coffee, red wine, smoking or tea? Simple bleaching or whitening can have a dramatic effect on the aesthetic appeal of your smile. These products contain some type of peroxide and the amount varies from product to product. In-office professional teeth whitening such as ZOOM! BriteSmile, and Rembrandt use a whitening gel and ultraviolet light to take your teeth to a lighter shade and to remove stains. KOR deep bleaching is a product that is more expensive than the others but can lighten your smile by 16 shades! Also, the results with KOR are permanent while other whitening options require continued maintenance. Want to try whitening your teeth at home? Dentist near Edmond can give you recommendations for the best at home whitening including gels, toothpaste and whitening strips. Used correctly and consistently, whitening offers a stunning, white smile to you give you the added self-confidence to show off that smile! It’s an uncomplicated, economical way to transform your smile from dull to dazzling!

If your teeth are chipped or your smile could use a little help to be extraordinary, dental bonding is also an inexpensive option to discuss with your dentist. Bonding is just what it sounds like—tooth colored resin is bonded to the tooth and hardened with a high intensity curing light. It can be used to fix chips or cracks, close gaps between teeth, replace silver fillings or even change the entire shape of the tooth. In addition to being one of the most economical cosmetic dental procedures, it is also one of the fastest: each tooth can be bonded in just 30 to 60 minutes in office. The two drawbacks to bonding is that the bonding material can chip so it is best to avoid chewing on ice or hard foods; and bonding material only lasts between three and ten years, depending upon your oral health care. However, bonding can be an excellent way to make your teeth more attractive, even temporarily.

Looking for a more permanent fix to your less-than-perfect smile? Porcelain or resin veneers are thin, custom made covers that are applied to the front of your teeth and then bonded. If your teeth appear too thin, with gaps or chips, veneers can rectify your problem. Veneers can be used to change the color, shape, size or length, dramatically changing your smile! Your dentist will place temporary veneers on your teeth while the permanent veneers are constructed in a dental lab. Once the veneers are bonded to your teeth, they are permanent, making them an excellent choice to achieve the smile you have always wanted!

A simple way to even out your smile is enamel shaping or contouring. If your teeth have an uneven edge or are slightly overcrowded, your dentist can correct those small imperfections by gently reshaping the tooth or teeth in question. If your teeth look fine, but your gums take away from your perfect smile, gum reshaping might be an alternative to consider. If you have a “gummy” smile, one that makes your teeth appear smaller, the gum line can be changed to one or several teeth to expose more of the enamel, which “lengthens” the teeth and improves the overall smile. A discussion with your dentist will determine whether these procedures are right for you.

Considering replacing a silver filling with a tooth colored crown, but don’t want to invest a lot of time? Ask about CEREC one day crowns and see if you might be a candidate for this advancement in cosmetic dentistry. The first step is having the dentist examine the tooth and prepare the tooth for restoration. Your tooth will then be coated with a safe, tasteless powder and then photographed with a special digital 3D camera to create an optical impression. If you always hated the goopy impressions involved with crowns, this new technology makes that a thing of the past. The tooth is then designed on Computer Aided Design (CAD) software, down to the very last detail. This ensures the snug fit of the crown once it is placed. When the rending is complete, it is sent to an onsite milling machine and it makes the restoration within minutes. The new crown is fitted, then polished and bonded into place. No need to wait for a new restoration; a new one can be ready in less than an hour!

Dental implants are a procedure that is changing peoples’ lives. Whether you have lost a tooth or teeth to dental decay or an accident, a brand new tooth can be put in its place, reserving the integrity of your smile. It’s like growing new teeth! A titanium screw is attached to the bone of the missing tooth and a fabricated tooth is attached to an abutment, securing the crown to the implant. If well cared for, implants can last a lifetime! They also look, feel and function just like natural teeth. If you are missing one or more teeth, discuss dental implants with your dentist to see if you are a candidate for this revolutionary procedure.

An investment in your smile can last a lifetime, so having a smile makeover to put your best mouth forward might be worth the time and money involved. Discuss with your dentist your aesthetic goals, budget, and options to determine the cosmetic services to best reach your desired results. A combination of efforts can take an unflattering smile and turn it into your best feature.

Fundrise eFunds: An Innovative Way To Invest In Your Future Home

Fundrise eFund Review: An Innovative Way To Invest In Your Future HomeWashington D.C. based Fundrise is one of the most innovative real estate crowdfunding platforms today. They were the first to create the eREIT, a real estate fund that uses crowdfunding regulations to provide access for  non-accredited investors to invest in private real estate across the country. Then they invented the “Internet Public Offering,” where the company directly raised over $14.6 million from 2,300+ Fundrise customers in a matter of 27 hours.

When they contacted me to sponsor a post about their new eFunds offering, I had to oblige as a real estate enthusiast who loves to learn new things.

What Is A Fundrise eFund?

An eFund is a brand new type of investment that allows you to invest directly into a diversified portfolio that aims to develop new homes for the next generation of American homebuyers in major US cities.

Imagine being able to invest in the renovation or construction of a home in downtown Los Angeles. If your life circumstances are right, several years from now you go ahead and exercise your right to buy. If you don’t want to settle down in LA because you found a better job in Austin, you can sell your position for a potential profit. Or, you can remain invested and continue to enjoy the benefits of diversification. This is a good solution that smartly aligns investment and lifestyle goals.

So many folks are getting shut out of buying in expensive cities such as San Francisco, LA, San Diego, Seattle, New York, and Washington D.C. due to a lack of supply and soaring home prices. I cannot imagine what SF rent and its median home price will be in 22 years when my son graduates from college, hence my reluctance to sell.

Actually, I know the exact figures for both rent and purchase. A $4,200/month 2/2 condo with parking will cost $6,493 a month in 22 years if rent grows at 2% a year. If rent grows at 3% a year, the condo rent surges to $8,048/month! The same condo that costs $1,100,000 today will cost $1,700,558 if it appreciates by 2% a year and $2,107,774 if it appreciates by 3% a year.

Folks, please don’t rent forever. You will regret it 20 years from now. You’ll also start getting upset at your parents for not buying way back when. There is no time machine. There is only inflation. Pay attention to the angst the home buying demographic is feeling today.

How The eFund By Fundrise Works

The Old Solutions To Buying A Home

In the past, there were really only two independent ways to save for a home:

1) Set up a home buying savings account. You’d come up with a realistic home you’d like to buy sometime down the road, multiply the price by 20%, and calculate how much and how long you’ll need to save until you can finally achieve the goal. The only problem with this method is that real estate tends to appreciate over time, while a money market account barely pays interest thanks to the Fed.

If your $500,000 target home appreciates by 2%, your $100,000 salary must appreciate by 10% to just stay even. Given that most people aren’t seeing steady 10% annual raises, it’s no wonder why it’s become difficult to get ahead of the home buying curve. As a result, home savers try to take on more risk or save a larger percentage of their income.

2) Invest in riskier assets that aren’t perfectly correlated. Investing in the stock market works over the long term. We’re talking 7% – 10% average returns over the past 50+ years. But sometimes the stock market corrects just when you plan to use the proceeds (e.g. retirement, education, a house, remodeling, etc.). Sometimes your stock picks turn into duds. The multiple corrections over the past 20 years have scared many would be investors into avoiding stocks altogether and holding cash and bonds instead. In fact, only ~52% of Americans own stocks.

If you have some gains from the stock market, do your best to regularly convert some of the “funny money” into real assets like real estate. I know too many people in 2000 and 2008 who lost almost all their gains if not everything.

The eFunds solution is smart because your investment is perfectly correlated with what you care about. Currently, Fundrise has two eFunds, one in Washington D.C. and one in Los Angeles with more to come if everything works well. On the respective pages, you’ll see their general arguments for why investing in D.C. or LA is a good idea.

If you’re planning to buy a home within the next five years and want to establish roots in Washington D.C. or LA, it’s worth digging deeper. You know that demand outstrips supply due to tremendous job growth and under-building over the years. If you’ve ever made an offer on a house, you know the anxiety that comes with realizing someone can trump you with a sweeter offer. Therefore, if you can invest in something that looks good to you now and later have the optionality of either buying a house in the project or potentially profiting by letting the eFund sell the house to other buyers, then that’s an attractive value proposition.

Final Thoughts To Consider

Fundrise eFund cost and investing time horizon

Due to regulations, each eFund can only raise up to $50 million. Therefore, each fund will be limited in the number and type of investments it makes and the value of your investment in an eFund will fluctuate with the performance of the specific assets it acquires. You don’t want to be greater than 20% of the fund’s size for diversification purposes. Therefore, it’s good to ask how the fundraising is going before locking up capital for approximately five years.

As with any investment, it’s always good to start small and work your way up. With a minimum investment of $1,000 for non-accredited investors, that’s small enough to cause minimal damage if things don’t turn out as hoped. A 0.85% annual asset management fee isn’t insignificant, but if the fund can deliver an 8% IRR net of fees and give you the chance to purchase a property you like without having to go through a stressful bidding situation, it’s worth it.

One thing I think could be very interesting is investing the minimum amount it takes to have the optionality to buy a house you want. For example, let’s say you discover that the LA eFund acquired land in a location you like to build a model home that suits your needs. Further, the eFund still hasn’t reached its $50 million cap.

Wouldn’t it be nice if you could invest just $1,000 to reserve a spot on the purchase list when the project is done a couple years from now? We’ve talked about the importance of predicting the future to get rich. Investing just $1,000 for the option of buying in an area that might turn hot seems very attractive.

I am continuously impressed with Fundrise’s forward-thinking ways. My only wish is that they open up a satellite office in San Francisco so we can go get a beer and brainstorm about the future of real estate even further. For more information, here’s the general eFund Page.

The information contained herein neither constitutes an offer for nor a solicitation of interest in any securities offering; however, if an indication of interest is provided, it may be withdrawn or revoked, without obligation or commitment of any kind prior to being accepted following the qualification or effectiveness of the applicable offering document, and any offer, solicitation or sale of any securities will be made only by means of an offering circular, private placement memorandum, or prospectus. No money or other consideration is hereby being solicited, and will not be accepted without such potential investor having been provided the applicable offering document. Joining the Fundrise Platform neither constitutes an indication of interest in any offering nor involves any obligation or commitment of any kind. The publicly filed offering circulars of the issuers sponsored by Rise Companies Corp., not all of which may be currently qualified by the Securities and Exchange Commission, may be found at www.fundrise.com/oc.

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Beware Of The Life Insurance Bait And Switch Tactic

Beware Of The Life Insurance Bait And Switch TacticNow that I’m a father, one of the first things I did was call up my life insurance provider to review how much life insurance I have and go through the various term life insurance options.

I was reminded of an existing $1,000,000 term life policy that’s expiring in five years. It was taken out 10 years ago when I was thinking of getting married. I figured, given I had about $1,200,000 in mortgage debt from buying a single family house, it was best to cover such liability so my future wife wouldn’t be financially burdened if I passed.

Now I’ve got 22 years to consider before my son graduates from college. Therefore, I decided to get a quote for a $2,000,000, 25 year term life insurance policy that came out to $181/month with my existing provider. Better to lock down a quote now before anything unhealthy happens, causing my premiums to skyrocket.

Unfortunately, because of the size of the policy, I was required to get my blood drawn, piss in a cup, and do an EKG. I hate getting blood drawn. It’s frankly one of the main reasons why I didn’t want to get a $1,000,000+ policy in the first place. But life insurance isn’t for me, it’s for my family, so I proceeded.

Life Insurance Test Results

The lab technician came to my house and did her thing within 40 minutes. I filled out some forms and checked a box to know whether my blood comes back as HIV positive. What fun it is to wait for potentially life-changing results.

I totally forgot about the life insurance application process for a couple weeks until I got a call from my insurance provider to give me the results. Here’s what he said in a nutshell:

We got your test results back and I wanted to say congratulations for doing so great! You were top rated for 19 out of 20 categories we assess for. For the one category where you were slightly below top rated, your cholesterol came in at 4.6 versus <4.0. You were so close, but due to the results, we cannot give you the Preferred ULTRA rate that we initially quoted, but the Preferred PLUS rate instead. The cost of the Preferred PLUS rate for a 25Y/$2M policy is $226/month.

Damn Gina! Because of not being top rated on 1 out of 20 categories (5%), I have to pay a 25% PREMIUM on my original quote? This seems outrageous. I told them I wasn’t happy with this new price, and then they told me this:

We can do a full body check up in two years, and if your cholesterol goes down to below 4.0, we will honor the original $181/month price. But in order to do so, you must sign up for the policy today at $226/month. Further, we will be contacting your general practitioner to get your medical records for the past several years.

Great, another blood test in two years. Hmm, why do I feel completely unsatisfied with the answer? It’s almost as if I was scammed because I had to go through the uncomfortable process of giving blood. If I didn’t have to go through the process and just got a phone call a week later saying the price had increased due to their background check, I wouldn’t be too annoyed. Then the agent went on:

We will beat any and all providers. Thanks for your time and we’ll be in touch after we have received all your health records.

Don’t Expect To Get The Best Life Insurance Quote

Just like how car dealers advertise the lowest price on a car to lure you in, life insurance providers will quote you the lowest life insurance premium price to get you to commit to the application process. But unlike buying a car, you don’t have to give any blood to even go for a test drive.

If my insurance provider said a 25 year/$2M policy cost $226/month, I may not have bothered with the blood work or mostly likely have gone with a smaller policy to get the figure under $200/month. $226/month = $2,712 a year = $67,800 in life insurance premiums I’ll end up paying over 25 years.

Here are some quotes I got for smaller policies from my existing provider. They said I can always lower my amount and pay less in the future, but I can’t increase my amount. With their new quote, they are basically charging me for the price of a $2.5M, 25 year term policy.

Amount: $1M
Cost: 25 term years – $92/month, 20 years – $62/month

Amount: $1.5M
Cost: 25 years – $136/month, 20 years – $91/month

Amount: $2M
Cost: 25 years – $181/month, 20 years $120/month

Amount: $2.5M
Cost: 25 years – $224/month, 20 years – $149/month

Amount: $3M
Cost: 25 years – $269/month, 20 years $179/month

If you’re looking for life insurance, just expect the premium you are quoted to be higher by 20% – 40% after you do the blood work, if need. If the premium doesn’t rise, consider yourself lucky.

The silver lining about the process is that I didn’t have to leave my home, I got free blood work done, and I know I’m in top shape for 19 out of 20 health criteria they look for (they wouldn’t tell me the categories). Now I can focus on lowering my cholesterol to live a healthier life.

Shop Your Quote Around

Because I shop for life insurance once in a blue moon, I don’t know whether $226/month is a good or bad price. All I know is that it’s 25% higher than what I was originally quoted. Because I’ve been with USAA for almost 20 years, I just trusted them to give me the best quote possible. After all, members have either served their country in the military or are children of those who have served.

To find out whether my USAA quote was competitive, I went onto PolicyGenius to get various 25 year/$2M quotes and compare the results to my original $181/month quote. PolicyGenius is a life insurance marketplace that uses technology to get you the most custom quotes based on all your variables in one place. I’ve met both their founders multiple times and really like the pricing discovery they are providing for their consumers in an incredibly opaque industry.

The process on PolicyGenius took two minutes, but it may take a couple minutes longer if you have a lot of health problems. They came back with 8 quotes, with the following two as the lowest and most appropriate: $170.04/month from Pacific Life and $172.62/month from AIG.

I’m glad that my original $181/month quote wasn’t too far out of line. Now I plan to either go with one of these two providers or use the quotes to have my current provider lower their price since they did say they will beat any price.

PolicyGenius quotes

One Last Life Insurance Twist

There’s one good thing about being born before the internet was born. It’s hard for life insurance companies to know everything about you.

When I was living in Taipei in the early 1980s, I suffered from asthma. The air was terrible back then, and it still is now. One day I woke up with red spots all over my body and I couldn’t breath. I was rushed to the hospital, given an IV, and stayed there for at least one night. When I woke up the next morning, my entire body had turned red!

Not being able to breathe is a scary feeling, and I’m fortunate I haven’t had an asthma attack for over 30 years. A stronger immune system and a cleaner environment must have everything to do with it. Therefore, I would say I no longer have asthma, and will never get asthma again. But just in case, I do have an inhaler in my home.

I was curious to know how my life insurance premium would change if I said I had asthma 31 years ago with no asthma attacks since. Here is the second set of results from PolicyGenius:

Best life insurance premiums after asthma

Suddenly, my $226/month life insurance policy doesn’t look so bad! I assume USAA did all the due diligence they could to find the lowest price possible while still being able to make a profit. They wouldn’t tell me what the other 19 variables were they were checking for so I’m wondering whether I’m supposed to tell them about my asthma attack from when I was 9 years old.

I’m always going to believe that getting life insurance is the right thing to do if you start a family. Just make sure you get the appropriate amount of life insurance for the right price. The internet has helped create better pricing discovery so we don’t get ripped off. Stay healthy my friends! I’ll be making a decision about my new life insurance policy this week.

Related: Life Insurance Needs When Having A Baby

Readers, what are some other examples of bait and switch you’ve experienced when attempting to buy something? Should vendors be more clear? Why do you think life insurers are so opaque when it comes to their underwriting criteria? We know that for getting a mortgage, income, debt, equity, credit score, and a bunch of other things count to help folks prepare. Should we disclose more health information if the insurance providers do not ask?

The post Beware Of The Life Insurance Bait And Switch Tactic appeared first on Financial Samurai.

Why Settle For A Good Retirement, When You Can Go For A Great One?

Don't settle for a good retirement, go for a great retirement!It’s a worthwhile goal to be great at something – top one percent great. Being a jack of all trades, master of none is an excuse many of us use because we aren’t willing to try harder. We know this, so we settle for good enough. Good enough is good enough if you’re content. But if there’s something bothering you deep inside, then maybe it’s because you know you can do better.

Fritz’s post called Seven Days To A Great Retirement was an insightful read that warmed my heart. It’s actually part two of a three part series that talks about how they decided to simplify life and live more intentionally once they became empty nesters . Given Fritz’s retirement plan is closer to the traditional retirement path, I thought it would be good to share his thoughts on how everyone can live their best retirement lives possible. 

From A Good Retirement To A Great One

My wife and I realized we were Settling For Good.

We weren’t doing it intentionally, but we recognized the signs. We decided to take action. Now, we’re moving toward Great. It’s been a heckuva a few years as we’ve pulled up the anchor (twice!), but we’ve learned some really good lessons from our two downsizing moves in 18 months. We’ve had some bumps along the way, but the bruises are healing and we’re moving on. Toward Great.

View our story as an analogy and focus on the broader issues raised. Think about how you can apply the lessons we’re learning in your own life.

Go For Great!


11 Lessons To Move Your Life From Good To Great


Lesson 1 – Ask Yourself The Question

Stop for a minute, and ask yourself a simple question: Are you “Settling for Good” in your Life, or are you “Pursuing Great”? Regardless of your age, sex or stage of life, you need to ask yourself that question. Do you want Good? Or do you want Great?

Before you can start moving to Great, you’ve got to think about what “Great” means to you, and how it compares to your current life. Are you taking action now to improve your life? What areas of your life can you move to a better place?

Some examples. If you’re….

  • Starting To Make Money...Are you settling for “Good” Money or pursuing “Great” Money?
  • Starting A Career…Do you want a have a “Good” Career or a “Great” Career?
  • Getting Married...Do you want to be a “Good” or “Great” husband or wife?
  • Starting A Family….Do you want to be a “Good” Parent or a “Great” Parent?
  • Buying A House….Do you want a “Good” House or a “Great” House?
  • Designing A Life…Do you want a “Good” Life or a “Great” Life?

The first lesson and the most important thing is to take some time to think about where you want to go. Do that before proceeding to the implementation of Lesson 2.

In our case, we decided it was time to take some action to move our upcoming retirement from Good To Great.


Lesson 2 – Think Long Term

Once you’ve decided on an what you’re going to move from Good To Great, take the next step. First, take a breath. Then, Exhale. In this age of hyperactivity, it’s hard to think much further ahead than the weekend. For Lesson 2, you need to slow down and think about the long term.

Think 5, 10, 20 years out, and imagine what “Great” looks like in your future. Identify the Gap between your current state of “Good” and your ideal state of “Great”. What steps can you take in the next 1 month, 1 year, 5 years to start budging yourself out of your “Settled” state, and begin planning the first step?

Cross The Stream

Think about the steps you could take to get from Here to There, from Good To Great. Imagine it a bit like eyeing out rocks you’re going to use to get across a turbulent stream.

In our case, we recognized 7 years ago that we were drawn to the mountains of North Georgia, near the trailhead for The Appalachian Trail. We started to think about it as a potential retirement location. We were living in the City at the time but knew that’s not what we wanted longer term. Would living in the mountains help us to achieve a “Great” retirement? We decided “Yes”, and we started to dream.


Lesson 3 – Dream

Take some time to dream. This isn’t something you have to have done by tomorrow (or next weekend). Take some time over the next 6-12 months to really think about what you want your life to be. Find ways to explore ideas that interest you, build experiences in the areas you’re thinking about. Experiment.

In our case, we dreamt about living a retired life in the mountains. We booked a cabin rental for a week in October week via AirB-N-B. We started to explore the targeted “great” area, and we thought about where we could live, and what we could do, in retirement.

Related: It’s Always Good To Dream About Living The Dream


Lesson 4 – Take The First Step

After you have an idea of where you want to go, take the first step. Step on that first rock in the stream, and begin to move. Identify something you can do, anything, that will start moving you in the direction you’re trying to go. It doesn’t have to be big, but it has to be something. The goal is to start the ball rolling, the momentum will build later. Just take the first step.

In our case, we took a big first step. We took the plunge and bought a cabin. The Dream was to retire to a cabin, so we knew we had to own a cabin at some point for the dream to come true. The first step, done.


Lesson 5 – Be Creative

Testing out areas that you think may lead to “Great” doesn’t have to cost a lot of money. Find ways to minimize the costs associated with your “trial runs”. If you want a new job, start working on your resume or try a side hustle while you’re still working. We spent a lot of weekends (and weeks) at the cabin before we moved their full time. As you move through Lesson 5, find ways to reduce the expense.

In our case, we really didn’t want the expense of a second home. We were on track for an early retirement, and spending the extra cash was something we wanted to avoid. We experimented with renting our cabin out, perfected the process through trial & error, and ended up with a nice “rental income” side business which totally paid for 5 years of cabin expenses. We were building equity, and not spending a dime. We were also able to enjoy the cabin any time we wanted to since we were managing the rental schedule and simply blocked out weeks and weekends we wanted to use for ourselves.


Lesson 6 – Downsize & Simplify

No matter what area you’re focusing on, find a way to simplify / declutter / dowsize that area of your life. Strip the thing back to it’s bare essentials, the thing that makes it Great. There’s a big movement underway of folks moving their lives to the basics that matter to them. You don’t have to “Go Minimialist”, but realize that “more” is not always the best way to “Great”. Sometimes less is a better path. Think about it in your life, and apply where it makes sense.

In our case, we literally downsized, and sold 30 years worth of belongings in 24 hours. From first-hand experience, I can tell you that really felt good, and was a major step on our move To Great.


Lesson 7 – Be Patient

It can take a lot of steps to get across the stream. Have the patience to hop from rock to rock, and realize you’re working toward longer term dreams. Sometimes it takes longer than you’d like to get there, but take comfort in the fact that you’re moving in the right direction and you’re making progress, however slowly, toward your goal.

In our case, it took us 32 years of work to achieve Financial Independence. We waited 5 years after buying the cabin before we could position ourselves to make the move from The City. Play long ball. Be patient.

Move In Day at our retirement mountain cabin


Lesson 8 – Enjoy The Journey

Recognize it’s a long journey, and don’t pin all of your life’s dreams on the eventual goal. Live a little along the way, and enjoy each day you’re given. Don’t put off everything for tomorrow, but don’t do everything today. Have some balance, but carve out time for fun on your way down the road.

In our case, we knew we wanted to retire earlier than “normal”, but we also wanted our life to be “Great” as we were living it. We were intentional about taking nice vacations every year with our daughter (now 22 and recently married, we’ll never regret those memories we built). We traveled the world (thank you, frequent flier miles), and probably sacrificed a few more years of work for the experience. I wouldn’t trade it for the world.

Learning to surf in Hawaii, enjoying the journey.


Lesson 9 – Expect Some Lumps Along The Way

Expect your feet to get a little wet as you cross the stream. You’re going to slip on a few rocks. Expect it, and wear some nice wool socks. Be prepared for the lumps, and don’t let them knock you off track (See Lesson 10).

After we completed our “Downsize #1 and became 100% Debt Free!!, we revisited our “Good to Great” strategy and re-evaluated our situation (see Lesson 11). Now that we were living full time in our dream retirement, we noticing some things that “weren’t Great” for our longer term retirement lifestyle dreams. We had to once again decide if we were going to settle for Good, or if we were going to go for Great. We chose Great (again) and made a plan to move once more if we were able to find a “Great Cabin”. We put together our list of criteria, and started our new search.

It was inconvenient, it was a “lump along the way”. That’s ok, it’s part of the process, and we’ll be closer to Great as a result.


Lesson 10 – Adapt, & Overcome

Remain flexible, and realize that your plan’s going to change. Be prepared for it, and meet the challenges with a longer term view on your direction to “Great”. It’s ok to sidestep every now and again, and it won’t hurt you to suffer a few staggers back. The important thing is that you’re always leaning forward, and you know the general direction you’re trying to go.

In our case, we adapted and made the move to buy a second retirement cabin. We found a Great place, and made the purchase. After we moved from our “Good” to our “Great” cabin, we put our “Good” cabin on the market. We got an offer, and we accepted. Things were going great until I got this email from the buyer, which ultimately led to the sale falling apart. The house is back on the market, and we’re continuing to adapt & overcome.


Lesson 11 – Repeat #1

The move to “Great” is a never-ending process. Continue to challenge your situation in life, and check-in from time to time to make sure you’re moving forward on your journey to Great.

In our case, we’re getting closer to retirement. We’re spending a lot of time thinkng about how we’re going to spend our newfound Freedom doing the things that matter the most to us. We’re continually modifying the plan, and we’re working our way across the stream. I suspect we’ll be doing it until the day we die.

Go For A Great Retirement

Life is like a car with no reverse. You can’t change the miles you’ve already driven, but you can change the miles ahead. Figure out what you want from your life. Decide to pursue Great.

Look for ways to apply the 11 Lessons above, and take your first step on that stone in the stream.

Decide to start your journey toward Great.

Your life will be better as a result.

Fritz – The Retirement Manifesto

The post Why Settle For A Good Retirement, When You Can Go For A Great One? appeared first on Financial Samurai.

Ideas For Reinvesting Proceeds After A Home Sale

Ideas For Reinvesting The Proceeds After A House SaleA large financial windfall can either be a joyous occasion or a stressful occasion. It all depends on how well you plan. Because it’s generally easier to spend than to save, I always recommend folks sit on their cash for at least a month before making any moves.

Holding a lot of cash is not a bad thing even in a raging bull market. A cash stash is only stressful if you suffer from an overwhelming amount of greed. Greed can kill your returns because you don’t properly think about the risks. All you think about is how much you could be making from a particular investment class without realizing how much you could lose as well.

In this post, I’ll focus specifically on what to do with the proceeds after a property sale. This post is applicable to any type of large windfall e.g. inheritance, year-end bonus, gift, etc.

The first thing you should do if you find a bag of gold inside an airport locker is to run some financial diagnostics to set up your investment framework.

Questions To Ask Before Reinvesting Your Proceeds

1) How much will the sold house be worth in 5, 10, 20 years? The goal is to come up with a baseline financial target to shoot for. Either use the asset’s historical annual rate of return over a 50 year time period or a risk free rate plus a reasonable premium.

2) What does your net worth allocation look like post sale? Once you find out, you can make a better assessment on where to allocate capital. After an extended period of time, your net worth allocation may skew more towards one asset due to outperformance.

3) How do you feel about the current economic environment? You are either bullish, neutral, or bearish. Make a best estimate of where we are in the cycle by studying previous cycles and extrapolating current data into the future.

4) What are your upcoming financial needs over the next 1, 3, 5, 10+ years? There must be a purpose to investing otherwise there’s no point. The biggest expenses include another home purchase, college tuition, healthcare costs, and retirement.

5) What is your estimated tax liability? There’s no avoiding the tax man. Calculate all the costs involved in selling your house (commissions, taxes, etc), the amount you spent improving your house, and any tax benefits such as the $250K/$500K tax-free profits to figure out your taxable profits. Put that money aside.

Once you’ve answered these questions during your one month+ cooling off period, you’ll have a much clearer sense of how to reinvest your proceeds.

How I’m Reinvesting The House Sale Proceeds

I’ve gone from having $2,740,000 of exposure in one asset in SF with $815,000 in leverage (mortgage) to having ~$1,800,000 in cash after selling.

Here were my initial thoughts after despositing the check.

1) Reduce risk by $815,000 by paying $1,800,000 cash for a different San Francisco single family home. But I’ve already got exposure in San Francisco through my primary residence, a rental condo, and a vacation property in Lake Tahoe. So I’m thinking this isn’t the best idea unless I can find another sweet panoramic ocean view home that has a clear appreciation path to $2,500,000 (39%+) over the next 5 – 10 years.

2) Reduce risk by $815,000 by investing all $1,800,000 in a portfolio of different real estate assets e.g. REITs and real estate crowdfunding projects to keep real estate exposure from falling by only 29%. This is the most sensible move since I’m bullish on real estate long term and I get to diversify from a single home to multiple properties around the country.

3) Find a dream home in Honolulu with a 10,000+ sqft flat lot near the beach. Unfortunately, these homes cost ~$3,000,000 – ~$5,000,000 and we’re not ready to leave San Francisco until its time for my little one to go to kindergarten in 2022. I’ve been searching for a couple years and haven’t found the ideal property at an affordable price.

I usually like to reinvest proceeds in the same asset class while I work on building up greater amounts in other asset classes to get to my desired net worth asset allocation. But after much deliberation, I wanted to focus on de-risking.

When you survive a financial crisis with a relatively large amount of assets that got pounded, you really appreciate second chances to take money off the table. Remember, I took a big risk in 2014 by taking out another $1,000,000 mortgage to buy another property while keeping my previous home as a rental with a $1,000,000 mortgage for three years. Further, I’m unemployed!

Here’s how I’ve reinvested the money so far:

Municipal Bonds: $500,000 into various individual California municipal bonds with a 3% – 4% tax free coupon, which is equivalent to a 4.4% – 5.9% gross yield based on a 32% effective tax rate (federal plus state). I’ve always enjoyed keeping a good amount of low-risk/risk-free investments because it ironically allows me to take maximum risk in my life: moving cities, switching firms, starting a business, retiring early, etc. Target annual return (gross): 5%

Real Estate Crowdfunding: $250,000 into the RealtyShares domestic equity fund, which brings my total to $500,000 + a $10,000 Conshy, Pennsylvania commercial project. The fund made new investments in Virginia, Dallas, Seattle, and Utah. This investment is my way of reinvesting a portion of the proceeds in 100% passive real estate that hopefully has more upside than San Francisco real estate, which has started to slow. Target annual return: 8% vs. their 15% target return.

Stocks: $100,000 into an S&P 500 index ETF IVV and $50,000 into various large cap tech growth stocks. I used the small sell-off in August and early September to allocate capital. I’m not excited about the stock market, so this is more an asset allocation decision. I will be allocating $100,000 into the stock market with every 2% correction, with an assumption the stock market won’t correct by more than 10%. Target annual return: 7%.

Financial Samurai Equity And Bond Investments Snapshot August / September 2017

Snapshot of various buys of iShares S&P 500 ETF and a couple CA zero coupon muni bonds

529 Plan: $35,000 to my son’s 529 plan. I can super fund the plan with $70,000 in one year, but I’m not sure I’ll do so because these long-dated target funds are very aggressive. With an 18 year target date, the fund has a 90%+ weighting in stocks, so this 529 plan is really just a stock fund at this moment. Besides, I have 18 years to reach the limit of $359,000, which should go up in the future. I’m more worried about allocating capital at the top of the market and not being able to legally allocate more if there is a correction.

Financial Samurai 2017 529 college savings contribution

Contributed $30,000 to my son’s 529 plan in two tranches. Have $40,000 left to contribute for 2017

Debt Pay Down: $50,000 was used to pay down a 4.25%, 30-year fixed mortgage on my Lake Tahoe vacation property that can’t be refinanced into a 5/1 ARM for a lower rate. The goal is to pay this debt off completely by 2022 before leaving California.

Total Invested: $985,000 over three months

Total Cash Remaining: $815,000 from proceeds

Return Hurdle: 4% (I estimate the house I sold will increase by 4% a year on average for the next 20 years). $1,800,000 of my equity will turn into $3,944,000 in 20 years at a 4% compounded return, if I cancel out the cost of carrying the $815,000 mortgage (2.35% + 1.2% property taxes + maintenance expenses = a wash).

Estimated Return Of Reinvested Proceeds: 6% (blended rate of return for investments excluding cash). $985,000 will turn into $3,159,008 in 20 years at a 6% compounded return.

Activity Difference: Going from semi-passive income to 100% passive income. Hallelujah!

Rating The Reinvestment Risk

It’s always good to make sure that what you are reinvesting in matches your risk tolerance and financial goals. Here’s my reinvestment risk assessment:

On a scale of 1-10, 10 being super risky and 1 being risk-free, I rate keeping $2,740,000 of exposure in SF real estate with a $815,000 a mortgage an 8. My rental property was valued at ~30X gross annual rent (crazy expensive IMO) after prices rose by 60% since 2012 and I’m already long three other properties in the Bay Area. If this was my primary residence and I had no other properties, I would assign a risk score of 5 for holding on, despite the surge in prices because I have to live somewhere.

I believe there’s a 50% chance the property I sold could decline by 10% ($2,500,000) over the next several years due to an increased supply of luxury condos, a small chance mortgage rates go higher, and a slowdown in hiring. Heck, I may have sold my property for $2,500,000 this year if the buyer threatened to walk away. But I also believe there’s a 70% chance my old SF property will simply appreciate at a rate of 1% – 4% a year forever, just like inflation.

I give my reinvestments a 3 out of 10 in terms of risk. 51% of my reinvestment is in almost risk free investment grade municipal bonds that will pay back their principal plus a coupon over the years. 25% of my reinvestment is in real estate crowdfunding in cheaper markets with higher yields. 20% of my reinvestment is in higher risk equity investments, while the remaining 4% of my reinvestment was used to pay down debt.

Why Still Hold So Much Cash?

Despite not wanting to own any more physical property, I just can’t seem to break my addiction. For 16 years, I’ve been combing the listings and going on open house walks every Sunday. There’s still so much upside for cheaper property on the western side of SF.

I believe there’s a 20% chance I can snag a property for 5% – 10% below fair value because that’s exactly what I did when I bought my current residence in 2014 from a 72 year old part-time realtor who didn’t live in SF. He was the seller’s childhood neighbor in the 60s so they asked him to do them a favor. There are inefficiencies in the real estate market due to out of town sellers, out of town realtors, bad listing timing, bad marketing, inexperienced sellers/realtors and so forth.

Visualizing Reinvesting The Remaining Proceeds

With whatever cash you have left, clearly visualize how you plan to reinvest the proceeds in what time frame. You don’t have to exactly follow your plan, but you should write something out in order to have a good idea when opportunities arise. In my case, I’ve got $815,000 left.

1) Taxes: $100,000 $150,000 set aside for April 2018 (thanks to reader feedback). I’ve actually been looking to buy a Honolulu dream home to do a 1031 exchange once 2014, but couldn’t find the right house.  It’s hard to leave my network in SF and get on a plane before my son turns three.

2) Physical property in SF: All $815,000 if a bargain can be had at a 10% discount to market. Need to have lots of cash to be competitive, unlike my buyer who had to take out a $2,000,000 loan and a $300,000 bridge loan to get the deal done.

2) Municipal bonds: $100,000 if the 10-year yield gets back up to 2.3% and $300,000 if the 10-year yield gets back to 2.5%. Minimum $10,000 a month no matter what happens to interest rates.

3) Stocks: $100,000 for every 2% correction in the market, and up to $500,000 if there is a 10% correction. Minimum $10,000 a month no matter what happens in the market.

4) Debt pay down: $10,000 a month without fail, and $100,000 in 12 months if the 10-year yield doesn’t get to 2.5% and stocks do not correct by 10%.

5) Real estate alternatives: An additional $100,000 – $500,000 by November 2017 in the RealtyShares domestic equity fund because they’ve told me that’s when they will close the fund. I’m waiting until the very end because I want to give as much time as possible to see how their investments do before committing more capital.

Given all the fund’s investments are equity and not debt, it can take years to see any type of returns, which is exactly what I want because of my current high tax rate, especially since I just sold a house.  I plan to have dinner with a member of the investment committee before committing more capital.

Below is a snapshot of my account so far. I’m surprised there’s income already being paid out.

Financial Samurai RealtyShares Investment Dashboard with $510,000

Total investment of $510,000 in various RealtyShares equity deals

It’s Worth Being Patient With Cash

Locking up $310,000 in a 4.1%, 7-year CD from 2007 – 2014 was a suboptimal financial move since the S&P 500 outperformed. But using $246,000 of the $400,000 in proceeds to buy a fixer upper for $1,230,000 in 2014 that has now appreciated to ~$1,650,000 (33%) or ~$2,000,000 (40%) if you include the $180,000 I spent remodeling, was a good financial decision so far. The $426,000 in equity for the downpayment and remodeling has grown to ~$1,160,000 (+176%).

There will always be great opportunities in the future if you have the cash and the courage to take advantage. Not everybody could have bought my house in 2014 because not everybody had a $250,000 downpayment or the desire to look west. When you have cash, you have options.

Besides providing optionality, cash also provides security. You don’t have to worry as much about losing your job, paying for an unexpected medical bill, or seeing your business go down the drain. With less worry, comes more happiness. And happiness is what having money is all about!

Readers, how did you decide to reinvest your house sale proceeds or any financial windfalls? How long did it take for you to deploy all capital? Where are you investing your money now?

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