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Winter Is The Absolute Best Time To Buy A House

Winter is the best time to buy a houseI’ve checked out open houses every weekend for the past 16 years.The idea is to blend exercise with remodeling ideas and property knowledge into a one to two hour window. I’ll usually visit three to four open houses within a two mile radius.

The knowledge gained from open house hunting helped me remodel a couple houses without the use of an architect and gave me confidence to go all-in in 2014 when I bought a fixer in SF, despite already have multiple properties and two large mortgages.

Without a doubt winter is the absolute best time to house hunt. The simple reason is that anybody listing in the months of November through January is probably desperate. During the winter, the weather is at its worst, many people are away during the holidays, most people don’t move until the summer due to school, people tend to front load their spending, and anybody who can’t wait until spring to list must be having financial issues.

If you plan to sell your house, please don’t list during the winter! You will have bargain hunters like me trying to terrify you into selling at a below market price.

House Hunting During Winter

If you pay close attention to your local property listings, you will notice the most amount of price reductions during the winter. These price reductions are largely the result of the properties being initially overpriced and sitting on the market for more than 30 days without at least an asking price offer. This is when desperation starts setting in.

The effects of over-pricing your property

Lesson: Don’t over price your property. It will back fire.

It is much more emotional and worrisome to sell a house than to buy a house. I know this first hand after spending 45 days trying to sell my house to a guy who took out a $2,000,000 loan and another $300,000 loan. So many things can fall through from the buyer’s side including: failed inspection, failed loan, cold feet, further negotiations and more. Once a deal is broken, people start wondering what’s wrong with the property.

Despite all the reasons I listed why house hunting during the winter is the best time and listing during the winter is the worst time, there’s one more reason I came across that is super important: seeing whether the house can hold up to the harshest elements!

Here in San Francisco, it doesn’t get below 40 degrees in the winter. But what we do get is plenty of rain for the entire winter season. At least when it rains in San Francisco, it tends to dump snow in Lake Tahoe.

In January 2017, I got a text message from my old rental house tenant saying his bedroom ceiling was leaking. We had just experienced three consecutive weeks of rain and apparently there was leakage from the light well above his room. I was completely stressed out because identifying where the leak comes from can often be a mind bending task.

Water proofing leaking light well

Water proofing leaking light well of my rental

On the next sunny day, I went over with four cans of FlexAll to seal the entire light well and all the seams of the roof. I also cut out a hole where the leak was coming from so I could let it air out and re-patch after making sure the leak was fixed.

Thankfully, my easy fix worked, and the leak stopped. But it was then that I started really considering selling the place due to maintenance headaches. Who knows how long the sealant would hold up. The roof was 10 years old and a new one would cost over $20,000. Further, my wife was in her third trimester and I really didn’t have time.

After successfully selling my house this summer, I forgot all about the leaky roof and maintenance stress until this winter.

The Opportunity

Because I still have about $940,000 in cash sitting around from my home sale, I continue to check out ocean view properties in San Francisco. It’s just habit after so many years. I stumbled upon a house that fell out of contract and slashed its asking price from $1.5M to $1.4M. Even at its new lower asking price, nobody has made an offer for a month. Perfect!

I saw the property in the evening and I wanted to see it during the day for the ocean view. Unfortunately or fortunately, the day we arranged for the second visit so happened to be raining. When I got there, I was surprised to see a massive leak where the vent attached the ceiling in the garage.

Check out the video and tell me this ain’t a disaster for the seller who must now not only disclose the problem, but fix the problem and then prove to prospective buyers the problem has indeed be fixed. I’m sure they’ll also probably have to offer at least a one year warranty to fix anything in the house since they advertise the home as “95% new.”

If I had seen this property when it was first listed during late summer, there is no way I ever would have caught the leak. If I bought the property, I would have found tenants and three months later, they’d be texting me with this video showing. Then I’d be pissed at the seller for not disclosing the leak or making sure everything in the house was in good standing. My stress level would be through the roof and I’d probably take on an entirely different tone with this post.

But thankfully, I didn’t re-invest all my home proceeds immediately. I took several months investing a little over half the proceeds and am now actively hunting for great property deals in the middle of rainy season when fewer people are looking.

With this new leaky information, the listing agent disclosed to me they had a buyer at $1.5M a couple months ago, but he fell through because his loan approval failed. They rejected a $1.35M cash buyer in favor of the buyer with the loan. Given it’s been over a month at the new lower asking price of $1.4M, and the $1.35M cash buyer is nowhere to be found, I’m thinking a $1.25M offer might be in order.

Unlike the stock market, where it’s hard for the average person to get an information edge, real estate provides a lot more opportunity for those who are willing to hustle. If you must buy property at the current top of the market, then winter is the time to look your hardest.

Related:

Every Consideration Before Selling An Investment Property

The Real Estate Investing Rule To Follow: BURL

Which Is A Better Investment: Real Estate Or Stocks?

Readers, anybody out there also love to house hunt during the winter? Have you bought a house during the winter for a great deal? If so, I’d love to hear about it. Why do you think sellers list during the worst time of the year?

The post Winter Is The Absolute Best Time To Buy A House appeared first on Financial Samurai.

It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak

It feels a lot like 2007 againReflection helps us appreciate how far we’ve come. Reflection also helps us learn from our mistakes. In this post, I’d like everybody to reflect on several key items: Career, Finances, Health, Family, and Happiness. See if you can tie the five together and weave a story about who you are today.

The one thing I know for sure is that 2017 feels a lot like it did 10 years ago. But this time, every asset class is expensive. I’ve got folks asking me about investing in cryptocurrencies when they haven’t even invested in stocks. Other folks are asking whether they should use their HELOC to buy another property with an 80% loan-to-value ratio. Everybody has maximum investing FOMO right now!

It’s an exhilarating time, but it’s also a perilous time for those who don’t have perspective. 

Life In 2007

Career: I was finishing up my third year as a VP at a large investment bank in San Francisco. 2007 was also the year I turned 30. Given my boss recently departed to become a client, I was left to take over the west coast business. Knowing my worth, I asked for a raise and a promotion and got them. If they lost me to a competitor, they would have been screwed for at least six months as they scrambled to find and train my replacement.

30 years old was a significant age because I finally felt like I could be taken seriously. Getting my MBA in 2006 also gave me a confidence boost. I was loving my career because I was finally my own boss in San Francisco. Sure, I had to work with the head of the office and a more senior colleague in a different department, but for the most part, I was free to control my own schedule. So long as the business was coming in, nobody could complain.

In 2007, I thought I could easily work for 10 more years and then call it quits for good. Little did I know the financial crisis would crush my industry and cause me to pursue a different path just four years later.

Related: A List Of Career Limiting Moves To Blow Up Your Future

Finances: I received the biggest bonus of my life in 2007 due to a negotiation I had with my big boss in Hong Kong. It was a handshake agreement, so you never know until the end of the year when bonuses are paid. But he delivered as promised. From that day on, I decided to be loyal until the very end.

Although the stock market was booming, I was still hesitant to go all-in due to the dotcom bubble that began to collapse in 2000. Instead of investing everything I had in the stock market, I decided to invest most of my savings in real estate. At least with real estate, if all went to hell, I’d still have something to sleep in.

I bought my first SF property in 2003, lived in it for two years, and was renting it out to a couple in 2007. In 2005, I decided to take out a $1,200,000 mortgage and buy a single family house in the Marina district for $1,523,000. It was the cheapest house for its size in the neighborhood because it was on a busy block next to the busiest street.

Because my real estate investing experience was positive, and I had just received a big bonus, I decided to buy a $718,000, 2/2 vacation condo at The Resort At Squaw Creek, Lake Tahoe in 2007. I loved the place because that’s where I took my girlfriend on our first getaway date back in 2001.

I was delirious about my financial luck and felt I just couldn’t lose. I was imagining that my compensation would continue to grow by 10-20% a year for the next five years. There were some warning signs about the stock market and real estate market getting ahead of themselves, but I didn’t listen carefully. Instead, I myopically focused on my fortunate career situation. I wish someone with decades of experience sat down with me to run through the pros and cons of buying more property then.

Notice the frequency. Nobody know when the next downturn will begin.

Health: Work was stressful given the 60-70 hour work weeks. But at least my chronic back pain from 2000-2003 was gone. But what replaced my chronic back pain was teeth grinding and TMJ. It hurt to speak for more than an hour. I remember paying $700 to a specialist dentist who ground down parts of my molars so I could get some relief when I closed my jaw.

I was in OK shape because I started aggressively playing tennis again. But of course, I suffered from occassional tennis elbow pain that kept me from swinging freely. I weighed between 162-165 lbs, which was a normal weight for someone 5’10” tall.

Now when I look back on my diet, I realize I ate extremely unhealthy due to frequent client entertainment. I’d often take clients to fancy steak restaurants and nice lounges. The wagyu beef and Moscow Mules tasted especially good thanks to a corporate card with a $200/head budget.

I remember telling myself that no matter what, living in San Francisco was healthier than living in Manhattan.

Family: My girlfriend graduated college in 3.5 years and came out to live with me in December 2001. She was 27 in 2007, and I was unsure whether starting a family was a good idea yet. Work was extremely busy and I had all this pressure to keep the ship afloat given my boss left.

But I knew she was the one, so I proposed during the heart of the financial crisis in 2008. We got married in Hawaii in December 2008.

If the financial crisis didn’t hit, I would have been more confident to start a family by 2010. It would have been nice to get parental leave and company benefits. Further, since our son is the best thing that has ever happened to us, he would have been in our lives for seven years longer.

It’s so difficult to figure out when is the best time to have children. Even if you decide now is the time, it might take several years to conceive.

What I do know is that having a life partner through my entire post college journey has been priceless.

Related: When Is the Best Time To Have Children? A Physical And Financial Decision

Happiness: I was ecstatic about getting a raise and a promotion. Part of my happiness stemmed from having gone to public high school and public university. Never in my wildest dreams had I thought I’d have a job at a respectable investment bank and earn a healthy income. If I had gone to an elite private school, I’m not sure I’d be as happy because I would have expected all these things and more.

It’s funny, but the memories that stands out most from this time period were figuring out what ring to buy and the cozy little wedding on our favorite beach in Hawaii the next year.

My happiness level has never really fluctuated much since graduating from college in 1999. It’s always been about a 7-8 out of 10. The happiness of getting recognized at work only lasted for maybe three months. The pressure to deliver took over.

San Francisco home price forecast 2018 and historical chart

Life in 2017 And Beyond

The most important thing I learned from 10 years ago is thinking that I couldn’t lose, and then losing big when the financial crisis hit in 2008. I remember swearing to myself in 2010 that if my investments ever came back to pre-crisis levels I would take some money off the table. I tried to do so in 2012 by selling my primary residence in order to pay off a ~$1,000,000 mortgage and live in a small two bedroom, one bathroom apartment. But nobody wanted to buy my four bedroom house.

The difference with 30 year olds in 2017 versus my 30 year old self in 2007 is that I went through the dotcom collapse in 2000. I saw paper millionaires end up with nothing within a couple years. They had to start all over, like the guy who made my breakfast croissant each morning. As a result, I tried to diversify as much as possible.

It’s hard to really know how scary recessions can be if you’ve never been in one with significant money at stake. Everybody likes to say they’ll hold on to their investments and buy more during a downturn. But when your investments are down 30%+ and many of your colleagues are getting fired, the first thing you do is think about survival, not dumping every last cent you have in the stock market.

I’m praying that I’ll finally be satisfied with what I have today and no longer grind as hard. My health depends on it. Staying in San Francisco and being surrounded by so many success stories has finally taken its toll. My recent bout of chronic back pain reminded me not to forget the point of financial independence and owning a lifestyle business: a better life.

Some Final Thoughts

* It’s easy to extrapolate explosive growth in your career and net worth in a bull market. The problem is, nobody wants to work forever and things always change. Be more conservative with your expectations. Don’t confuse brains with a bull market.

* No matter how much money you make or have, your steady state of happiness won’t really change. Stop thinking that if you get to X amount you will be happy. Retire by a certain age, not a financial figure. There will always be something that will give make you feel bad. But the good thing is, you’ll likely revert back to your steady state.

* If you’re relatively young (under 40), it’s worth swinging for the fences during the good times. It’s worth allocating some funny money to chase unicorns. Money is abundant and cheap. Once the spigot shuts off, dumb ideas no longer get funded and silly job offers are no longer given.

* Learn when to cash in your chips by setting goals. You made these goals because you decided how much was enough. If you’ve somehow found yourself way beyond your goals, then absolutely focus on using your profits for a better life. The saddest thing is losing a massive lead.

* Even if you buy at an inopportune time, if you wait long enough, you’ll likely eventually get back to even. Just look at us now.

* The next 10 years will go by faster than the previous 10 years. Make the most of it.

Related: Recommended Net Worth Allocation By Age Or Work Experience

I’d love to hear about where you were 10 years ago, and what you learned about yourself then that you will apply to your life now? Time truly accelerates the older we get. Let us not waste a single minute. 

The post It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak appeared first on Financial Samurai.

What Every Home Seller Should Do Before Listing A House On The Market

What every home seller should do before listingFor a guy who likes to thoroughly analyze things, I made a mistake when selling my house that could have cost me hundreds of thousands of dollars. Before accepting the final offer, I failed to do a thorough analysis of what similar homes bought at a similar time for a similar price sold for most recently. Instead, I just looked at current listings, recently sold homes no matter when they were purchased, looked at how the overall median price point moved, took my realtor’s guidance, and went with my gut.

In other words, I extrapolated the overall trend of the real estate market and applied it to my house without finding apples-to-apples comparisons. If the SF housing market was up 50% since 2012, so was mine! I now realize after writing this post why I wasn’t more thorough. I was afraid I wouldn’t like what I found. My house was on a busy street near one of the busiest streets in San Francisco (three lanes each direction). I didn’t want to relive the disappointment when I tried to sell the house in 2012 and failed.

To refresh, I bought a 2,070 sqft, three bedroom, two bathroom single family house with an unwarranted room and bathroom on the ground floor on a 2,300 square foot lot in February 2005 for $1,525,000. I tried to sell the house for $1,700,000 in 2012, but didn’t get a single offer. Finally, I sold the house in June 2017 for $2,740,000 because I no longer wanted to be a landlord.

In this post, I will now do the exercise I should have done before I listed my home. This is an exercise you should do too if you are planning on selling your home. If you don’t want to do it, make your real estate agent do it! You will be amazed at your findings.

Example 1/3: 5 beds, 5 baths, 4525 sqft, asking $2,295,000

This house blows my rental house out of the water in terms of livability, interior quality, house size, and lot size. I’m a big fan of brick facade buildings because they remind me of homes back in Virginia where I lived for eight years.

This house sits on a half acre lot in a gated community with a pool, two outdoor hot tubs, and a gourmet kitchen. The house is located in the town of Moraga, a lovely suburb 22 miles east of San Francisco where the temperature hovers around 70-85 degrees throughout the year. Unfortunately for the seller, the town of Moraga declared a fiscal emergency in 2017 because they’ve got a management crisis.

The public schools in the area are good, and there’s also a nice country club in the town for swimming, golf, and tennis. Every year I come out here to watch for free the Heritage Bank Tennis Open, where ex-pros and college players compete for $100,000 in prize money. This year, I finally started visualizing what the possibilities of suburban living now that I have a son.

On the financial front, this house sold for $1,843,000 right around the time I bought my SF home for $1,525,000. Now the home is for sale for $2,295,000, after going without an offer at $2,395,000 since April 1, 2017. At the time of this post, the house went into contract August, but then fell out in November 2017.

In other words, this perfectly beautiful home cost the buyer $328,000 more to buy and will net at least $445,000 less than my house IF it sells for $2,395,000. That’s a whopping $773,000 profit difference. Such a difference is astonishing given Moraga is a sought after location where many working professionals who have jobs in San Francisco want to live. All this time I thought the entire Bay Area was inflating at a similar pace. Not so.

Some takeaways: There are relative value opportunities all the time if you look beyond what you are used to. If you can’t afford to buy in the most prime neighborhood, that’s OK! You can probably get way more for the same or less if you’re willing to look. That’s what I did in 2014 when I decided to look for panoramic ocean view homes in the western part of San Francisco. That said, the returns may definitely not be as good.

Before buying, it’s also important to analyze the fiscal health of the town, city, and state. It never would have occurred to me to check a municipality’s finances when its median home price is over $1,000,000. If you have a government that mismanages its finances, you can expect tax increases and/or a cut back in services. See Chicago as a model city for fiscal mismanagement.

Home price sale history

https://www.zillow.com/homedetails/15-Merrill-Dr-Moraga-CA-94556/18473921_zpid/

Example 2/3: 3 bed, 2 bath, 1,700 sqft condo in the Marina district, SF

Some of you are thinking it isn’t fair to compare a home in the suburbs with my old rental home in San Francisco even though both homes fit similar demographics. Fair enough. It’s hard finding a home that was purchased at a similar time (late 2004/early 2005) at a similar price point ($1,525,000), but I found another one.

Here’s a lower full-floor condo in the same neighborhood as my house. With three bedrooms, two bathrooms, and 1,700 sqft, the condo is similar in size to my 2,070 sqft home I sold. The target buyer is definitely the same as well. The condo looks to have been remodeled maybe 20 years ago based on the bathroom and kitchen pictures. It’s in a prime block, unlike my house.

Marina Condo

Marina Condo

The home was purchased for $1,500,000 in October, 2005. Because the market went up about 10% in 2005, let’s say the apples-to-apples cost was $1,410,000 if they had purchased the condo when I closed in March 2005. After being on the market for $1,795,000 since April 6, 2017, the seller lowered the price to $1,750,000 on June 16, 2017 and finally accepted an offer for $1,720,000.

In other words, during the same time period, the property owner only made $220,000, or $1,020,000 less than I made on my home.

One takeaway: Condos, even in better locations, may underperform single family homes because they are more susceptible to large supply increases. We’re now seeing a surge of condo construction in San Francisco that is putting a damper on rental and property prices. New condos are not only competing with older condos, they are also competing with single family homes in a similar price point as demographics shift towards simpler living.

Price history

https://www.redfin.com/CA/San-Francisco/3622-Broderick-St-94123/unit-1/home/1227703?utm_source=myredfin&utm_medium=email&utm_campaign=iphone_email&utm_nooverride=1&utm_content=home_image

Example 3/3: 3 bedroom, 2.5 bath, 2,100 sqft single family home in the Marina, SF

OK, so now you’re thinking it’s unfair to compare my single family home to a condo in the same area, even though the size and type of buyer is similar. Fair enough!

I stumbled across a home that is basically my same house, just on a super prime block with little traffic, and very close to the Palace of Fine Arts and the Bay. I spoke to the realtor and he mentioned they put “a good amount of money” into renovating the two bathrooms. They also painted the entire interior, refinished the top floors, and staged the home as well. Based on my home renovation knowledge, I’m guessing they spent about $50,000 fixing everything up, plus $15,000 on staging.

Marina SF home

Marina SF Home

Marina SF Home kitchen

Marina SF home bathroom

Charming house right? Back in 2004 when I was looking to buy a single family house in the Marina, this was the type of house on a quiet street I wanted to buy. But they were all going for about $1,000/sqft already, which meant this home would have sold for roughly $2,100,000. I couldn’t afford this price point, so I bought a similar house, but on an inferior street for 29% ($600,000) less.

With the way the house was finished and the location, I was guessing the house would go over its $2,995,000 asking by $100,000 – $200,000. This is San Francisco after all, where homes are purposefully priced below market to ignite a bidding war.

What transpired was odd. The home went into pending at $2,995,000 within 14 days of listing, giving me confidence that my pricing assumption was correct. But a couple days before the home closed, the listing price changed to $2,799,000.

I was wondering why this would be the case given the pending status, and I realized why after the home was finally sold for $2,807,000. By changing the asking price to $2,799,000, the realtor and the seller could officially say the home was sold for over asking. Tricky stuff!

I’m honestly very surprised about the final selling price. If you are to use my 29% pricing discount when I bought in early 2005, the home should have sold for closer to $3,800,000 since I sold my home for $2,740,000. Even with a narrowing of the pricing gap to a 15% premium for the far superior location, the house should have sold for at least $3,150,000.

The seller had put in ~$65,000 to prepare the house for sale, while I spent only $4,000 refinishing the floors, fixing the yard, and buying a fancy kitchen faucet. Granted, I did spend eight hours painting two bedrooms and touching up all the moldings, but still. The prep work cost differential along with the 1% higher realtor commission fee the seller had to pay is a lot.

Some takeaways: Be careful over prepping your house for sale. I’ve seen so many cases where the buyer just comes in and rips everything out, like this buyer is doing after I spoke to the contractor who so happened to be outside when I was walking by after sale. Painting, refinishing the floors, updating fixtures, cleaning, and staging is probably good enough if you can sell the dream.

I was told by a top producing realtor that if I spent $50,000 – $60,000 prepping my home I could get “maybe $2,500,000.” He wanted me to paint over my natural brick facade to a dark grey too. Crazy! I then got his opinion on the floor staining color and he told me a dark grey as well. But then he called his interior designer who said a white oak color. Then I talked to another top producer who said to make the stain clear to show off the original floor. Everybody had a different opinion.

Finally, although realtors are absurdly expensive, the right realtor can make all the difference based off his or her connections. There’s only a ~45 day window to sell a property before it becomes stalefish, and the right realtor will be able to maximize exposure to the right agents. All it takes is one perfect buyer to get the deal done. My buyer loved the brick facade of my house because it reminded him of the colonial homes back at UVA, where he went to school. He didn’t mind the vicinity to a busy street and liked that one floor had three bedrooms and two full bathrooms given he has a girlfriend and toddler.

price history

https://www.redfin.com/CA/San-Francisco/2028-Jefferson-St-94123/home/881785

So Many Variables To Buying and Selling A Home

Here are some common recommendations before buying: 1) not buying the most expensive house on the block, 2) buying in the best location possible, 3) buying during the middle of winter, 4) buying from a couple getting a divorce, 5) offering all cash, 6) buying in a fiscally sound area with tremendous job growth, and 7) buying below a certain valuation.

Now that I’ve sold my house, I realize there are more variables that go into getting the best price possible, including a well-connected real estate agent who can find the right buyer and good old fashioned luck.

If I wasn’t fearful of losing my job in Manhattan during the dotcom collapse, I never would have moved to San Francisco in 2001. If I never attended an open house for a three bedroom condo for $1.2M in the winter of 2004, I never would have parked my car next to the house I ended up buying and selling this year. If my rowdy tenants never decided to move out in May 2017, I never would have had the opportunity to test the market. If I never met my realtor at a house she was listing a couple blocks away from new new house a year and a half prior, she never would have found the agent with my ideal buyer.

Luck is easy to find in a bull market. The key is to recognize whether we are in a bull market or not and press if we are and de-risk if there are signs of a slowdown. Don’t forget that often times, money is made on the purchase, not on the sale. To their long term detriment, I see too many emotional buyers pay irrational prices because they just love the kitchen or have been outbid one too many times (examples #1 and #2). A good realtor should be able to walk you off the ledge.

Although it’s best to hold onto your property forever, if you want to sell, you should sell when you don’t have to sell. It’s when you have to sell that you might be screwed because you won’t have as much courage to negotiate and everybody else might want to sell too. Once a downturn hits, the bottom drops out and you’ll see vultures offer way below asking. I experienced this during my unsuccessful listing in 2012 when I was getting whispers for $100,000 below asking.

Finally, all it takes is one buyer to fall in love with the place and pay top dollar. Therefore, it’s worth spending a little longer searching for that one if you can afford to wait.

All it takes is a $500,000 household income to afford a $1.5M median priced home in the SF Bay Area

My final realization is that if I did this exercise before getting my initial offer of $2,600,000, I would have gladly taken it and not countered to $2,788,000 before finally settling on $2,740,000. Example #3 selling for $2,807,000 would have implied my house was valued at ~$2,400,000 using a 15% discount.

I’m sure 20 years from now I’ll look back and realize how cheap I sold my home. There’s no doubt in my mind the house will be worth $4M+ by the year 2037. But for the next 12 months at least, I’m feeling good about my sale, especially since I’ve reinvested the proceeds in truly passive investments that take zero of my time and may provide higher returns now that the SF market is cooling.

Readers, any lessons you’ve learned from selling your house? What are some surprises you found out before or after selling? What are some other things home sellers should consider before listing? 

The post What Every Home Seller Should Do Before Listing A House On The Market appeared first on Financial Samurai.

Reduce Emotional Stress By Seeing Life Through A Different Perspective

Reducing emotional stress by seeing life through a different perspectivePerfect happiness is an illusion.

You would think life is a piece of cake being a stay at home and work from home dad with a stay at home spouse. But I recently went through two weeks of intense lower back pain due to emotional stress. The last time I went through this type of pain was during the dotcom collapse between 2000 – 2003 because I was constantly fearful of losing my job.

After reading Dr. Sarno’s book, Healing Back Pain, I became back pain free for 14 years until recently. If you are suffering from chronic pain, you must read this book.

So what’s the issue today? It’s simply adapting to the loss of 100% freedom, being a new parent, receiving judgmental comments, getting bombarded with endless requests over e-mail, keeping up a regular posting schedule, and being the sole provider for my family.

Something had to give. And that something was my back. Chronic pain is the mind’s way of distracting us from emotional stress.

My back pain is a reminder that health is more important than wealth. It doesn’t matter how much money you have if you can’t take care of your physical AND mental well-being. Do not be embarrassed to seek help, especially for mental health issues.

Now that I’ve recovered, I’d like to share some thoughts on reducing emotional stress in order to appreciate life more. Might as well turn a bad situation into something useful for those who currently suffer. 

Do What You Can


I’ve always believed that so long as you do your best, nothing else matters. The worst is being gifted at something and not taking full advantage.

Can you imagine being a talented singer and never bothering to audition for your high school musical? Can you imagine being 6′ 10″, but never practicing any sports? Or how about if you are a brilliant academic who decided to skip university despite getting a full ride in order to go vagabonding for years? We need champions by our side to guide us in the right direction.

Because I’m neither physically nor mentally above average, I took it upon myself as a teenager to try my best at every opportunity I was given. It was important to maximize my potential because my potential was never that great.

To not take full advantage of my opportunity would be an insult to those who didn’t have the same luck. It was hard with missing so much poverty growing up in emerging markets. So I toiled and toiled until I finally decided after a couple decades I no longer felt guilty anymore. The growth stage of my life was over. It was time to focus on taking care of my family and volunteering some time to help others who could use some help.

But if I was truly content, why would I experience chronic back pain again? I got angry at myself for not being more thankful.

Then I met someone who helped put things in perspective.

The Gift Of Seeing Clearly

Roughly 15% of the world’s population, or 1.2 billion people have a disability. Disabilities range from seeing, hearing, movement, learning, neurological and more. Don’t assume that just because someone looks normal, they aren’t dealing with some sort of impediment.

Sonya, one of the girls I met at a foster home had two visual impairments called ocular albinism and nystagmus. You can have one without the other, but often times they go together.

Ocular Albinism and NystagmusOcular albinism is a genetic condition that reduces the pigmentation of the iris, which is the colored part of the eye, and the retina, which is the light-sensitive tissue at the back of the eye. Many folks with ocular albinism have difficulty seeing outside without sunglasses and transitioning from outside to inside.

Nystagmus is a condition in which the eyes move in an involuntary and repetitive way. Sometimes the movement is slow and horizontal. Other times the movement is fast twitched, vertical, and rotary. There are supposedly 49 different subtypes of nystagmus with varying degrees of severity. These movements often result in reduced vision and depth perception. The condition tends to improve until about age 10, and stabilizes for the remainder of the person’s life.

Due to her visual issues, Sonya’s best corrected visual acuity is 20/200, the cut off point for legal blindness. In other words, even with glasses or contacts, she can only see something clearly from 20 feet away that other people can see clearly from 200 feet away. Most people who are near-sighted or far-sighted are able to correct their vision to 20/20 with glasses, contacts, or laser surgery. Sonya cannot.

Sonya didn’t say much to me about her family life or visual impairment at first, but she slowly opened up about how she was having a difficult time at school. She always had to sit in the front of the class, and even then, it was often hard to see what the teacher had written on the white board. But she said she always did her best to keep up.

Despite her family situation and her visual impairment, Sonya showed me a great attitude that made me proud. Although she said she had her fair share of bullies, she also told me wisely how she wasn’t bothered because she knew the bullies were going through their own difficulties. The sister of one of the bullies died in an accident a year ago. Another bully’s father was sent to prison. The kids in school found out and made fun of the bully as a result.

Sonya also mentioned how she’s become an expert listener as her hearing makes up for her vision loss. “Sam, I’m like Daredevil in the comics!”

Sonya displayed the one trait I long to instill in my son: empathy / compassion. Empathy comes from understanding about other people’s situations before making any judgement. Empathy allows people to listen and connect without making any judgement at all. Even if spite is hurled their way, the compassionate person is able to forgive and show kindness.

The other trait Sonya possesses that I hope all of us embrace is an indomitable spirt. No matter what our challenges, we will find a way to overcome. Whether it’s trying to reach financial independence early or getting through middle school without too many emotional scars, an indomitable spirit is important. “What I see is all I know. I’ll be fine,” she said when she sensed my worry.

Snapping Out Of A Funk

Sonya reminded me that I took my situation for granted. Feeling stressed about losing temporary freedom was silly because I had freedom to give up. What about all those who are still stuck in the salt mines, unable to ever get out? Feeling the pressure of having to constantly write on Financial Samurai is self-induced pressure that’s unnecessary. Taking a week off won’t change a thing.

Sonya also reminded me that no matter what challenges my son faces, he has two loving parents who will give all their time to help him lead a normal and happy life. She told me that all she’s ever wanted was for her parents to stop fighting so they could go to the park like her friend’s families. As a foster kid mentor, I hope to help fill some of that gap.

We will all go through emotional stress. Some of you will burn out and decide to quit your job, quit your marriage, or go down some deep dark path. I encourage you to take a good amount of time feeling angry and sorry for yourself. Afterward, get up and see life through the perspective of others.

Changes Are On The Way

I hope all Financial Samurai readers can embrace empathy in your day to day lives. The next time someone doesn’t look you in the eye when speaking, don’t get annoyed. Maybe it’s because they literally can’t due to their nystagmus. The next time someone seems cold, don’t feel insulted. It may be because they have Aspergers, which sometimes makes socializing a little more difficult.

In addition to being mindful about different perspectives, I plan to reduce stress further by deleting spiteful comments, aggressively filtering e-mails, and writing freely without concern. I will remind myself that doing something is better than doing nothing at all.

I leave you with an inspiring TED talk by Caroline Casey who might just very well be the adult version of Sonya. You’ll enjoy the clip because it talks about everything we talk about here: belief, self-esteem, courage, finding a purpose, and helping others. Try not to take what you have for granted.

Please enjoy and share your thoughts about how you reduce emotional stress in your life. What are some of the walls you’ve faced and successfully climbed over? Who have you met that changed your perspective?

Related: The Source Of All Stress Is Giving A Giant Crap About Everything

The post Reduce Emotional Stress By Seeing Life Through A Different Perspective appeared first on Financial Samurai.

How To Win Under The Proposed Republican Tax Plan

How to win under the new GOP tax planHere are the latest key points from the Trump administration’s tax plan for 2018 and beyond. The administration’s goal is to get the plan enacted before 2018. Surely there will be some compromises before the final plan gets passed, if at all.

After reviewing the key points, I share my thoughts on how to win under this possibly new tax environment.

Republican Tax Plan Highlights

* No change to existing rules on 401k retirement accounts and the ability to contribute the current $18,000 into the accounts tax-free, and $18,500 for 2018 and beyond

* Lowers the deduction for mortgage interest for new home loans of $500,000 or less from the current $1,000,000 cap.

* Limits the deductibility of local property taxes to $10,000

* Eliminates the deduction for state income taxes

* Reduces the number of tax brackets from seven to three or four, with respective tax rates of 12 percent, 25 percent, 35 percent and a category still to be determined.

* The plan sets a 25 percent tax rate starting at $90,000 for married couples, with a 35 percent rate kicking in at $260,000

* Individuals making over $500,000 and couples earning over $1 million may still pay 39.6 percent

* Reduce the corporate tax rate from 35 percent to 20 percent

* Repeal the estate tax completely e.g. remove taxes on inheritances over $5.49M per individual and $10.98M per couple

*  Increase child tax credit from $1,000 to $1,600, though the $4,050 per child exemption would be repealed.

* Nearly double the standard deduction used by most average Americans to $12,000 for individuals and $24,000 for families

* Finally, the lowest tax bracket would be 12 percent, down from 15 percent. The middle rate would be 25 percent, down from 28 percent. The third bracket would be taxed 35 percent, down from 39.6 percent. The top bracket would retain the 39.6 percent tax rate, but for income above $1,000,000 for married folks and above $500,000 for individuals. 

How To Win Under The New Republican Tax Plan

1) Continue to max out your 401k. There’s no reason not to take advantage of tax-deferred investment growth and potential company matching / profit sharing.

401k savings targets by age

2) Reduce real estate exposure in the most expensive cities. Slashing mortgage interest deductibility on debt down to $500,000 from $1,000,000 may put downward pressure on homes priced above $625,000. $625,000 is the cut off because most people put down at most 20% and borrow the rest (80% X $625,000 = $500,000).

The real estate segment that will likely come under the most pressure are those homes priced above $1,250,000 and up until about $3,000,000. In this price range, taking out a $1,000,000 or higher mortgage debt is quite common. After $3,000,000, the percentage of buyers who pay cash increases, and the segment will therefore be less affected. However, if there is weakness at lower price points, it will ultimately drag down higher price points.

Areas such as San Francisco, San Jose, Oakland, Manhattan, Brooklyn, Los Angeles, San Diego, Washington D.C., Seattle, Boston, may experience weakness at the margin.

The Most Expensive Cities For Real Estate In The US

Related: Why I’m Investing In The Heartland Of America

3) Move out of states with high property tax rates. Limiting the property tax deductibility to $10,000 will hurt homeowners who live in high property tax states or who own expensive property or both. Residents of California, New Jersey, New York, and less so Illinois should look to move or sell their property and rent. Although Utah, Wyoming, Arkansas, Alabama, West Virginia, and Louisiana have high property taxe rates, real estate in most parts of those states are relatively inexpensive. Hawaii has the lowest property tax rate, but also one of the highest real estate prices.

Property Tax Rate By State

4) Move out of states with high state income tax rates. Consider relocating to one of the seven states with no state income tax: Washington, Nevada, Wyoming, South Dakota, Texas, Florida, or Alaska. No longer being able to deduct state income taxes will hurt states like New York, DC, Iowa, Minnesota, and New Jersey the most because life is hard in the states with high tax rates and brutal winters. At least in California, residents can play outside year around. But make no mistake, California residents lose under the new proposal.

Income Tax Rate By State

5) Get married and make up to $1,000,000. The current top tax rate is 39.6% for individuals making more than ~$420,000 and married couples making more than $470,000. That rate is set to decline by 4.6% to 35% if the GOP plan passes. If you are an individual, the proposal is for you to pay the 39.6% tax rate again on income above $500,000, so you’re really only saving $80,000 X 4.6% = $3,680. But if you are married, your benefit is $530,000 X 4.6% = $24,380 because the threshold goes up to $1,000,000.

The roughly doubling of income threshold makes sense for those who believe in equality between man and woman. For example, if a man and woman each make $400,000 a year for a combined total income of $800,000, why would they ever get married if they now have to pay a 39.6% tax rate above $470,000 on their combined income? They would simple remain single in order to pay a 33% top marginal tax rate as individuals, saving themselves roughly $21,000 a year in marriage penalty tax ($800,000 – $470,000 = $330,000 X 6.6% = $21,780 minus income paying the 35% marginal tax rate).

Related: The Average Net Worth For The Above Average Married Couple

6) Start a LLC or S-Corp to earn pass through income. If the top tax rate for businesses with pass-through income declines to 25%, you’re basically winning if you have operating profits of over $92,000 per individual or $153,000 per married couple because those are the cutoff amounts for a 25% marginal income tax rate.

If you don’t have a business idea, then consider switching from full-time employee to consultant and having your old employer pay you a higher rate as a business. They might oblige since they don’t have to pay you any benefits.

If you aren’t willing to start a business or become an independent contractor, then consider investing in businesses that will benefit from the corporate tax cut to 20%. And if you don’t know what company to invest in, then you can simply buy an S&P 500 index fund.

Related: The 10 Best Reasons To Start An Online Business

7) Step on the gas when it comes to building wealth, or die before Trump leaves office. Repealing the death tax should motivate you to try and accumulate far beyond $5.49M as possible to leave to your loved ones or charitable organizations you care about. But even if the death tax limits are repealed, they will likely be reinstated with the next administration, unless every single administration after Trump’s is Republican.

If you have the ability and motivation to build great wealth, you might as well go for it during this window. As soon as you start thinking about how your wealth can be used to help others, then there’s endless upside

Related: The Benefits Of A Revocable Living Trust

8) Enjoy being a middle class American. Reducing the $1 million mortgage indebtedness to $500K, raising the child tax credit to $1,600 from $1,000, limiting the deductibility of property tax to $10,000, raising the income limit to $1,000,000 from $480,000 for married couples until the 39.6% marginal income tax kicks in, and eliminating the death tax doesn’t affect the middle class.

But what does help the middle class is almost doubling the standard deduction, whether you have a property or not, to $12,000 for individuals and $24,000 for families. Roughly 70.4% of taxpayers claimed the standard deduction on their tax return, therefore, most Americans will benefit from the increase. Of those who do itemize their deductions, the average claim for 2014 was $27,447 according to the IRS. Therefore, there is a convergence and a simplification or the tax code.

A $24,000 standard deduction for married couples equates to paying a 2.4% interest rate on a $1,000,000 mortgage. Hence, the increase in standard deduction takes some of the sting out of the potential halving of the mortgage interest deduction to $500,000. That said, property in higher cost areas should still feel downward pressure at the margin because mortgage interest is only one of several itemized items for deduction.

Related: We’re All Middle Class Citizens

Try To Avoid Getting Stuck In The Upper Middle

Republican Proposed Marginal Tax Rates Under Trump

The GOP tax proposal is telling everybody not to get stuck in the upper middle like garbage in a trash compactor. The people who may lose the most are working individuals making between $200,000 – $416,700 and families making $260,000 – $470,700 living in high tax rate states. These folks may see their marginal income tax rate go up from 33% to 35% and see many deductions disappear.

You either want to make less than $200,000 as an individual or less than $260,000 as a married couple or as close to $500,000 as an individual or as close to $1,000,000 as a married couple. Everything else will either be neutral or slightly negative.

As for me, I plan to generate as much business profits as possible until the next administration arrives. If the business pass through tax rate does get capped at 25%, I will use my tax savings to hire someone to help run the business and write content so I can spend more time with my family. Readers win because I won’t end up quitting under the strain of full-time parenthood for the next five years. The economy wins because one more person gets a job and spends.

I’ve already sold a very expensive property in San Francisco to lock in gains, simplify life, and diversify into heartland real estate. If the mortgage indebtedness cap for interest deduction does decline to $500,000, I will pay down my principal mortgage debt to $500,000 if previous mortgages above the threshold are not grandfathered. Finally, I plan to leave San Francisco and move to Honolulu where the property tax rate is 70% lower within the next three years.

Hopefully by the time tax rates rise again, I’ll be completely sick of making money and want to relax. As a retiree, you want high tax rates so that other people can pay for your benefits. In a low tax rate, bull market environment, it’s best to press as much as possible.

Readers, how do you feel about the latest GOP tax proposal? Will you do anything to take advantage?

The post How To Win Under The Proposed Republican Tax Plan appeared first on Financial Samurai.

Reasons Not To Do A 1031 Exchange To Save On Taxes

Reasons not to do a 1031 exchangeIf you read about the 1031 exchange, you’ll immediately think it’s the greatest thing on earth for real estate investors. What’s not to like about paying zero capital gains tax after the sale of a property? The government already taxes real estate investors through an annual property tax and a transfer tax upon sale. Having to pay capital gains tax on the way out can be very painful, especially since prices have surged to all-time highs in many areas of the country.

But I don’t mind paying taxes. After all, taxes help keep our country running. I just mind paying an amount much greater than 30% on gains or income earned. In other words, after you start making over $300,000 as a single person or $500,000 as a couple, based on our current tax rules, it doesn’t make sense to kill yourself at work to make much more.

Making more than $300,000/$500,000 won’t increase happiness because you can buy pretty much anything you want at this level. And since you’re no longer gaining more happiness, you’ll start losing happiness once the government starts siphoning a larger percentage each minute you spend away from your family chasing the all mighty dollar. Trust me, there are plenty of miserable couples making $500,000 a year.

For those on the fence about conducting a 1031 exchange, here are some reasons for not proceeding.

What Is A 1031 Exchange

A 1031 Exchange allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property.

To do a 1031 exchange effectively, you must exchange one property for another property of similar value. Further, the purchase price and the new loan amount has to be the same or higher on the replacement property.

In my case, I had to find a single family or multi-unit property worth at least $2,740,000. I could find a property worth less than $2,740,000, but then I’d have to pay the capital gains tax on the difference in sale price and purchase price of the new property known as “boot.”

The property owner has 45 calendar days, post-closing of the first property, to identify up to three potential properties of like-kind. After the properties are identified, the investor has 180 days to make the purchase and initiate the exchange OR by the due date of the income tax return with extension, whichever is earlier.

Finally, you’ve got to pay a Qualified Intermediary anywhere from $1,000 – $3,000 to hold your proceeds (you never get to see or touch the proceeds from your home sale) to conduct the exchange. If you are unable to identify and buy a new property, you lose that money and all that time.

How does a 1031 exchange work

Main Reasons Not To Do A 1031 Exchange

* You don’t mind paying taxes

* You haven’t found the right property

* You want to reduce exposure to real estate

* You want to simplify your life

For a guy who wanted to de-risk and simplify life, trading one expensive SF property for another expensive SF property just to save on taxes wouldn’t achieve my goals. I felt a little like I escaped death, having gone through the financial crisis with a huge mortgage, and coming out unscathed. Further, I’m focused on freeing up as much time as possible to take care of my family.

With an equally expensive San Francisco property out of consideration, I looked at Honolulu property, where we’re considering moving back once our son is eligible for kindergarten in 2022. Given Honolulu is cheaper than San Francisco, we’d end up buying an even larger property to manage than the one we have in San Francisco. Or, we could buy our retirement dream home near the beach, but it would have to be rented out for at least one year, if not two years for it to be considered rental property by the IRS.

Dream property in Kailua, Oahu, but this one costs over $15M

Finally, I asked RealtyShares whether they had any properties on their platform eligible for a 1031 Exchange. At the time my house was to close, they said they didn’t, but that something was in the works. About a month after my transaction closed, they sent me an e-mail saying they had launched their first 1031-eligible property, a 272 unit multi-family project looking to raise $4,500,000 in Houston, Texas with an 8-year holding period, and a 13% target IRR.

I’m fine with an 8-year holding period (longer the better so I don’t have to think about redeploying capital and paying taxes), but with $2,740,000 million to put to work, I would take up more than 50% of the deal size. I don’t recommend anybody account for greater than 10% of any deal due to concentration risk. Further, think about how stressed I would be before, during, and after Hurricane Harvey hit.

As I thought about this close call, I realized the primary purpose of de-risking and simplifying life is to minimize stress. Up until my son was born, almost all the stress I had was dealing with maintenance issues and tenants.

I already got rid of work stress in 2012 by negotiating a severance. I got rid of money stress by hitting a net worth target and reaching a passive income goal. Online work is not that stressful because writing comes easy to me and there are only a few truly thoughtless people who like to say unthoughtful things.

From a financial perspective, although the gross gain from selling my rental home was ~$1.22M and ~$1.8M hit my bank account after years of paying down the mortgage, the taxable gain is much less due to the $250K/$500K tax-free gain exclusion, selling expenses, and home remodeling expenses.

For example, theoretically, I could pay no capital gains tax if I spent $600,000 remodeling the house and $150,000 selling my house because when you add the $500K tax-free exclusion, the total is $1,250,000, or more than the gross profit I received.

In this example, the negative of not paying taxes means the gains weren’t much greater than the tax-free gain exclusion amounts. But at the end of the day, I’m left with $1.8M in the bank versus $305,000 when I first put the 20% downpayment in 2005.

I’ve set aside $150,000 for capital gains tax (federal + state) next year, but hope the actual tax bill after deducting all my home remodeling and selling expenses will be much less.

Focus On What’s Most Important

For all of you considering doing a 1031 exchange, consider these thoughts:

1) If you cannot find the right property to reinvest the proceeds, don’t do a 1031 exchange. It would be foolish to try and save on taxes, but then lose principle value because you bought the wrong property at the wrong time in the cycle. You might feel a lot of pressure to identify three properties to purchase in 45 days and pay a bad price because you’ve got to close within 180 days.

2) Don’t let your tax bill dictate your decisions. A large tax bill is usually great because it means you made an even greater profit. I remember plenty of folks during the 2000 dotcom bust who refused to sell their stock after they exercised their options because they didn’t want to pay any taxes. But when their stock eventually went to zero, not only were they left with nothing, they also had to pay a huge tax bill!

3) Focus on lifestyle first, money second. Your real estate investments should serve you, not the other way around. Even if we found our dream home in Honolulu, we wouldn’t move because we don’t want to leave our lifestyle in San Francisco just yet. We just finished completely remodeling our house. We have our doctors we’ve trusted for years and a pediatrician and ophthalmologist we like for our son. We’ve got a set of friends we enjoy hanging with. And we’ve also scoped out and applied to several pre-schools too.

4) Will you really be able to hold on forever? A 1031 Exchange allows you to delay paying your taxes. It doesn’t eliminate your capital gains tax. Only if you never sell your 1031 exchanged property or keep on doing a 1031 exchange, will you never incur a tax liability. You can pass on your property to your children who get to step-up the value to current market value so they never have to pay taxes on your property either. It’s only after your assets exceed the estate tax limit ($5.49M individual, double for a couple) do your heirs need to pay ~40% tax on anything over. The median holding period for property in America is between 7 – 8 years.

5) Do you really need the rental income? A 1031 exchange is exclusively for rental properties, not primary residences. Therefore, the primary reason to own rental property is for income. Income streams can change over time, as they have for us. I thought we would need the rental income forever because we never wanted to go back to work. Little did we know that during the three years we tried renting out the house, our online income grew to the point where we definitely don’t need rental property anymore. Even if our online income was slashed by 80%, we still wouldn’t need any portion of our rental income in our passive income portfolio.

The decline in SF rent in June 2017 when I tried to rent out my house is finally showing up in the data in October 2017.

A Simpler Life Feels Great

In a perfect world, I would have 1031 exchanged all the proceeds into a diversified private real estate fund that returned at least 10% a year forever, guaranteed. Alas, I was unable to find such an opportunity. I’ve already redeployed over half the proceeds in 100% passive investments. The remaining proceeds will more than likely stay liquid in order to finally buy that dream home in Hawaii one day.

Readers, have you ever done a 1031 exchange? How did you decide which property to invest in? Did you set up a 1031 Exchange and end up not following through? If so, why not? 

The post Reasons Not To Do A 1031 Exchange To Save On Taxes appeared first on Financial Samurai.

Why Get Life Insurance If You’re Financially Independent

Why get life insurance if you're financially independent and can self insure?The following post is sponsored by SelectQuote, based in San Francisco. They’ve been around for over 30 years, and I had the opportunity to sit down with their CEO for an hour to talk about his business and how they’ve managed to grow for so long. 

After giving folks a heads up about a common bait and switch tactic in the life insurance industry, I was asked by a number of people why I’d waste my money on life insurance premiums if I’m financially independent. It’s a good question that merits a deep dive because many of you will face the same dilemma once your passive income can cover all your living expenses or once your net worth reaches 20X your gross income. After all, you’re one of the few who care enough about your finances to read this site!

But I’m a little surprised why the folks asking couldn’t think of the many reasons why life insurance might be necessary after reaching FIRE. I guess if you haven’t reached FIRE, don’t have a family, or have never sat down with an estate planning lawyer, it’s hard to know.

Here are some reasons why life insurance is a good idea despite being able to self insure. You can click on the audio version if you scroll to the bottom.

Why Get Life Insurance After Reaching Financial Independence

1) Your estate’s value is still below the taxation limit. You may be financially independent, but your estate’s value might still be far away from the $5.49M limit per person. Anything you pass to your heirs beyond $5.49M per person gets taxed at roughly 40%. If you’ve got let’s say $3M left when you die, you can have up to $2.49M of life insurance get paid out tax free to people of your choosing.

2) Your estate’s value is above the taxation limit. Given you’ve got to pay a 40% tax on every dollar above $5.49M per person, your heirs might have a large tax bill if you are far beyond the limit. Leaving $8M as an individual would lead to roughly a $1,000,000 tax bill. A life insurance policy can help pay for the tax liability. High property taxes and ongoing maintenance costs are the reasons why many historically mansions are gifted to the state. Their heirs couldn’t afford to take care of them.

3) You believe you’ll die before the term limit is up. Despite all the blood work and physical exams, insurance companies can only come up with a best case guesstimate of when you will likely die. But despite all the actuarial data, you may know your health better than anybody. If you think you’ve got a greater chance of dying before the term limit is up, then life insurance becomes a better deal.

4) You want to provide liquidity. You may be leaving behind stocks, bonds, real estate, fine art, and collectibles, but they require an extra step to become liquid. Further, don’t assume that all your assets will neatly go to your heirs as your will directs. Probate court can tie up your assets for months or maybe years. Life insurance is a way of diversifying your giving.

5) You plan on setting up a life insurance trust. A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. A life insurance trust doesn’t count towards the $5.49M per person estate tax limit, provided it’s stood alone for a number of years. There is a limit to how much isn’t taxable, but you’ll have to check with an estate planning lawyer.

6) The premiums paid is worth the peace of mind. If you’re financially independent, the monthly premiums aren’t as big of a deal as they would be for someone who isn’t financially independent.  Therefore, it’s easier for a financially independent person to afford life insurance to provide greater security for his/her family. It’s the same logic as people who can pay cash for a home taking out a mortgage because the interest rate is so low, compared to the person with poor credit who needs to take out a loan and has to pay a much higher rate.

7) You have a large amount of debt. You might have a massive net worth, but if you also have a large amount of debt, your net worth can disappear quickly during a downturn. The time to sell anything is during a bull market, not a bear market. Think about how many wealthy people had to declare bankruptcy due to being over-leveraged. Further, if you want to hold onto your the assets left behind for sentimental reasons or because you believe its a good investment, life insurance will help.

Life Insurance Is A Good Deal

At some point, you truly may be sufficiently wealthy to not need life insurance. Maybe that net worth is over $10+ million per person, it’s an individual decision. But for the vast majority of us with dependents, having life insurance is a good idea. You can always reduce your coverage amount or cancel your policy as your wealth grows. That’s what I plan to do.

I like knowing that my wife and son will get an extra million dollars in case I’m stuck in a ravine somewhere with my car on fire. I like that life insurance will pay for a good portion of my estate taxes. It also makes me happy knowing that my son will never starve, even if my wife ends up spending everything or getting bilked out of everything I leave her through a revocable living trust.

Life insurance is relatively cheap for people on the healthier end of the spectrum. You do not want to wait until you have some type of illness before getting a quote. Just having something as common as sleep apnea can cause your premiums to quadruple.

If you’re middle class, then life insurance is even more valuable to your dependents than if you are rich. And if you’re wealthy, the cost of the premiums are such a small percentage of your income that it makes life insurance also worthwhile.

Providing peace of mind to your loved ones is a major reason why people buy life insurance. It’s a universal factor for people of all income levels, even those who are financially independent. SelectQuote, America’s No. 1 term life sales agency, takes the time to talk with you and listen to your specific needs to find the policy that’s right for you and your family. Working with only highly rated life insurance companies, SelectQuote shops multiple plans to help you deliver peace of mind to your family. Get a free quote from SelectQuote today. 

Readers, what other benefits are there to having life insurance after reaching financial independence that I may have missed?


The post Why Get Life Insurance If You’re Financially Independent appeared first on Financial Samurai.

How To Stop Worrying About Your Child’s Future And Start Enjoying The Journey

By far the best reason to own and operate a business

Ever since publishing, The Fear Of Screwing Up Our Kids As FIRE Parents, I’ve been brainstorming how we can give our kids everything without giving them everything. The worst thing we can do as parents is take away our children’s sense of accomplishment. I pity the kid who starts off driving a BMW to school instead of walking or biking.

But recently, I’ve been losing enthusiasm for writing because I’m often too tired due to full-time fatherhood. If I had a mundane job that required little thinking, work might be easier. Besides, how hard is taking care of a child if you’re gone for 12 – 15 hours a day, right?

Unfortunately, even as a stay at home dad with an online business, it’s difficult to be creative when you lack sleep. It’s as if creativity uses a different chemical in the brain that is finite in supply.

Hitting the 10-year business anniversary mark in 2019 can’t come soon enough. After that, I’ve considered becoming Keyser Söze, never to be seen or heard from again.

But I realized instead of lasting until 2019, I’ve got to last at least until 2042. Why? Because the absolute best benefit of owning a business is creating a life safety net for our children. Not only does a business provide insurance they don’t fall through the cracks, a business produces a perpetual teachable moment for all our kids to apply what they’ve learned in the classroom to the real world. 

The Real World Is Brutally Difficult

Imagine spending almost $500,000 in private K-12 tuition only to see your child go to an average university anybody could have gotten into. Because the school is average, he will likely land an average job or no job. Now imagine the best case scenario where you send your kids to public grade school and they get into a top rated university. You still have to pay out the wazoo, yet there is no guarantee they’ll get a great job.

Related: What If You Go To Harvard And End Up A Nobody?

The world is now a hyper competitive place. Even if your child is “perfect,” s/he will have a difficult time getting ahead. But what if they have some challenges? Here are some things you may worry about for your child that can be overcome by owning your own business:

  • Your child may be a minority who will face racial discrimination her entire life
  • Your child may be a minority who is required to score higher on standardized tests to have the same chance of getting into a university
  • Your child may have a learning disability
  • Your child may have a physical disability
  • Your child may get into an accident, resulting in a disability
  • Your child may be small in stature and get picked on by bullies because their parents are terrible
  • Your child may be unattractive, even though you think he’s the cutest ever
  • Your child may get in trouble with the law
  • Your child may get suspended or expelled from school

If you own a business, you ensure that your child will always have something interesting to do no matter how much they try and fail on their own. Getting straight A’s or going to an elite university no longer matters as much, so long as they are learning.

Further, you don’t have to wait until your child graduates from college before introducing her to every facet of your company. You can start in elementary school or middle school so that by the time she goes to college, she’ll have a much better idea at what she wants to study.

One of the biggest problems with education is that we learn a bunch of subjects and forget everything we learned years later because we don’t see the relevance, nor do we apply what we learn to the real world. Therefore, we’re only teaching our children how to listen, follow instructions, study, and take tests. What a shame to only create an army of “yes sir, yes ma’am” in society.

When I went back to Berkeley for business school part-time, it was amazing to use my professors as business consultants for my job in finance. Suddenly, theory turned into application, and education became super impactful. The same can be said for getting your child involved in your business.  Continue reading

The 10 Best Reasons To Start An Online Business

The 10 best reasons to start and operate a businessStarting a business changed my life for the better. But I dilly dallied for a couple years before starting Financial Samurai in 2009 because I wasn’t sure whether I’d be able to commit to a long term plan. I remember hearing that it takes 10 years to become an expert in anything, and I didn’t want to start something if I wasn’t going to follow through. When the financial crisis hit I figured it was now or never.

Now that I’m 8.5 years in, there’s not a day that goes by where I’m not thankful for having this site. I understand that a lot of you will say that you don’t have a good business idea or don’t have a clue as to how to start. The reality is I had no business idea either

But now, things are so much better than having a day job. The key is to just launch  and then figure things out as you go. You can afford to do so nowadays because the cost to launch and maintain is so cheap. Good luck doing trying to figure things out when you have to pay $5,000+ a month in rent to run a retail store or restaurant!

Let’s look at the top 10 benefits of owning your own business in Part I of this two part series.

The Top Reasons For Running Your Own Business

1) No Boss: The older you get, the less likely you will tolerate someone telling you what to do. By the time you’re in your 30s, you’re already a master at your job. You’ll also have a lot more money. Thus, you won’t accept instructions as easily because you don’t need the money as much. Further, you’ll also have the requisite work experience to get another job for likely more money and more appreciation if a change of scenery seems advantageous. Even if your boss is awesome, being your own boss is 10X better.

Related: How To Deal With A Micromanager Without Killing Yourself First

2) Master Of Your Time: Sunday evening is always a great time because you’re reminded there’s no need to set an alarm clock. You get up when your body naturally wants you to get up. As a result, you’re happier, healthier, and way less stressed than being forced to wake up by a certain hour because you have to be on a call or in the office by a certain hour. You can take a three hour break in the middle of the day to watch a baseball game if want. Afternoon siestas are no problem either. By the time your kids get home from school, you’re refreshed and can spend as much time with them as they’d like before they go to bed. Then you can work in the evenings if you wish.

3) Much More Efficient: I always knew that working for a large corporation wasn’t very efficient because there were too many meetings about meetings. To get something done requires so much bureaucracy. Many people I know simply spend hours surfing the web at work (thank you!) because they’ve either already finished with their work or are waiting for their managers to catch up. It’s no surprise that startups with no resources constantly innovate much quicker. I’ve now experienced countless examples of business development deals that have taken 3+ months to finalize, which would have only taken me one hour if I was on the other side of the table. Three hours of entrepreneurial time is like 12 hours of corporate day job time.

4) No Commuting: Commuting is one of the biggest wastes of time and money. Not only are you more stressed by the time you get to work, you might also get in an accident on your way there as well! Unlike those who smartly run internet businesses, not every entrepreneur gets to have no commute. But at least when you’re your own boss, you can decide guilt-free when to work from home, when to go to the office during non-rush hour traffic, and when to leave at more convenient times.

5) Expense Deductions: Although it’s nicer to have a corporate card that pays for everything, it’s still nice to have expense write-offs so you can have more freedom to spend however you wish. For example, instead of having to spend a weekend in a conference room at your company’s corporate offices where they serve you free rubber chicken sandwiches, you can write-off a semi-annual team building trip to Hawaii. Besides expense deductions, running an online business costs a fraction of what it costs to run a bricks and mortars business, which much more scaleability.

6) All The Income And All The Equity: As an employee, you earn a salary, and maybe get a tiny amount of equity (the vast majority of employees get no equity). As a business owner, you not only earn what your business makes, you also hold a massive portion of the equity that can be sold for multiple times revenue, operating profits, or earnings in the future. The only way to next level wealth is to own equity in a business. As an employee, you are making someone else rich. As an owner, you are directly making yourself rich. Operational leverage is huge with an online business. Please study this chart carefully:

Wealth breakdown including business equity

The wealthy own businesses. The non-wealthy have all their wealth tied up in an illiquid primary residence, if they’re lucky.

7) More Correlation With Effort And Reward: Most people simply want a fair shake. But working for someone else requires playing politics. People promote and pay people they like and trust. This is why there are always questionable performers who rise to the top. The larger the corporation you work for, the more politics you must play. If you are the business owner, you don’t have to play any politics. You decide what’s best for the business. There’s nothing better than getting rewarded for hard work.

8) Potentially Lower Tax Rates: Expense deductions will lower your effective tax rate. You just don’t want to take on superfluous expenses because that would be counterproductive. There is a chance the Trump administration may lower the small business pass through tax rate to that of the corporate tax rate. In which case, small business owners may see 5% – 15% lower income taxes for the same income earned by W2 earners.

Related: How To Pay Little Or No Taxes For The Rest Of Your Life

9) Higher Pre-Tax Retirement Contributions: Business owners can save up to $55,000 in their Solo 401k for 2018, provided they have an operating profit of at least ~$182,000. Business owners who elect to go the SEP-IRA route can also contribute $55,000 a year pre-tax, provided you pay yourself ~$220,000+ in income. As an employee, you can only contribute up to $18,500 max in your 401k or $5,500 in your IRA (if your income is low enough). Anything more depends on your employer’s matching program.

10) Location Independence: Being able to run your business anywhere in the world is truly liberating. You can geo-arbitrage by moving to a cheaper country if you wish. If you don’t want to go that far, you can always relocate to the heartland, where housing is often one third the price of coastal city real estate. Vacations are no longer limited to just two or three weeks. There’s nothing more fun than seeing the world while making money.

Business Ownership Provides Options

How much you can make online a month

With all these great reasons, hopefully everybody will now start their own online business, even if it’s just a side hustle while you have a day job. You just never know what the future holds if you take action. Two years after starting Financial Samurai, I realized I could leave a well-paying banking job. Heck, even one site I hardly ever update is generating a passing ~$500/month for the past five years.

As a business owner, you will feel more proud of what you produce because before you, there was nothing. Every time you see your product in the store or in the news, you will beam with pride. It’s rewarding to see an FS article hit the front page of Yahoo. And it’s surreal to see hundreds of thousands search results when you type “Financial Samurai” into Google.

But the reality is that 97% of you won’t take action. This is an irrefutable truth supported by millions of data points. It’s much easier to do nothing, even if you aren’t satisfied with your lifestyle.

So for those who need extra motivation to change, stay tuned for Part II of this series. I’m confident after reading Part II, the non-action rate will decline by 1% to 96%! Just like investing in real estate and stocks, 10 years from now, you’ll be happy you started today.

Related:

How To Build A Stronger Brand For Your Business Or Career

How Much Can You Really Make Online

Readers, what are some other benefits and reasons for owning a business I haven’t touched upon? What stops you from starting a side hustle when people are starting the dumbest businesses everyday, raising tons of money, and sometimes getting rich?

The post The 10 Best Reasons To Start An Online Business appeared first on Financial Samurai.

What A Potential Real Estate Crowdfunding Loss Looks Like

My first potential real estate crowdfunding lossDo you ever feel like your faith is being tested? I’ve been feeling this way a lot more recently. For example, I always get to the bus stop right after the bus leaves. Yet every time I drive down the hill because I’m sick of waiting 20 minutes for the bus, the bus drives by.

I recently published The Worst Landlord Horror Story Ever, a story about a reader who bought a Las Vegas residential property several years before the bottom fell out in 2008-2009. He went through hell dealing with maintenance issues and suspect tenants. Eventually, the complex started accepting Section 8 housing where the government would subsidize 80% of the rent to lower income earners. His housing complex of 157 units turned into a drug infested war zone. Only after buying two more units at the bottom of the market did the reader finally break even after 13 years.

So it is with complete surprise that I got an e-mail the very next week notifying me my real estate crowdfunding fund invested in a 168-unit garden-style apartment complex in Las Vegas! This was also after I decided to invest another $250,000 in the fund, bringing my total up to $500,000.


Here’s the e-mail,

“The Fund’s Investment Committee has approved a $600,000 preferred equity investment in Vernazza Apartments, a 168-unit garden-style apartment complex in Las Vegas, NV, only 3.5 miles from the Las Vegas Strip, 4.5 miles from McCarren International Airport and 8 miles from downtown Las Vegas.

The Property was originally constructed in 2001 as an affordable housing development. In 2016, the Property was purchased by the seller under a “qualified contract” that released the Property from its affordability requirements. Although technically a market rate property, residents in occupancy during the conversion maintain protected below market rents for a period of up to three years, and as of May 2017 only 54 of 168 units (~32%) had rolled over to market rate units.

The Nathan Family Office and Madison Residential (together, the “Sponsor”), see an opportunity to purchase the Property and roll the remaining below market units to market rate units, especially after restrictions are lifted in October 2019.

The Nathan Family Office and its management partner, Madison Residential (“The Sponsor”) has successfully raised capital on the RealtyShares platform for three prior deals, and all payments for those investments are current. For Vernazza Apartments, the Sponsor is contributing $3.5mm of capital to the deal (100% of JV equity), putting its own money at risk before any losses would be incurred by RealtyShares. Additionally, the Sponsor is expected to set aside 28 months of preferred current payments in a RealtyShares controlled account.”

My heart sank when I read that not only was this a Las Vegas apartment complex, it was also an affordable housing development. I’ve got nothing against affordable housing from a social good perspective. Rocketing housing costs are making it difficult for everyday people to live.

But as an investor who is hell bent on staying financially free due to his investments, I worry about investing in an affordable housing complex for all the reasons my landlord horror story mentioned and the fact that in order to get the target 13% IRR, the Sponsor is relying on turning the remaining 114 units (68%) into market rate housing. It remains to be seen whether the tenants will simply accept the rent increase, move voluntarily, or be evicted with potential buyouts.

RealtyShares Las Vegas deal

Here Are The Investment Highlights and Risk Mitigants

RealtyShares Vegas Investment

Target IRR: 13%

Demonstrated Rent Increases: As of the May 29th rent roll the seller has rolled 54 units to market. Of those 54 units 24 have been renovated. Leases executed in the last 60 days have achieved the following:

1) Unrenovated market rate units have leased at an average $112 (~10%) per unit over affordable units, 2) Renovated market rate units have leased at an average of $188 (~24%) per unit over affordable units.

Attractive Basis: The subject property is being acquired off-market and was sourced through a relationship of the Sponsor. The Sponsor believes that the $108k per unit price basis is well below comparable assets of a similar 2000 vintage. The sales comp summary included indicates that the purchase is 15.2% below the comp set on a per unit basis and 13.7% on a psf basis. It should also be noted that the average age of these comparable properties is 5 years older than Vernazza.

One thing to note from my landlord horror story is that an institutional investor picked up their 157 units during the financial crisis for roughly $60K/unit, but I’m not sure if these units are like for like since the Vernazza is newer.

Strength of Submarket and Primary Market: The Property is located in the Spring Valley submarket of Las Vegas, which reported a mean vacancy rate of 3.2% in Q1’17 across all property classes per REIS, and average vacancy is expected to decrease to 2.6% by 2021. The included proforma assumes a 5.5% stabilized vacancy for conservatism.

Alignment of Interest: The Sponsor will have approximately $3,500,000 of its own money at risk before losses would be incurred by RealtyShares.

Reserve for Preferred Payment: At closing, the Sponsor is expected to set aside 28 months of preferred current payments in a RealtyShares controlled account.

Population Growth: According to ESRI, within a 3 mile radius of the Property, the population is forecasted to grow by 6% over the next 5 years translating to over 8,000 new residents in the near vicinity.

Access to Local Amenities: The Property is located in close proximity to numerous amenities and employers not the least of which is the Las Vegas strip located 3.5 miles due East.

RealtyShares Las Vegas Property Location

Setting Low Expectations

Perhaps I’m being too pessimistic on the deal given the Sponsor is putting up $3.5 million of their own capital before investors lose money. The catalyst is very clear: a “qualified contract” that releases the Property from its affordability requirements by October 2019.

But given the risk involved, I’m disappointed the target IRR is only 13%. A target IRR of 18% seems more appropriate. For reference, a 13% IRR is lower than all the previous target IRRs for projects in the fund that aren’t investing in affordable housing.

But here’s the thing. The seller is selling the property to us for $18,200,000 after they had bought the property for only $11,530,000 in August 2015! I’d be selling too if I could make a 58% return on my money in two years. Yes, the sellers had to spend money renovating some of the units, but they couldn’t have spent that much since 68% of the units are still below market rate units. Therefore, even if the seller loses $3.5M of its equity financing, they would still make a 27.4% gain in two years ($3,117,000). It is the seller who is playing with the house’s money, not us.

Housing prices

I personally would not have invested in this deal because I’m trying to stay away from coastal boom bust cities like Las Vegas, the #1 city that got crushed during the housing crisis. The other cities that got hit the most were Phoenix, Fort Lauderdale, Miami, West Palm Beach, and Tampa according to Trulia. I’ll be happy if this project just gives us our money back (0%) return in three years.

Now you know the downside of investing in a fund. You can do all your research, but once you hand over your money, it’s up to the investment committee or fund manager to decide how to best invest your money. Sometimes their investments won’t align well with your beliefs, and you’ve got to be OK with it.

My problem is that I’ve been hands on with all my investments my entire life. Therefore, it’s hard for me not to watch where every dollar goes. But as a 40-year old father who has better things to do than pick every single investment, I need to outsource my investing to others who do have time and expertise.

The more I can let go, the more I can focus on enjoying life to the fullest. And who knows? This Las Vegas investment might very well return 40% after three years as targeted. I’ll be sure to let y’all know if it does! And if it’s a big bust, I’ll be sure to let you know too. At least this is only one of potentially 10 – 20 investments within the fund.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Related:

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

Focus On Trends: Why I’m Investing In The Heartland Of America

What do you think about this Las Vegas multi-family property investment? Do you think it will return a 13% IRR for three years, or do you think it’s going to be a money loser? Anybody from the Las Vegas area want to do a drive by or tell me what they think about the apartment complex? Have you noticed good deals getting harder to come by in real estate crowdfunding land?

The post What A Potential Real Estate Crowdfunding Loss Looks Like appeared first on Financial Samurai.