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

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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?

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The 401k Maximum Contribution Limit Finally Increases For 2018

401k Maximum Contribution For 2018 Rises To $18,500401k savers rejoice! For 2018, the maximum employee 401k contribution will increase by $500 to $18,500, from $18,000 in 2015, 2016, and 2017. Meanwhile, the employer contribution limit also gets a $500 increase to $36,500, bringing the total annual 401k contribution limit to $55,000 according to an IRS announcement.

For participants ages 50 and over, the additional “catch-up” contribution limit will stay at $6,000, a level that has stayed the same since 2015. It’s interesting the IRS doesn’t want to give older folks an incentive to save more.

Although your 401k alone will likely be insufficient to meet all your retirement expenses, if you max out your 401k every year, you will likely far surpass the median (~$18,000) and average (~$200,000) household retirement savings held by those between the ages of 56 – 61 today.

Historical Maximum 401k Contribution Limits (Employee + Employer)

Here’s an updated chart with the historical maximum 401k contribution limits. Notice how much more the employer can contribute to your 401k than the employee. When you hear about employer profit sharing or employer 401k matching, those numbers can now go up to $36,500. It all depends on how profitable and generous your employer is.

For example, those employers who are offering a 100% match up to $5,000 of employee contributions still have $31,500 they can contribute if they truly wanted to. From 2001 to 2012, I worked for a pretty generous employer who during my final five years contributed over $20,000 a year in profit sharing.

Historical 401k Contribution Limits Up To 2018

For those of you who are now entrepreneurs, freelancers, or work for money-losing startups, not having a 401k or an attractive company contribution is a real opportunity cost. Make sure you calculate these lost benefits before you leave your cushy day job.

For entrepreneurs and freelancers, however, not all is lost when it comes to the 401k because we are allowed to contribute to a Self-Employed 401k (aka Solo 401k) up to the $55,000 maximum if you have enough operating profits. A self-employed person has the right to contribute up to $18,500 to their 401k as the employee, and roughly 20% of the operating profits (revenues minus expenses). Therefore, to contribute the maximum $55,000, the entrepreneur needs to earn at least $182,000 in operating profits.

Here’s a more detailed write-up about how to calculate how much you can contribute to a self-employed 401k plan. Although it’s great an entrepreneur or freelancer can contribute $55,000 in tax-deferred profits to retirement, remember it’s all their money to begin with. Whereas if you´re an employee working for a company, it’s free money.

401k Savings Guide By Age

The below is my updated 401k savings guide by age to include various contribution amounts, various contribution limits, company profit sharing amounts, asset allocation levels, and historical stock market and bond market returns. These are all rough estimates to give readers a target to shoot for.

401k savings targets by age

If you are “unfortunate” enough to only work until age 35 at a company with a 401k plan, then you can shoot for a 401k savings range of between $150,000 – $500,000. If you are fortunate enough to work for 38 consecutive years at a company with a 401k plan until you’re allowed to withdraw penalty-free, then your target savings is $750,000 – $5,000,000.

As a Middle Age Saver (40 years old), I started my 401k contribution in 2000 when the contribution limit was just $10,500. Therefore, I’m more focused on the Mid End column to get to $2,500,000 by the time I turn 60. Even if I contribute $35,000 a year for the next 20 years to my Self-Employed 401k plan, I’ll need the stock market and bond market to rise by at least 3% a year to get to $2,500,000. In other words, when it comes to investing, there are no guarantees. You must take a certain level of risk.

The “Younger Age Savers Or High End” column is the 401k savings potential for those just out of school and who have generous employers. In every scenario, an individual who contributes for 38 years will become a millionaire. Unfortunately or fortunately, not everybody will work for such a period of time.

Motivation For Maxing Out Your 401k

I really hope everybody who has a job that provides a 401k plan takes full advantage. To not do so is completely foolish. Below is data from the Bureau Of Labor Statistics regarding the latest participation rate in defined contribution plans like the 401k.

A 44% participation rate is not bad, but the number should be 100% if you are a Financial Samurai reader. Further, you can bet that only a minority of the 44% max out what they can contribute to their pre-tax retirement savings plan, otherwise, how else would you explain only a ~$18,000 median and $200,000 mean average retirement savings amount for 56 – 61 year olds. My hope is for 100/100, meaning every reader hear maxes out their plans for as long as you are able.

Defined Contribution Plan 401k Participation Rate

Here are some thoughts to get you motivated to max out your 401k.

1) Remind yourself a 401k is only one leg of the retirement stool that is already broken. The other two legs of the retirement stool are a pension and Social Security. According to the Bureau of Labor Statistics about 22% of full-time private industry workers have a defined pension benefit compared to 42% in 1990. Although most public sector employees still get pensions, public sector employees account for only around 10% of the population. In other words, most people don’t have pensions anymore.

As for Social Security, the realistic calculation is that when eligible, we will still all receive Social Security checks, but at 70% of what is currently promised if nothing is changed. Given most people don’t have pensions and Social Security won’t be paid in full, the 401k is an integral part of your retirement plan.

2) Calculate a budget based on a $18,500 reduced gross income. Nobody really sits down and writes out their expenses. We’re either afraid or lazy for some reason, yet we can spend hours doing research on our next big screen TV or laptop. But for your own sake, take your current income, subtract $18,500, and multiply it by one minus your effective tax rate to calculate your disposable income e.g. $100,000 – $18,500 = $81,500 X (1-25%) = $61,125 after taxes and 401k max. Divide the annual income by 12 to get a monthly disposable income figure and work your budget from there. The bigger the buffer you can have from spending all your disposable income, the better.

3) Make your contributions automatic. As soon as you make your maximum contributions automatic, you will adapt your lifestyle to your paycheck. Automatic contributions will save yourself from yourself. It’s exactly like the government withholding federal income taxes each paycheck because they know you won’t pay your full tax liability at year end. Making your contributions automatic will make savings so much easier. You will wake up 10 years from now and be amazed at how much you have accumulated.

4) Envision your 60 year old self working the cash register at McDonald’sOne of my biggest motivators for saving and paying down debt was seeing senior citizens working minimum wage jobs. While I admired them dearly for continuing to work, they also scared me straight into saving more because I didn’t want to be them one day. Instead, I wanted to be relaxing on a beach with a Mai Tai in one hand watching the sunset with my lovely wife. The more we can envision ourselves in poverty, the more incentivized we can be to max out our 401k.

5) Do it for your family. If you’re not willing to get in shape, save aggressively, and invest wisely for yourself, then at least do so for your family. There’s not a day that goes by where I don’t think about ways in which to give my son and my wife a better life. When you know you’ll likely die before your spouse and child, you’ll start focusing on your finances much more seriously.

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

Diversify Your Retirement Savings

Once you start contributing like a champ to your 401k, run your 401k through a 401k fee analyzer to see how much in fees you are paying. I discovered I was paying a whopping $1,748 in annual 401k fees when I thought I was paying maybe $200 a year. Over a 20 year period, my fees would climb to ~$90,000, provided my portfolio also increased as well.

How To Reduce 401k Fees

For those who seek to retire before 60, it’s important to also to save and invest as much as possible in your after-tax investing account. Ideally, your goal should be to grow your after-tax investment account larger than your 401k by the time you’re ready to retire. Make your after-tax investment contributions automatic with each paycheck as well.

The chance of you working for 38 years at a company with a 401k is not high. Therefore, you shouldn’t rely on your 401k for retirement. Instead, look at your 401k as a bonus you’ll get to use once you pass the age of 60. I plan to have over $2,500,000 in bonus money in 20 years. How about you?

Regards,

Sam

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The Fear Of Screwing Up Our Kids As FIRE Parents

The fear of screwing up your kid as a FIRE parentEvery other weekday, I walk by my 27-year-old neighbor playing catch in the middle of the street with his 20-something-year-old friend. He’s a nice guy with an intricate tattoo of a dragon on his right throwing arm. I saved his beat up Subaru Outback from getting a $120 street cleaning ticket one day, so he’s always super friendly.

Although Jake is a nice guy, it doesn’t seem like he has a job or any ambition beyond just having fun. When he’s not playing catch in the middle of the day, he’s off to Tahoe with his buddies for a week at a time. When he’s not snowboarding, he’s traveling for a softball match. It’s a great life. I just wonder whether his parents deprived him of his potential because he’s still living with them.

The truth is, I’m afraid my son will turn out to be like Jake or my other 26-yo neighbor who lives at home with his parents and wakes up the street every morning with the gurgle of his new motorbike. When I asked his mom what he’s doing now that he’s graduated from college, she shrugged and told me, “he’s still trying to find himself.” Fair enough. At least he’s got a sweet sports car and motorbike to take him wherever he wants to go.


A FIRE Parent’s Warped Reality

As two stay at home parents who live unconventional lives, we feel our financial independence may end up screwing up our son’s life. After all, being raised by middle class and lower middle class parents, and going the traditional route ultimately led us to FIRE in our 30s.

I now approach life not caring about following the rules anymore. Don’t want to go to college? No problem. Just take classes so you can be an expert in something. Want to try your hand at online entrepreneurship? Sounds good! Your old man can give you some good pointers. Don’t want to get married? Wonderful. Use the annual $10,000 in marriage penalty tax savings to go see the world.

For those of you who’ve built some multi-generational wealth, who have FIREd, or who work non-traditional jobs, let’s talk about what our lifestyles might do to our kids.

Educational Attainment

As a tennis coach for a private high school in SF, I’ve begun to learn about the intricacies of the private school system. You’re supposed to apply to a feeder pre-school before your child is born in order to get on the track to one day get him/her into the very high school I’m coaching at.

But before applying to my high school, you’ve first got to get your kid into one of the selective K-8 private schools after completing pre-school. The admissions process includes an evaluation of how your kid plays with others as well as an aptitude test. Talk about putting your kid through the gauntlet early on!

The thing with going to an elite private high school is that not every alumni gets into a prestigious university. In fact, only the top 10% of kids get into the most selective universities. Everybody else gets into a top ~50 school, which is great. But so do many kids who go to free public high schools.

As a public high school graduate who attended a public university and got a front office job at Goldman Sachs in NYC, I 100% believe in the value of a public school education – so much so that I have ZERO stress about trying to get my son on the private school track. If he doesn’t get in, he’ll go to public school, hooray!

But because I hang out with so many friends who do send their kids to private school, they give me stress about whether or not I’m doing the right thing being so lackadaisical. I think, Will not sending my kid to private school, even though I can afford it, deprive him of an opportunity to reach his full potential? This stress is part of the reason why I’m considering leaving San Francisco.

While at GS, we routinely rejected kids from Harvard, Princeton, Yale, Stanford, Columbia, Cornell, UPenn, Brown, and other great schools for various reasons. One consistent reason was that the rejects were all one dimensional, uncharismatic geeks who didn’t know how to communicate. Therefore, if you can’t get a good job, what’s the point of spending all that money, working so hard, and stressing all those years? The more prestigious your education, the higher the expectations.

I’d rather have my kid attend a lower tier school and surprise on the upside. Your mannerisms, communication skills, affability, work ethic, and connections are more important than where you went to college. You can work on all these things without ever attending a top ranked university.

Besides, in 18 years, how important will a traditional college degree really be if everything can be learned on the internet for free? There are speciality schools popping up everywhere now that teach kids hard skills. Over time college may eventually become a relic.

Career Choices

I firmly do not care if my son becomes a doctor, lawyer, banker, venture capitalist, private equity investor, strategy consultant or some other traditionally high paying occupation. I’ll be proud of him, whatever he does. I just want him to be happy and find someone who cares about him as much as I care for him and my wife.

As someone who worked in finance for 13 years and has written about money for more than eight years, I clearly see how money and prestige does not automatically lead to happiness. I’ve written about this topic over and over again with examples such as:

Scraping By On $500,000 A Year: Why It’s So Hard To Escape The Rat Race

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

The Unhealthy Desire For Prestige Is Ruining Your Life

The only professions I feel are incredibly honorable are those that help other people. Being a doctor or a teacher are two occupations that come to mind. Working at a non-profit that helps foster children is another.

I can’t believe how much education doctors have to go through to be who they are. To be able to heal and provide solace are wonderful skills that cannot be over-appreciated.

Given there’s nothing more precious than our children, I believe teachers aren’t given enough credit for what they do. A good teacher can make all the difference in the world.

Mom and dad have already sacrificed themselves for money. Thus, after graduation we’d like to have our son focus on service to others.

A Sense Of Achievement

There’s nothing better than working hard and then achieving your goals. We want to instill in our son a work ethic that allows him to appreciate the correlation between effort and reward. To give him everything would be an absolute travesty, because we never fully appreciate what we don’t earn.

I fear we won’t push our son hard enough to achieve his maximum potential. Instead of spending at least three hours a night on homework like his mother and I did in high school, let’s just have fun since he’s going to forget everything anyway! If we were struggling, surely we’d like for him to go to a great school and get a high-paying job so he can not only take care of himself and his future family but also provide us some financial relief as well. But we don’t have such anxiety.

We’re going to try our best to raise a grounded kid who appreciates the value of a dollar. But I know it’s going to be a challenge because our son will wonder why his parents are the only parents who never have to go to work. He’ll wonder why his old man is at every soccer match, every orchestra recital, every play, and every debate. He’ll see that all I do is type on a keyboard for several hours a day and that’s it!

I remember clearly as a 23-year-old wanting to make as much money as possible so my mother could retire earlier. She was often stressed at work and even consulted me on whether she should retire before the age of 60. I told her to not waste one more second at a job she disliked. Her pain motivated me to aggressively save in order to let her be free sooner. When she retired before 60, it was one of my proudest moments.

Is It Time To Stealth Wealth Our Kids?

Deep down I find solace knowing that no matter what, our son will be fine because we’ll always be there for him. But I wonder whether it’s a good idea to Stealth Wealth our son before he understands what wealth means.

One of my friends lives in a $18 million mansion and flies private with his kids. How the heck are his kids going to be happy with anything less than the best once they get jobs? Will they be willing to live in a dumpy room in an overpriced SF apartment because they only make $50,000 a year? Hard to imagine.

We already live in a middle class neighborhood in a very humble home that’s less than 2,000 sqft. All we’d really have to do is get rid of the SUV before he’s seven years old and drive a Honda Accord instead. Mom doesn’t wear jewelry, and I just wear jeans and sports clothes.

We want our kids to have it better than us. And I’m sure our kids want to see if they can one up their parents. But if you retired in your 30s and live a life of leisure, that’s going to be damn hard to beat.

Related:

No Wonder Why Millennials Don’t Give A Damn About Money

A Massive Generational Wealth Transfer Is Why Everything Will Be OK

How To Get Your Parents To Pay For Everything Even After You Become An Adult

Confessions Of A Spoiled Rich Kid

Readers, anybody fear screwing up their kids’ lives due to the lifestyle you lead today? How do we instill in our children an appreciation for hard work if they come from a financially well off family? What are some of the action steps you’ve taken to ensure your kids don’t grow up to be deadbeat losers?

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