Develop Your Sphere Of Influence To Achieve Financial Independence

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

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

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

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

The Power Of Influence

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

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

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

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

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

Develop expertise through consistent execution and patience.

Influence Can Come From The Smallest Idea

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Achieve Financial Independence With Influence

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

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

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

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

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

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

Key Points Of Influence

* Influence must be earned through repetitive successful outcomes.

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

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

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

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

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

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

Related:

When To Sell Real Estate: Every Indicator To Consider

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

How To Build Passive Income For Financial Independence

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

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

from Financial Samurai https://www.financialsamurai.com/develop-sphere-of-influence-financial-independence/

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

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

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

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

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

Buy Utility, Rent Luxury (BURL)

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

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

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

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

Rent Luxury Example

Rent this

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

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

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

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

Buy Utility Example

Buy this

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

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

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

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

What Determines Luxury And Utility?

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

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

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

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

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

Luxury = 13.3X Median Price To Rent Ratio Or Higher

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

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

Utility = 9.6 Median Price To Rent Ratio Or Lower

The Optimal Investment Lifestyle Combo

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

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

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

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

Financial Samurai reader pool party anyone?

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

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

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

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

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

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

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

Update 9/27/2017: I sold my rental home in SF for 30X annual gross rent and am reinvesting the proceeds in higher yielding, lower valuation multiple properties across the country.

Related: A Housing Expense Guideline For Financial Independence

Real estate investors, are you following the recommendation of buying utility, renting luxury? What type of growth / income percentage mix do you have in your real estate portfolio? If you live in the Midwest or South, what are some of your reasons for not buying real estate? If you live in a coastal city, what are some of your reasons for buying real estate now after such a massive rise in price?

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

from Financial Samurai https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/

Is "Plan It" Program From American Express For You?

MoneyTips

You check your credit card bill on a regular basis, and keep track of your purchases. Wouldn't it be nice to be able to pay some purchases in advance, and to avoid interest on larger purchases that will carry over from month-to-month? American Express has offered a new Pay It Plan It^TM program that allows you to do both.

Pay It Plan It is a mobile app that comes with many American Express cards issued before June 1, 2017. Cards issued after June 1, 2017 will have the feature added in early 2018. See the AmEx press release for a list of the eligible cards.

Pay It and Plan It are complementary programs that apply on either side of the $100 purchase level. You can use Pay It to select any individual charges below $100 and pay them off immediately with the app. By paying off some debts early, you can reduce your bala...

from MoneyTips https://www.moneytips.com/is-plan-it-program-from-american-express-for-you

Investing Is The Ultimate Case Of FOMO

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

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

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

Investing Is The #1 FOMO

1) Everybody is getting rich, so must I.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For Those Who Lack Investing FOMO

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

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

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

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

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

FOMO Reduction Plans

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

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

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

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

Other Thoughts On FOMO

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

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

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

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

Related:

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

One Of The Biggest Financial Mistakes A Retiree Can Make

Investment Strategies For Retirement Based On Modern Portfolio Theory

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

The post Investing Is The Ultimate Case Of FOMO appeared first on Financial Samurai.

from Financial Samurai https://www.financialsamurai.com/investing-is-the-ultimate-case-of-fomo/

One Spouse, Two Cars, Three Houses, Four Jobs

There’s a simple personal finance mantra everybody should consider following: one spouse, one car, one house, one job. The idea is that if you stick with one of everything, you’ll maximize its usage, minimize extraneous expenditure, and live happily ever after.

We get in trouble when we want too much.

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

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

How Many Of Each Is Ideal For A Wonderful Life?

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

Verdict: One spouse is ideal.

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

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

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

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

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

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

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

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

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

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

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

A Wonderful Life Is What You Make Of It

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

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

Here are some other profiles I can think of:

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

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

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

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

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

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

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

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

from Financial Samurai https://www.financialsamurai.com/one-spouse-two-cars-three-houses-four-jobs-wonderful-life/

How To Pay Bills Late

MoneyTips

Normally you are on time with your payments, but somehow you managed to miss one this month. What are the consequences of a missed payment, and how do you minimize their effects?

Missing a single credit card payment may not seem like a big deal, but, as Matt Schulz, Senior Industry Analyst at CredtiCards.com observes, "…even just one single late payment can really impact your credit." How far your credit score drops and how long the drop lasts depend on how you handle the situation.

To limit damage, you must submit the missed payment as soon as possible. Usually, a bill must be at least thirty days past due to be considered as a late payment to be reported to the credit bureaus. Make your payment before that thirty-day mark, and you may be able to avoid many of the typical consequences of a late payment.

A bill that is sixty days past due is considered mor...

from MoneyTips https://www.moneytips.com/how-to-pay-bills-late

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

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

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

What Is A Fundrise eFund?

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

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

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

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

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

The Old Solutions To Buying A Home

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

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

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

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

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

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

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

Final Thoughts To Consider

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

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

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

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

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

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

The post Fundrise eFunds: An Innovative Way To Invest In Your Future Home appeared first on Financial Samurai.

from Financial Samurai https://www.financialsamurai.com/fundrise-efunds-review-way-to-invest-in-your-future-home/

Lenders Pulling Back on New Subprime Loans

MoneyTips

It's tough living on the lower end of the credit score scale. If you have a credit score below 640 or so, you are generally given "subprime" lending offers for any form of credit that you request. From credit cards to auto loans and mortgages, you will be hit with higher interest rates and potentially other restrictions and fees.

According to credit bureau TransUnion's Q2 2017 Industry Insights Report, you now have another problem to deal with – difficulty in getting credit at all.

TransUnion found that overall originations for subprime consumer credit have dropped sharply over the past four quarters. Total subprime originations dropped from a post-crisis peak of just under 6 million consumers in Q2 2016 to just under 4.6 million in Q1 2017. The last two quarters represent the first consecutive year-over-year decreases in overall subprime ori...

from MoneyTips https://www.moneytips.com/lenders-pulling-back-on-new-subprime-loans/648

Beware Of The Life Insurance Bait And Switch Tactic

Now that I’m a father, one of the first things I did was call up my life insurance provider to review how much life insurance I have and go through the various term life insurance options.

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

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

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

Life Insurance Test Results

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

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

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

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

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

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

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

Don’t Expect To Get The Best Life Insurance Quote

Just like how car dealers advertise the lowest price on a car to lure you in, life insurance providers will quote you the lowest life insurance premium price to get you to commit to the application process.

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

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

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

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

Amount: $2M
Cost: 25 years – $180/month, 20 years $120/month

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

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

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

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

Shop Your Quote Around

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

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

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

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

One Last Life Insurance Twist

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

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

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

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

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

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

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

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

from Financial Samurai https://www.financialsamurai.com/life-insurance-bait-switch-tactic/

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

It’s a worthwhile goal to be great at something – top one percent great. Being a jack of all trades, master of none is an excuse many of us use because we aren’t willing to try harder. We know this, so we settle for good enough. Good enough is good enough if you’re content. But

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

from Financial Samurai https://www.financialsamurai.com/settle-good-retirement-when-you-can-go-great/

Ideas For Reinvesting Proceeds After A Home Sale

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

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

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

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

Questions To Ask Before Reinvesting Your Proceeds

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

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

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

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

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

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

How I’m Reinvesting The House Sale Proceeds

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

Here were my initial thoughts after despositing the check.

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

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

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

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

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

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

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

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

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

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

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

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

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

Total Invested: $985,000 over three months

Total Cash Remaining: $815,000 from proceeds

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

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

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

Rating The Reinvestment Risk

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

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

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

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

Why Still Hold So Much Cash?

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

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

Visualizing Reinvesting The Remaining Proceeds

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

1) Taxes: $100,000 set aside for April 2018

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

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

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

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

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

Given all the fund’s investments are equity and not debt, it can take years to see any type of returns, which is exactly what I want because of my current high tax rate, especially since I just sold a house. Below is a snapshot of my account so far. I’m surprised there’s income already being paid out.

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

It’s Worth Being Patient With Cash

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

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

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

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

The post Ideas For Reinvesting Proceeds After A Home Sale appeared first on Financial Samurai.

from Financial Samurai https://www.financialsamurai.com/ideas-reinvesting-proceeds-home-sale/

For A Better Life, Be The One Percent In Something

Most of us like money because it’s an easy way to keep score. If we make over $400,000 a year and have a net worth of over $2,000,000 by age 35, we’re in the top one percent for income and net worth. Hooray!

But money is a pretty meaningless measure after you’ve got all your needs taken care of. Further, a rich person is no more special than someone who has less.

After a certain point, the more money you have, the more I question your goodness. In San Francisco, there are people worth hundreds of millions and even billions of dollars, yet they continue to hoard more money than they could ever spend in their lifetime while over 100,000 people are homeless.

But this post isn’t about how we should tell other people how to spend their money. This post is about trying to be the best in at least one thing to have a better life.

Be The One Percent In Something

In high school, I tried my best to be in the top one percent academically, but failed miserably. I only got a 3.3 / 4.0 GPA freshman year because I goofed off too much. By the time I got my act together sophomore year, it was too late. I would have had to get a 4.0 GPA for the next three years to average a 3.825 GPA. Instead, I ended up with a ~3.6 GPA, which put me outside of the top 15%, let alone 1%.

It’s scary to know your whole life can be determined by how well you do academically as a 14-year-old. That one C grade on your history final exam might be the difference between getting an interview at some prestigious college that may lead to a position at some highly coveted company or being “stuck” cleaning toilets for $250,000+ a year.

Thank goodness our lives aren’t always dictated by freshman year! What I realize more now that I’m older is there are many things we can do beyond academics to give ourselves the best chance at living the greatest life possible.

We know that if you are in the top one percent of something, people will naturally gravitate towards you. With a lot more opportunities, you’ll have a higher chance of achieving your dreams. Not everybody can be an academic genius, but everybody can be an expert in SOMETHING.

Here are some examples beyond academics where you could possibly be in the top one percent. Remember, it can take 10 years to master anything, so please be patient.

1) Fitness. The great thing about fitness is that way more people can become top one percent fit versus becoming top one percent good looking. You know that if you only drink water, eat celery for breakfast, a chicken breast for lunch, carrots for dinner, lift weights two hours a day, and run one hour a day you are going to be ripped! As a fitness one percenter, you can parlay your physique into a business. You’ll likely always be courted and have more opportunities than you deserve. People will more likely believe anything you say in regards to exercise and health even though you might be hurting inside.

2) Music and Art. Who doesn’t love listening to a beautiful voice or listening to a maestro pluck his guitar? Music is what has brought people together since the beginning of time. And great art has brought our walls and galleries to life for centuries. With enough hours of daily practice polishing your skills, you can turn a musical or artistic passion into a rewarding career that delights and impresses audiences of all sizes.

3) Sports. We worship top athletes because they amaze us and give us something to cheer for. There’s no more patriotic a feeling than seeing your country compete and win during the Olympic Games. Who doesn’t admire the captain of the football team or want to get to know the star soccer player? Who doesn’t want to date the captain of the tennis team? Sports is a part of Americana.

4) Communication. There are certain people who make you drop everything to listen to what they have to say. They know how to intermingle humor, story telling, quick wit, and charisma to make you feel more strongly than you did before the speaking began. You can develop your personality by improving your communication skills. You can join a Toastmasters group to practice speaking. You can spend years writing in a journal to master email communication. The great communicator will go farther than the smartest mind any day.

5) Kindness. Kindness is underrated. To be kind, all you have to do is always put someone else before yourself. Yet, so many of us don’t have the patience to give a rat’s ass about anybody else but ourselves. OK, being a one percenter in kindness is hard to measure, but everybody knows someone who they will immediately think of as the kindest person they know. For me, that person is my wife. She who is kind will develop a network of true supporters who will do anything to help.

6) Side-hustling. I’ve come across so many people who are excellent at what they do beyond their day jobs. For example, a friend of mine sings in a popular SF rock band a couple times a month, another is a top seller on e-bay, several more are top niche bloggers, and another is a well rated music teacher. Don’t let your day job define you, especially if you don’t love it. Work on something outside of work that you are truly passionate about.

7) Perseverance. If you never quit, how can you lose? Perseverance, or grit, as some people call it, is an admirable trait because you see people who are less talented succeed over those who are more talented. Starting anything is easy. Sticking with something for the long haul through all the bumps in the road takes perseverance. The guy who grinds away from 10pm – 1am and then wakes up by 6am to grind some more before going to work is going to make something happen.

8) Investing. The great thing about investing is that you don’t need a degree in investing to become a great investor. You also don’t need to be a certain type of person. All that matters is beating your benchmark and your peers. If you are a top one percent investor, you will not only accumulate wealth faster, you could parlay your acumen into running a massive fund to earn even more money. You’ll also never need to work for anybody again.

I’ve come up with a lucky eight number of things that are worthy of being the best at. What are some other things you can think of?

The 1% Category That’s Helping The Most

One thing I can objectively measure as being in the top one percent is tennis. Tennis helped me make some friends and get into college as a teenager. After getting bumped up to 5.0 in 2015 and winning my club’s championship in 2016, I’ve noticed a little bit more love and recognition.

The wonderful thing about sports is that the outcome on the playing field can’t be influenced by race, religion, income or politics. When you are on the tennis court, all that matters is keeping a fuzzy yellow ball in play. If I didn’t play tennis, I’d focus on golf.

Just the other day, a highly connected VC e-mailed me to hit. Maybe he’ll open up his next blockbuster fund with what little I have? Or maybe he’ll introduce me to a larger firm in the online media world that might establish a business partnership with Financial Samurai one day. Who knows.

Whenever I run into a parent of a middle schooler nowadays, they seem a little bit nicer because I’m a tennis coach at a high school they’d like their children to attend. When you’ve got to compete beyond money to improve your child’s chances of entry (since so many folks have money in SF), it’s important to build relationships with people who can vouch for you. There’s a real thing called “getting blackballed” where just one thumbs down from anyone ruins your chances or your child’s chances of gaining admission.

Everything I do now is geared towards helping my son find opportunity and happiness. My thought process before doing anything was: will whatever I’m doing lead to more freedom, wealth, or happiness? Now my thought process before doing anything is: will whatever I’m doing have some positive impact on my son’s future? By helping others and being involved in the community thanks to tennis, perhaps others will be more willing to help my little one when the time comes.

I urge all of you to find something where you can be a one percenter. And if you are a one percenter, don’t be greedy with your talents! There are top 0.1 percenters at my club who only hit with each other because they’re not interested in hitting with anybody of lesser ability. As a result, they don’t maximize their potential.

It doesn’t matter what you choose to be good at because the world is big enough and connected enough that if you get to the top of anything, others will want to help you out if you just give them some of your time. If you figure out how to be the top one percent in multiple things, dare I say the world is your dragon roll.

Related:

Who Are The Top One Percent Income Earners

Emotional Intelligence: The Key To An Easier Life

The Rise Of Stealth Wealth

Readers, what is something where you are a one percenter? What is one or two things you’re working on to become a one percenter? How has been great at something helped make your life better?

The post For A Better Life, Be The One Percent In Something appeared first on Financial Samurai.

from Financial Samurai https://www.financialsamurai.com/better-life-be-the-one-percent-in-something/