Hacking your HSA / FSA / Flex Spending accounts

I’m going to start out by saying please do not take this as legal/tax advice!

One rule I follow is “pigs get fat but hogs get slaughtered.”

But if there is a tax code or loophole within reason/ethical good faith you should exploit it as much as possible.

In 2017, I purchased a half acre in a turnkey Coffee farm in Panama in my Health Savings Account (HSA) for about $15,000.

HSA’s are truly awesome! You add money to an account tax-free (like a pre-tax 401k), don’t get taxed on the gains (like any retirement account), and you don’t have to pay taxes when you use it on Eligible Health Expenses (like a RothIRA).

You need a High Deductible health plan to be eligible for an HST. I’m going to get a little political here… health costs are on the rise because it bails people out for not being accountable (good diet, sleeping habits, stress, and exercise program). The company famous for the yellow Twinky bars cited rising health cost as their reason for going bankrupt… go figure.

You WILL have health expenses, MAY have retirement expense… in other words, you will likely die and have health expenses before you retire. So it makes sense to fund an HSA account before any 401K, Roth IRA, IRA, etc.

Here is some information for your entertainment purposes to see what you can start to use your HSA for:

USA Today article

More resources

Getting a doctor to sign off on your medical purchase as necessary will need a template:

Sample Letter of Medical Necessity for Hyperhidrosis Treatment

[Date]
[Insurer name]
Attn: [Name of individual]
[Address]

re: [Patient name]
[Policy number]

Dear [Insurer name]:

I am writing on behalf of [Patient name] to document the medical necessity of [insert treatment option here] for the treatment of hyperhidrosis. This letter provides information about the patient’s medical history and diagnosis and a statement summarizing my treatment rationale.

Hyperhidrosis, or excessive sweating, is a medical condition that can have a devastating effect on a patient’s quality of life, causing physical discomfort, secondary skin problems, social/emotional  sequelae such as anxiety and depression, and disruption of occupational and daily activities. This has certainly been true for [Patient name], who has been impacted by hyperhidrosis for [insert duration of symptoms here].  Specifically, [he or she] has had difficulties with [insert quality-of-life, social/emotional and/or career/daily living problems here].

[Discuss patient’s diagnosis, treatment history, and degree of illness]

[Insert patient’s name] has tried the aforementioned therapies thus far without success and I, therefore,  recommend [insert treatment option here] as the next logical choice for treating [his or her]   hyperhidrosis.

In light of this clinical information, and this patient’s condition, [insert treatment option here] is medically necessary and warrants coverage. Please contact me at [(000) 000-  0000] if you require additional information.

Sincerely,
[Physician’s name]

Here is what I put together to get massages for stress from dealing with SPC listeners who don’t listen to the podcasts before booking a call or people who don’t take action:

[2018.11.8]
[Insurer name]
Attn: [Lane Kawaoka’s HSA servicer]
[Address]

re: [Lane Kawaoka]
[Policy number]

Dear [Insurer name]:

I am writing on behalf of Lane Kawaoka to document the medical necessity of massage for the treatment of mental stress and muscular discomfort. This letter provides information about the patient’s medical history and diagnosis and a statement summarizing my treatment rationale.

“Mental stress and muscular discomfort”, is a medical condition that can have an effect on a patient’s quality of life, causing physical discomfort, secondary skin problems, social/ emotional sequelae such as anxiety and depression, and disruption of occupational and daily activities.  Specifically, he has had difficulties with discomfort performing his duties at work and exercise routine [insert quality-of-life, social/emotional and/or career/daily living problems here].

[Discuss the patient’s diagnosis, treatment history, and degree of illness]

Lane Kawaoka came into the office in early 2018 where we ran a cardiovascular and blood assessment.

Lane Kawaoka has tried the aforementioned therapies thus far without success and I, therefore, recommend massage as the next logical choice for treating him.

In light of this clinical information, and this patient’s condition, massage is medically necessary and warrants coverage. Please contact me at [(000) 000-0000] if you require additional information.

Sincerely,
[Physician’s name]

Paying your mortgage of in 4 to 8 years with “mortgage rate arbitrage”

Flip the Script on the Banks

Summary: Pay a 30-year mortgage in 5 to 8 years by paying back your mortgage with simple interest instead of amortized interest.

I recently discussed this in my Forbes article here.

Is this something new?

We all know it’s a sellers’ market, with the lack of deals out there and the majority of the Simple Passive Cashflow Podcast listeners looking for something to invest their cash in. Good times, if you ask me. This strategy is nothing new but now the strategies that are, “trending,” like bell bottoms, tights, and neon colors but forgotten. One of these old plays from the playbook is called the Mortgage Equity Arbitrage Strategy also known as, the Australian Banking system.

First off, let’s talk about good debt versus bad debt. Obviously, an 18% interest rate paid on something like a credit card is bad debt. But taking a 4% HELOC (Home Equity Line of Credit) or loan from your life insurance policy can be good debt. Especially, if you are putting the loan proceeds into AHP at 12%, a MFH Syndication at 20%, a Turnkey rental at 30%+, or another higher risk syndication at 35%+. Just don’t buy jet skis or other doodads with the money… I don’t know why it’s always jet skis as the example. Maybe something to do with the fact that it is a mini-boat, and boats are known as the worse purchase known to man.

What you do with the liquidity from the debt is what really matters. Traditionally, it has been good to go into debt for a college education paying 4-8%… unless you are getting a glass blowing degree… or maybe a psychology degree so you can trick yourself into thinking college was worth it… or Asian studies degree because you are going to have to get used to ramen noodles in your adult life… or a Communications degree to be able to spin your financial reality. Ok I admit, I had a pretty depressing college experience…

 

Other Resources:

Podcast #105 – Jordan Goodman – Affiliate connections + mortgage rate optimization + Dolphin mentality

 

SPC028 – Chris Myles explains the downside to using Helocs to pay off mortgages & a teaser on life insurance

HELOCs in Hawaii

 

Sample Inspection report

I would say this is a bad report because it’s not Prescriptive. It is very important to have a chat with your inspector so they know it’s not going to be a warm and fuzzy home to live in but a rental property. They will need to avoid citing nitpicky things because the seller is likely another investor and more sophisticated than a regular homeowner and will call BS at your repair requests.

This is where an hour of coaching will go a long way to maximize what you get at the negotiation table.

Now back to SimplePassiveCashflow.com/turnkey

 

   

125 – Living the FI dream abroad with Jeremy Jacobson from Go Curry Cracker

YouTube Link: https://youtu.be/3NQ0agjuxXY? sub_confirmation 1

Article Link: Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “”ebook”” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Went on normal path. Got a job after college, house, and fixated on paying off student loans.

Aggressively paid down student loans, but motivated by people who retired early.

5 years ago, both quit their jobs, traveling, raising family, and living their dream.

Ruthlessly slashed expenses and saved 70-80% after-tax income.

Max contributed to 401K, IRA, HSA, and after-tax accounts.

Short-term joy = trading years of financial-free opportunity.

Actively chose lifestyle. Traveled internationally by arbitraging where they lived with low living expenses.

Didn’t listen to mainstream advice of owning home. Choosing a renters lifestyle to not get “”stuck.””

Both have blogs and garnered new friendships; not the “”Seattle Chill.””

Finances on auto-pilot. Can work on growing family in Taipei and doing creative things they did during childhood.

Two types of things preventing people from being financially-free: Afraid to take leap to be financial-free and long-term goals to strive towards.

People don’t change minds because you provided info to them; they change when they’re ready.

Visit www.gocurrycracker.com and social media accounts on FB, Instagram.

Open post

Downgrading transportation

I recently was involved in a car accident where my car got totaled (I’m 100% fine which is why you buy Mercedes) but I’m a bit at the crossroads now.

Should I get a…???
A) Bike with Electric Assist
b) road bike (maybe not like this one but definitely no spandex)
C) Electric unicycle

Important notes:
1) My daily commute is under a couple miles
2) I live in Hawaii the weather is perfect
3) I need to interject more activity and vitamin D. I’m getting fat because there is too much good food here.
4) If I need to go somewhere for fun I feel the time savings I would get by Ubering and getting work done will be a huge improvement#time>money – Here is my discussion on trading money for time.
5) I am not a good driver, to begin with, lol

This is my latest experiment to try and go with a combination of an electric bike for my normal commute and Uber (maybe even get the American Express perk card so I can get VIP Uber status). I figure I can always go and get my Ford Raptor if this experiment fails.

I know what a lot of people might be thinking. Oh, another millennial with this own nothing mentality. First off I’m a late Gen X’er (I just look like I’m 20 years old) and secondly my hourly rate these days makes driving a car a little dumb. I’m not really a saver like Mister Money Mustache (most famous financial blogger with 30M subscribers) but seem to be following in his footsteps.

I see a bunch of people strive for a gazzlion apartment units I have been trying to step back and ponder why??? This video captures how I am feeling.

For people going after said gazzlion apartments… cool, but a little weird to me personally. When does the madness end? What is the end game or is it just ego and a big pissing contest – cause I imagine those are a little messy.

Off the soapbox.

Here is what I plan on getting for Costco – the greatest store on the planet with the greatest return policy.

I already bought a helmet, Osprey bag, and this model below. Maybe I can even charge this at work 😉

 

In 2009 I as a young 20-something year old I bought an A class rental and it has been a series of lesser and lesser quality and size of housing arrangements. But is that really important?

I always wanted a Mercedes and got one a couple years ago (with a $500 payment that AHP pays for). But in the past few months, I noticed I was kinda over it. So it was interesting this turn of events happened. As Tony Robbins says “Things happen for you not to you.”

Freedom (FI) is really what’s important to me the most. Not shiny objects or looking cool in front of people you don’t care about (who are going to work at jobs they don’t like).

An excerpt from Kyle Wilson:

Great Lesson From Jim Rohn

In my earliest days as a seminar promoter (prior to launching Jim Rohn International in 1993) I was promoting an event in Dallas. I had booked Jim Rohn for a day long event starting at 10 am and going till 4 pm.

Typically I would arrive around 6:30 am to make sure the stage, room and tables were all set-up correctly and then my team and I would set-up product tables and get everything ready for when attendees arrived. Often people would start to to show up as early as 1-2 hours before the start time.

Well, for this event I was in for the shock of my life. I arrived at the meeting room to find it packed full of people eating a buffet style breakfast! Another event in MY meeting room! What??

I instantly went into panic mode. When I found my event coordinator they assured me everything was okay since that meeting would end by 9 and they could do a quick turnaround by 10.

Well that’s NOT how it works. It takes hours to set-up the room and tables/products plus we would already have guests showing up before the current meeting was even over.

I went into solution mode and asked if they could give us another room. Answer: no – they were booked solid (one of the reasons they tried to sneak this other event in).

Now I’m beyond upset and panicked. My first thoughts were all the expectations of those who had purchased tickets and their busy schedules. And I have to be honest and admit that I then started thinking about all the refunds that were going to happen as a result.Then it escalated to me worrying how all this would reflect upon me with not only the attendees but also the man I had booked to speak, my future mentor and business collaborator, Jim Rohn.

All attempts to find a solution, a fix were exhausted. Now what I faced was how to best communicate this to the folks showing up and how to tell Jim.

Around 8:30 am Jim came strolling down to check in before going to breakfast. I braced myself to share the really bad news.

I humbly and embarrassingly told him I had somehow dropped the ball and allowed the hotel to overlap us with another event. I explained at best we would be able to start at 11 and sheepishly would need to explain what was going on with attendees and ask them to wait. 

I’ll never forget this next moment for the rest of my life. After sharing the bad news and making it clear we were out of options, Jim just calmly looked at me and said, “Kyle it will be okay. It’s not like a good friend died. Now that would be a problem. This is just an inconvenience and I will make it up to them by going longer and making it my all-time, best seminar.” WOW!!

What a paradigm shift! And what an incredible life lesson for me to learn from my future mentor. “It’s not like a good friend just died!” How many times have I since used that line and the real meaning behind it to put into perspective when things don’t go the way I planned or intended.

I will always be grateful for all the remarkable lessons and wisdom Jim passed on to me beginning with the first time I promoted him in 1990, then starting Jim Rohn International in 1993 and up until his passing in 2009. 

This lesson in particular, maybe because it was so early in our relationship, has special meaning and memories and appreciation for my mentor and friend, Jim Rohn.

Buying or renting? The biggest inhibitor to financial freedom?

Introduction

Home ownership is part of the American Dream. In the minds of many, psychologically and mentally, it represents security, stability, and financial independence. Renting has traditionally been seen as throwing money away, as many people also see homeownership as a financial investment in their future thanks to the popular belief that property will only ever rise in value, even if the recession of 2008 demonstrated otherwise.

The reality is that allowing for inflation, house prices have increased by just 1% during the last century, representing an extremely poor return on investment, and one that has been easily outperformed by the stock markets and direct investment in businesses and hard assets. Research has shown that the net value of homeowners is, on average, 44 times greater than that of non-homeowners, however, it’s unclear whether this is a correlation or causation.

So should you buy or rent? The truth is that there’s no ‘one size fits all’ answer to that question. Every individual has different circumstances that determine if buying or renting their home is best for their long-term financial prosperity. This guide is about you making the right financial decisions for you. It’ll examine the pros and cons of buying and renting, what you should take into account before making a decision, and the relative financial considerations of a mortgage versus rent.

If you are a numbers guy here is the spreadsheet – SimplePassiveCashflow style!

*I spent $300 dollars for an editor to get the grammar and spelling right on this article. I am sick and tired of seeing young families make this mistake.

What’s in this guide?

This guide will cover everything you need to consider about purchasing a home, renting, and purchasing a property to rent. This includes:

  • The advantages and disadvantages of renting
  • The advantages and disadvantages of buying
  • The costs associated with renting vs buying
  • Choosing a property
  • Taking on a home loan
  • Using your home to finance your future
  • Buying a property to rent
  • Useful resources

Financial freedom

Firstly, this guide is about helping you to achieve financial freedom. What the wealthy do to achieve security and optimize investment returns is not always conventional wisdom. When financial freedom is your goal, there are two simple principles to follow:

  1. Prioritize purchases/acquisitions that make you money
  2. If a purchase/acquisition doesn’t pay you and you are speculating on increasing home values, don’t do it.

While this may seem black and white, sticking to these principles will again depend upon your individual circumstances. See the difference in how the poor, the middle-class, and the wealthy live financially:

For some, buying will generate the most financial opportunities, for others it’ll be renting

Hint: If you can’t save money to save your life then buying a home acts as a forced savings account, which will benefit you in the future.

So let’s look at the case for each.

Rent or buy? What to consider

Before going any further in this guide and considering whether buying or renting a home is the best option for you, there are a few important things you should bear in mind as you continue. These are:

  • Are you comfortable living with unknown and variable costs? Or prefer having your costs fixed?
  • Do you like to personalize your home, or are you happy to live with other people’s choices?
  • How much space do you really need? Do you really need 2,000 square feet and that 4th bedroom to raise a family or is that your ego’s need to keep up with the Joneses talking?
  • How much time and work are you prepared to put into the upkeep and maintenance?

 

Renting

Chances are that you’ve been told repeatedly that renting is like flushing water down the toilet. That you are paying money out each month and twenty years later you have nothing to show for.

The wealthy do not believe this misnomer and see housing as just another line item in their personal finances.

Our changing lifestyles mean that renting can be a sensible option for many people which can actually help you achieve your financial dreams.

So what are the advantages of renting?

 

Flexibility and mobility

The biggest argument in favor of renting over buying is the flexibility and mobility it offers. If you have to – or want to – move regularly, then renting allows you to easily pick up and relocate. Equally, if you decide you don’t like the property/neighborhood after all, that your commute is too long, or that you want to get your kids into a better school district, you have the flexibility to do that. Remember, gone are the days where you stay a loyal employee for decades. Often many professionals need to be mobile to compete for the best positions and salaries. Many of my friends in IT and Tech report dusting off the resume after they have reached the 6-month employment milestone. Having geographical mobility is essential in competing for the best jobs.

 

Liquidity in difficult times

Renting can often be cheaper than buying. Some rents even include utilities, and when things break, it’s not your problem, call the landlord – it’s their problem! That means you have more available cash. Don’t forget that life is unpredictable and things change. Perhaps your income goes down, unexpected bills occur, your mom falls in the shower and can’t get up, or your deadbeat brother-in-law hears of the rental properties you are picking up and needs a place to hang out and join your family. The beauty of renting is that if your financial circumstances change, you have the option of moving to a cheaper property without too much difficulty instead of selling the home in a fire sale due out of distress.

 

Credit ratings

Not everyone has a perfect credit history. Experts estimate that around a third of all American adults have a credit score below 601 and so are considered a poor or bad risk. This greatly reduces the likelihood of qualifying for a regular home loan, meaning that borrowers would have to pay higher interest rates on any borrowings. If you fall into this category, buying is unlikely to be worth the expense.

Note: Don’t let real estate or lending brokers trick you into using the “scarcity tactic trick” where they say interest rates are at all-time lows! Buy now because it’s not getting any lower! Remember they get paid when you buy or originate a loan. Locking in a low-interest rate is a poor reason to go into a 30-year commitment for something you should not buy in the first place, even at a 0%.

 

Buyer’s remorse

A survey by Trulia found that 44% of American homeowners had some form of buyer’s remorse, and around a fifth had actually been prevented from changing their situation because of making a mistake when purchasing a home. With renting, if you’re not happy, you’re free to move at the end of your lease. Paying a couple of dudes to move your stuff from time to time is pretty cheap in the grand scheme of things.

 

Local costs

If the area you live in has high property taxes, high insurance costs, or low rent-to-value ratios, then the math on renting makes sense. The rent on identical properties can vary hugely based simply because of their location, for example a $100,000 house might be leased for $500 a month in one town but $1,500 in another. Where rent to ratio values are low, renting is the savvier decision. Often primary markets such as San Francisco, Seattle, Los Angeles, New York, Washington DC, Honolulu, (are cool places to live but) have low rent to value ratios, as a result of too much wealth living there driving up the overall market. Investing in secondary and tertiary markets where the rent to value ratios are high means that the income more than supports the mortgage and expenses, for positive cashflow. Examples of these locations are Atlanta, San Antonio, Houston, Indianapolis, Birmingham, Memphis, or Kansas City. In these areas, it may make sense to buy a primary residence to live in.

The disadvantages of renting

Of course, while there are many advantages to renting, there are also drawbacks that can’t be ignored, and each individual needs to decide if the benefits outweigh the disadvantages.

Not feeling at home

Tenants are rarely allowed to decorate the property the way they would like. Decor is usually neutral and can feel clinical. Personalization is usually limited to putting up pictures and damage caused by doing so must be rectified before the tenant leaves. If personalization is important to you, then get over it… nah just kidding 😉

Rent Increases

Rents usually rise annually. In some areas, rents increases are limited by local regulations. In most instances he landlord is free to increase it by as much as they like. In areas that are very popular, rent rises can be a significant increase to reflect increasing market demand.

Lack of security

While renting offers flexibility, it also lacks security. Your landlord might decide that they want to sell the property or have someone else live there. If you’re on a month to month lease, typically your landlord only needs to give 30-60 days’ notice.

Moving residences costs money, and you’ll need to find a deposit plus up to two months’ rent in advance for a new property, alongside the fees listed below. And that’s all before your landlord returns your deposit.

Tip: Building a relationship with your landlord could be invaluable. If you are renting a home in a primary market where the numbers don’t make sense, then chances are that you’re dealing with an amateur landlord. Often amateur landlords just want reliability and rent paid on time, as opposed to top dollar. You may be able to sign a longer rental agreement or just be given a further heads-up if the landlord is looking to make any moves with the property. They may need you more than you need them so try to negotiate a lower rent by signing a longer rent or a fair rent escalation factor.

Lack of tax breaks

Homeowners brag about claiming extra tax write offs on their mortgage interest against their tax bill. This is true that tenants can’t claim anything against their rent but this argument is a very weak one and likely dogma created by brokers to motivate you to create more transactional commissions.

Spending 100 dollars’ interest to deduct it on your taxes is actually one of the dumbest pieces of financial advice I have ever heard. They’re basically telling you to incur expenses to save a fraction of it. The tax benefits that you get as a real estate investor will blow the mortgage interest tax deduction out of the water due to taking other expenses as and operational business, depreciation, and not to mention the overwhelming greater return on investment if you bought a rental property than buying a primary residence to live in. And if you have seen the 2018 new tax laws it’s just a matter of time until the tax deduction for the regular person is going to be phased out. The middle-class just can’t catch a break!

Additional costs

Taking out a new lease incurs a number of costs. These can vary with state and your circumstances, but typically include:

  • Broker’s fee: whether or not you need a broker will depend on where you want to live. In many big cities, landlords or property managers frequently won’t consider any applications that haven’t come through a broker. Typical fees vary between one month’s rent and 15% of the total annual rent. However, this is not the case in most circumstances but I’m just trying to be a good journalist here.
  • Application fee: this covers the cost for credit and criminal background checks. Usually cost between $35-75 per person.
  • Security deposit: we’ve already mentioned this, and it’s generally set at one or two months’ rent. However, some property types, especially condominiums, charge a move-in fee as well. This covers the charge of updating mailboxes, reprogramming buzzers, etc. This can range from $100-$200.

Based on a $1,000 monthly rent:

 

Fee type Minimum Maximum
Broker’s fee $1000 $1800
Application fee $35 $75
Security deposit $1000 $2000
Move-in fee $100 $200
Total $2135 $4200

 

What about my furry friend?

Many rentals will charge a cleaning fee or surcharge for a pet. Due to people abusing the “service animal” loophole this is usually at the landlord’s discretion. However, more and more people are single or don’t have a roommate, landlords are becoming more accepting of our four legged friends.  In fact, many landlords including myself see your pet ownership as a sign that you are more of a dependable long term tenant – minus the crazy cat lady/man with more than 3 cats.

But my spouse wants to buy our own home?

If you are in a Primary market the prevailing market rent to value ratios under 1% usually means that if you rent you will be able to live in a much nicer home than if you bought, assuming you had the same PITI mortgage payment.

Say you are looking at a $1,600 mortgage on a $350,000 home (typical 20% down payment). Now consider taking that same $1,600 monthly payment you will be amazed that you would be able to live in a nicer home. This does not even take into account the hidden costs of homeownership that we will talk about in a bit – and you can dive into the numbers with the accompanying spreadsheet.

And by the way, have you ever driven a rental car? It’s a lot more fun when you are not worried about a dent or paint chip here or there.

 

Purchasing a home

Now we’ve looked at the pros and cons of renting, we’ll do the same for purchasing a home or property, what to consider when taking out a mortgage, and how your home could be used to finance purchasing a property to rent.

Supersize me “homeowner style”

Average sizes of homes have increased according to the U.S. Census Bureau. In 1973 the average home was 1,525 sq. ft. Today that number approaches 2,500 sq. ft. That’s almost a 64% increase in square footage on the average home!

Despite the average family size decreasing from 2.9 persons per household in 1973 to 2.5 persons today, kitchens have doubled in size in those 4 decades along with the average ceiling height in a home rising by more than a foot. But more space in a home ultimately means more space for “things” and the increase in maintenance costs. Add to the mix cheaper and faster construction methods and you have the beginnings of a bubble.

The graph below illustrates Robert Shiller’s data. Shiller, a Yale University Economics Professor, shows how housing prices have changed over time using an arbitrary starting point of 100 adjusting for inflation.

Difference between a home and a property

This might seem like a strange concept, but there is a difference between a home and a property. Why? A home is somewhere you live, where you invest emotionally as well financially. It’s your anchor. A property can be anything from a piece of land to a luxury penthouse, but where you don’t intend to live and is purchased as an investment.

Buying a home is a huge commitment. No-one can argue with that. While home ownership is usually associated with stability and security to many, that stability and security can be a double edge sword become if your circumstances change.

When our parents and grandparents bought their homes, they probably expected to stay in the same area, near their families, working for the same employer for most of their life. If they wanted a new job, chances were that they’d find one in the same area. People didn’t often move away from their roots.

Employment trends have changed where very few jobs are for life anymore. And many people – especially professionals – find themselves looking further afield for work. Perhaps the perfect job is on the other side of the country. What do you do? Being tied into owning a home can restrict where you can work and, therefore, your earning potential.

Homeownership also ties up your cashflow, and the more expensive your property, the more that’s true.

The biggest mistake I see young couples make is not having a personal balance sheet that has a net positive cashflow. This cashflow is the oxygen for investing and learning about investing. Along with just plain overspending, buying a house is the biggest cashflow suck in the middle-classes’ budget.

For an analysis of the opportunity costs – check out the accompaniment spreadsheet that outlines the numbers.

The Big Questions

Before deciding to purchase your home, you need to understand what your priorities are. Without understanding these, you could easily make a costly mistake. Let’s call these The Big Questions, and they are:

  • What do you want your financial situation to be in five or ten years’ time? What would your desired savings be? Are those savings realistic and achievable if you purchase a home?
  • What space do you consider essential? How much do you own? Are you willing to downsize and declutter if necessary? Are you someone who likes to be able to get away from the other people in the house and have your own space? Would you be prepared put your ego aside to live with a smaller home if this gives you financial freedom?
  • How much time are you prepared to spend on renovation, repairs, and maintenance?
  • I know what you young parents are thinking… and I ask you do your kids really need a yard? They’re on their electronics all the time anyway. And with you taking that higher paid job to afford the mortgage they will never see you.

The advantages of homeowning

  • Depending on the area, mortgage repayments can be lower than rent.
  • Unlike renting, where a landlord can decide not to renew your contract, you can live there as long as you like as long as you make your monthly payments and ever-increasing property taxes.
  • A fixed rate mortgage means that your costs are predictable.
  • The interest and property tax on the mortgage are tax deductible. Note: BS Flag!
  • For those who struggle to save, a home is a forced savings plan.
  • The value of the home may
  • You have an asset you can sell or refinance if you need access to cash.

The disadvantages of home ownership

  • It’s a very long-term financial commitment. How many of us can imagine where we’ll be in thirty years? 5 years even?
  • Mortgage payments may not be cheaper than renting. And purchasing a property requires a down payment plus considerable closing costs. Money today is more valuable than in the future especially if you can invest and make 10-20% per year.
  • Any maintenance and repairs are your responsibility. There’s no way to predict what might go wrong, and costs can add up.
  • Should you want or need to move, selling a home can take some time, making you less mobile.
  • The value of your home may fall, depending on the economy.
  • You can have terrible neighbors who start a side business selling Meth or, potentially more impactful, have the next door teenager start their own garage band.
  • If your life circumstances change, e.g. your wages fall and you can’t afford the mortgage, then you’re stuck in the situation until you’re able to sell.
  • Have you ever seen those scummy “buy your home for cash” ads? It works because everyday people run into problems and one day it might be you. (Sorry, that was a low-brow sales technique!)

The History of a Mortgage

Majority homeownership in the United States is mostly a recent phenomenon. Until the mid 1940’s, most Americans did not own their places of residence.

Big banks and their activities could be argued to have been the catalyst for the “American Dream” of homeownership becoming the majority statistic post-1950. The National Bank Acts of the 1860’s kick-started this gradual change. US Treasury securities now backed the US National Currency and standardized practices of US national banks. And by the 1890’s, American banks saw the popularity of Mortgages rise.

These early mortgages at the turn of the 1900s were in stark contrast to those that we see today. A typical homeowner in 1916 would pay up to 50% down with a 5-year interest-only-structure whereas a typical homeowner will save for 20% with the standard 30-year plan.

Amortized interest front loads the fees and interest in the beginning of the terms and greatly advantages the bank instead of the homeowner. For more discussion on this phenomenon check out this webinar on the topic to pay your mortgage off much faster with instead of simple interest.

What to consider when taking on a mortgage

The vast majority of people purchasing a property, whether it’s for their own use or to rent, will need a mortgage. A mortgage is a long-term commitment, typically thirty years in the USA. Fifteen years is the next most popular option. On average, most people now occupy the same home for around nine years.

Purchasing a home isn’t cheap. Lenders typically require a 20% down payment, which immediately reduces your available funds. You’re then tied into an ongoing financial commitment that reduces your cashflow for years to come. Even though the high level of competition in the mortgage market means that interest rates are generally competitive, mortgage payments are still a significant chunk of your income.

If you are also a real estate investor looking for additional income be mindful that one of the biggest factor’s in getting a loan is the debt-to-income ratio. Having a large mortgage (loan) without the income coming in from your primary residence will greatly impact this ratio.

Fixed rate mortgages vs adjustable rate

We all know that interest rates vary. Most Americans opt for fixed interest mortgages, preferring to know what their costs will be for the foreseeable future. The downside is that any drop in rates can be taken advantage of only through refinancing, which incurs additional costs.

While Adjustable Rate Mortgages (ARMs) are available, and often have lower interest rates initially, rates can rise dramatically if the economy changes, making them a higher risk. However, homeowners can always refinance.

Costs of taking out a mortgage

As mentioned above, there are a number of costs associated with securing a mortgage, which can become significant. Although they can vary depending on the state and municipality, these costs, typically are:

  • Mortgage application fee: around 1% of the total loan, payable on the application even if the loan isn’t approved. This is why it seems like everyone is trying to give you a loan because it’s really profitable to be a lending broker.
  • Home appraisal charges: even if you stay with the same lender, they may want to appraise your home to confirm the current market value. Charges vary between $225 and $700.
  • Loan origination fees: a charge applied by the lender for processing the loan, before the application is sent to the underwriter. Usually between 0.5% and 1%. The smaller the loan, the higher the percentage is likely to be as both require the same amount of work.
  • Documents preparation fee: a charge for preparing key documents, including the refinance mortgage, note, and truth-in-lending statements. Typically, $200-500.
  • Title search fee: before lending, the lender wants to check that the home’s title is free and clear of liens and encumbrances. It’s usually carried out by a separate company which will check court records, prior deeds, and property databases. Usually $700-900, which includes insurance to protect the borrower against any losses caused by legal issues relating to the search.
  • Recording fee: set by local or State government, these are the fees for recording the refinancing publicly. Varies between $25 and $250.
  • Survey fee: to ensure that the property boundaries are followed and are not being encroached on by adjacent properties. Usually between $175-300.
  • Inspection fee: not always necessary, but some lenders require an inspection of the home’s plumbing, electrical and HVAC systems and roofing, and check for potential infestation. $175-300.
  • Attorney fees: again, not always required, but some states require attorneys for both the borrower and lender to confirm that the closing documentation is correct. Typically, $500-1000
  • Flood certification: if a property is in a federally-designated flood zone, homeowners may be required to add flood or life of loan insurance coverage. Certification costs between $50-150.

Fess on a $100,000 mortgage:

Fee type Minimum Maximum
Application fee $1000 $1000
Home appraisal $225 $700
Loan origination fees $1000 $1500
Document preparation fee $200 $500
Title search fee $700 $900
Survey fee $150 $400
Inspection fees 0 $300
Attorney fees 0 $1000
Flood certification 0 $150
Total $3275 $6450

 

These are all in addition to a 20% down payment.

While these costs may be negotiable to an extent, they still add up. It may be possible to roll the costs into the loan, but will then attract interest alongside the capital amount, and may push up the interest rate.

Choosing a home

Part of the purpose of this guide is to help you achieve financial freedom. Choosing the right property will make a real difference to the possibility of doing this, so careful consideration needs to be given when purchasing a home. Remember you are competing with other emotional buyers. It’s a race to the bottom, and based on the “greater fools theory” where there will always be a greater fool paying more.

Property size

When buying a home, people often choose to buy the biggest and most expensive home they can afford. A logical fallacy is to think “this is my forever home where my 5 kids and grandchildren will hang out!”

It’s not surprising as homeowners want the best for themselves and their family. But purchasing the best home on the market and being financially solvent is mutually exclusive. Instead, buyers should consider taking on a smaller, cheaper property. Not only will mortgage costs be lower, so will maintenance and taxes, and you’ll have better cash flow which can be the foundation of your financial freedom.

Apartments vs houses

Apartments offer a number of benefits. Again, they are usually cheaper than houses and are easier to maintain. Even better, emergency costs are shared by all the residents in the building, reducing the cost of repairs.

As investors, we like investing in apartments as opposed to homes. Simply put tenants can only screw up 6 sides of the property in an apartment (ground, ceiling, and 4 walls) whereas a home has a total 10 sides and a yard at their disposal. Factor this into your decision as you evaluation the hidden maintenance cost.

Cheaper properties

A cheaper property means the down payment needed is smaller. If you have a large enough amount, the funds could be used as a down payment on two or more properties for an immediate investment. Alternatively, as lower costs free up cash, these savings can be used to purchase another rental property which is proven to snowball into more and more investments.

The problem with a fixer-upper

If you’re buying a home, you want it to increase in value. Taking on a fixer-upper can seem like a way of guaranteeing this, which is why it’s become a very popular option with people who can’t afford a decent house in a good area. But while taking on a fixer-upper can seem attractive there are a number of common mistakes that inexperienced buyers make which end up costing them money rather than making it. These are:

  • Rushing into a purchase without fully costing out the necessary work or considering all the holding and sales costs.
  • Buying an overpriced value home rather than a fixer-upper. A true fixer-upper should be around 10-20% under the local market value.
  • Not checking the floorplans and layout to ensure that they’re accurate and workable, leading to considerable expenditure to correct it.
  • Finding out that the property has foundational or structural issues.
  • Underestimating the cost of repairs.
  • Underestimating the work required.
  • Not considering whether it’s an area that people are likely to want to live in. This is especially true if adjacent properties are boarded up or also require extensive work.
  • The repairs are NOT financed, so require more funds out of your pocket, which again cripples your precious investment capital. In terms of the finances and return on your equity this is where you hurt the most.

Using your home to purchase other properties

Another way of purchasing other properties is to use the equity you’ve built up in your home. This can be done by a complete refinance of your home or you could consider taking out a HELOC.

HELOC stands for ‘home equity line of credit’ or, more simply, ‘home equity line’. In some ways, it’s similar to a mortgage, as it is a debt secured against your property. It differs from a mortgage in two significant ways. These are:

  • A home equity loan (mortgage) is a lump sum, paid at once. A HELOC allows homeowners to borrow or draw money on multiple occasions usually over a period of 5-10 years, as the need arises, up to a maximum amount.
  • As mentioned above, a home equity loan usually has a fixed mortgage rate, while a HELOC normally has variable interest rates linked to Bank Prime.

Typically, during the first 5-10 years, borrowers need to pay back only the interest on the sum(s) they have borrowed. Repayment periods begin after the borrowing period and are usually between 10-20 years. The repayment amount is calculated by dividing the capital accessed by the number of months in the repayment period. However, borrowers should be aware that some lenders require the capital to be repaid in its entirety at the end of the drawdown period.

Some lenders won’t allow a second charge to be secured against properties, so borrowers should seek permission from their mortgage company first.

Advantages of HELOC

  • HELOCs are a convenient way of funding one-off needs, such as a down payment on a second property, or renovation.
  • Interest is paid only on the sum borrowed, and during the drawdown period, borrowers can repay just the interest.
  • Upfront costs are very low. The cost for taking out a $150,000 HELOC loan is typically less than $1000 and may be paid by the lender without a rate adjustment.
  • Some HELOCs can be converted into fixed-rate loans when a drawdown is taken.

Disadvantages of a HELOC

  • HELOCs are adjustable rate mortgages (ARM) but are much riskier than a standard ARM thanks to the way the interest is calculated. If the interest rate increases on 30 April, then the HELOC rate will rise on 1 May. There are also no interest rate caps.
  • Ensuring that the HELOC is repaid can require considerable financial discipline, especially if the capital must be repaid at the end of the drawdown period.

Buying a property to rent

As fewer people are buying their own home, there is a strong demand for rental properties across the country. This demand has been fueled by factors such as the 2008 economic crash, the high number of people with poor credit ratings, stagnant wages, rising house prices, and the increased mobility of the workforce.

Owning one or more rental properties can be a good investment in your financial freedom. But it requires careful consideration. It’s not like buying a home. When you buy your home things like space, schools and amenities will be your primary focus, and you’re likely to spend more to get your perfect house.

When choosing a rental, you need to look at the local market. Check with local real estate agents what type of properties are in demand and choose accordingly. It may be that single bed apartments are snapped up, or that there’s a shortage of family homes. Buying in the best locations with the best school districts will lead to more competition and overpaying for the asset and its income stream.

If you do your homework, buying a property to rent can be profitable over time. It’s a way of generating a passive income, while also building up savings through increasing the equity in the property. In many cases, renting will cover the mortgage and the taxes, if not generate a small profit on top.

Renting out your home

Should you want to relocate or want to improve your cashflow, renting out your own home is a possibility. However, this option comes with a number of potential complications – both financial and emotional – that need to be considered.

Financially, you’ll need to inform your mortgage company when your home stops being your residence. Different mortgage lenders have different rules for borrowers who convert their homes into rental properties. It’s common for them to require you to live in your home for at least two years. Typically, interest rates for buy to rent properties are higher because of the increased risk to the property, and you may need to refinance.

When you purchase a home, you invest in it emotionally as well as financially. You decorate it in your preferred style. You make memories there. You have a connection. Then strangers live in your home. Perhaps they’ll be good renters and take care of it as if it were their own. But perhaps they won’t and seeing what was once your home damaged can be a devastating experience. Even if you find good tenants, seeing someone else in your home can be an emotional experience. With a property bought purely as an investment, it’s much easier to be dispassionate and deal calmly with any issues.

Factors to consider when buying a property to rent

Just as with deciding whether to rent or buy your home, deciding where – or even whether – to buy to rent needs to be carefully considered.

Rent to value ratios

The Rent-to-Value Ratio is a quick calculation real estate investors run to determine if a property will cashflow. Take a $100,000 home that rents for $1,000 a month, the Rent-to-Value Ratio would be 1% ($100,000/$1,000). One of the biggest factors to consider when buying a rental property is the rent to value ratio. In some areas, such as Seattle, Los Angeles and the East Coast, properties are expensive to buy, but rents are relatively low. In these areas, rent to value ratios can be less than 0.75%, meaning that there is little chance of even covering the costs, making purchasing a property a poor decision. In areas where housing is cheaper to buy and rent to value ratios are much higher, then it makes sense to purchase a property and rent it out. Some markets you can find these Rent-to-Value Ratios over 1.5% in solid areas.

Type of property

As already mentioned, knowing the local market and which type of properties are in demand is important. A property sitting empty is costing you money, not generating it. However, even knowing that, there is still the decision as to whether it’s better to take on a more expensive property that will attract a higher rent, or two or more smaller ones that may have a higher rent to value ratio even though the rents are lower.

Location

In real estate, the mantra is ‘location, location, location’, and that’s just as true for rental properties. Getting the location of the property right is just as important as choosing the right property type. If the market wants apartments in the city and large houses in the suburbs, buying an apartment in the suburb could be a costly mistake.

Location opens up other possibilities such as vacation properties. These can range from city apartments, beach or lake-front houses, to near big tourist attractions, anywhere that people are keen to visit. With the development of sites such as AirBnB, it’s easy to advertise properties for short-term rentals. While the property is likely to be empty at times this could easily be offset by the higher amounts that you can charge, and you can get to enjoy the property too.

Resources

Hopefully this guide has given you plenty to think about, and you now feel confident that you’re in a position to make decisions that will benefit your financial future. However, the right decision needs the right information, and so we’ve included these rent-vs-buy calculators from Realtor.com and Trulia.com to provide a personalized breakdown to assess whether buying or renting in your neighborhood of choice is most financially beneficial option for you.

Closing

The wealthy (not necessarily the rich) believe that home is not a place or house. It is the people that make a home. All too often a big house (the dream) is paired with long commutes and stressful jobs which minimizes the time away from home and what really matters.

The wealthy don’t attempt to keep up with the Joneses. They keep things simple and spend their resources (time and money) on the essentials and make sound financial decisions.

On an emotional note, although buying a home goes against everything from an investment standpoint there is something to be said about the security of owning especially if you have a family with kids.

We skimmed the surface on rental properties. For more information please visit SimplePassiveCashflow.com and check out our podcast.

About the author

Lane Kawaoka is co-owner of MFPE Investments LLC, which controls 1400+ units and where he is responsible for finding investment opportunities, analysis, and marketing. Mr. Kawaoka obtained a BS in Industrial Engineer and MS in Civil Engineering and Construction Management from the University of Washington. In addition to an analytical engineering background, Lane has real-world experience in working as a project manager for over $220 million dollars of capital construction projects in both the public and the private sector. Working as a high paid professional in Corporate America and frustrated by the traditional wealth-building dogma, Lane was compelled to inspire and mentor other working professionals via his top-rated podcast at SimplePassiveCashflow.com.

What are you doing this weekend? Me?!? I’m sure as heck not repairing my depreciating home and out trying to spend my money.

 

HELOCs in Hawaii

The following downloadable cheat sheet was made for Hawaii residents but the concepts discussed are typical as it is a confusing game.

What is a HELOC (Home equity line of credit)?
A line of credit where the collateral is the existing equity in your home. Think of a credit card where your max limit is a portion of your equity in your home with some actually good rates.

Pros:
It’s a line of credit where if you don’t use it there is no interest being accrued.
Low-interest rate because it is seen as a low risk loan from the banks perspective
A good way to get access to liquidity in a pinch. Especially when starting a new investing strategy and need proof of concept.

Cons:
There is a possibility of the bank calling a loan due or changing the terms as the economy changes
Its not the best way of using equity because you should just sell the asset and be deleveraging into more fixed debt (very counter-intuitive I know but most things are)

What is LTV?
Loan to value. So if your home is worth $100,000 and you have $50,000 left on your mortgage then your LTV is 50%.

I’m confused… this all sounds great but just tell me what to do
Option 1: Initiate a HELOC with Aloha Pacific CU for 1yr @ 0.5%. Then either go with ASB or CPB. They both will cover up to $500 for early termination with Aloha Pacific (which would be some of the closing costs that were waived) and no annual fee. For ASB, as long as you have $2500/month in direct deposits then there are no other fees – setup an automatic transaction from another bank recurring every month to take care of that, extra credit if you send that same $2,000 right back a few days later (that’s almost like money laundering). At the time of origination, can check rates to see if you go with another 1 yr (with ASB) or 2yr (with CPB). If you need to do a third time – a few years out, then go with whichever one you didn’t go with for the second HELOC. These rates change and so do the fee structures so try to learn this stuff and connect with other investors. A good way to do that is come to have a beer with other sophisticated investors at ReiAloha. Notice CPB is put in the 2nd order because they will waive the cancellation fees from the host bank prior. Yes, we thought this out like the Sunday arm chair quarterback strategies-out the running back rotation of the Denver Broncos.
Option 2 (for the lazy): Although this is not optimizing the rates this method is a little simpler if your time is so valuable like you are coming up with the cure to some rare form of cancer. Take the lowest of the 2-3 year HELOCs and just go with them. This minimizes movement and makes your life simpler. Perhaps it makes your life so simpler that you free up time and mental bandwidth to invest in real assets such as rental real estate or passive syndications?

I’m still confused… walk me through a real-life example
Someone who just did this with a credit union… for a $200k loan, the closing cost was about $1200 (which were covered by the cu) and he paid $700 for an appraisal. He intends to hold for 3 yrs, so he didn’t get much details on how much of the closing costs he would have to pay back…. for this scenario, we estimate that all $1200 and would have to be paid (which $500 of that would be covered by the new lender).

Thoughts about appraisals
In order to cut costs some banks will do a desk review to determine the value of your property. This usually is more conservative figure and hurts you because you want your home to appraise for the most that it can in order to qualify for the biggest loan. These desk reviews utilize the tax assessed value which usually lower than if you paid $500 for a real appraisal or a cheaper “drive-by” appraisal. Sometimes it might be worth it to pay the extra fees to get a real appraisal instead of the lazy man method. It might be obvious but have a conversation on which appraisal is being used or be disappointed like when Coke switched your C&H sugar for corn syrup.

What about for a high leverage option (above 80%+) and low leverage option or will all of them not touch higher than 80%?
Higher leverage HELOC are available but not openly published. The author of this guide did not want to waste their time finding such fringe data since it changes so much and did not want to wait of a consultation from another bank employee. The collaborator did note that Hawaii State FCU was one of the few Credit Unions that openly published a higher LTV (up to 95%). Note – Hawaii banks are much more conservative on appraisals and terms than on the mainland. You may want to have a bank on the mainland if they will give a HELOC out of state. Typically anyone can get into most Credit Union after all they just want your money to sit in their bank paying you 0.01%. Sometimes you just have to donate $10 to some friends of the library account to gain membership.

Thoughts about fees
Be cognizant of closing costs are. The credit unions don’t have an early termination fee, however, you got to pay back closing costs. For the banks, there is a $500 termination fee and rates are higher, but maybe a better route if you got to pay back waived closing costs with the credit unions… especially since ASB and CPB will cover up to $500 early termination.

Why are you doing this?
Equity in your home is lazy money. It is not yielding a return and in fact it is a liability for lawsuits. The wealthy try to control everything and own nothing (encumber their assets with debt). In addition, typical investment yields range from 12-25% for stable, cashflowing assets, that hold their value even if the economy weakens.

Fine tuning:
“At some point you are going to ask the following: Assuming the delta between the one and two year helot is 1% and we are talking about a 200k loan… That’s 2k. Is it worth it to run around one afternoon and move stuff around online???

Are you going with the one year one first then get the two year from the next one? At this point it may make sense to get on a coaching call for 30 minutes to get an expert opinion.

Also it is possible to get a HELOC on a non-owner occupied home (rental property) but if you are considering so read this… simplepassivecashflow.com/roe”

Conclusion
Overall the process is pretty painless. You might have to run around looking for your mortgage files, HOA documents, or insurance but once setup it works just like another checking account.

Download link

Additional reading…

Webinar – Hui Webinar – How to pay your 30-year mortgage in 4 to 8 years with Mortgage Rate Arbitrage – https://www.youtube.com/watch?v=yysbua0nOaM&t

SPC105 – Jordan Goodman – Affiliate connections + mortgage rate optimization + Dolphin mentality – http://simplepassivecashflow.com/podcast-105-jordan-goodman-affiliate-connections-mortgage-rate-optimization-dolphin-mentality/

Here is the download link for Jordan’s text on the mortgage rate optimization strategy: https://drive.google.com/open?id=1XajKX3Otl9egfIbTnPBsr49wf7pDZHsO

116 – Jay Papasan from the One Thing

YouTube Link: https://youtu.be/4K4VFnGpfJo? sub_confirmation 1

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Jay Papasan is a bestselling author, vice president and executive editor at Keller Williams Realty International, and co-owner, alongside his wife Wendy, of the Papasan Properties Group in Austin, Texas. His most recent work with Gary Keller on The ONE Thing has garnered more than 200 appearances on national bestseller lists including #1 on the Wall Street Journal bestseller list. Before joining Keller Williams Realty, Jay served as an editor at HarperCollins Publishers, where he worked on such bestselling books as Body-for-Life by Bill Phillips and Go for the Goal by Mia Hamm.

Jay serves as Gary Keller’s co-author and executive editor on best-selling titles including: The Millionaire Real Estate Agent, The Millionaire Real Estate Investor, SHIFT: How Top Real Estate Agents Tackle Tough Times, FLIP: How to Find, Fix, and Sell Houses for Profit,HOLD: How to Find, Buy, and Rent Houses for Wealth, and The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results. He also co-authored SHIFT Commercial.

Best investing books Simplepassivecashflow.com/books

The domino theory – momentum

18-25% total return for SFH

Start small – and go small first fast

Co pairing tasks

Focusing question – what is the one thing I can do that will make everything else go away

411 – annual goals

Work a maze backwards – begin with the end in mind

Counter balance not balanced

When do you stop pushing and start living?

Don’t buy your primary residence

Involving your spouse

Short segments:

 

 

Podcast #112 – #LaneHack – Fear + How much risk to take + KProxy!

YouTube Link: https://youtu.be/8K4AY4oOAUs? sub_confirmation 1

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

The two biggest enemy of success is fear.

It inhibits you from taking action. And nothing happens without that.

Fear, never goes away, no matter how successful you become. Same thing is said about CrossFit workouts… they never get easier. You just plateau to a new level of suck.

The same fear exists for the successful, why don’t they hold them back from taking action?

It made me push to busy my first out of state rental in Birmingham from Seattle, sell my Seattle rentals to 1031 into a dozen out of state properties, and lately moving toward a portfolio of syndicated private placements. I don’t know what’s next?

Successful people simply make a habit of taking action, despite the fear. They have gained the habit/muscle or mental six pack of taking action.

By taking action do you gain the experiences of facing obstacles and overcoming them, facing mistakes and learning from them, taking risks and surviving failure. Gained muscle or even a crazy mental eight pack. You draw upon these experience in times of hardship or difficulty.

Obstacles always change but your ability and track record to move around it is what is most important. When we evaluate people to work with Track-record is always important. Obvious we want to work with someone who is proven but realistically every situation in the future will be different and we are really looking for someone who can deliver despite the obstacles. We are not looking for who is a genius (although it helps) or even with some competitive advantage but mostly good character and ability to overcome obstacles… dare I say turn obstacles to opportunities.

There are a couple leads that have had touch times in their deals lately due to circumstances outside their control. What I know of their mindset is that they are freaking resilient that they will overcome the obstacles.

When crap happens we want say:

“we’ve faced a similar uncertainty before and this was the mistake we made and need to avoid”

“we’ve taken a similar risk before and we survived”

Do not mistaken brazen courage with competence/confidence. There are a lot of people who fake it till they make it.

Risk: If you are in aware of the risks and rewards (mentor/stage 3 of 4 of learning) then take the most risk as possible. The Shape ratio theory that I believe in that the more risk you take the more reward you get exponentially. Therefore take as much risk as you can to capitalize on the most reward. BUT… huge caveat here… only take the most risk that you are willing to take that if the worse that can happen you can live with.

This is why I don’t skydive.

This is why I stick primarily to non-recourse deals where the apartment is stabilized.

proxy service: http://kproxy.com/

Financial Planners & the Death of the “Fiduciary Rule”

This topic really fires me up! Here is a little humorous video to lighten the mood. Warning its going to be 20 minutes so better put the sign on your desk saying you are “away at the toilet” or “away at lunch.”

I’m not a fan of Suze Orman/Dave Ramsey because of their scarcity/fugal money saving ideas but for some people who can’t seem to save two pennies to save their life, I guess it is better than nothing. 

Suze’s WTF face @4:41 when the caller says their financial planner recommended buying an annuity. (that would net a 5% commission!)

@4:00 – Financial advisors make commissions and often put you in investments that are best for them.

Obama tried to do a good thing and pass a law where all financial professionals (like brokers and insurance agents) had to adhere to the “fiduciary” standards—meaning they’d have to work in your best interest if they were advising you on your retirement investments. But this died recently and there is no more fiduciary rule – https://www.wsj.com/articles/fiduciary-rule-dealt-blow-by-circuit-court-ruling-1521164915

Federal Department of Licencing discussion on conflicts of interest or kickbacks to the tune of $17 billion – https://www.dol.gov/newsroom/releases/ebsa/ebsa20160406-0

I don’t recommend any financial planner because I don’t take financial advice who is still working for a paycheck and not out of the rat race (lives in their parent’s basement) but if you must go with one of my friends or a flat-fee one – http://www.fpany.org/

I have heard of these guys/gals do their sales pitch and use fear-based words like “diversity”, “security” and “risk” where the 25-year-old kid is trying to sell random investments to me. And don’t get me started when I tried to tell them about the being your own bank concept. #FacePalm They just tried to sell a higher return (6% whoop-ti-doo) with no liquidity. Totally not what I was going for. Not saying these guys are bad people, they just don’t know and products of the Wall Street institutions.

“It’s like a lawyer who only sets you up with only a will (and not a living trust) because they know you will come to them for probate which will cost on average 10-30k for most people. Talk about BS!”

Note: When I call out financial planners I am also calling out brokers and insurance salespeople. Repeat never listen to a broker!

Share this with your co-workers & friends/family that still believe in the Easter Bunny (happy pre-Easter!) and have a false sense of security in what this financial planner says.

Who took all my money?!? We are living in the best time to be alive with all this information at our fingertips.

Why do people still choose to follow the advice from financial planners working for a commission or so-called low-cost index funds that have about a million middlemen taking the majority of your returns? Who knows, probably why 10% of people in this test are still using the “pull out method” as their form of birth control?

A little off topic but just making sure you are still awake there because financial education is very important.

Check out this podcast with a CFP telling us of the insider secrets in the industry. Link

Speaking of less know tricks… Last year I learned this cool financial hack utilized by the smart money. By being your own bank and using the “Infinite Banking Concept” you can create a dividend-paying whole life insurance. Its called life insurance but its just a tax code loophole to make a tax free yield in an account that is sheltered from lawsuits and creditors. I can assure you this is another thing you financial advisor or life insurance sales guys just does not get… likely because they are still working for a paycheck and it actually decreases their commissions.

Go to SimplePassiveCashflow.com/banking for more info.

And for you high net-worth professions still dabbling in paper assets you won’t want to miss this other trick that I will reveal on there too.

Financial advisers and portfolio managers get paid no matter what.

They make money by taking a percentage of your portfolio called an asset management fee. They have skin in the game.

Here’s how it works when things are good and the tide is floating all boats:

  • Your manager creates your portfolio but doesn’t really out preform the index funds
  • You have a gain and your manager takes 1% of that sum.
But in a bear market this is how it works:
  • Your manager cannot save you from a market downturn because they don’t put you in hard assets (cause they can’t get paid off of it)
  • You lose 20% of your nest eff and yet your manager takes 1% of the sum.
  • They still invite your to the customer appreciation party 😉

In bad times these managers rarely take any blame. Conventional conversation says nobody could see a downturn and we were dollar-cost averaging anyway.

If the market is good, they can take full credit for their supposed management skills.

They try to make things confusing with their complex trading systems which no one can explain in order to glorify their position and allow you to just let them drive.

No one really gets rich with Wall Street investing other than the insiders. Not retail, mainstream investors. As real estate investors, we do not buy retail (turnkey is sort of retail) but syndications and private placements are not retail.

I only invest in things that make sense. Where the income has to exceed the expenses. And where there is a forced appreciation (not market appreciation componet) where you have control over your destiny.

In the end, you want to buy direct as possible. Buying REITS is the same thing as buying mutual funds with a bunch of middlemen. Crowdfunding sites remove a few layers but as a syndication working with a Crowdfunding site is very expensive way of acquiring capital. Sometimes I wonder who are the people using this high cost of private equity… Perhaps they are “desperate syndicators?”