Most people are broke and this Ultimate Guide should help – please share!
Roth vs Traditional Pretax 401k?
Both are retirement accounts where you don’t get taxes on the gains while the money is in the program.
Both get taxed at some point and you get to elect when you get taxed, either putting the money in (401K) or when you take it out (Roth).
Question is when?
Conventional wisdom says that generally, you want to pay taxes on it later because taxes will likely go up to pay of Quantitative Easing (ie paying out all the 2008 bailouts).
#ConventionalWisdom engineered to keep you working forever
But its a bit more complicated than just that and takes into account if you are going to make more money now or when you are old and taking the money out. Here at Simple Passive Cashflow, we are growing our money at 15-30% every year that we will likely be in a much higher tax bracket when we retire (cough cough… in our 40’s).
Let me be clear… if you are investing in hard assets that produce income and employing safe prudent leverage then stay away for any sort of 401K or Roth plans.
401Ks are for suckers. Plain and simple. You get stuck with bad investment options and getting killed by the fees. It’s such as shame that everyone is getting robbed blind by this.
I am very against the Roth or any retirement account (other than 401k in some situations).
You will pay taxes now or later and you will likely to pay more taxes in the future… so pay it now.
And 10% penalty is nothing to be in retail type investments. You can recoup that in 12-14 months.
QRPs or qualified retirement plans (Roth-IRA, Solo 401ks, etc) if you are an active real estate investor. If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts.
When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using the QRP loans get you the second tier financing options, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!
Caveat: If you are late to the game and already have a fat 401k then you should convert it to a solo401k. At that point, you should think about putting it into syndications since you are restricted on how you can leverage it.
Anyway, let me know you would like a referral to my checkbook ira contact. You can get a free book on QRPs here.
What should I be doing now?
At some point, you are going to start moving through the wealth progression but for now you need to get your finances in order to save $5,000 a year then work to accumulate a $20,000 minimum downpayment on your first rental property and get on the escalator of true wealth.
When you’re young or a drone of society conditioning, you tend to think more in the moment. The long-term consequences of our actions and decisions are an after-thought to instant gratification. Many of you will read this page and get motivated but only a fraction to take incremental action and build the support system around you. All the resources are around you and most of which are free… if nothing comes of this then its an execution problem.
Here are the steps:
1) Stop sabotaging yourself
You hear it in personal development a lot that we often are our worst enemy. In our financial health, this is even more so the case whether you can’t hold a job or a doctor making $400,000 a year yet spending every single penny. SimplePassiveCashflow.com has never been about mindset that often employed by scammy Multi-Level Marketing ploys or get rich quick schemes. We are about tactics and putting your head down and driving toward a goal. That said there are things you need to stop.
a) Stop listening to people who are NOT financially free. This includes commission based financial planners, family members, and co-workers. There are a lot of well written financial blogs and podcasts (PF Blog-o-sphere) following the FIRE (Financial independence retire early) philosophy (refrain from wasteful things like your $5 Coffee) but many of which are misguided and dogmatic in their approach. We are pretty dogmatic too but the results speak for themselves (see asset list) 😛
b) Stop investing in a 401k where you are limited to investments where there are hidden fees or so-called low expense ratios. Sorry to break it to you if you still believe in the Easter Bunny or Santa Clause but mutual funds are robbing Americans blind often taking the lions share of returns from asset management fees and leaving you all the risk of the market. At the very least stop contributing to 401ks or other retirement plans over the company match threshold. You should also start paying the minimums on your low-interest rate student loans.
c) Spend less than you make to build up a surplus yes. But let’s have a goal and plan in mind. Many times this is a simple plan to save $20,000 to purchase that first asset that puts money into your bank every month instead of something that you don’t need. Once we have the cashflowing by all needs let loose and enjoy. Likely once you have a plan and see positive feedback you will be hooked and you will tighten the belt on your personal spending.
d) Be conscious of what information (propaganda) you are taking in. If you want to be like everyone else (broke and working forever) then do what everyone else does. Trade your morning commute listening to the radio to filling your mind with new ideas via podcasts. Instead of mindlessly consuming YouTube videos on the toilet or coming home to decompress on the couch with Netflix try to open up a book or better yet connect with someone who is where you want to be or like-minded in the journey.
e) Stop giving a Buck – Read this… Too many people are afraid of doing something different! Taking money out of your 401K/retirement is considered a sin or naughty even if it is to direct to safer investments. The system has got us trained like “Sheep-o” and we are being taken to the slaughterhouse if we keep on the linear path we were all programmed to do. Do the math and the numbers will tell you what to do. Even if you are not an engineer its pretty simple. Wall-Street wants to make it complicated so you just go with them and they fee you to death. Numbers don’t lie, brokers do!
2) Get a credit card
You need to build credit to qualify and build your credit score to eventually take advantage of Government subsidized Fannie Mae/Freddie Mac loans.
Captain obvious warning: Avoid credit card debt. While you want a credit card to build credit, you don’t want to use it when you don’t need to. Pay it off immediately and don’t let a balance sit on your account.
3) Find ways to make money
Find ways to make money by selling the crap you don’t need. Facebook Marketplace and Craigslist is a great place to start.
If you have a lot of credit cards try this little trick out.
Find a side-gig that you enjoy. As some point, you will want to grow this as an excuse to take business deductions to lower your tax rate.
I Don’t Understand the Economy?
The 2008 financial crisis was a mortgage industry issue which then impacted real estate crushed housing values and equity markets (stock market prices).
Real estate was not the issue.
This is one of the reasons we like real estate because:
- An ever-increasing population in the USA need a place to live. Te demand for housing remained stable while inventory stock remains lagging.
- A hard asset that is made up of multiple commodities (lumbar, fasteners, equipment, roofing, concrete).
- Rental real estate which produces income. This is why we are not advocates for owning your home unless you are in an area where the Rent-to-Value Ratios are more than 1%. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example, a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%.Watch as I break down how you can make 30%+ annual returns with simple rental property.
I digress… obviously I am super passionate about rental real estate and you can get started here.
In 2008 it was the credit markets that failed. In a credit-based economy, everything stops when credit markets seize up … including home loans.
Conventional wisdom from so-call financial gurus (Suzie Orman or Dave Ramsey) will tell you debt is bad. They might be bad for most people because most people are unable to control their impulses and purchase things that they don’t Need and too much of what they Want.
AAA You can read more about this controversial topic of the use of debt here. Oh by the way, without an influx of fresh debt to fund demand, prices collapsed… including Stocks too. Mortgage and real estate is just where it started in 2008 and likely with all the changes the 1) appraisal regulatory changes to minimize off the wall appraisals by random people, 2) lending standard to not allow people with no money, no job, no income, no assets (NINJAs) to get a loan, 3) no overbuilding of inventory to decrease the demand for housing stock.
If you recall back in the 2004-2006 era, George Bush said that everyone should own their own home. This is where the government got involved to incentivize home ownership by only the (clumsy) government can… “Let’s commission the hell out of lending brokers to give every warm body a loan to go buy a home!”
The double-whammy of teaser rate resets … and the resulting big monthly payment hikes which sunk a lot of homeowners …
After 2009, the Federal Reserve got involved to “bailout” these big banks that commissioned the heck out of their minions to give these loans to unqualified people (sub-prime loans).
It seems unfair that the banks get relief from realizing their losses on their financial statements but the government knows that property values are the collateral for all those mortgages. And when values drop, borrowers are underwater on their mortgages and will start to strategically default and just go into bankruptcy and start over again (unlike student loans). The government was like “crap we don’t want that to happen”.
Basically, the banks were like a little puppy crapping all over the floor and the government realizes that the banks were incompetent to go outside and help themselves so they went to Petco and bought the puppy some potty-pads so they could salvage the day.
This was not cheap and the government needed to pay for it but in a super-spy way. You can google the term Quantitative Easing (QE) as a fancy way of saying that the Government printed a lot of fake money to bail out banks and make sure the stock market did not collapse.
Here is how…
They just go into a lot of debt with today’s money, say $1 dollar. And just inflate the heck out of the money supply and payback that $1 IOU with $5 dollars that they created.
In the meantime to pay back some of the QE and to get some dry powder in case of a market cycle downturn (normal 8-12 intervals) the government is employing Quantitative Tightening.
About 2012, Warren Buffett … “I’d buy up ‘a couple hundred thousand’ single-family homes if I could.”
Me personally this was about the time I had started looking outside of my local area and started picking up turnkey rentals remotely.
I think too many people idol Warren Buffet as a stock guru but in reality, he is buying businesses with good management in place. As an investor that’s what you are doing by buying a rental granted its small potatoes but this whole thing is not a get rich quick scheme. It’s a proven way to get rich slowly where mitigating your risks with insider trading is allowed. This why joining masterminds and getting an edge is so important but hey if you want to learn by making costly mistakes on the way that’s cool too… that’s what I did. After all my ego at the time told me that I was an engineer and I did not need to get help from anyone after all I had all the YouTube Videos, podcasts, and blog articles out there at my disposal 😁
What is appealing about rental real estate is that you are actually creating value.
Too many kids these days just want to get rich by buying something low and selling high whether it is bitcoin, stocks, or selling products on Amazon.
“True wealth comes to those who create value for others… Everything else is just a gimick that will not be sustainable in the long term because there is an endless supply of Cheap, Easy, Free people who just want to make a buck” – Lane Kawaoka
Single-family property management requires you to provide good stable living conditions for customers.
Shouldn’t I buy my home to live in?
First off never take financial advice from someone who is not on their way to financial freedom! This includes many of our family and close friend who may seem like they are doing well but could be another victim of Americal consumerism.
As an engineer out of college, I made pretty good money was able to save for a few years for a conventional 20% downpayment on a non-owner occupied rental.
There are a million ways you can earn more money. Sell drugs, sell things on eBay or Etsy, start a wedding emcee business, get a raise at your day job. But they are all trading time for dollars. Something that I am consciously aware not to do but in the beginning that’s you have to do. Trust me as the rockstar Sting says… “There is nothing more satisfying than earning your wealth”.
This part is going to suck…
You may need to start a budget because you might be your worse enemy with your out of control spending. Regardless, you need a savings plan in order to be aware of how much you’ll need to set aside in order to make that down payment.
Again you are going to need a 650 credit score, 50% Debt to income ratio, and 20% down payment for a rental. You can listen to this podcast and this podcast on the details. That means if you are buying a $100,000 home that rents for $1,000 a month you will need $20,000 for the downpayment and at least $5,000 for closing costs and some cash reserves in case some issues come up.
You can house-hack which is where you live in the property and get away with a 1-10% downpayment via a FHA loan but this is a little ghetto and its lame living with your tenants. But hey beggars can’t be picky if you don’t have the cash. And as the saying goes successful people do things most people are unwilling to do.
How to Save for a Down Payment
1. Create a Budget
This may seem pretty lame but you may be surprised of the holes you have in your wallet. I’ll be honest even after having 2,000 units of my own I am amazed on how much I spend on dumb things. I
2. Sell Your Crap
If you make $30,000 a year and spend $29,000 of it you are dealing with a very fine margin. Something happens and you are screwed. I work with a lot of high net worth clients and one of the first things we do look for low hanging fruit. I should not tell you this because it will make you sad but its reality that many of these guys will have 300-600k in their 401k just making less than 5% or have a lot of equity in real estate making under 3% a year. Read more about this here.
If your networth is $2M or $200 you need to look for low hanging fruit to get the equity working (harder than you).
One of those ways to get that momentum is to sell items that you no longer need or want.
Watches and jewelry are obvious choices. When I got out of college and was a cheapo I went to my parents house and sold all my old Nintendo and Super Nintento games.
Keep in mind when you buy things especially tech which things have good salvage value. Which is why I try to buy the best which have a good resell value.
If you are using Craigslist or Facebook Marketplace be safe by meeting people in a public place but if you don’t like doing it and your net worth is under $100,000 you need to suck it up.
3. Set Aside Unexpected Money
Anytime you receive money unexpectedly like a gifts, tax refunds, work bonuses, or stock dividends, put it into your down payment savings account.
*If you are looking forward to getting a tax refund you need to stop thinking like the average broke American. Increase you W9 witholdings so you owe the IRS money after you do your taxes so you don’t give your government a tax-free loan. I have typically claimed 19 exemptions. Also consider to extend your taxes each year…. you are not filing late…. you are just decreating the IRS window to audit you by 6 months.
4. Take on Extra Work
Find a part-time job or side hustle to bring in some extra money? Better yet find something you are passionate about. In the future (once you are financially free) you will look to do things not of the money but something you are passionate about. In addition, in the process you can use this side gig as a means to change your tax situation and allow you to be creative in what you write off for taxes.