Author Archives: livingrichcheaply@gmail.com

Good Thing I’m a Bad Stock Picker!

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Andrew Hallam, author of the book Millionaire Teacher, “crushed the market indexes” investing in individual stocks, but decided to sell all of those stocks, worth over $700,000, and put all that money into a total stock market index. He explained that he came to the realization that a big part of his success was due to luck even though he said that he researched companies more than anyone he knew, ordering five to 10 years worth of annual reports, and scrutinizing them from back to front. He pointed to Bill Miller, who ran a mutual fund which beat the S&P 500 for 15 straight years until the Great Recession at which time, the fund lost dramatically compared to the S&P 500. Hallam reasoned that if someone as smart as Miller, with the access to research and information that he had, could fail, then who was he to think that he could continue beating the market.

I’m not sure most people would have the self-awareness and humility to realize their limitations when they’ve been so successful. We’re humans and sometimes facts don’t matter. We often suffer from recency bias. “I’m beating the market, I must know what I’m doing when it comes to picking stocks!” It doesn’t matter that the facts and data show index investing consistently beats active investing. Sometimes investing in a bull market is dangerous because everyone thinks they’re smarter than they really are.

Back in the spring of 2000 when I was still in college, everyone and their mother was investing and making money in tech stocks. Everyone thought they were expert stock pickers and everyone was glued to CNBC. I opened a stock trading account so that I wouldn’t miss out on this money making opportunity. It was not a lot of money, but it was a lot of money to me at the time. I bought some internet stocks that were recommended by analysts which I had never heard of. I also bought well known stocks like AT&T (they were soon offering a wireless IPO and IPOs were hot!). Yes this is AT&T wireless. To you youngsters who don’t know a time without cellphones, wireless phones were a big deal back then and this stock would no doubt be a big deal (so I thought). About one month after I opened my stock trading account, the internet bubble burst and my stocks came crashing down. I lost 50% of the value in the account.

After the internet stock bubble bust, I was a little weary but I didn’t totally give up on stocks. Fortunately, when I started working, I kept most of my investments in mutual funds, and most of them were in low cost index funds. The lure of investing in individual stocks kept calling me though, because hitting a homerun with an individual stock was much more exciting than the slow gradual returns of index funds. However, I was always a little risk averse. Probably because of what I experienced during the internet stock bubble bust. That’s probably a good thing.

I invested in some winners. I purchased Nokia stock at $14. It made the most popular cellphones at the time and I loved my Nokia phones. The stock price went up to the $40 range and I held on to it…even as it went all the way down to the single digits. Around the time before the Great Recession, I held stocks in Starbucks. They were rapidly expanding and everyone had to have their daily grande non-fat caramel machiatto frappucino. However, I sold my shares in Starbucks for a small loss after the Great Recession hit, thinking the stock price would drop. Who’s going to pay $5 for coffee when the economy was in the tank and we’re in a recession? The price of Starbucks stock would eventually double and then triple from the price I sold it.

“Don’t forget that your incredible success in consistently making each move at the right time in the market is but my pathetic failure in making each move at the wrong time. … … I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results” – John Bogle

I was having a conversation with a friend who thinks that he’s pretty knowledgeable when it comes to investing in the stock market. He has made some profitable investments. However, he has also often kept a lot of money in cash because he didn’t have the time to do the necessary research. He currently is staying out of the stock market because he believes that there is too much uncertainty, especially in the political arena. He said this months ago, but the stock market has still be roaring upwards. He might ultimately b e correct in his prediction, but his timing is off. You not only need to know what company to invest in. You also have to have the timing right as well when it comes to buying and selling. You have to be right about all three, which is why being a great stock picker is difficult. Do you think you can do that?

Not All Turnkey Rental Investments are Created Equal

Credit: freedigitalphotos.net

Credit: freedigitalphotos.net


I hesitate to use the word “turnkey” because there is no clear definition of what it means. Sometimes I refer to my real estate investment as a turnkey investment, but that isn’t exactly accurate. Generally, a turnkey property is defined as a house that has been fully renovated and is ready to be rented out. The company that sells this turnkey property usually also manages the property for the investor. The goal is for the management company to handle the day-to-day operations of the property, it takes a fee, and you, the investor gets to sit back and have the remainder of the rent sent to you. This is mostly true for my investment except the first part.

The Hybrid Turnkey Approach

The company I worked with first acted as my realtor in bidding on the foreclosure. Then it acted as a project manager in hiring and managing the contractors in making renovations to the property. The property I purchased ultimately appraised for about $10,000 above the purchase price plus the renovation costs. If you were to buy a pure turnkey investment property, the company would have purchased the property at a foreclosure or short sale, made the renovations, and then marketed the property to potential investors. The key difference is that I purchased the property at the distressed price, whereas an investor of a turnkey property will purchase at fair market value. The turnkey company is a business and needs to make a profit so that is understandable. And I am not saying that buying a rental property at fair market value is unwise, I would just prefer to have some more equity from the start.

I was talking to another newbie long distance rental property investor, just like I am, and he purchased a property for about $55,000, which rents for $850 a month. Sounds like a good deal, right? However, he mentioned that the property he eventually purchased did not appraise for the agreed upon purchase price. Apparently, this is not uncommon in some turnkey investment properties. Appraising a house is not an exact science. It can be pretty subjective. An appraiser will compare the property you are looking to get a loan for and compare it with similar houses that were sold near that property. Generally, a property’s condition is not taken into account so it can be unfair to compare a newly renovated turnkey investment property to a property which has not been renovated.

He said that he was able to negotiate the price lower which made it a “steal” of a deal in his eyes. (Sometimes the seller won’t budge and the investor will have to put a higher down payment to get the deal done) His opinion is that the bottom line is what the cash-on-cash returns are and what his net monthly cash flow each month will be. Granted, those are incredibly important factors but I think it is short-sighted to only look at the numbers and nothing else. And it is definitely what I looked at when I decided to make my investment. But one thing that is also important when making an investment is to have an exit strategy. What if you want to sell the property? Will there be demand by other investors or by those seeking to purchase it as their primary residence? Will you have to take a loss when you sell it? I don’t want to be overly critical of his investment because he might just be a steal of a deal. I just don’t want to take that risk.

Cash flow is #1 but appreciation potential also matters

When investing in rental real estate, cash flow is important. Living in NYC, I hear many people talk about investing in properties here, even though there will be negative cash flow each month. They assume that because of the high demand in NYC, there will be great appreciation and they can then sell it for a much higher price. I’m not going to lie, the appreciation that I’ve seen in some neighborhoods in NYC are pretty impressive. I’m not taking that risk though. What if there is another downturn in the housing market? Will you be able to sustain paying the mortgage, property tax, insurance and for the upkeep. Also, NYC is pretty tenant friendly, so what will happen if your tenant doesn’t pay rent and it takes a long time to evict them?

While I invest for cash flow because appreciation can sometimes be hard to predict, the appreciation potential of the property and the market is still important. The newbie investor I spoke to bought a property that doesn’t appear to be in the greatest of neighborhoods. The numbers will look great because the property is very cheap compared to the what it will rent for, but numbers aren’t everything. You might end up with a property that is hard to sell or that you’re forced to sell at a loss. You might be dealing with more headaches involving the tenants.

Generally, when investing, money is made on the purchase so I would prefer to buy a property at distressed sale prices and fix it up to “force” appreciation. Once again, I’m not saying not to pay market price for a turnkey property or that I wouldn’t do it. I just prefer this route if possible. If I feel a market has a lot of appreciation potential, I would be more likely to pay fair market value.

What do you look for when you’re investing in real estate?

Facts Don’t Always Matter

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“When dealing with people, remember you are not dealing with creatures of logic, but with creatures of emotion, creatures bristling with prejudice and motivated by pride and vanity.” – Dale Carnegie

Sometimes facts don’t matter. Some people believe in “alternative facts!” One conclusion that can be drawn from this phenomenon is that people are humans and often times our decisions are dictated by our emotions rather than by logic or facts. Facts don’t matter as much as emotion does. Stirring up strong passionate emotions like anger, fear, outrage, and on the more positive side, love, inspiration, and hope will often trump facts, logic and math.

A friend of mine, who taught a financial literacy class, talked about Dave Ramsey’s snowball method of paying off debt to his students. With this method, you pay off the debt with the smallest balance first and then move on to the next one with the smallest balance. “The math doesn’t make sense,” I argued, and countered that you should pay the account with the highest interest rate first to save on the interest you pay. My friend explained that while math may be on my side, his experience told him that paying off small balances motivated people to continue on the path to debt freedom. What good are facts and logic if someone gives up on making those extra payments because it seems like such an uphill battle? We need to win the small battles to win the war.

In a similar financial debate, many often ask whether you should pay off debt first or invest. In a recent post from the Big Law Investor, Josh asked whether you should pay down an auto loan of 1.9% or invest. I always thought my decisions to be fact-based, rational, and logical. I always came down on the investing side and wondered why others chose to pay off low interest debts so quickly. If you look at the math, it would seem pretty easy to beat a 1.9% return.
In the comments section, one reader said, “In my experience, most folks don’t actually invest the difference and /or increase their lifestyle since they have the low-cost debt.” Josh replied, saying that lifestyle creep occurs without you even realizing it when there’s “extra cash sloshing” and that you’re probably tricking yourself into thinking you’re actually “investing the difference”. I started to think about what was said and realized that this was true with me. I had been tricking myself into thinking that I was investing the difference when that wasn’t really the case.

My student loan interest rates are low and I haven’t made any extra payments to them since paying off the high interest ones. I also recently bought a car with an auto loan even higher than the rate posed by Big Law Investor’s blog post (It’s at 2.9%). I didn’t pay it off either, but am I using that extra money that I have to invest? Not really. I keep thinking I will use that money to invest but just haven’t done it yet. Maybe I’ll buy another rental property, but maybe I won’t. However, in the 10 years that I’ve had my student loans, did I invest the difference because I didn’t put many extra payments towards those loans. I would say yes, to a certain extent, but it’s hard to say how much extra I invested. And I think it is highly likely that much of that excess cash also went to lifestyle creep instead.

After this realization, I think I’ll be taking some cash I have on hand and combine it with my tax refund this year to make extra payments on my auto loan. Speaking of tax refunds, I used to think it was silly for people to want big tax refunds. Getting a large tax refund is giving the government an interest free loan right? And having money now is better than getting the money later, so why not take the money now by increasing your withholding? It made sense, but when I owed money to the IRS a few years back, I was very upset. But shouldn’t I have been happy? The government had given ME an interest free loan, and I just had to pay it back. It didn’t feel like a win to me and I had to allocate some savings to cover the tax bill. With my higher paycheck throughout that year, did I save and invest that money? I’m pretty sure the answer to that is “NO.” After that painful lesson, I changed my withholding and have been getting a tax refund ever since. And now, every year after I get that tax refund, I make contributions to my Roth IRA account as well as my wife’s IRA account, contribute to our son’s 529 plan, pad our savings or make extra payments towards debt (mortgage/student loan).

Money is more about emotions than the numbers. And as disciplined and logical as I may think I am, I am still human. I’m not a robot analyzing every decision, inputting the numbers and running an algorithm to determine the best and most optimized choice. I have to remember that when making financial decisions and in giving financial advice to others.

Your Most Important Financial Decision

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I am proud of many of the financial decisions that I’ve made in my life. I opened an IRA account while in college. I signed up for my employer’s deferred compensation plan my first day on the job, even though most of my co-workers said they were too young, had too little money, and that retirement was so far away. I am proud that I continued living below my means even as my income increased, and even as my peers inflated their lifestyles. But the decision that has had the most positive affect on my finances is marrying my wife. While, marrying someone is not just a financial decision, it is undeniable that it will have a huge impact on your finances.

The best investment strategies and savings advice won’t do much for you if you save and invest money while your spouse promptly spends it all. The leading cause for most divorces is financial stress. And a divorce will often leave you in financial shambles, as well as emotional shambles. According to a 2016 Fidelity survey, the top cause of money spats is the significant other’s spending habits.

Opposites often attract and a lot of times financial opposites attract. I’ve met a number of couples where one is the spender and the other is the saver. There’s the husband who wants the latest tech gadgets and the biggest flat screen television set. There’s the wife who has more name brand shoes than can fit in the closet and handbags which cost as much as or more than the big flat screen T.V. This causes conflict when the saver spouse doesn’t agree with those expenditure and prefers to save or invest that money instead. Sometimes the saver spouse will feel like he or she is getting the shaft and gives up on saving and spends on their wants too. I’ve also met some couples where both were spenders. In that case, they might agree on the SPEND SPEND SPEND philosophy, but their financial stress results when bills come due and money is tight.

I am very fortunate that my wife and I are pretty much on the same page when it comes to finances. In an old post from over two years ago, I wrote an Ode to My Frugal Wife. I wrote how we’d rather make an effort to make each other happier, rather than buy material things and spend money on things that won’t bring us happiness. But even though we have the same financial mindset, it was very helpful that we talked about these issues during a premarital counseling class. It is also important that we continue these discussions now that we’re married.

In a New York Times Article, Ron Leiber lists four money talks you should have before marriage.

1) How did your parents deal with money, how does that impact how you deal with it, and how might that impact the relationship?
According to the article, so many of our money behaviors are learned so it’s important to know your significant other’s “financial ancestry.”

2) Can I see your credit report?
A person’s credit report holds a lot of information about his/her financial past.

3) Who’s in control?
Gregory Kuhlman, a psychologist who runs marriage success training programs, says that control issues come up constantly when talking about money. He listed a few things that should be discussed: “If one person is making most or all of the money, does that person get to make most or all of the financial decisions? If you’re the car aficionado or have researched all of the local school options for the children, do you get to make the decisions about those things?”

4) Just how rich do we want to be one day? What is your “desired level of affluence?”
Mr. Kulman asks his clients, “are our career paths going to be something that pulls us together? Or, more often, are they things that will tend to pull us apart, where we’ll really have to be proactive to make sure it’s under control?”

I don’t recall many of the questions that my wife and I discussed at the premarital counseling class, but three questions stand out and they are questions we ask each other still when we discuss money.

What are your short-term financial goals?

What are your long-term financial goals?

How will we get there?

When my wife and I talk about finances, those are the core issues we focus on. Do we want to help our children with college costs in the future? Let’s open a 529 plan. Do we want to retire early? Let’s try to max out our retirement plans. Do we want to buy a house? Where should we go on vacation and how much will it cost?

I know that it is Valentine’s Day and talking about finances is not the most romantic thing, but to have a successful relationship, having conversations about money is necessary.

What are other “money talks” married couples and those looking to get married should have?

Buying an Investment Property Sight Unseen

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A little over a year ago, I purchased an investment property in Kansas City, Missouri. I have never been to Kansas City, Missouri. I bought the property sight unseen. I live in New York City and can’t afford rental property in this area so I decided to invest out-of-state where the numbers make more sense. I am a risk averse person and buying something sight unseen sounded crazy. I just didn’t have to time to fly out there to see the property personally. However, ultimately, I determined that me physically going to the location wouldn’t have made that much of a difference. Was it really necessary to drive around the neighborhoods, look at houses, and speak to the staff of company I was looking to purchase my investment from? With the power of the internet, I can research the neighborhoods, look at pictures and videos of the houses, and speak to the staff of the real estate investment company over the phone. I know very little about housing construction and the extent of my home improvement skills is changing a light bulb and hammering a nail into the wall. Yes, it is pretty pathetic. I am much better off in leaving this to the experts.

Here is what I did instead:

First, when choosing someone to work with, I went to the forums of Biggerpockets. There are many people asking for references and a few names consistently came up as being trustworthy. I contacted the people who gave the good reviews and asked them more specific questions about how their investment was going. I googled those companies and checked if there were complaints on BBB. The most important thing when investing (and especially when investing out-of-state) is to trust the person you are working with. And even if you do trust the person, you must always make sure to the best of your ability that what they are saying is true. Trust, but verify!

After narrowing down the companies that had great reviews, I contacted them and asked them more specific questions regarding the investment. If the person I spoke to take forever to reply to e-mails or phone calls or if they sound shady or overly optimistic about their investment, sounding like they were making a sales pitch, I’d be less inclined to work with them. Sure, an in-person meeting may be slightly better way to determine whether one can be trusted, but I don’t think it was absolutely necessary.

Researching the neighborhood and property:

Zillow: This is one of the best tools giving you a good amount of information about the property and neighborhood. It will provide you with a “Zestimate” which is their estimate as to the approximate value of the property. They seem to do a pretty good job estimating how much the property is worth. You can also look at the comparable sales in the neighborhood. There are also ratings for the schools in the neighborhood. Another great tool that Zillow has is their rent zestimate which estimates the amount of rent you can probably get from that property. It is a pretty good estimation but also check out Rentometer, which also gives a rent estimate. Another thing you can do is to call up local property managers and ask them how much rent they think you can charge for that property.

Trulia: It provides similar information to Zillow, but I like using Zillow better. I do like Trulia’s Crime Map which shows the amount of reported crimes in that neighborhood. It also has information about demographics as well as average commute time and businesses in the neighborhood. For more information about crime, SpotCrime is also a good resource. Another great resource with a wealth of information about various neighborhoods is neighborhood scout. (You will have to pay for more advanced data)

The Biggerpockets forum is not just a great place to get recommendations on companies to work with, but it is also a great place to find which neighborhoods you should invest in. There are plenty of helpful people who will tell you what areas to avoid and which areas are a good investment. Also, check out the City Data forum where there are many locals who will provide information about the neighborhood you are looking into. The Biggerpockets forum is geared towards investors whereas the City Data forum seems to be people talking about their neighborhoods generally and helping those who plan on moving there with information. Another way to look at the neighborhood and house without traveling there is to use Google Street View. Of course, these pictures may not be up-to-date but it still gives you a feel for the neighborhood.

Seeing the property- the turnkey company, realtor or whoever it is you are working with will send you pictures and/or videos of the property. If you want to make sure these pictures are accurate, you can hire an independent third-party to take pictures of the property and send it to you. For $69, WeGoLook will send an agent to the property to take some pictures and verify the condition of the property.

Finally, after all this research, I think that an inspection and appraisal of the property adds an extra layer of security. If you are taking a mortgage on the property, the bank won’t want to take the risk of giving you mortgage with a property that is in horrible condition and about to fall apart. The home inspector has no incentive to lie about the condition of the property. Consider using a different home inspector than the one recommended by the turnkey company or realtor you’re working with to ensure there is no conflict of interest.

I’m not saying you should purchase real estate out-of-state without seeing it. If you are able to fly out to see the properties offered, check out the neighborhoods, and talk to the people you will be investing with, it’s a great idea. I’m just saying that it is doable even if you cannot personally go there. Just make sure you do your due diligence. Investing in real estate has risks and investing in a property out-of-state has increased risks, but they can be reduced.

Would you consider buying a property without seeing it? If you’ve done this before, are there any other resources you would recommend using?