Category Archives: Saving and Investing

Good Thing I’m a Bad Stock Picker!

stock-market-board
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?

Buying an Investment Property Sight Unseen

house
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?

Successfully Launch Into Adulthood

after college

A few of my co-workers have mentioned that they are postponing their retirements so they can “help out” their adult children or soon to be adult children. I think it’s great when a parent can lend a helping hand to their children as they transition to being an adult, although teaching them financial skills is often better than just giving them a handout. I also have no problems with a child living at home with their parents as they settle into adulthood, as long as they use that time to improve their financial circumstances by saving and investing their money. But by taking care of every aspect of a child’s financial life, he or she will never learn these important life skills. Here are a few things that one needs to learn financially as they become adults:

Credit Cards

Many people entering adulthood already have credit card debt along with student loan debt. You may think that this is the norm, and it may well be, but don’t treat it as such. Treat it as an emergency! Having high interest credit card debt will set you back financially. If you have credit card debt which was not accrued paying for life essentials like food and shelter or getting to and from work, immediately cease spending on non-essentials until you have paid off that debt. Contrary to what some may say, credit cards are not inherently evil. A credit card is only a tool. If you pay your balance off every month and having a card does not tempt you to spend more than you usually would, it can be a great tool. (If you cannot handle the responsibility of a credit card then I’d definitely recommend using a debit card/cash only) Many smart users of credit cards earn lots of points which can be redeemed for travel or cash.

Credit Score

Another important aspect of having a credit card and using it responsibly is that it builds your credit score. Why is a great credit score important? You want to buy a house? You get the best interest rates with a high credit score. Same goes for financing a car. You have student loan debt like many this generation do? You better have an excellent credit score if you want to refinance your student loan to a lower rate. You will only qualify for credit cards with the best bonuses if you have a high credit score. Many employers will also check a prospective employee’s credit score.

Budget or Anti-Budget

So you’re an adult now and you’ve got bills to pay. You’ve got to make sure that you have enough money to cover your expenses. If your expenses exceed your income, then you’ve got a problem. Making a budget probably isn’t much fun and many people scoff at it. However, with many online budgeting sites, like Personal Capitaland Mint, it makes budgeting easy to do. No need to break out your excel sheets and list out all your expenses. I will be honest though, I don’t really budget, but instead I have an “anti-budget,” which is a term coined by Paula Pant who blogs at Afford Anything. I list out my expenses and figure out how much I should be able to save. I make sure I save that amount each month and don’t stress about my spending. Whether you decide to budget or use an “anti-budget” will be determined by your personality.

Live below your means

I remember many of my friends who graduated from college and immediately went on a spending spree. If you have a full-time steady job, you probably have more discretionary income than at any point in your life and it’s tempting to inflate your lifestyle. However, it’s in your best interest to continue living like a college student. Buying a new car, expensive outfits or even buying a house does not make you an adult! Like I said above, if your expenses exceed your income, you’ve got a problem. You’re young and saving for the future may be the furthest thing from your mind, but this is the best time to start saving and investing. The magic of compounding works if you give it time, which is why it is important to start early.

Investing

I was talking to a friend, who is in her 30’s about investing, and she said that her mom handles that for her! And, no, her mother is not an investment advisor. Maybe you don’t have an interest in investing, but it’s in your best interest to learn about it. No one will care more about your money than you do, plus it is something that is important for your future financial health, so you might as well learn about it now. How do you expect to save enough to retire if you don’t have a basic understanding of investing? Living below your means and saving is important, but it is not enough! You want to make your money work for you. Stuffing it underneath your mattress won’t earn you anything. Neither will putting all of it in a savings account earning less than 1%. Spend a few hours learning about investing by reading the Bogleheads website or JL Collins’ stock investing series.

Quick Tip: When it comes to paying bills and investing/saving, make it automatic. It makes life easier. When it comes to bills, you won’t worry about late payments. As to investing and saving, it’s a great way to pay yourself first so you avoid the temptation of spending it. It is also a great way to get into the habit of saving and investing. However, make sure to review your statements to make sure everything is correct.

Cooking

Wait, I thought we were only talking about finances? Cooking is an important life skill, and it can also save you a lot of money. Cooking your own food at home is not only more affordable, but it is healthier. Cooking is not rocket science, if I can do it, pretty much anyone can too.

Learn skills

Just because you’re out of college, doesn’t mean you should stop learning. Learning life skills is important, but so is learning skills that will help you advance in your career. Learning new skills is very convenient as you can do it online using Coursera or Udemy. For certain courses, you may be able to receive a certification as well.

Side Hustle

You’re already working a full-time job, who wants another job? Maybe you want to earn some extra cash to build up your savings or pay off debt. Employees are expendable these days so it’s a good idea to have another source of income. Also, having a side hustle might feed your entrepreneurial spirit or passion and possibly replace your full-time income. Having a side job is a lot more flexible nowadays and often will not require you to take a job with set hours. Here’s a list from The College Investor of 50 ways to make a side income. You can also check out a few more ideas from David Carlson who runs the blog Young Adult Money as well as his book Hustle Away Debt: Eliminate Your Debt by Making More Money.

What other financial skills should young adults learn as they transition into adulthood?

Mind-blowing Ideas Found Reading Blogs

credit: Freedigitalphotos.net

credit: Freedigitalphotos.net


Even before I started my own blog, I was a blog reading addict (mostly personal finance blogs). I’ve learned so many great things and gotten so many ideas from reading blogs, which include ideas that the main stream media often don’t talk about. I was tired of reading the recycled articles about making a budget and contributing to your 401K up to the employer match. I didn’t want to read any more stories about how early retirement was almost impossible (and by early they meant 50’s) and that even retiring at 65 might be a pipe dream. Here are some of the amazing things that I’ve learned thus far:

Retire in your 30’s

I always thought that, like most people, you get a job, work for 40 some odd years and retire in your 60s. I thought I was doing an awesome job saving for retirement when I opened an IRA account and increased my 401K contribution over the amount that my employer matched. Since I was working in government where I had a pension, I started thinking that retirement at 55 would be possible and thought that was incredibly awesome. Now when I stumbled upon the Early Retirement Extreme blog where the blogger, Jacob, said that he retired after working 5 years and was not yet 30, my mind was blown. He was a little extreme with his frugality, but then through Jacob’s blog, I found Mr. Money Mustache and his story really made me think that early retirement was possible. He went into detail about how he and his wife retired early, and argued that early retirement didn’t mean a life of deprivation, explaining often that he lives a very fulfilling life. I’m not going to be able to retire in my 30’s, but it’s possible I get there in my 40’s.

Simple, Stress-free Investing with Superior Results

I have talked about index investing many times on my blog. I believe in it and I am glad that I found this strategy. It wasn’t always this way though. Like many others, I used to chase returns by trying to a hit run by investing in the next hot stock and by investing in mutual funds which had the best returns. Now I realize that it is difficult if not impossible to consistently beat the market, so I just stick with low-cost index funds. Warren Buffet has encouraged most investors to just invest in low-cost index funds and I’m going to take his advice. This investment approach has also reduced my stress. The market drops a few hundred points! There’s a recession coming! Britain is exiting the EU! I’m investing for the long haul and I don’t really care about the stock market fluctuations. I continue to invest and stay the course. I’m not exactly sure when I first learned about index investing but it was likely on the Bogleheads’ forum.

Don’t Pay Taxes

You know how the saying goes that “there are only two guarantees in life: Death and Taxes.” Well, what if you could pay very little or no taxes? Wait wait wait, I’m not saying you should be like Wesley Snipes and get convicted of tax evasion. There are legitimate ways for regular working Joes to shelter our money from taxes. When I read the blog post title $150,000 Income, $150 Income Tax and Never Pay Taxes Again, I was very interested. We often hear about maximizing our returns when investing, but most times we ignored tax savings. Taxes are boring and complicated. Nobody really wants to deal with them. Heck, most people I know have no idea about their own taxes! They send their tax documents to the accountant who files the taxes for them. The tax policy in the US targets people with earned income so if you reduce your taxable income by “making your take home pay as small as possible,” you can avoid paying a good amount of taxes. Justin who blogs at Root of Good and wrote the post about paying only $150 in income tax with a $150,000 income, suggests that “you do everything you can to make your take home pay as small as possible” by maxing out tax advantaged plans like Retirement plan contributions (401k, 457 or 403b plans), flexible spending accounts, health savings accounts, and others. I’m pretty sure that after I read this post, I immediately logged onto my 457 plan online and maxed out my contributions.

The post about never paying taxes again was found on the Go Curry Cracker blog and it gave four simple rules to eliminate taxes:

◾Choose leisure over labor
◾Live well for less
◾Leverage ROTH IRA Conversions
◾Harvest Capital Losses AND Capital Gains

I’m especially a fan of choosing leisure over labor to eliminate taxes. That’s a win win! This advice is geared more towards those seeking or near early retirement, which is what I often dream about.

Out-of-State Real Estate Investing

I always wanted to invest in real estate but it didn’t seem possible because real estate was so expensive in the area where I lived. When I read that the blogger FI Fighter, who also lived in a high-cost-of-living-area, invested in real estate in states where the prices made more sense and where the properties would cash flow, I was very intrigued. I was somewhat skeptical at first but after some due diligence and research, I jumped in and also purchased a rental property out-of-state.

Travel for Free

I used to focus on earning cash back on my credit cards. When I read bloggers write about earning travel points on credit cards and going to exotic locations for nearly free with points, I didn’t really pay much attention because I always figured it was just too good to be true. There was a catch, right? However, after I read more and more stories of people were doing it, I was of course, interested to see if I could get in on it too. After learning some of the “tricks of the trade” with travel hacking, I’ve been able to score some free flights and have stayed at hotels (some pretty luxurious ones) for pretty much free. If you are someone who overspends with a credit card, travel hacking is not a good idea. If you are disciplined with your spending and are an organized person, you can definitely take advantage of travel hacking. I think I first started reading about travel hacking on the Flyertalk forums, but the information can get pretty technical and it might be intimidating to newbies. I think from that forum, I found the Million Mile Secrets blog which is a great resource for those interested in pursuing this. If you want to learn more about this area, there is even a free online course about the topic on Travel Miles 101. If you want even more hand holding, you can contact Holly from Club Thrifty with your ideal itinerary and she will help you create a “credit card rewards-fueled plan that can make your travel dreams come true”

You Can Really Make Money Online!

I always thought that there was an opportunity to make money online but I didn’t know how, plus I am not the least bit technically inclined. Reading articles where bloggers reveal how much money they earn online really opened my eyes to the opportunities out there. Check out the income reports on Club Thrifty and Making Sense of Cents and tell me you don’t want to learn more about this possibility. I definitely am and will need to learn more about how to earn some money online! The best thing about making money online is that you can be often work from anywhere and your schedule is a lot more flexible. Also, if you do it right, a lot of the income can be passive.

Drastically Reduce the Cost of Your Cellphone Service

I was in a family plan with AT&T and had an employer discount. I thought that was the best that I could do. There was no other way to reduce this expense unless I went with some unknown network which was probably unreliable. Then I read Is Your Cellphone Plan Ripping You Off? on the Saving the Crumbs blog and I knew that I could saved a lot of money by switching. Being that Cricket Wireless uses AT&T’s network, I figured there was no downside to the switch. With Cricket Wireless’ family plan, you can have 5 smartphones with unlimited talk and text and 2.5 gigs of data (after which your data speeds are reduced) for $100. That is less than half of what you would pay if you had a similar plan on AT&T. So why wouldn’t I switch? I’ve also heard great things about other plans like Republic Wireless and Ting which are a lot more affordable that the traditional plans, but I haven’t tried them. If you’re interested, you can check out the review on Republic Wireless here, and the review on Ting here.

Consider an Adjustable Rate Mortgage
When I was purchasing a co-op, I went to the bank and the loan consultant just assumed that I was looking for a 30 year fixed mortgage. I didn’t know any better and after the housing crash in 2007, there was such a stigma with adjustable rate mortgages that I just assumed that a fixed mortgage was superior. I truly regret not doing more research about this because I would have saved a lot of money if I didn’t go with conventional advice. When I read Financial Samurai’s post, 30-Year Fixed Mortgage Loan or an Adjustable Rate Mortgage (ARM)?, I knew I made a costly mistake. Here is an excerpt of what he had to say:

“First of all, the average duration one lives in and owns a home is 7 years. If that’s the case, what on earth are you doing borrowing a 30-year fixed rate mortgage for? A 23 year + overestimation of ownership is a serious miscalculation based on the statistics at hand. With a 5/1 ARM, your underestimation is only 2 years, but you already have baked that in”

We bought a co-op which is a junior 4 (small dining alcove converted into a small bedroom). Being that our family was growing, it was very likely that we’d outgrow the apartment in 5 to 7 years. I did run the “rent vs buy” calculator and given other factors, I think it made sense to buy a co-op even given this timeline. But it made no sense to get a 30-year fixed mortgage. If I had gotten a 5/1 ARM, I’d reduce my interest rate by 1% saving over a thousand dollars a year. *Face Palm*

Do you see anything here you might implement in your life? Have you read anything tips or ideas on other blogs that was really mind-blowing? If so, please share in the comments!