I spent time over Thanksgiving reviewing my 2017 goals, refining my investing strategy, and setting goals for 2018 and beyond. FYI, you can read it on the blog or listen to the podcast episode for more detail. I wrote it to organize my thoughts and because I believe in written goals. Either way, enjoy and please share your thoughts.
It's hard for me to share my goals and discuss personal things in public as I'd much rather keep everything private. But the benefits that I receive far outweigh my personal hangups. My reasons for continuing to share:
- I believe in written goals!
- It holds me accountable and makes me perform at a higher level.
- It leads to great discussion and insight, which helps me fine tune my strategy and goals.
- It gets clients or potential clients creating and discussing their investing strategy more as well. It's a win/win!
Two Big Take Aways (So Far)
Discussing and learning investing strategies from Charles Roberts, Joe Massey, and Justin Cooper (plus others who haven't posted on here) have been insightful.
- High Cash Reserves - A common theme is maintaining high cash reserves (6-12 months+ for each property.) It made me rethink how cash heavy I want to stay. The finance side of my brain has the constant struggle of keeping cash stashed for rainy days vs earning a return (My thoughts in the "Cash vs Earning a Return" section below.)
- Simplicity - I was surprised at how simple they keep their investing strategies. These guys are experts in their respective fields and don't do crazy deals! From all the books and blog posts that I've read, it's not what I was expecting. It's made me get even more focused on the KISS principle. I have seen a correlation to the simpler I keep things in business and stock marketing investing, the better results/returns that I receive. I'm not surprised to see similarities to real estate investing.
With the KISS principle in mind, one of my continual goals is to systemize (as much as possible) my investments and business. If you've programmed anything before, you're familiar with IF / ELSE logic. An example explains it the best for my dollar cost averaging into the market:
IF my opportunity fund (investment cash) is ≥ (greater than or equal to) the down payment, THEN BUY.
ELSE (IF NOT), then don't buy and wait.
In other words, breaking things down to very basic rules. Now, of course, I'm not going follow the rules blindly and buy the first property that I can afford. I've found using the rules, within in context, reduces less "mind clutter". It leads toward quicker and better decision making by keeping your emotions in check.
I'm even more focused on dollar cost averaging into the real estate investing. Here's why:
- In business, I have success when I put the "blinders" on and do the daily grind... for years.
- In stock market investing, I have success when my investing is on autopilot (automatic contributions).
- Plus I just have more "mental" space because I'm not worrying about those things.
I'll keep that winning attitude moving forward because I believe real estate will be worth more in 50 years than it is now. Now I have more mental space and energy to put towards things in my control.
Rethinking My 401k Contributions
Before discussing this, understand these two things:
- I'll never retire. I've never envisioned myself as "retiring." I can't see myself not pursuing opportunities until the day I die, even if I have enough money to last me 300 years. At 80, I'm sure what I'm pursuing will be very different than today. Regardless, I want to always be learning and trying new things. It keeps the mind sharp and life exciting.
- I'll be financially free before I'm 59.5 (the age that you can withdraw without the 10% penalty). I'm only 35 years old. I have time on my side, live frugally, a hard worker, and taking advantage of this amazing period of opportunity that we're in. Side rant.... There have not been many times in history where opportunities like the current evolution of the Internet. I'm so happy that I'm alive right now and was born in America. I have zero excuses as to why I can't achieve financial freedom.
Since I never plan on tapping into my 401k (until the government starts making me take distributions at 70.5), it begs the question of "How much do I need in my 401k?... or any at all?!?"
Yes, I do believe in contributing to 401k's (and similar retirement accounts). It's my ultimate "oh shit" emergency fund. Here's my strategy for emergency funds:
Tier 1 - 6 months in a savings account. This includes 6 months of personal funds and 6 months (including salary expenses to myself) in my business account.
Tier 2 - 6 months+ ROTH IRA. I love ROTH IRA's because the money grows tax-free and contributions can be withdrawn at any time without penalty. It's a great emergency fund! I'll continue to contribute every year that we're allowed too.
Tier 3 - 401k (the ultimate "oh shit" emergency fund!). Now I don't have a rule of thumb for how much I need in there. Since there is more than enough to live off of for awhile, how much more do I need put in there? Especially since I don't plan on using it in retirement.
I know that traditional financial planning doesn't classify a 401k as an emergency fund, but I'm of the philosophy that everything is an emergency fund. If things get that bad where we burn through 1 year+ of tier 1 and 2 emergency funds, then I won't give a damn about a 10% withdrawal penalty to make next month's mortgage payment. If things get that bad, I'll presumably be in a lower tax bracket then when I had excess cash to contribute.
401k Contribution Strategy: Focus on 100%+ Returns Only
As I'm typing this, I haven't fully made up my mind. I'm leaning towards no more 401k contributions, except for when I can get immediate 100%+ returns. There are two scenarios that can achieve this:
- My wife's amount to get her employer match. Many employer matches give you a 100% return on your money. For example, if you invest $5,000 and they match $5,000, that's doubling your money. I have a hard time turning down an immediate 100% return!
- I'm self-employed, so I don't get the traditional employee/employer matching contributions. But, I get the amazing benefit of contributing 25% of my salary to my 401k, completely tax-free!
As an employee, when you contribute to your 401k, you defer your federal and state taxes. You still pay FICA (Social Security and Medicare) of 7.65%. But there are more taxes that your employer pays. When you're both the employer and employee, the tax savings are borderline crazy.
Let's run a real-world example. These numbers are based off my previous business (before real estate) as a California resident.
6.2% Social Security
28% federal tax bracket
9.2% California income tax bracket
6.2% Social Security
1.45% Medicare (If you didn't know... your employer has to pay this as well!)
2% unemployment tax and misc payroll taxes (rounded)
54.6% total tax savings = 9.65% + 44.95%
The plan I have setup allows a 25% employer contribution of my total salary. For simplicity, let's say I paid myself $100,000. On the employer side, I can contribute $25,000 (25% of $100k) to my 401k, completely tax-free (It's counted as a business expense on the business books.) If I salaried the $25k instead, I ultimately pay $13,650 (54.6%) in taxes. OUCH!
That tax savings is an immediate 120% return ( [ $25,000 - $11,350] / $11,350 = 120%!)
I realize Colorado will be cheaper, but not that much. It'll be around 50% tax savings instead and close to 100% return. I can't see myself not contributing and taking advantage of it.
For clarification, when the money is pulled out, I (not the business) will have to pay federal and income tax on it. I avoided 17.3% other taxes. Since 17.3% is greater than the 10% early withdrawal, what's the downside?
If you want the details of these 401k plans, read Vanguard's website on the Individual 401k plan.
Self Directed 401ks? - Nope!
I'm sure some of you are yelling at your computer, "Why don't you use a self directed 401k?" If you're not familiar with those, Google it. Essentially, it allows you to take your 401k and investing in real estate to bitcoins. Here's why I'm avoiding it, at least for now:
- Higher fees, more complexity, rules, and paperwork. I hate all of those things.
- The knowledge of having years of liquid living expenses in a traditional 401k makes me sleep very well at night.
Perhaps, down the road as I set up a new 401k plan for my real estate business, I might consider a self directed 401k. But that's down the road and nothing for me to worry about now. I'm happy earning a ~7% average return from the stock market. I love being liquid and diversified. I can get money from my 401k stock fund in days.
Cash vs Earning a Return
This is a never-ending internal debate I have with myself. It's like the cartoons I watched as a kid where you have people (often the angel and devil) standing on your shoulders debating.
One side: Cash in the bank is soooo nice.
The other side: But you're losing to inflation. You're losing!
Read Betterment's "Safety Net Funds: Why Traditional Advice Is Wrong" post as it has great data.
Here's the summary from their page:
- Don’t keep your safety net fund in cash savings accounts. Odds are you’ll lose money due to inflation, and lose out on potential growth of your savings.
- A smarter way is to invest 130 percent of your safety net in a moderate-risk portfolio (40% S&P500 and 60% 5-year Treasury Bills). This ensures you keep your safety net fund available -- and growing.
On the chart above we’ve plotted the actual returns for every five-year period since 1955 for a $23,377 safety net fund with a 40 percent stock allocation. As you can see, the returns — like those of any investment — can vary on both the upside and downside. However, over any five-year period it is rare to find the value of the safety net fund dip below $18,000. On the other hand, for the saver who keeps a safety net in cash, inflation is likely to chip away at that amount in real terms.
In fact, the best scenario is that you will never need your safety net fund at all. Even the poorest returns on investing will still handily beat cash over 50 years. In other words, cash is a very poor long-term investing — or safety net fund — strategy.
If I have years of emergency funds in my 3 tiers, then how much needs to stay in cash? Won't I be better earning a return on that money? It's in stocks and bonds, so it's liquid -- very liquid. I used to keep cash in money market accounts. But that changed after many money market accounts were frozen a few years ago. That freeze actually scared me more than the stock market crash.
Right now, I'm leaning towards having more cash invested.
Readers, any thoughts?
Flipping Houses Is Not For Me
In 2017 I was partners in my first flip. Even though it went relatively smoothly and I didn't have to do the work myself, I have no desire to focus on fix and flips as a way to generate cash. I have no doubt that it's a very profitable model, but it's an entirely new business that I would have to learn and scale. I'm a believer in doubling down on my strengths, which is online marketing, technology, and working with people.
My emotional intelligence is much, much higher than my construction intelligence!
I can utilize the Internet to build a business with a few thousand dollars to bootstrap it and "sweat equity." The phrase "sweat equity" is in quotes because it takes a lot of time, but I won't be sweating from my air-conditioned home office. The most physical issue that I'll deal with is lower back pain from sitting on my ass too long. Tough business and life!
My goal is build up my network, knowledge, and cash to buy properties for long-term wealth. I can accomplish that quicker by leveraging my current strengths to build up cash rather than forcing equity appreciation through fixing up properties.
Goals for 2018 and Beyond
I typically don't set goals for each year. Setting yearly goals is an arbitrary time frame for me. I just set my goals, work towards them and reevaluate as needed. It typically happens as I hit big milestones, achieve my current goals, or need to scrap them. Here's my next batch of goals.
One of my goals for 2017 was to network as much as possible. It's been a success! Both on a professional and personal level. Since my previous businesses were Internet-based and I was single, I moved around the country constantly. It's been a long time since I've had a lot of local friends and colleagues. Denver is where my wife and I planting our roots.
My two focuses on networking:
- Say "Yes" to more people who want to get together. Ask more people to grab coffee.
- Focus on bringing value to everyone that I meet. It's more fulfilling and makes better connections. I want to give more than I take from a relationship. (HINT for anyone looking to find a mentor... bring more value to the relationship than you receive.)
To clarify, I don't consider networking shoving my business card in everyone's hands that I meet. In fact, I don't have business cards! People use business cards as a crutch, rather than actually spending time and energy getting to know someone. My definition of networking is making genuine connections.
Buy a House
My first real estate purchase for 2018 is a personal residence, not an investment property. Just sharing it because that is the #1 priority in terms of buying real estate. Even though I'm itching to invest some cash into more real estate, the house for the family comes first.
My mother-in-law is moving in with us. So we'll be adding a mother-in-law suite to the basement. It's not quite house hacking, but more like parent-hacking (is that a word?). It will save on expenses. More importantly, it's the best set up for my family. It will also save on daycare and time running around.
If anyone has experience or recommendations, please share.
As I outlined in my original investing strategy post, my goal is to build a Realtor business to build up cash, connections, knowledge, etc to invest in real estate and the stock market.
DenverInvestmentRealEstate.com - It's been a blast launching and building this website this year.
Two huge accomplishments from 2017:
- Charles and I are getting into a groove for producing content.
- The technical foundation of the website is very solid (knocking on wood!). That's great news for me because that means fewer hours of mind-numbing stuff that I have to do.
- More podcasts and webinars (and getting on a better schedule!)
- More local, in-person events.
- This goal is impossible, but I'm still shooting for it: Connecting with every single person that comes to the website. Whether it's an email, phone call, coffee or one of the other 22 ways to connect. It's just more networking!
Pursuing Opportunity and No Regrets
When I originally got my RE broker license, I didn't have any plans to work outside of investments. As I got more into the real estate world, I started seeing more opportunities where I could leverage my online marketing background. I won't go into all the details, but here's the summary...
The majority of the real estate industry is behind in technology and utilizing the Internet. I'm talking about the agents and brokerages. The Zillow's and Redfin's out there are on the right path (and kicking ass!). From what I can tell, I'm one of the few agents that don't bitch about them. Rather, what they are doing excites me because it means I have the same opportunities with technology that they do! Technology does an amazing job at leveling the playing field.
At the 50,000 ft level view, we're at an amazing opportunity right now. The Internet allows a person with their iPhone to do things that only 20 years ago that a handful of the large media companies could do. I doubt my two sentence description will have a big impact on you because it took me awhile to really comprehend what that means.
I wish a time machine could take me back to when the real estate market crashed so I could invest in real estate rather than mess around with the stock market. Oh well, hindsight is 20/20.
Business opportunities are like buses, there's always another one coming.
- Richard Branson
Richard's quote is one of the few that has stuck with me over the years. One of the next amazing opportunities happening is what's going on with the Internet and real estate. I don't want to miss out on it!
When evaluating new opportunities that I'm undertaking, I asked myself three questions:
- Is it a viable opportunity for me? (YES!)
- Will I enjoy it? (YES!) I'll be grinding these out for 10+ years. If I'm not getting out of bed excited, I won't stick with it long term.
- Will I regret this if I don't do it? (YES!) One of my fears is having regrets when I'm old. I'm fine with striking out. I'm not fine with me regretting that I had not "stepped up to the plate."
With that in mind, I'm focusing on two new brands to seize this opportunity.
Mr. Real Estate Agent - It's a weekly show (perhaps more) on Facebook Live and podcasts geared towards other real estate agents. I'm using as a vlog (video blog) as I build my business. The goals for "Mr. Real Estate Agent":
- Public accountability. I'll be a better and more productive agent by posting my weekly activity.
- Build a nationwide network of agents for referrals.
- Be an influencer to position myself for big opportunities as real estate and technology evolve.
- Help agents build their own brand. It's the best way the "little guy/gal" can compete with the "big online real estate business."
If you visit Mr. Real Estate Agent, you won't see much. I launched it within days of starting to write this post. It's a work in process and a testing ground.
Owner-occupied brand - This brand is focused on the traditional real estate space of owner-occupied. It's going to be a very unique spin! I'll be launching this in the first quarter of 2018.
My top priorities are buying a house for my family and scaling up my Realtor business. Once I've accomplished those, that buying more rental property is at the top of the priority list. Below I talk about the importance of long-term patience. So, whether I buy my next property in 6 months or 16 months, it doesn't really matter in the long run to me. Life is a marathon. Taking a methodical, yet conservative approach of maintaining high cash reserves and building solid business income streams, is a winning formula over a 50+ year time horizon.
Reno Condo Rental - Keep or Sell?
In 2011, I purchased a 2/2 condo in Reno, NV for $67,000 as a primary residence. It's now worth $225,000 and I'm 7 years into a 15-year mortgage. It rents for $1,200/mo and is leased through August 2018. I'm never living in Reno, NV again nor have any ties to go back regularly. I'm debating to keep it as a long distance rental or to sell it so I can move the capital to Denver.
I like the idea of having the property near me in Denver. But, I have a hard time selling a winning property. Pros and cons to both decisions. I have until the summertime before decision time.
2018 Habits and Mindset
Habits and mindset are critical to success! Here are the ones I'm focusing on:
Fail, fail, and fail more - This probably sounds really weird! Failing provides the best learning opportunities. It also means I took one more step to success. Just to be clear, I hate failing! But one can't have success without failure.
Have long-term patience, but short-term impatience - I started my first business during college. I decided to commit four years to building my online business, no matter what. Many people start businesses (or investing) and expect success quickly. It doesn't happen overnight (despite all the crap you read on the Internet). My reasoning was that I was spending four years in college before ever expecting to make money from my degree, so I took the same attitude towards my business. The worst-case scenario would be making no money, but having tons of experience. Best case is money, experience, and a network!
As I'm building my new real estate businesses and building my rental portfolio, I'm practicing long-term patience (like 10+ years!). Being impatient in the day-to-day is good. It makes me work with a sense of urgency. I have to get things done!!!
Stand more - Sometimes I go hours sitting and staring at my computer. Not good for productivity, the lower back, or my eyes. I love the idea standing desks, but don't want to spend $500+. My $25 kitchen table from a yard sale still works fine as a desk. A few months ago grabbed some extra monitors sitting in my closet (Yes, I have an absurd amount of monitors from my stock trading days) and slapped them up on some shelves laying around. Doesn't look pretty, but it gets the job done! My only expense was a raised keyboard tray from Amazon.
My current desk setup and my buddy Charlie!
Focus - I'm a horrible multi-tasker. Every time I try to multi-task, I get less accomplished and more stressed out. Not a good combo. Focusing and minimizing distractions is key for me. I get way more done when I focus.
Morning routines - I'm a big believer in morning routines. A good one gets the day started off right. Our baby just turned 4 months old. So... yea... trying to figure it out!
Think bigger - Just always keep thinking bigger. What's the worst that happens? I'll be farther along than if I didn't! I love this quote:
“Shoot for the moon. Even if you miss, you'll land among the stars.”
Norman Vincent Peale
I love talking goals, investing and finances. Please leave a comment or reach out to me so we can discuss your investing strategy in detail.