All Forum Posts by: Paul Vail

I like @Greg Scott's take: a bank account per tax entity.  As a solo proprietor, we've always had one for personal use and one for business use.  That's clear and concise for me, my accountant and the IRS.  I'm not sure if I had a whole nest of LLCs that getting one per entity is appropriate.   But if I had a bunch of LLCs for real estate, and another for selling chickens and eggs at the farmers market as another gig, that'd be two separate business accounts for two very different businesses.

Quote from @Mark Fein:

Quote from @Aaron Byrne:

Something to add to the equation, since your IRA is a ROTH, the contributions (not earnings!) can be withdrawn from the account both tax- and penalty-free. Hope that helps you in your decision-making!

 Great advice here.

Understand the rules for a Roth -- one is limited to how much can be added any given year.  If it is withdrawn, you cannot replace the sum withdrawn in the future, so that chunk of principle is lost to future compounding -- fully tax-free.    With regard to retirement, many consider tax-advantaged accounts the money you access AFTER other accounts are drawn down.  As Roth earnings are tax-free at both the federal and local level, this form of account is the last one to be touched for spending.  I'm not a financial professional and am regurgitating only my interpretation of general planning advice, so take these comments on that basis alone.  What I'm saying is the Roth is something you should touch next to last. 

Avoid touching tax-deferred accounts if that induces fees, fines and taxes if you have other options like taxable accounts.  A normal equity investment account will likely induce the same amount of taxes on long-term investments as would an IRA or 401k, but it doesn't offer tax-deferred benefits with that compounding growth nor are there fines for accessing that tax-deferred account prematurely.  Accessing taxable accounts cost you the least, so they would be the first accounts to consider UNLESS you are willing to find a way to convert some (not necessarily all) of a Roth into a self-directed Roth and a LLC.  Simply taking money out of the Roth strips all that tax-free capital for future tax-free work.  IMO, it's a really bad idea.

Quote from @Nathan Gesner:

I had an Ecobee thermostat a couple years ago and loved it. My rental is 30 minutes away but I could log on and adjust the A/C or heat. The temperature would be at 50 degrees, I would kick on the heat when I leave my house, and the rental would be warm by the time I arrived.

Then one day I was doing some work and noticed the fan was running constantly. Turns out the thermostat failed and was running heat and A/C simultaneously. My electric bill was $800 that month, 4x what it normally is. So much for savings.

Yep -- any technology can fail.  Any of it.

Quote from @Joe Garretson:

@Alex Wise,...

Also, a great nugget I heard on the BP podcast this week (I'm working my way through all 600+ episodes and currently in the mid 200's) regarding analysis: we get hung up on numbers like CoC returns, cap rates, 1% rule etc and look at those as absolutes. However, all markets are totally different and getting big CoC returns in your market might not be possible. Run the numbers on a number properties and establish what average returns are in your hood; then you can use that as a benchmark for your deals and help you with the analysis paralysis.

Love this -- I'm on episode 199 from #1, going chronological as well (listen to one a day).  Kind of weird to here the trepidation and predictions that 2016 was the height of the real estate and stock markets, maybe bubbly.  Looking backward six years really reinforces how little our prognostications actually come to pass.    The talking heads in stock investing were doom/gloom (regardless of who would win 2016), claiming it might be time to take ones earnings and winnings off the table.  Some real estate pundits claiming the same.  My father would say 'ignore the news, it isn't the future, buy-n-hold quality until you need otherwise'.   So I stayed the course, not timing the market, steadily allowing the investments to work for me.  My stock market investments have nearly doubled since then.  Real estate pricing in my area similarly has skyrocketed in the same time.  Not saying the S&P500 or the real estate is really worth or valued properly presently (I am even more convinced equities and property is grossly inflated and skewed inappropriately, but it is what it is).  So back to the near historical 'predictions' and advice tacitly offered in the BP and other investing/financial podcasts of late 2016.  

So in this light - find one's balance in how comfortable you are with your investments, but stop letting fear/greed of the future spread by pundits continue to stop you from doing something you want to do.  Build the habits that are healthy for you, dump the toxic, have your safety net, but don't live or cower in the shadow of that net.  Step out and try your dreams.

Very pleased with ecobee units.  Setting up isn't difficult.  Never hurts to have access, even if you don't need it or feel like being a helicopter parent for a property.

The stock market is NOT doing terribly.   It was over-bloated in 2021 and it has corrected somewhat.   If one is invested in widely diverse holdings, compare wealth today to what it was in 2019 or 2018 for some prospective, and stop paying attention to the market news cycle -- that 'news' designed to churn people.  VTI is an example.  Closed today at 201.  Closed 17 months ago at 201.  Closed 3 yrs ago at 153.  Closed 6 years ago at 109.   As we sit today, VTI has nearly doubled in six years with a 14%/yr return.  Hard to say that sucks.  Frankly, the market is still bloated, but if one's only measure is what it was last November, then that is short-term thinking and unhealthy.

However, to your point, your assets are tied up in a combination of tax-advantaged and taxable accounts.   Presumably you have emergency cash on hand (i-Bonds, CD ladders, something to hold you over for a few months to a year in crisis) and you have no debt.  I don't want an answer and you shouldn't share too much in a public forum -- I just want you to think about that, and start building a parachute and paying off debt if appropriate, because you should.   Assets in your taxable non-retirement accounts can be sold for a profit (unless you bought everything last November) and hopefully as long-term capital gains.   Perhaps your income is low, so the taxes won't be painful if a chunk of that money you wish to reallocate into real estate investing.   Or you can work with a financial advisor to shift roth money into a self-directed roth to invest in real estate with an LLC.   You have a LOT of options, many that won't generate a tax bill and could possibly build a heck of a nest egg.

Don't cash out of your retirement accounts, period.

The basics of financial management hasn't changed in many, many decades:

For short-term cash/emergency planning, use something like a CD ladder or money market/savings acct that pays something.  This money is to keep you from going into debt should a near-term emergency happen (car engine throws a rod, water heater dies, etc.).  CDs do three things: they psychologically present a barrier to 'easy' cash like a savings/checking account to cash out, even if it only takes 10 extra minutes to do; they pay better interest than savings/checking, and they CAN be cashed out within a business day or less if you need them.  You might be wise and ladder them over time (buy a 60mo one every year, and build up over time.    You can do the same thing with i-bonds from TreasuryDirect if you like to have interest rates that track with inflation.   Ideally, you'd build up savings to eventually cover 6 months to a year of your annual budget.    All of this is predicated on you spending less than you take home, and you find debt more distasteful than kidney stones.  Personal debt=no.  Just don't do it, or get rid of it and don't do it again.

Mid-term planning overlaps with CDs/iBonds.  This would also include investing in broad low-fee items within an HSA-qualified health account (these also save on premiums as most folks over-buy health insurance out of ignorance of their options and realistic fees.   Fear sells insurance.  Talk with a fiduciary advisor to see if whole market index or target date funds might fit your investment needs.   Presumably you are also using a Roth account.  Nice thing about Roths is that you can pull your contributions out after 5 years if you had a different investment opportunity came along -- or you can open a self-directed Roth and use it with an LLC for passive real estate opportunities.

Long-term opportunities such as 401k-type investments that a W2 job may offer a match -- again, with low-fee broad spectrum investments.  You can open a solo401k (and use it for real estate down the road), too.

So note the multi-use options with a few of these thoughts.   Yes, you should be on the lookout for deals that seem to fit your math for investing in real estate.  Nothing stopping you from developing the skills and understanding for paper savings, habit-forming behavior to position you for a deal in the near or far future -- all of this would be good life skills to learn and practice while you are under your analysis paralysis.   Personally, I think you should be doing all of the above AND look for either property or an opportunity to partner with someone else so some current assets could be used for a 'deal'.   Set a starting number, write up a business plan, join a local REIA, and figure it out.   You are risk-adverse.   So do you want to start with $5k or $10k to loan out as private money?  Do you want to just shadow some active investor/developer to learn what they do (help them with spreadsheets, or pricing materials/labor, or maybe befriend a real estate agent to help them as a volunteer.   Just go do something -- it'll cascade into something more or you'll learn real estate isn't for you.  All good.

What does a divorce atty cost?  What are the annual costs of such a separation?   Seriously -- not being a jerk here but seems you have a choice:   be married to your current wife or be a market-driven property manager/owner.    As others have noted, there is a third choice: give up the property mgr title.   As that Brandon guy says now and again, you are either working for your business, or you are working ON your business.   Smells like you are working for your business (with an admirable big heart, BTW).   Gotta work the math -- and it isn't as cut/dry as some posters above suggest.

So that brings up: how much does a property manager take out of your hide?   Because if you elect to go for 'market prices' on your own, your marriage will have that skeleton in the closet and a cascade effect on the mutual respect between you and the missus.  Where does that end up over time, even if not in divorce court?   If you decide to go for 'market prices' using a property manager so that the wife has less immediate knowledge of rent changes, you will spend the extra money or more gained from 'market rents' on property managers, but there may be other gains by using one (buffered from the other property mgr headaches).  If the wife finds out, you still get to deal with THAT, but you avoid 3am water heater calls.  Probably.   However, it does let you work ON your business rather than FOR it, so stresses change and maybe even diminish.   Unless you get a sucky property mgr or two.

Now that brings you full circle to doing what the wife suggests.  Why not compromise with her -- work up a road map of rent increases that don't seem too onerous to her (or yourself), while bringing your assets more in line with your market over a set time?   Here's where your 8th grade algebra comes into play.  If you are under market at U %, and the market rates are increasing by M (in %/year as a decimal), and you want to be at market parity in (Y) years, you can figure your desired annual rate increase (R) using this formula:  R=-1+(((100/U)^(1/Y))*(1+M))        I'll leave it to you to check the derivation from your starting point (A=P*((1+(r/n))^(t*n)) where t is in years, n is the compounding frequency in years, r is the rate, P is the initial and A is the final values.  If your market is appreciating by 5% (0.05) per year, you are at 80% of market rate now, and you want to hike rates to get to parity in 6 years, plug and play tells you to raise rates 0.08978, or roughly 9%/year.  

Just a thought for you and the missus.

Why did you choose a LLC in this situation instead of a S-Corp (with the SD-IRA)?    Are LLCs better for passive income such as buy-n-hold rentals?   If you were flipping instead, which structure would you have chosen and why?

Are smokers a protected class?   Get current quotes on smoke remediation from three different vendors (including not just repainting, replacing the carpet, and every surface wiped down, but HVAC duct cleaning).  Perhaps do your interview AT THEIR CURRENT HOME to see how they live now -- what do you see and smell?