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New project: a live-in flip


A couple months ago, I wrote that saving for investment real estate is more important at 33 than saving for a 401k. This approach had allowed my wife and I to pay off six figures of student debt and turn a $50k nest egg into about $300k sitting in the bank. The only question was where to invest it.

Last month, we found our new project: a live-in-flip! Basic opportunity stats:
Purchase price: $540k
Down payment: 25%, or $140k
Renovation budget: $50k
Total investment: $190k
Holding period: 2 years (or longer)
Target sales price: $790k ($750k after sales fees)
IRR over 2-year holding period: 39%

Here's a little about the home:
- 1970s (asbestos and vinyl baby!) 2 bed 2 bath + bonus room + backyard
- townhome in a gated community with easygoing HOA
- next-door unit sold for $690k in November (more than comps out)
- excellent 10/10 school district (surrounding homes are NICE)
- super walkable neighborhood, 2 blocks from a 270 degree view of the ocean
- loud, busy street outside
- needs EVERYTHING: HVAC, floors, paint, doors, windows, kitchen and bathroom remodels (lots of fun to be had)

Possible scenarios after we fix it up:
1. Live in it for 2 years and sell - we get our money out and look for another project
2. Live in it for several years, enjoy the fantastic location, and walk our daughter 2 blocks to the best school in the county
3. Worst-case, the housing market has a correction and we make less money, but still turn a profit

Areas of concern:
1. Will all of our renovations be approved? The HOA approved our proposal. We just have to make sure the city is on board. So far, so good.
2. Will we stay within our $60k budget? Probably. We've interviewed 3-4 vendors for each major thing (carpentry, electrical, plumbing, kitchen and bathroom remodeling, flooring, painting, HVAC), so we have a good idea of the cost and the work involved.
3. Can we avoid a major screw-up? Good question. Some of #2 applies here, and we've weeded out sketchy vendors in our interviews. We're making very clear plans for the project, and sequencing each vendor to make each job run smoothly. We're basically managing the project and learning a lot along the way.
4. Will we drive ourselves crazy? The good thing is, we won't be living there while we do the renovation. That will save our sanity and also save time on the project. On the other hand, we're both very excited to do a good job and finish, so we can finally move in to a home where we're picking out EVERYTHING ourselves!

Next steps:
1. Close. Loan is getting funded tomorrow.
2. Start the renovation process, beginning with asbestos abatement.

Why Ramit is wrong about buying a house

Ramit Sethi is one of the voices of the millennial generation. He sounds more like a cocky guy you’d pound shots with at a party rather than a buttoned-up financial guru or a career coach. It’s the fact that he doesn’t sound like your traditional financial advisor that makes him appealing. Instead, he rebels against anything that sounds like it would come from your parents. (Frugality? Don’t waste your time. Focus on earning more!) Ramit also urges readers to learn the facts about so-called Invisible Scripts - standard life advice that may be obsolete - and do what’s right for you.


So I’m surprised (and a bit disappointed) that he’s so religiously against owning real estate. He may be right about a lot of things, but in this area, he’s substantially wrong.
Here’s a breakdown of one of his blogs on the subject, Surprising Real Estate Investing Myths. Here's the video:


The video's main points are:
  1. Return is zero after inflation
  2. When you own, you pay for repairs, and a $290k home becomes a $1M home
  3. There are 50% in hidden monthly costs in addition to your mortgage payment
  4. Stock market returns decimate real estate returns


Let me address these one by one.


  1. “Return is zero after inflation”


NOPE. just saying it doesn't make it true.


Ramit quotes a study by Shiller of average home values over a 100 year period. This is a super macro view. Forget that home prices started picking up in the 70s with the wider availability of credit. This super macro metric may confirm his anti-real estate bias, but it’s irrelevant for a couple reasons.

Real estate is highly local, and is also cyclical. How is the 100-year metric relevant to us? Is our investment time horizon 100 years? No way. Then why should that be the metric we use to gauge return? We should use metrics that are in line with our own time horizon. Since the typical homeowner owns a home for 6-10 years, and I've been investing in real estate for a little under 5 years, I'm going to choose a time horizon more in line with that. To be clear, real estate is not necessarily a long-term investment. It can be, but the vast majority buy and sell long before the 100 year period. (Most of us will be dead by then.)

The real estate market is also inefficient, meaning that individual investors can still find good deals when they know the areas well and know how to fix up a home. My annualized return on the 3 homes we’ve bought and sold have been 63%, 42%, and 11.5%. Adjusting for inflation, which has been around 1% over the last few years, that’s still about 62%, 40%, and 10.5%, respectively.


  1. “When you own, you pay for repairs, and a $290k home becomes a $1M home”

He’s right - home ownership has significant costs. I found an article on Angie’s List that tallies the total cost of owning a home. For a $300k home, the 30-year cost of ownership is $708k. What that statement fails to take into account is what you’d pay as a renter. I did some calculations myself, and as long as rents are sufficient for landlords to make their monthly payments, renters would pay the exact same amount!


You have to think about this from a landlord’s perspective: they’re going to pass on their costs to the tenant whenever possible, and they usually do. If rent wouldn’t cover my home costs, I’d get out of that business. But the great thing is, it does for me. Even if you’re only “breaking even” (covering your monthly costs with no extra gross profit), the tax savings means you could save $152k over 30 years as a landlord, before even considering the equity you’re building over time, or depreciation. Being able to deduct mortgage interest, maintenance, and repair costs, as well as depreciation, is a pretty sweet deal. (After 30 years, you’d have your home paid off, so you’d actually be $452k ahead of a renter, plus any depreciation savings.)


Don’t want to be a landlord? That’s fine, you’ll still save money - about $68k before accounting for equity increases, and $368k including those.


Don’t have 30 years to wait around? Let’s use a smaller timeframe. On a monthly basis, because of tax savings, you should be profitable. My $300k home example gives $214/month ($2,572/year) net income after taxes the first year. But the good things for landlords is that rents have increased at double the rate of inflation over the last 15 years nationwide - about 2.7% (and in LA, 4-8%). Price in those increases, that you’ll make $252/month ($3,035/year) the next year, increasing roughly $500-600 each year after. Again, this calc ignores equity, which makes this an even better deal for you.


Saying that buying a home costs you more than renting is kind of like saying buying a car costs you more than leasing. That’s pretty easy to refute. Renting / leasing’s advantage isn’t saving money, it’s flexibility. Whether you want or need that flexibility is up to you.


Calculate your own situation using this handy rental property calculator. Take a home you’re interested in. I like looking for homes on Redfin and checking rents on Zillow. See how the numbers come out for you. It only takes a minute.


  1. “There are 50% in hidden monthly costs in addition to your mortgage payment”

You can’t say costs are hidden when they’re listed on Redin. Here’s a breakdown for a $600k home (close to the median in Los Angeles County):
With a 4.5% interest loan, Principal and Interest are $2,432. Property taxes are $635. HOA dues are $300 (for this property). Insurance is $110, for a total of $3,477. In this case, non-”mortgage” component is 42% of the “mortgage” component, but you’re still pricing all the payments into your total monthly payment. Lenders routinely ask if you want to include these in your monthly payment. If the total monthly payment is too high, you know before you even make the offer. That’s hardly a “gotcha” by any stretch of the imagination.


By contrast, for our first primary residence, we got a way better value than when we were renting. We went from $1,750/month for a 1-bedroom to $1,300/month for a 2-bedroom. In our case, buying was a way better value, and gave us a much lower monthly payment.


  1. “Stock market returns decimate real estate returns”


Not the case for me (see my answer to #1). Stocks have done 7-8% year over year, and that’s taxable, so the real pre-tax return is 5-6% year over year, if you think of taxes as a large management fee that the government compels you to pay. We used to benchmark stock market growth at 10% year over year, but we’ve learned in the last decade that it might not be sustainable. On the other hand, my real estate deals have done 11.5-63% year over year. Not even close.


To use Ramit’s words, in the last 5 years, real estate returns have decimated stock market returns.


Now what about the risk factor? Sure, with enough volatility, you can get a high upswing. What about the inherent downswings? My answer is to pay attention to market trends. In real estate, that’s not hard to do. The information is publicly available in the number of transactions, median home prices, time on market, Case-Shiller Index, etc. What’s more, the rate of volatility isn’t fast - it’s slow, because real estate transactions are slow, and reports are relatively low-frequency compared to the instantaneous stock ticker updates. Effectively, that market inefficiency is the equivalent of you having one of the fastest fiber-optic trading computers that Wall Street brokers use to buy at the best prices. Putting in a strong offer quickly is just as effective. If you pay attention to your market, great deals are completely within your grasp.


Dissention Within IWT


The interesting this is, even when you read the blogs on Ramit’s site, IWT, you see conflicting statements. This guest post, The Real Scoop On Real Estate, is a telling example. It starts out by saying “Real estate can be one of the most rewarding investments that you can make”.


Hold on, isn’t that a complete 180 from what Ramit originally said? Yup.


Here are the main points, and I actually agree with all of them.


1. Starting to invest in real estate takes time.
2. Real estate is a very local business.
3. It’s hard to make serious money without serious leverage.
4. Real estate can be very illiquid.
5. Real estate can be real time consuming.
6. You are in control.


My general response to these points is “Yes, of course! Please learn about real estate and your local market. That’s how you become successful.”


Later, the post says "Real estate is a great investment for some and a horrible investment for others. If you think it might be for you, or if you don’t know which category you fall into, continue down the rabbit hole and follow your gut." So while Ramit talks a good game, he’s hedging his bets with this guest blog post.


Things To Remember


Calculations about appreciation are misleading, unless you have 100% equity. If your house goes up 3%/year, and you have 25% equity, your investment goes up 3%/25% = 12%/year. This is basic leverage math. Ramit’s correct that leverage goes both ways - that’s how people get underwater on their mortgages. So do your research and if you feel something’s overvalued, don’t buy it. Also, don’t count on insane amounts of price appreciation.


Remember, Ramit doesn’t invest in real estate, and his target audience probably doesn’t either, so he can get away without using actual investment metrics like IRR, NOI, and cap rate. Make it simple: use an ROI calculation and compare for yourself. I included a rental property calculator I like to use. There are others online. Just search for them.


Ramit is correct that there are fees when buying and selling. Home transaction costs might be 5-7% of the sales price when selling. Hopefully, you’re either selling because you’ve made enough money to offset the fees, either through price appreciation (renovating, flipping, or riding the market up), or rental income. Many people say that in real estate, you make money when you buy, by purchasing at a good price. Keep that in mind, and don’t overpay. Also, look at ways to save taxes when you sell. Two common ways are the 1031 exchange, where you can defer taxes and pay no taxes if you’re selling one home to buy another; and the 2-year rule, where you pay no capital gains tax if you’ve lived in the home for at least 2 years. Hopefully, these will far outweigh any transaction fees you have to pay.


When is real estate worth investing in?
  1. When the market’s not too hot
  2. When you’re willing to own for at least 2 years
  3. When you’re willing to learn about your market


Final Thoughts


Real estate has been good for me. I’m not even that good at it - others are much better - but my wife and I have made 6 figures so far. So have thousands of other people. If you’re looking for a community of people like this, BiggerPockets has tons of tools, content, inspiration, and systems to help you. I’ve only been reading and listening to them casually for a couple months, but I’m enjoying their content and learning a few things along the way.


While Ramit’s opinions on real estate investing are highly suspect, his writings on systems applies to investing too. Ramit’s focused on investing in yourself and starting lifestyle businesses. That’s great! You should always invest in yourself. I have a post about the ROI of my MBA. 4 years after I began, it’s paid off at about 40% per year.


Just keep in mind that your ventures doesn’t have to look like anything Ramit talks about. Real estate hasn’t been good to Ramit, which I’m assuming since he’s never mentioned buying or selling any property. That’s fine for his lifestyle, but remember that it biases him. With his affinity for psychology, he would be aware of this.


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Ramit’s done incredibly well for himself over the last decade. He’s set himself up as an iconoclast - the songbird of a generation, if you will. You can count on him to present his views strongly and unapologetically. He’s all about contradicting traditional advice and letting his unique voice be heard. That’s fine. He says not to blindly follow society’s advice about buying a house. If you agree with his point, you should approach these decisions with critical thinking. Don’t blindly follow his advice here.

It’s really hard to fire someone (so you’re probably not going to be fired)



The only people I know who’ve been fired, really legit fired, in the engineering world:
  1. A guy who literally choked his cubicle-mate
  2. Another guy who threatened to kill a coworker, and sexually harassed another
  3. A woman who basically talked herself into a job that she didn’t know how to do, and got found out a couple weeks in
  4. That’s it.


I know lots of people who’ve been laid off, including about two-thirds of my old R&D department coworkers at The Old Place, after a product recall slashed the company budget. There didn’t seem to be a single reason why they were laid off. They basically fell into these categories:
  1. Incompetent
  2. Old (sorry, that’s not politically correct - unproductive and close to retirement)
  3. Socially awkward
  4. A pain in someone’s ass
  5. Just clueless about interacting in a corporate environment.


The main things I learned about the fear or being fired or laid off are:
  1. If you’re not one of the above, you most likely will never get fired or laid off
  2. You shouldn’t be scared of this
  3. What you should be scared of, is staying at your job too long, and become stagnant, so that eventually you are one of those people who get fired or laid off.


There’s a guy I know at work who’s incompetent, a bad communicator, defensive, and slow. He’s NOT getting fired, amazingly. I know because I have it on good authority that his boss (a very patient man) is giving him time to improve. I’ve known this poor performer for the majority of my time at Rocket Inc, and I don’t have any reason to think he will improve. But, he’s survived this long, and he may continue to do so. And this is at Rocket Inc, a place that’s not known for coddling its workforce. (Edit: I'm happy to share that said guy has actually improved a lot in the last couple months!)


If you read this and your response is “awesome, I can most likely just coast at work forever,” then I pity you, but I don’t respect you as a professional. You should be trying your best at your job, because you shouldn’t be wasting your life taking up space in an office! Find what you’re good at or what you love, and save yourself and everybody else the trouble of dealing with you and your lack of competence and/or passion.


If you read this and your response is “phew, I’ve been sacrificing my well-being because I was afraid of being fired or laid off, but now I don’t have to do that,” that’s more of the response I was going for. Life shouldn’t be lived in fear. You shouldn’t let someone hold that kind of threat over you.


I used to have a boss who constantly berated, insulted, cursed, and bullied me. It was the worst. I would call in sick to work to avoid dealing with him. I was medicated for extreme hypertension (my blood pressure was 160/90, which any doctor will tell you is horrible for a young man). But I just dealt with it because I was scared of being fired.


I felt like I was literally at the breaking point, so I talked to HR and told them I was going to resign because of my bully of a boss. They told me they’d actually received complaints about him (but of course didn’t remove him!), and offered to mediate a meeting with us. Or, they said, “we can give you some training and support so you can have the conversation with him yourself, up to you.”
I figured I should talk with him myself, since bullies usually respect you more when you stand up to them. So I set up a meeting with him.


I was so nervous about this. Would I lose my job? Would my boss actually try to hit me with those pointy fingers he always waved in my face? I was shaking, but I told myself that any outcome would be better than how I currently felt. The meeting began, and before he could start his toxic routine, I took control of the conversation. I told him he would not be talking to me like that anymore, or threatening me. If he wanted to fire me, do it! Otherwise, stop being a bully. I actually called him that, to his face. It felt scary… but good. And the sick thing? He told me, “you know, I’ve been wondering when you were going to say that!” He went on to tell me that he respected me a lot for standing up to him, but that I should really be thankful for his abuse, because how else would I learn what it’s like to deal with an asshole at work? (So… he admitted to being an asshole, on purpose, to help me deal with hypothetical future assholes… OK, there’s no much wrong with that.)


Anyway, that was a bit of a tangent, but seriously, if this helps anyone in that category, I’m extremely happy to be of service.


Conclusions:

  1. Don’t be concerned with getting fired.
  2. Do be concerned if you legitimately suck at your job, or if people make you feel that way. Do you really want to work there? There’s almost always a job that’s a better fit for you out there. Just go out and find it.

Living with your parents or in-laws (and challenging the traditional American stigma)



I’ve been living with my wife’s parents for about six months now. Since the birth of our daughter, they’ve graciously allowed us to rent two extra bedrooms for $1,000/month.


It’s been a major challenge to my concept of being an adult. I thought being an adult meant being independent. I didn’t know what to think of the all-too-common story of the Millennial college grad who moves back in with her parents, the “boomerang child”.


It’s also a potential strain on our relationship. Being that close to one set of parents presents its own set of problems:
  1. Parents can get on kids’ nerves.
  2. Adult children can get on parents’ nerves.
  3. You don’t want to think about your in-laws seeing or hearing some of the normal married things you do with their precious son/daughter.
  4. There can be tension about your multiple roles. Should you be treated as a guest? As a tenant? As something entirely different?


However, there are many benefits as well:
  1. Parents can be an enormous help with the grandchild.
  2. It makes grandparents feel included, which helps their sense of well-being.
  3. You can also be a big help to the parents with various things (household repairs, shopping, etc)
  4. If your parents have a big house that’s now an empty nest, your financial assistance will help them pay their mortgage. It’s also a more efficient use of housing than to have two big houses (one for you and one for the parents).
  5. Parents don’t always like to take monetary gifts from children, so this can be a creative way to help your parents out. You’re also keeping more money in the family, instead of paying some stranger.
  6. Baby can get to know more family members, which is great for baby’s social, relational, and language development.
  7. You can save money on rent and increase your savings for upcoming expenses.
  8. If you’re at all concerned about your parents or how they live, it’s a way you can keep a closer eye on them and make sure they’re OK.


From a cultural perspective, living with one's parents isn't as taboo as you might think. In the US, it's become more acceptable since the Great Recession. In many European countries, more young adults live with parents, even up to age 40. And in Asia, multi-generational homes are very common.

From the family unit’s economic perspective, we’re saving my in-laws $1,500/month, and we’re saving ourselves about $700/month in rent and $1,200 in childcare costs, so the total economic benefit is $3,400/month. That’s over $40k/year tax-free in after-tax money, or it’s like making $56k/year more before taxes if your marginal tax rate is 28%.  


From the family’s relationship perspective, I think we’re building stronger family bonds, and we’re allowing everyone to spend a lot more time with baby, which is a huge win.


On the other hand, if you’re living with parents, you’re kind of on the same train with them as far as lifestyle, by default. You eat what they eat, if you share a fridge with them. You may not always do what they do, but your activities are compatible. And you may not spend what they spend, but you’re influenced by it to a higher degree. Herein lies the risk of diluting the benefit of multi-generational cohabitation.


How to beat this:

  1. Be really clear on your priorities. Get clear with your spouse on this if you’re married. One of you is related to these people, and may have a stronger emotional attachment to their way of living. On the other hand, they may be more effective or more knowledgeable at broaching uncomfortable subjects with them.
    1. Make specific plans as a couple.
    2. Talk about your specific goals, and any actions you need to take separate from your family’s normal activities.
  2. Make sure you spend time with yourselves, and not only time with family. If you don’t make an effort, you start to feel like siblings instead of romantic partners.
  3. Don’t feel like you need to always do what your family is doing. Chances are, your parents don’t want to always spend time with you either.
  4. You can score points with the parents and buy some leeway by doing thoughtful things for them occasionally. Wash the dishes, do some housework, take them to dinner, and be a good neighbor / tenant / child / in-law.
  5. Know how long you want to do this. Talk with your spouse about how long they’re OK with this arrangement. Decide when to reevaluate. Discuss how it’s going regularly. Have a plan to get out, and don’t be afraid to pull the trigger and reclaim your independence!

I wish I’d thought about alternatives to an MBA



As I’ve written about before, I really enjoyed going to business school, and I learned a lot of topics that I never covered in my Bachelors of Science in electrical engineering. Here are some great things about the UCLA Anderson MBA program:
  1. Learning about tons of topics outside of engineering (strategy, marketing, organization behavior, mergers and acquisitions, real estate) and models that I still use today
  2. Meeting non-engineers who are great people, ambitious, and curious (my class was ~25% current and former engineers, 20% consulting, 20% finance, and various other disciplines)
  3. Fun social events with said great people
  4. Many opportunities to explore different career paths, with varying levels of engagement and commitment: case competitions (marketing, banking, hackathons, startups, consulting engagements, real estate deals, nonprofits)


I’ve described UCLA Anderson as “a 5-star buffet of educational opportunity (and I’m not just coming hungry, I’m bringing Tupperware!)” (They love to put that in the promotional emails). But what if you don’t need a 5-star buffet? What if, instead of the $50 Bacchanal Buffet at Caesar’s Palace in Las Vegas, you just feel like some high-quality sashimi and only need to spend $25 to get it?


Here’s a decision flowchart that can help you decide whether an MBA is right for you:


Some quick takeaways from this flowchart:

  1. Instead of a full-fledged MBA from UCLA Anderson (and other top business schools), you could enroll in targeted certificate programs if you’re more sure about what you want to do after school.
  2. If you’re curious about other jobs, and you work in a company with people who do those jobs, talk to them before committing yourself to an expensive degree. Go out to lunch / coffee / drinks with them and say you’re considering a career change. Ask them how they got into this field, and what experience and education helped them. Ask if they ever hire internally. Ask if you can help out with a project, something they’d use an intern for.
  3. There are many ways to learn the same thing. Some career paths require a name-brand education, or formal training, and some don’t. Knowing which you need can save you lots of time and debt.
  4. I’m not against getting an MBA! Far from it, I’m happy I got a part-time MBA. It’s taught me many helpful concepts that I still use today. However, when I was deciding whether to pursue an MBA, I didn’t have this whole picture at my disposal. As informative as they were, the various info sessions I attended didn’t point us toward non-MBA paths (imagine that). I remember wanting to feel like I was making active effort and measurable progress towards my dream job. For some people, these paths do not require a fancy piece of paper.