Financial Samurai

The lease for my studio rental clearly states only one person shall live in my property at a time. The space is only around 325 square feet, but it’s in a good location close to shops, restaurants, bars, parks, and the Bay. For $1,100 dollars a month, the unit is a steal!

My tenant always pays on time and never causes problems since she moved in two years ago. However, at 28 years old, she’s in the prime of her dating life. She always has a guy(s) staying with her now.

How do I know? Because I live nearby and bump into them at all hours. I see them when I go for a bike ride at 7:30am. I see them when I’m coming back from lunch. And I see them after a 2am jaunt at the bars. The guys are clearly living with her.

I don’t care if she has a different guy every week as it’s not my place to dictate. San Francisco is all about free loving, baby! What I do have a problem with is the constant double occupancy for a single occupancy lease.

Two occupants will obviously wear a place out faster than a single occupant. There’s twice as much use of the bathroom and appliances. There’s twice as much foot traffic on the floor. And there’s twice as much liability!

WHAT IS UP WITH GUYS NOWADAYS? Read more…

For the right price, everything is for sale. So when my real estate agent friend pitched to put my home on the market this past summer given the lack of inventory, low interest rates, and pent-up demand, I figured why not test things out.

I have a single family home that is suitable for a young internet couple looking to start a family. I told my realtor that if I don’t get X amount, I’m not selling, and he agreed. The asking price was $100,000 over estimated market value, but he still thought a sale was possible. It’s important to manage his expectations since he’s the one who’s going to be spending all the time staging, marketing, photographing, and showing.

It feels good not having to sell if you don’t get your aspirational price. It’s kind of like going to a bar with your buddies and having no fear talking to the hottest women there because you already have the most beautiful wife already. My biggest goal was to gain enough insight to write this post!

ANNOYING THINGS BY MY REALTOR Read more…

Can you spot the tiny rental?

Real estate is all about asymmetric risk and reward. When the government gives you subsidies in the form of mortgage interest tax deductions and bails out overextended homeowners over and over again, you’d be silly not to invest in real estate! When you can invest lots of other people’s money and not have to split the proceeds if you make a killing, that’s a wonderful thing!

There’s a reason why every rich person you know owns multiple properties. There’s a reason why enormous fortunes have been made through real estate as well. How can Donald Trump still be a billionaire after declaring bankruptcy? Asymmetric risk and reward!

It’s no wonder property owners were once called lords, or now more colloquially, landlords. The wealthy own assets, while the not-so-wealthy lease assets. After 30 years of paying $2,000 a month in rent, your return on $720,000 is negative 100%. At least through a mortgage you’ve got an asset which you can live in rent free or pass on to your children once paid off. You might not make money as the downturn has certainly shown, but at least you have a chance.

When it comes to making money, if there is no risk, there is very little reward. After a lifetime of working, not owning might be one of the biggest risks of all!

EXAMPLE: BUILDING $400,000 THROUGH ONE PROPERTY Read more…

$1.5 million for 1,260 sqft

All real estate is local. Despite San Francisco clearly being the most beautiful city in America (you know it’s true), there’s a steep price to pay to live longer, healthier, and happier lives: expensive homes!

The cheapest single family house on the market in San Francisco’s north-end has three bedrooms, two bathrooms, and 1,266 square feet of living space for $1.5 million. The location is good, but $1.5 million is pricey! The kitchen and bathroom upstairs is outdated, and there is not even a small yard to play around in. Maybe the house will sell for $1.4 million, but even still, that’s a large sum of money to pay for a small house without views.

There are two bedrooms upstairs where a couple and child can sleep. Downstairs is the third bedroom behind the garage. The problem is that you’ve got to walk through the garage to get to the third bedroom. Hey, at least there is a garage right?

I really hope the owners get $1.5 million or more for the house. If so, there is no doubt in my mind that real estate is back with a vengeance here in San Francisco. The funny thing is, my Manhattan friends are salivating that $1.5 million can get a stand alone house with a garage!  Surely they’d have to pay over $2 million back home.

THE SECOND CHEAPEST HOUSE IN SAN FRANCISCO’S NORTH END Read more…

This guest article was written by Shilpan of Street Smart Finance, Common Sense Personal Finance.

Armageddon is viewed as a spiritual battle or struggle in the present age between the forces of good, i.e. righteousness, purity and virtue, and the forces of evil. Well, my battle wasn’t spiritual, but it certainly was righteous as it involved saving hard-earned money from the hands of our wasteful government.

Let me end the suspense here. It all began when I wrote an email to Sam asking if I can write an article for Financial Samurai. I wanted to write about why most people can’t retire early. Soon I received a samurai like response from Sam, “Maybe your $500k in tax-free profit in the depths of Armageddon? How anybody can make money anytime and the boon of real estate as a great tax shelter for singles and couples?” How can I say no to the guy who has uncanny ability to find catchy titles?

Let’s rewind back to 2004. The commercial real estate — especially hotels — market was doing well. Lehman was still considered a major financial institution. I bid on a Comfort Inn that was owned by the Laselle bank. This hotel was doing well, but the owner recently refinanced it, took over a million dollars cash out and happily handed the property back to the bank. It was ridiculously easy to screw banks back then.

I knew that hotel required a few hundred thousands in improvements. But, I calculated that in the price that I bid to make sure that I can run it profitably from day one, should I get to buy it. I knew that there were many bidders, so my hopes weren’t too high.

Luck knocked on my doors Read more…

I’ve spent the past three months catching up and really understanding the local property market. Every Sunday, I draw a three mile loop of five open houses to bike or jog to. Might as well get a workout in as well right?

At each open house, I take notes and pictures on interior design, get an idea of price, listing duration, and ask why the owner is selling. I even tested the waters myself for 25 days on the Multiple Listing Service to see if I could lure someone to pay me higher than what I believe is current market.

The main things I learned about the current real estate market are:

1) Inventory is down about 40%-50% Year Over Year.  Realtors and buyers are starving for inventory.

2) The majority who are selling are going through a divorce, a trust sale, or “need” a larger space due to a new addition to the family.

3) There is little sense of urgency to sell as sellers are happy to pull their listings off the market if they do not get the price they want. There was no sense of urgency for buyers to buy for for the past five years as well, however, that is changing now that rents are starting to rise and inventory is declining.

4) Realtors will agree with anything you say if it means a potential transaction. I decided to be bearish with five real estate agents and bullish with five other real estate agents to see what their responses would be.  When I was bearish and mentioned that I was thinking about selling my home, all five agreed that now is the right time to sell.  When I was bullish and mentioned that I should be buying rental properties given low rates and high rents, all five agreed that now is the right time to buy!  Try the experiment sometime. You will be astounded by how much they resemble sheep.

5) The agents have all said the sellers have either bought another property or will be buying another property.  Not once did the Realtor say their client was selling to rent. I think I can understand the psychology behind this phenomenon because as a homeowner, I don’t ever plan to rent my primary residence. Perhaps it’s because we get accustomed to the mortgage interest and property tax write-offs. I get the feeling many also feel the sense of defeat if they go from owning to renting, not that renting is bad, just a return to when we didn’t have enough money to own.

HOMEOWNERS NEED TO CONTINUE GOING ON STRIKE Read more…

The US government has blessed us with the ability to deduct our mortgage interest expense from our income, thereby lowering our tax liability. If you go to Canada, Australia, Asia, and Europe, there is no such benefit. At least they’ve got cheap healthcare!

Given the US has a progressive tax system, the higher your income, the more valuable your mortgage interest income deduction. Homeownership with a mortgage is absolutely the best tax shield for everyday folks out there. I knew my income would rise over time and wanted to match the timing of my home purchase when I entered the 28% tax bracket.

Take a look at the latest marginal tax rates for singles and married couples.

Marginal Tax Rate Single Filers 2012

• 10% on taxable income from $0 to $8,700, plus
• 15% on taxable income over $8,700 to $35,350, plus
• 25% on taxable income over $35,350 to $85,650, plus
• 28% on taxable income over $85,650 to $178,650, plus
• 33% on taxable income over $178,650 to $388,350, plus
• 35% on taxable income over $388,350.

Marginal Tax Rate For Married Filed Jointly 2012

• 10% on taxable income from $0 to $17,400, plus
• 15% on taxable income over $17,400 to $70,700, plus
• 25% on taxable income over $70,700 to $142,700, plus
• 28% on taxable income over $142,700 to $217,450, plus
• 33% on taxable income over $217,450 to $388,350, plus
• 35% on taxable income over $388,350

Forget the fact that 1+1 does not equal 2 i.e. why is the 35% tax bracket still on income over $388,350 and not $776,700 for a married couple is beyond me. What’s important to note is that if you are in the top tax bracket, you get 35 cents back for every one dollar in interest you pay on your mortgage.

If you also pay State tax, you can see how your marginal tax rate can easily reach 45% on your last dollar of income earned! The beauty of the mortgage interest deduction is that it applies to your marginal income, and therefore your highest marginal tax rate.

For those in the 15% Federal tax bracket or below, I would not rush to buy a home. There are more costs to ownership that just a mortgage and property taxes. When you’re in the 25% marginal tax bracket, that’s when homeownership starts making more sense provided you follow the 30/30/3 rule of homeownership.

HOMEOWNERSHIP IS WORTH MORE TO HIGHER INCOME EARNERS Read more…