NATALI MORRIS

Forget The Nest Egg! The Fundamental Shift You MUST Make About Your Investment Strategy

Nest Egg. We have all been taught to save our money in order to build a Nest Egg. But I am sorry to tell you that this is the absolute wrong way to think about finance. Forget the Nest Egg! If you want to build wealth, you must think in terms of a Nest Goose.

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No matter how many eggs you put away, your retirement fund will probably not be enough. Your fund will suffer from deflation and your standard of living will suffer as a result. The average 401(k) balance at retirement is less than $200,000. If you want to live a vibrant life for 20-plus years after retirement, is that enough? That’s $10,000 per year! That is not financial freedom in this country.

So if aggressive savings is not the answer, what is? The answer is the Nest Goose! A goose is a PERFORMING ASSET that will continue to make money for as long as you own it. This was the main principle of the book Rich Dad, Poor Dad, a cult classic in the personal finance world. You don’t want a PILE of cash. You want a STREAM of cash! This is such an important distinction!

The finance industry would have you think that dividend-producing stocks, bonds, and funds are the only performing asset game in town. They’re not. There are many types of performing assets. Real estate is the favored asset in my home but here are a few other ideas:

My point is this: If you don’t start to think about buying performing assets now, you will find yourself with a finite amount of money in a savings account at retirement, wondering how to stretch it like Silly Putty. You should be saving your eggs, yes. But you should be saving them to buy Performing Asset Geese slowly but surely while you are still working!

My husband is on a mission to acquire 2-3 rental properties per year. The man stresses me out but we have been able to do it because of his good job and dog-with-a-bone mentality. This has stressed our cash flow considerably and I won’t pretend there haven’t been arguments with me pleading him to slow down. Nevertheless, we have been able to acquire nine single-family homes in the last five years. All of them are rented. All of them are respectable geese, providing good homes for other working families. We are proud of that but I don’t recommend acquiring geese at this breaknecking pace. Slow and steady wins the race too.

Next week I will write about how we find real estate investments that we are able to pay off so quickly. It isn’t magic and it isn’t illegal, I promise. But before I end, let me leave you with one last success story about a Nest Goose.

In the 1960s my grandparents used their savings to buy warehouse buildings near Oakland, California. There was a mortgage on them but the loan was paid off in the late 80s. Businesses pay rent to operate out of those warehouses. My grandparents lived comfortably off of that rent until they died and now my father and his siblings collect that rent. Those geese have been laying eggs for two generations. That my friends is true generational wealth!

Thinking this way can be uncomfortable since we have all been taught that we would be okay if we just socked away enough money. It is also uncomfortable to spend the money in your savings accounts to buy performing assets because they are expensive and they take a HUGE leap of faith! This is also why so many of you were uncomfortable with my post about borrowing from a 401(k). You want to believe that the 401(k) will be the cash cow that saves you in retirement. Most likely it won’t be. Not unless you find a way to turn it into a performing asset sooner rather than later.

My next post will be about acquiring rental real estate and doing it with your net worth in mind. Click below to subscribe to my newsletter so you won’t miss it!

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How To Evaluate Debt Service On An Investment

How do you know if a loan is a good idea for an investment property? I get this question a lot so I figured I would share how we do it.

I am going to write about how we evaluate our real estate investments, although the same rules can apply for an investment in a non-real estate asset too. But for simplicity sake, let’s say we are evaluating a rental property.

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I’ve written a lot about using private money to finance investments. For the purpose of this post, let’s say it does not matter how you finance an investment. It could be with a bank. It could be from your Aunt Mildred. The point is that some of your investment is going to be financed and you want to know if it is worth it. So let’s run some numbers on what we will call “debt service.” Does it make sense for you to pay for money to secure a given investment? That’s what we are trying to get at here.

When you secure financing for your investment, you agree upon terms. Those terms are as follows:
How much money are you borrowing?
How long as you borrowing this money?
What happens at the end of that time frame? Is the loan paid off or is there a balloon payment due at the end?
What interest rate are you agreeing to pay to the lender to borrow the money?
Is there a penalty to you the borrower if you’d like to pay off the loan early?

Before you figure out these terms, you need to know what the property in question can make back. Presumably you know what it currently rents for or what it can rent for. If you do not, check Rentometer.com to get an idea of how a property in the given zip code can perform.

Now you’ve got an idea of what property can make per year. But of course you don’t keep every penny in rent. As the landlord, you will pay for taxes, insurance, and repairs, as well as any legal fees necessary. You also want to account for possible vacancy between tenants. And possibly debt service. So the question is: can your property make enough to pay for all of the above expenses and still make you money? If not, can it make you money in the near future?

In order to be conservative, we take the annual rent roll, which is the monthly rent times 12 months, and slice off 40% for taxes, insurance, legal fees, and vacancy. This is an industry standard and usually pretty safe. Now you’ve got a new yearly figure. Divide that by 12 to see what this property makes you per month and ask yourself: can I afford debt service in that number? Remember, debt service is not taken into account in this 40% slice. We are going to account for that next.

What will you pay to borrow this money? I keep a free and easy Loan Calculator app on my phone for when I’m toying with numbers on the go. But Bankrate.com also has a good loan calculator that allows you to play with the terms. This is important. Change the numbers around to see what works for you. Change the terms (time and interest rate) and see what happens.

It is important to note that loan calculators differ if they are interest-only or amortized. Make sure you are using the correct online calculator when toying with the numbers! Here is a good interest-only loan calculator. Here is a good amortized loan calculator. Bookmark them!

I use a spreadsheet to evaluate several terms against each other to see what works best for us. A spreadsheet which I will happily share with you! Click here to get it!

In this spreadsheet, you will have to input all the cells in green. Meaning you have to calculate your monthly payment on the loan yourself using the tools I describe above. The spreadsheet’s calculations should do the rest for you.

Next, simply see if you can afford any given debt service. In the spreadsheet I just gave you, you will see that an interest-only loan will cash flow for you nicely but you have to have a plan to pay off the balloon payment at the end of the terms. Maybe you save up for it with the cash flow or some other way. You’ve got to be pretty sure in your plan to do this because a balloon payment at the end of a loan is a rude awakening if you haven’t been planning for it.

Or maybe you amortize your loan. You’ll see that short-term amortized loan is expensive but a longer term, lower interest loan is not so bad. And of course a lower interest rate is always in your favor. Find the terms that work for you!

Now you work your magic to find this loan! That is the subject of a whole other blog post and the subject of one of my favorite books by Susan Lassiter-Lyons called Getting The Money.

Another way to “fiddle” with these numbers is lower the loan amount. Can you put some of your own money into the deal to reduce what you are borrowing? Play with that too.

My husband likes to say that you should invest in a property if it cash flows even $1 per month because it means that it is paying itself off and you will eventually reap many rewards. This is certainly how you build a portfolio: secure investments that cash flow above their cost. However, $1 per month in cash flow is hard to stomach. I’d say you want to get closer to $100 per month in cash flow for the deal to be worth it to you. Remember, you are trying to build a nest goose portfolio. This calculation is an important part of a larger plan. You have to be able to see it as a whole, as well as individually. That is what prudent investors do!

I hope this helps you begin to see your debt service as a moving target. Remember, debt service is not just up to the banks. It is up to you too. There is opportunity for creativity here. You are in control far more than you know!

As always, I welcome your comments, questions, and corrections too!

Disclaimer: I am not a financial professional. I just play one on TV. This blog is not to be construed with personal financial advice. It is my attempt to share with you what I have learned on my road to building my own family’s wealth. I hope you enjoy it! 

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Why Dave Ramsey Is Just The First Training Program When You Unplug From The Matrix

I finished Dave Ramsey’s “Total Money Makeover” this weekend. For you, dear reader! I did this so that we can understand one another better when readers inevitably quote Ramsey to me. You’re welcome!

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I can’t say I’m a big Dave Ramsey fan now but I’m also not a Ramsey hater either. Let’s just say I appreciate his efforts but I will not subject myself to any more of his products.

I had several issues with this book but one big problem with Dave. (I’m going to refer to him in the first person because I have no editor and I can do what I want.) Dave likens personal finance to health and fitness. He puts a lot of blame on the masses for not keeping both in check. He makes it seem like it’s your fault if you are fat and/or broke. Just stop spending and eating cake, folks! Same difference. I do not believe this.

I believe that there are MANY institutional systems in place to keep people fat and broke. I believe that physical fitness is no longer simply a matter of exercise and calorie consumption. Science increasingly points in that direction. I believe that big business keeps Americans fat with chemical manipulation and mass-produced “food” and there is huge profit in doing so. I also believe that it takes a lot of research and work to not fall victim to this way of eating, living.

Likewise, there are institutions at work to keep Americans in debt. Why do the credit card companies advertise so aggressively to college students? Why are the fees in our investment accounts so hard to find on our statements? Why is money management so confusing to so many? Again, there is big profit in doing so.

Saying that financial fitness is like physical fitness – Just a matter of willpower folks! – is an injustice. You don’t just try harder. You LEARN harder. That is how you achieve success in both realms and the truly successful keep learning how to work the system they live in. They bob and weave where big business keeps them down. It is constant work but for me, a labor of love. It takes camaraderie and an inquisitive mind. That is why I started this blog: to learn and share what I will be a student of my entire life: family wealth building.

Last month I attended a talk by Ron Lieber, author of “The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, And Smart About Money.” He told a story about a college admissions counselor that accepted money under the table to help advise him on financial aid. Then he said this, which made me want to stand up and yell, “Amen!”

“The world is full of systems that are meant to be legitimately exploited and it is our job to figure out how to legitimately do so in order to succeed. Not gamed or cheated. Just legitimately worked to our best advantage.”

That is EXACTLY how I feel about money! There are tricks to making our way in capitalism that have nothing to do with will power. There are systems that you can use to build wealth that you may never have known had you not been in search of knowledge. It requires a constant thirst for knowledge and improvement!

Good old Dave wants you to save aggressively, stop racking up debt, and then invest in mutual funds. The first two parts I’m okay with but the last? Is it as simple as that? Just invest in some mutual funds, folks! Forget the fact that the market is volatile as shit and mutual funds have super high fees compared to ETFs. Just buy some! You don’t have to know much about what you’re investing in. Doesn’t matter! The market goes in cycles. You’ll be fine.

You may be fine but you’ll never be wealthy. If you’re aiming at fine, you’re in the wrong place. We can do better.

I have a few other issues with this book that I’d like to mention but be brief about:

  • Debt repayment. Why does Dave suggest paying off your debt in order of size of debt rather than interest rate? You are paying money for money! This makes no “cents” to me. He does not want you investing in low-return investments such as life insurance because he is playing the interest-game, looking for the best return on your money. I get that. So why not prioritize the amount you are paying for money by way of interest rate too? I don’t agree with the idea that you should pay more money for money because you need a quick win. I think you need to pay less for money! Simple as that.
  • Not using credit cards for anything. You know how I feel about that.

I know, I know, I have people write me and say, “Oh Dave is good for the masses. He helps people get started with money.”

I get what you’re saying but are you implying that we are not the masses? We are unplugged from the Matrix? I can be down with that but in that case, Dave was the first training program. He is where Neo starts, not ends!

I commit that if you stick with me, we keep learning together! With Dave you’ve learned not to live with debt and save for some flat tires. But blindly choosing mutual funds ain’t going to help you much when you’re free from the Matrix. We’re going to learn to grow our Nest Goose through legitimate financial life hacks. That is where we go beyond Dave Ramsey and this is my manifesto I shall link to anyone who dares quote him to me again.

That’s what you get! You took the Red Pill!

 

How To Find Discount Real Estate Investments

A few years ago my husband walked into the kitchen hot and bothered about a way to invest in off-market real estate called Wholesaling. He had learned about this from John Lee Dumas’ Entrepreneurs On Fire podcast.

Before this we both thought that the only way to buy real estate was through a licensed Realtor. We had no idea that there was a system in place for discount off-market properties. That is what I have promised to share with you so share I will! Real estate is our main form of Nest Goose investing in our house so I want to share how we do it.

Wholesaling is when one investor finds properties that would not do well on the open market and sells it to another investor, most of the time for cash. The wholesaler is the middle person. This benefits the seller because they can find a quick cash sale for their properties, and the buyer because they find off-market deeply discounted properties. The wholesaler usually takes a flat fee.

I had a lot of questions about this and you probably do too. Let me take you through the ones I had:

Why would someone decide not to list their house with a Realtor?

Realtors are great most of the time. But buying a house takes forever, especially with traditional bank loans, and Realtors take an average 6% commission on the sale. In certain circumstances, that does not make sense.

For instance, what if a seller inherits a property and lives out of state? They cannot maintain it, show it, or pay taxes on it so they need to sell it quickly. What if someone has back taxes and liens on the property and wants to get out from under it as fast as possible? I’ve even heard a story about a guy who had some weird sex chamber in his house and that is why he didn’t want it shown by a Realtor. To each his own. An investor will not care. An investor will rip that stuff out, fix it up respectably, and sell it to an unsuspecting buyer on the open market.

Discounted properties are hard to come by but a wholesaler knows how to find people who may be in over their heads and match them up with the right investors.

What is the discount on these properties? 

Usually the buyer gets the property at about 60 percent of open market value.

Isn’t the wholesaler illegally acting as a Realtor?

No. It is illegal to sell real estate that you don’t own without a real estate license. The wholesaler does own the properties that he/she sells, even if for a short amount of time. They can sell you the property that they have purchased outright or they can sell you their contract to purchase a home, which means they assign their purchase agreement to you.

If the wholesaler does not own the house and is trying to sell it to you on behalf of the seller, yes that is illegal. But that is not what this is.

What condition are these homes in? 

It really depends. Sometimes they are total crap holes. I’ve seen some stuff. I don’t recommend doing major rehabilitations on properties unless you have an awesome contractor and lots of time to learn this skill.

Other times, wholesalers will have what is called Turnkey properties to sell to busy investors. That means your renter can live there right away because it is in good shape. This is probably what you want.

For novice investors, I recommend seeking out turnkey investments. A wholesaler may sell it to you at a discount with the caveat that it needs $10,000 worth of work. They will have a contractor ready to do that for you and since you’ve saved so much on a Realtor and the property itself, that work should not be a burden. Then they will point you to an awesome property manager and you will have been in good hands from start to finish.

How do I find a wholesaler? 

A good wholesaler has a web presence. Some of them also have Facebook ads. If you Google the name of your city plus Wholesaler, you can start to find some. You can also join local Meetups for real estate investors. My husband and I own most of our turnkey properties out of state so this is exactly how he found the wholesalers that sold us our properties.

My husband does some wholesaling of his own in New Jersey and works with wholesalers around the country. If you want to learn to do this yourself, I can point you in that direction but that is not my expertise. I manage the investments once we’ve got them. I don’t find them.

How do I know if any given house is a good deal? 

Do I have a spreadsheet for you? You know I do.

You want an investment with a cap rate of about 9-11%. Higher than that is even better! This is your return on a cash investment. If you are using a bank, your cap rate will be lower because you are also paying interest. Let’s talk about that another day.

Your cap rate is what you make on this property per year, with 40% deducted for taxes, repairs, and possible vacancy. This is a conservative estimate for these expenses. Now you divide that annual net operating income by your initial investment and see what your cash is doing.

What about property management?

Yes! You need that. You should NOT manage your property yourself! A property manager is the best investment we make each month! A good one will be strict about vetting renters, collecting rent, and keeping the house in tip-top shape. In my experience, they typically charge 10% of the rent or $100, whichever is highest. They are oh-so-worth-it! If you don’t know how to fix broken toilets or accept a credit check, hire a good property manager and then just collect rent checks. Trust me on this one.

Note: Property managers are required by law to be licensed real estate agents. Verify that before you hire one. Also, ask for referrals from other investors.

What if the house doesn’t appreciate? 

Who cares!? Smart real estate investors do not invest for appreciation. Never! That’s how you get burned. You should invest for cash flow. Buy and hold people. Keyword: hold. As long as the house is renting consistently, who cares what it is worth on Zillow?

What kind of properties should I look for? 

Depends on your comfort zone. We are comfortable with single family homes. My father likes condominiums and small apartment buildings. You’ll have to decide what you are comfortable with but single family homes are a good place to start.

How do I work with a Wholesaler? 

A wholesaler will put you on their mailing list. If they get a good deal, they will mail it to the investors that they know are looking. If you see one you like, put the purchase price into my spreadsheet and estimate the monthly rent using Rentometer.com. If the numbers work for you, buy it!

Anything else? 

Well yes, we have to talk about how to manage your cashflow but this post is already long in the tooth. We’ll do that another day. Meanwhile, do you have questions for me? Fire away!

Are Your Finances As Custom-Fit As Your Jeans?

I received a fair amount of disagreement on my post about borrowing from your own 401(k) and while I appreciate the feedback, I want to be perfectly clear about something: There are no absolutes when it comes to personal finance! Your investment goals have to fit like your favorite pair of jeans: Comfortably and uniquely. 

My goal in this Chief Home Officer blog is not to convince you of any one way to go. My goal is to educate you on the MANY ways to go and help you think outside of the big-bank-box. Big banks are not the only way to grow your nest egg. They are simply the most common way. 

Does a 401(k) loan make sense for everyone? Heck no! Here is some of the criticism I got on that post and my response: 

Most of the things I write about here are investment strategies that will not work for everyone. The things I will write about here are things that I did not know about until I started studying personal finance in earnest. These are things I would like people to understand and keep learning about in order to implement. The best plan is your plan but only when you know all the options! 

In terms of our 401(k) loan, we used that money to buy a real estate investment that will pay dividends forever. That is what my father calls a goose. A 401(k) is a basket of eggs. Once you use up those eggs, you’re hosed – especially if you consider this: the average 401(k) withdrawal is $91,000 at retirement. That’s kind of depressing if you are planning to live on for the duration of your Golden Years. 

The traditional thinking about saving a big pile of eggs for your retirement is simply not the best way to go about building wealth. If you are a disciple of the Rich Dad, Poor Dad philosophy, you know that you need to invest in geese, not eggs. I want my readers to start to think in terms of geese-buying via alternative and well-researched methods. 

This is uncomfortable for a lot of people – like wearing a new style of jeans. Goodness knows I was uncomfortable in my first pair of skinny jeans. But finance is taught inconsistently in this country and there is frankly too much fear that goes along with decisions about money. This fear keeps us paralyzed and ignorant of alternatives to high-fee investment products. That is why I started this blog. I know we can do better if we consider all the facts. Borrowing from your 401(k) is not for everyone. But it is for some and what if it fits your needs and you never knew about it? That’s why I’m here to share. 

And for the record, I never mind you throwing shade on the techniques I discuss. I like the feedback and often I learn from it! And so far no one has attacked me personally for things they disagree with! We’re all so mature! 

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