Stop Milking Me! - Cow’s Journey To Financial Freedom

Have you ever wanted to tell your younger self about the tings you know now, with insights you wished you had when you were younger?

Laura Rowley, author of Money & Happiness wrote a letter to her younger self about what she wished she had known when she bought her first primary residence. Here are a few tips that I find quite insightful:

1. No need to feel bad to drag your agent to show you 100 houses for 3 months. It’s his/her job. And ask for Comp Data – what are the selling prices of the comparable homes in your area in the last 18 months.
2. Look at the bone structure of the place, rather the depressing decors or the faded wallpaper, because the wall color can be changed easily, but not the guts and bones of the house. Well, unless you are in the fixing and flipping business
3. Live in a home for at least one year before doing major renovations. You need to have a better idea of how the space is utilized to better understand what are the critical changes will be.
4. Convince your spouse or partner to use professional services to get the paining and the flooring job done all at once, rather than targeting room by room for the next 10 years.
5. Save every receipt from your renovation. When you sell, the IRS will allow you to include these renovation costs in calculating what you paid for your home.
6. Try your best to take a 15-year mortgage rather than 30. The amount of interest you will save is phenomenal. Use a calculator like the one on bankrates.com to see an amortized table. You will be amazed by the 6 digit saving.
7. Don’t be so quick to tear out the former owner’s quirky additions. That weird foam padding on the back of the attic door might have some practical use you don’t know about until you settle in for a while.
8. Do a little more research on the schools before you buy. You may not have or want kids, but it doesn’t mean your future homebuyers won’t either.

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No, you don’t have to spend hundreds of thousands of dollars to renovate your house in exchange of above-market value. Other than knocking down a wall, adding another roof, there are 10 small things you can do to drastically boost your home’s value:

1. Make your kitchen really cook. The kitchen is still considered the heart of the home. Potential home buyers make a beeline for this room when they first view a home for sale, so make sure your kitchen looks clean and reasonably updated.
   For a few hundred dollars, you can replace the kitchen faucet set, add new cabinet door handles and update old lighting fixtures with brighter, more energy-efficient ones.
   If you’ve got a slightly larger budget, you can give the cabinets themselves a makeover. “Rather than spring for a whole new cabinet system, which can be expensive, look into hiring a refacing company,” says serial remodeler Gwen Moran, co-author of “Build Your Own Home on a Shoestring.”
   “Many companies can remove cabinet doors and drawers, refinish the cabinet boxes, then add brand-new doors and drawers. With a fresh coat of paint over the whole set, your cabinets will look like new.”
   If you’re handy, you can order your own replacement cabinet doors and door fronts from retailers like Lowe’s Home Improvement or The Home Depot and install them yourself.
2. Give appliances a facelift. If your kitchen appliances don’t match, order new doors or face panels for them. When Nicole Persley, a Realtor with Real Estate of Florida, in Boca Raton, was sprucing up her own home to sell, her mix-and-match kitchen bothered her. The room had a white dishwasher, microwave and wall oven mixed with other pieces that were stainless steel with black trim.
   When Persley called the dishwasher manufacturer to see about ordering a new, black face panel, the customer service representative clued her in on a big secret: Many dishwasher panels are white on one side and black on the other.
   “All I had to do was unscrew two screws, slide out the panel and flip it around. Sure enough — it was black on the other side!”
   Persley, who has remodeled numerous homes for resale, says that a more cohesive-looking kitchen makes a big difference in the buyer’s mind — and in the home’s resale price.

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A lot of us (small business owners and investors) are puzzled by the form of business structure we want to establish to protect our personal assets. A while ago, I formed a S Corporation and here is why:

Tax
Both LLC and S Corp are pass-through entities in terms of tax. The income of your business becomes your personal income, thus eliminating double taxing. C corporation is the one that gets taxed twice, which is subjected to corporation income tax and personal income tax. So there is no difference here between a S and a LLC.

But the difference is the employment tax (Soscial security and Medicare). LLC’s owners are taxed on the entire net earnings, while S Corporation’s owners are only taxed on the salary they get paid. The rest are treated as Corporoation distributions and will only be taxed as income but not employment. (meaning, a 15.3% savings).

So for example, if your S Corporation pulls in 100K a year but you only pay yourself $50K a year. You only need to pay $7650 in Social Security and Medicare tax if you own a S. But if you own a LLC and makes the same amount of money, you pay double of that.

Although we are very careful with the salary payouts. There is absolutely no cheating here allowed. IRS will nail you if you make 100K but only take 5k a year salary.

Business Ownership and Procedures
S Corporation is owned by shareholders (no more than 75) and LLC has greater flexibility in terms of business ownership. LLC can be member managed based on your agreement. S Corporation however has to abide a set of procedures and processes such as record keeping and board meetings. The profit for S Corporation has to be divided up according to the shares owned by each shareholder. LLC however, can distribute its profits in whatever ways the owners/managers seem to fit.

We like the formality of the S Corporation and thinking long term, it is better for a S Corporation to expand and manage than a LLC. LLC is heavily depending on the agreements you have with other owners. S Corporation, however divides the profits based on the investment. There are records being kept from each board meeting to document major decisions. Since it is law so nobody has excuse NOT to do it.

Another difference is that S corporation has to be owned by US citizens and Legal Resident Alien. LLC has no such restriction. All of our shareholders are US citizens so we don’t need the advantage offered by LLC

If it’s a Mama-Papa shop, maybe LLC will work better since you can fight over the agreement in the bedroom at anytime you want. But if there are several investors working together, I would personally choose S over LLC.

Based on my past experiences as a part time real estate investor and home owner, location matters the most when it comes down to a piece of real estate. I usually would spend months trying to research a location before I put any money in it. In my definition, “Location, Location, Location” really means three different things:

1. Location – the city/county you will be buying. In LA, you are screwed cuz there ain’t any cheap affordable homes left. In Denver where I live, I can still find something
2. Location – neighborhood. I think this is the most important part of the location. The neighborhood must be desirable, safe and has great schools. I spent a great deal of my time researching the local school system when I was buying my home in Naperville, IL. Although I don’t have any kids, I know the first thing the family will worry about is “where will my kids go to school?”. Call me superficial, but the demographical information is also important. How many renters in the area comparing with home owners? What is the average age and how big is the average household? What is the medium income? What is the crime rate? etc.. Bottom line, you don’t want to live in somewhere that murder happens once a month.
3. Location: The home location. Whenever I look at a listing, I first looked up the address on Mapquest to make sure it is not facing a busy street, rail road or cemetery. My ideal home location would be facing a park, open area or a small street. I don’t even check the home if it is not situated desirably.

After spending a full month doing research (I wasn’t working at that time), I purchased a home in Naperville that is backing the most famous golf club community in the area with superb school system. The house has been going up by double digits each year! Too bad that I sold it after 20 months. If I would still own it today, I would make $30,000 just in 2005! It’s unreal.

Now, the whole game is starting all over again, but in a different location – Denver. I was using Chicago Tribune’s online tool to conduct research on schools and census data. After signing up with a realtor, I had full access to MLS listing. So now, I need the same kind of tools to cover the ground work and I have found three great sources:

1. www.schoolmatters.com – It shows you the public school reports at your finger tip.
2. Google’s housing report – It combines Google map and Census data so you know what people live in this area
3. www.zillow.com – It combines Google map and Real Estate transaction data to show you the history of sales and how much it is worth right now.

Combine with my usual tools like Census site, Realtor.com and finally the Realtor’s service, I have quite enough information to look around.

Soon, I will be going to Open Houses in the area I want to buy and start screening Realtors that fit my needs.

Your first reaction might be: how the hell can that be possible??!! It’s a God damned Money Market Fund!

Yep, I thought so too when I first saw my forgotten e-Trade Money Market fund declined from $580 to $460 in just 9 months! I was prepared to see some penny size interest earnings, but never thought that I’ve lost hundreds in less than a year! Who the hell sucked up all of my bloody money?

With lots of anger, I called e-Trade representative. The answer? I should have read the fine print:

Account Minimums

• $100 minimum initial deposit required
• $1,000 average monthly balance in the account or $5,000 in combined average monthly E*TRADE Bank deposits balances required to avoid a fee
• No account minimums if you have $50,000 or more in linked bank and brokerage accounts; or, if you make at least 30 or more stock or options trades per quarter

Costs and Fees View all bank fees

• $10 for each month your account minimums not met
• Account holders are allowed six free withdrawals or transfers from their account in any calendar month (ATM withdrawals excluded), with a maximum of three withdrawals by check

Matter of fact, since my Money Market fund was part of my old brokerage account, it was $40 per quarter instead of $10 a month. I still can’t find where the fine print is on my specific account. Bummer… Well, on the bright side, I forgot about this account long time ago. So whatever is in it, it’s extra cash, right?

From time to time, I still make this mistake. When I purchase a fund, I looked at it’s expense ratio (if it is a mutual fund), or interest rates (if it is a saving or money market fund), however, I do not always check for other fees. If you have a broker who is handling your money, do you ask how much your broker charges in addition to what the fund manager charges? It’s very tricky to figure out the total cost of one investment. So I learned my lesson about the fine print. You gotta read every single little thing before you sign up for it.

If only if I have read about e-Trade’s fine print, I could have closed this account last year after I sold my stocks. $120 is worth 3 months of my coffee fund! Damn it!

I came across an article on USA Today about the rising high yield saving account rates. It looks like my beloved ING Direct isn’t paying the highest interest at all.

While ING Direct pays a handsome 3.8% with no fees, these banks pay far more in interests:
1. HSBC (Savings) : 4.8% www.hsbcdirect.com
2. GMAC Bank (Money Market) : 4.65% www.gmacbank.com
3. UmbrellaBank.com (Money Market) 4.61% www.umbrellabank.com
4. Virtual Bank (Money Market) 4.6% www.virtualbank.com
5. Heritage Bank (Money Market) 4.49% www.heritagebankna.com
6. EmigrantDirect (Savings) 4.25% www.emigrantdirect.com

But be careful of the promotional season. I just checked HSBC and it’s 4.8% only lasts until April 30. If you have some cash right now, it is a great time to lock in the great rates.

Fed is going to raise rates again later this month. It seems that the savings rates and CD rates will keep going up, so will the home equity line or any other loan rates. It’s really a great time to start saving and cut down on the usage of equity line. A lot of us (including my close friends) think that home equity line is a great source for crisis money. When it was 4% not long ago, it wasn’t a bad debt, however, as the rates are shooting through 8%, it gets quite expensive in case you need to borrow.

So, time to take a look at the budget pie and figure out how to save a few valuable dollars for the future.