My argument is that if you are a go-getter who doesn’t want to (or let’s face it, if you can’t) miss out on a job or career based on location. If you are single and never know when you might find “the one.” Alternatively, you want to keep your options open for any number of reasons, buying a house can and should probably wait.

It is a big decision.

That said, you may have purchased a house recently and for some unforeseen reason you have to sell it. Bummer. Good thing the IRS will help you out. If you purchased a house in the last five years and have personally lived in it for the most recent two years, then you will not be taxed on any capital gains up to $500,000 from the sale of the house.  That is correct, any amount up to $500,000 sold above your original purchase price will not be taxed so long as you meet this requirement.

If you have owned the house for longer than a year but did not meet the above criteria, it is considered a long-term investment and you will most likely pay 15% in capital gains tax. You will likely pay over 20% in capital gains tax if sold within the first year – another consideration for fix and flips (which is open for a guest post if there are any takers, it is not my knowledge area but is another way to optimize your free time and earn income on the side).

Another safety net is if you lose money on the sale, the capital loss is tax deductible.

It is probably a good thing that I find these tax topics so interesting since I am starting my Masters in Taxation in a few weeks. I hope to be able to keep up with this blog, there will be tons of ground to cover. Not only on tax topics – that would make for a dry blog – but on managing life when working full-time, obtaining one (or another) master’s degree, managing my side businesses, maintaining a restrictive diet for autoimmune disease, and, yikes, family planning.

My intention for this blog is to interview or have guest posts from people who are rocking their career and taking life by the horns. Those of you who are honing your craft, blazing trails in various aspects of life, and considering the legacy you are leaving behind.

I grew up in property management. Even still, I cringe at the idea of bad tenants and bad investments.

I do not want to lose my ass.

I made a commitment to you to share everything I have learned as I research my real estate investments. Many people, like me, dive into real estate investing with mixed results because we did not fully develop a strategy and had so many conflicting messages about how to measure success.

While at Colorado State University, I developed a property management business plan for my capstone thesis. My final presentation was in front of five venture capitalists who appreciated my approach. That business is becoming wildly successful for the company I consulted while I earned a grade. However, my education did not truly start until I found my first tenants.

Believe me, my first tenants gave me a crash course on property management.

The first part of your business plan is to know your market.

In an earlier post I touched on the Denver Market “crunch” that we are experiencing.  I had wanted to downsize my house, without downgrading, and I am especially feeling the crunch.  Given that interest rate has increased, given closing costs, given capital gains tax (a future post), I really don’t come out ahead.  Plus, everything that I’ve been able to look at is not the quality I’d like in my downsize.

The second part of your business plan is to…

Know Your Value Proposition:

I was asked so many questions from my first tenants that I learned tons about my role and how to talk them through these issues without making their issues my issues.

As the questions kept rolling in, I had flashbacks to my experience as a Trust Advisor educating clients on legal guidelines as it pertains to their situation; explaining rules with your client’s interest in mind given that those documents were likely written and signed long before your client’s needs were in the picture.

Part of my legacy and a huge reason I call this blog “Sharing the Legacy,” are the business lessons I learned from my grandpa. My grandpa always helped his tenants out and in return, most tenants were good to my grandpa and his properties.

This idea drives me in my approach to every business and career venture I undertake.

The third part of your business plan is to…

Know Your Investment

In the last post, we covered three of the four main sources of income from owning this investment property.

1) Cash Flow
2) Depreciation
3) Amortization

Now, we’ve come to

4) Appreciation and capital gains.  Capital gains will get its own post soon.

You can take a deeper look at appreciation and your investment by looking at leverage.

Leverage

When you take a loan to purchase the property, the loan is collateralized with the asset and will give you a better interest rate. In addition, your investment is leveraged.

What does leverage mean? Well, this gets fun. I tried to explain it to my husband, and his eyes glazed over. I totally lost him. However, I did not draw a picture, so I am going to attempt to explain it to you but with visuals. Let’s say you purchased your property for $100,000. You put 10%, or $10,000 down payment and obtained a loan with a fixed interest rate of 4.5% for 30 years. You have now paid $10,000 for control of a $100,000 asset.

Now, your property has appreciated by 1%. You have a gain of $1,000 on your $10,000 investment which is a 10% return. I told you this gets fun.

Say your property appreciates by 5%. You’ve now gained $5,000 value on your $10,000 investment. A 50% return – very fun!

The one major caveat – if you personally pay the loan each month, then your returns diminish. However, real estate investing is a long-term plan, and it is feasible to ride out the remainder of your mortgage terms with a renter paying the mortgage.

Leverage is one reason not to pay down the mortgage.  This method is not a cash flow generator. If you only earn an extra $50 per month, that is still a positive cash flow! The benefit is from the tax shelter it creates (you will not deduct your principal payment but you will deduct many of your other expenses, including interest expense), and from the potential increase in capital.

Now there was a time in the not so distant past where there were three guarantees in life: death, taxes, and appreciation. We watched that bubble burst. We all felt the impact of it. And now we are all wearier to rest our hats on the idea that real estate will always increase in value.

Sad, but true.

Sad but, oh, so true.

In upcoming posts, I’m going to cover criteria you must check – often – to determine if your investment is working for you or if you need to sell. One of the biggest lessons entrepreneurs learn is how to let go and walk away when it simply isn’t working anymore.

I’m also getting the question my husband debates me on: so you have an extra $100 each month, now what!?!?!?

While residence duration increases with age, on average, people move every two to five years. So the probability is that you will lose money on your purchase. That, there, is my first gripe about purchasing real estate to live in, yourself. Extreme markets aside, it is usually not a good idea..

Why? There is a term in the finance world, “real estate rich, cash poor.” This means that things change, and we need a level of liquidity to be able to adjust. We get married; we get divorced. We have kids; we die. We change jobs. We adopt puppies. Putting all of your savings into a house is not an investment, it is not a retirement plan, and it certainly does not put food on the table when you’ve exhausted your income sources.

Unless, of course, that real estate is generating cash flow for you.

Getting Started

Purchasing real estate is one of the most complicated purchases you will ever make. Make sure you are working with a realtor and a lender who know their craft and focus on educating you through the process. If you plan on investing in real estate, add a CPA, attorney, and experienced property manager to your speed dial list.

Some things you will be able to do on your own as a new landlord and these two resources helped me tremendously.

For Rent – Generating interest for rent is easier than putting a sign on your doorstep. Try Zillow to list for free.

Background Checks – TransUnion has created a rental application, credit check and background check called My Smart Move.

Cash Flow

Let’s say you purchase an investment property. The price is $100,000. You pay $10,000 as down payment and obtain a 30 year fixed loan for 4.5% for the remaining $90,000. Heads up, I am going to use this assumption throughout my property management series.

General rule of thumb is that rent price is 1% of your purchase price. One percent of $100,000 is $1,000.

You get a tenant – great! You are earning $1,000 per month – even better! Cash flow is simple to measure. Rent comes in, and payments go out, what is left over is cash in your pocket. All this tells you, however, is whether or not you have positive cash flow – your number one metric when you evaluate your investment.

If, in the following month, you have to fix a broken furnace for $200, your cash flow may be a negative $150 for the month. As a side, you can not tap into the security deposit if you have added expenses. The security deposit is not yours, and you are merely holding it in case the tenants default on their lease. You will want to build up an emergency fund to carry you if you have emergency repairs or vacancies, and if you are not there yet, you’ll have to tap into your savings.

Positive cash flow is your number one metric when you evaluate your investment. However, if you dig a little deeper, you can use this analysis to optimize your investment and plan for anything that comes up – like, repairs and vacancies.

Tax Statement

Your Taxes are calculated from your operating income on your Income Statement. You will start with your rent income for the year, $1,000 * 12. You will deduct your interest paid, management fee, and property taxes – these are considered operating expenses. You will subtract any capital improvements you make to the property as well as repairs and supplies.

What’s the difference between repairs and capital improvements?  For example, if you paint the walls or fix a toilet, this is considered repairs and supplies and is deducted as an expense. If, for instance, you purchase new windows for $2,000, this is a capital improvement because it increases the value and the life of the property. You can depreciate capital improvements.

Last, depreciation. You are allowed to deduct depreciation expense on your investment property. Land is not considered a depreciable asset since land does not wear out, so you will subtract the value of the land from the purchase price. I am assuming that 10% of the value of the property is for land and I will depreciate the value of the property, $90,000, on a straight-line basis for 27.5 years since it is a residential property.

Once you have taken all of your deductions, your Net Taxable Amount is the amount from which you will calculate your taxes due. A loss on your net taxable amount is a good thing! No taxes are due! You will want to be in the red, but as close to zero as possible since there is no additional benefit below zero.

Because every line item on this income statement is somewhat predictable, I also use it to plan my budget for capital improvements and repairs. Based on Year 1, I know that I will have roughly $1,250 to spend in order to maximize my tax benefit.

Statement of Cash Flow

When making decisions on things as whether to hire out property management or replace a piece of crap sliding glass door, you will also want a deeper look at your cash flow. The Statement of Cash Flow breaks down your activities into Operating, Investing and Financing activities for the period (month, quarter, year).

For example, your mortgage payment may be further broken down into principal, interest, and escrow accounts. Interest, tax, and PMI escrows are considered operating costs. These are the costs of doing business. The principal payment, on the other hand, is a financing activity as it is paying down the loan you took out to purchase the asset.

My Statement of Cash Flow looks like this. It tells me I have a positive cash flow – number 1 metric. I also have a negative net income, so I have optimized my tax benefit creating additional cash flow. Also, my mortgage has been paid down. By this analysis, I know that I have hit three of the four primary sources of income from owning this investment property. 1) Cash Flow, 2) Depreciation, 3) Amortization (mortgage principal is paid down). The last – and, I will tackle this topic in my next post – is 4) Appreciation and capital gains.

With a few extra dollars in my pocket from my investment properties, I now have a foundation for my argument with my husband whether to pay down the mortgage or invest. Because I know where my cash flow is going, and I can plan and prepare for my expenses. However, there is still work to be done. Also, I will share it with you.

When we met, I owned a townhouse. He owned a townhouse. Instead of having a wedding, we eloped in Cancun and used the wedding money to purchase a house together.

At the time, we could have sold both townhouses. But because we could not recover the cost, we decided to rent them out. The landscape has changed drastically in two years. We are experiencing record high’s in Denver housing prices due to low inventory.  It is a seller’s market.  If you look at Trulia’s affordability index, the front range is starting to look a lot like LA.

On the other hand, the rental market has its own rally. The Colorado statewide average rent hit an all-time high of $1,026 in 2014. Vacancy rates remain below 5%.

New construction may help to create some vacancies.  You may have noticed most of the new builds in suburban areas around Denver are condominiums, and even the stand-alone houses are in very tight patio home communities.  However, new builds also tend to be luxury homes at a premium price.  Yes, construction is a great sign that the economy is coming back which is bringing jobs – and prospects for those jobs – to Colorado from other places, and it is in turn increasing demand for housing.  Low inventory and high prices is creating a housing market “crunch.”

Goals

Keeping the townhouses is a no-brainer for us.  Investment diversity for the long-term future, a project on the side, a fail-safe if the marriage falls apart…

One thing that you’ll learn about me while following this blog is that I am a deliberator – it is a strength of mine. Being a deliberator means that rather than deny the risk, I throw it out there, which drives my husband nuts. However, we have a game plan for all possible foreseeable risks, thereby reducing them. This comes in handy when developing business plans, as well as real estate investing.

The transition into real estate investing and property management came naturally for me. My Grandpa has always had rental units. Summer jobs were always cleaning and painting Grandpa’s apartments.

Now I have my stakes on the table, too. How to handle the cash flow – now that we’ve met the first milestone of building an emergency reserve – a critical debate inside of any venture or entity. It is the underlying question in every business.

Investment properties are not only a question of cash-flow but of tax policy and investment strategy. For instance, paying down the mortgage creates cash flow, but your mortgage interest will reduce your taxes. Paying down the mortgage also reduces the gross overall amount that you pay on the house, but what if you can invest for a higher return than your interest paid?

In the next series of blog entries, I am going to illustrate the immediate forecast for each strategy through the lens of paying down the mortgage, or not.

The answer throughout, of course, is how much risk are you willing to take? I want to see numbers before I make that decision, and I will show you what I find.

My reaction to this suggestion was first, “oh, some things people have to figure out on their own.” However, in hindsight, by the time I set foot in the interview, most of the work was done. My intention was to not only land a job, but also to make a very deliberate change in my career, both in industry and function. Maybe he is correct that there is value in sharing this information to help others find their dream job, and employers find their best hire.

1) Self-reflect

Prior to my career change, I spent nearly a decade in banking and private wealth management. I started my EMBA program in 2009, right as the recession hit the wealth management industry the hardest. What I liked most about my first career was the client-centric culture. However, by this experience, I learned that I excel at building procedures and fill gaps seamlessly in the chaos of client and employee turnover as well as in periods of growth. I also discovered in the classroom that I enjoyed big picture corporate financial strategy – again, mitigating chaos. Holding the idea in the back of my mind that I love financial strategy, and I should have pursued accounting straight out of college, I decided to make the change now. My self-reflection has been years in the making, but valuable in building energy toward evolving goals and reminding me of my history of repeatedly stepping out of my comfort zone.

2) Do your homework

Even those at the top have had moments in their career where they were completely lost and had to figure it out. However, once you have reflected, start talking. To everyone. Who is in your network? Contact your mentor. Reach out to recruiters. Meet with the career center at your alma mater. Do you have a parent or step-parent in a similar field? Call them! There are many people prepared to discuss your target job or career, and if you hold steady to “I’ll figure it out,” then you are missing all of the information and resources they have to give to help you gain insight into the industry, location, and the company.

3) Practice. Practice. Practice.

One strange benefit to being older when I met my husband, is that thanks to eHarmony, I had been on an embarrassing number of introductory dates. I learned how to sit face to face with a stranger and be, somewhat, engaging. Take every opportunity to network formally and informally. Sit down with an interview book, like, “How to Interview like a Top MBA” that gives sample interview questions and writedown answers to many of them. Sit down with friends, explore interview stories, and conduct practice interviews. Be candid with each other when giving feedback. Practice does not make perfect, but practice helps you to hone your message so that you can deliver it in an authentic, non-scripted way.

4) Tell a story

Once you are in the interview, tell a (focused) story of how your history has lead you to here. This story should highlight two or three significant achievements that have shaped your career. Draw links between the paths you have taken to lead you to the job you are applying to, and end with where you will take the job and your career. The interviewer knows why they are sitting at the table, but it is your responsibility to tell them why you are there. Listen and answer their questions thoughtfully, but keep the conversation on track to make all of the points you wish to make. Make it personable, the interviewer has been in your shoes.

5) Ask good questions

After soul searching and much research, I knew why I wanted this. I could ride out the first-career path, but I chose to make a change, and I had this one shot to get it right. Coming off the heels of briefly joining a company that was the wrong cultural fit only exposed and amplified what I needed in a company, a manager, and the team. Yes, they had to choose me from a pool of applicants, but I needed to be sure of them too. Asking questions shows respect to the interviewer, helps to break down barriers, and shows a high-level of interest in the role you hope to fill. Asking good questions shows that you have done your homework and are committed to the company and the job for which you are interviewing.

6) Send a thank you note

I am amazed at how the art of thank-you notes has become lost. However, this sad fact is an opportunity for you. Since it does not often happen, it automatically sets you apart. After the interview, send a thank you email within 24 hours to stay ahead of the decision and fresh in mind when they decide. Reiterate points made in the interview that you hoped the interviewer to take away from their discussion with you. Also, address weaknesses that have been uncovered (for me, that was a lack of direct accounting experience coming from the banking world, although a lot of the software used is very, very similar) and how you are already working to overcome them.

One last note, because I have seen this happen recently, make sure you address the thank you properly. Don’t give your interviewer a nickname they did not know they had.

I have spent the last year of my life working to simplify it. Really simplify. Have you ever wondered what it means to live your truth without clutter? To know what it is that you want and where you are going?

Me too.

After a year of simplifying my diet to the bare basics, decluttering my house, clearing out negative influences within my friends and family, and even changing careers, I still don’t know what it means to simplify life. It seems confusing as ever. I am not nearly as lost as I was at the start of this journey, however, and that is where I plan to start this blog. Right where I am at.

When it works, it is simple.

Let me just say that I do much research and testing in my own life, and I am hoping to learn how you discover and test ideas within the scope of your life as well. I read every comment and every email.

For instance, I did not give up grains in my diet because it is trendy. Granted, I learned to cook using Paleo guidelines because Colorado has a strong culture of urban hippie that fuels the health conscious trend and others. Like, locally sourced. I eliminated grains for a period, reintroduced them to see how my body would respond, took notes, and simultaneously started gathering information on what the risks and benefits are from a scientific backing.

However, this is not a Paleo blog. Eventually, I’d like to share resources and build tools to help us both to test ourselves in life, push each other out of our comfort zones, and get where we each want to be. Create a legacy to leave the next generation. What would that look like for you?