With government subsidized 30-year mortgages and tax deductible mortgage interest, buying a rental property is by far the most accessible way for people to invest in something with tangible leverage. It’s no surprise that there are thousands of sites like Bigger Pockets dedicated to real estate investing in all of its forms. 

But, even if you start Googling like mad, you won’t see very much about investing in condo rentals. They have historically been an unpopular choice for real estate investors for a couple of reasons:

• Condos have homeowners association (HOA) fees that make them more expensive to own on paper, and make it more difficult to satisfy the 1% rule (which basically states that the monthly rent from a property should be 1% or more of the purchase price)

• Multi-family properties (duplexes, triplexes, apartments, etc) have built in advantages of scale. With a duplex you have two units to rent out or live in but only one roof, water heater, etc.

• SFH and multi-family are both generally easier to remodel, since you can do choose to do whatever you want that is within code. The HOA at most condos will have significant restrictions on what can and cannot be changed in a condo (e.g., flooring).

• In some cases, HOAs restrict the number of units in the building that can be rented out

Why would anyone invest in condos?

These criticisms of condos are fair, but don’t take them out of the running quite yet. There’s one big problem with single family homes and multi-family properties that new real estate investors often run into: if you live in a large, popular city, chances are single family homes and multi-family properties are really, really expensive. The median home price in San Francisco is $1.6m, and more importantly for first time investors, there are only a few homes available for less than $700k. 

The median condo price is $1.25m, and there are over 30 listings under $700k currently. 

If you want to own physical real estate in an expensive city, condos are basically the only game in town. Although many people don’t like condos as investments, the truth is that you can turn a nice profit owning and renting out a condo even with big, bad, scary HOA fees.

Condos also have a unique benefit beyond their more accessible pricing. Although HOA fees are annoying, they are there for a purpose: most of the time the HOA will pay for the exterior, outdoor, and common area maintenance, making your job as a homeowner significantly easier.

How to start investing in condos

Ready to get started with condo investing? You need to start off with the right neighborhood, the right financing, the right business plan, and the right paperwork before jumping in. 

Find a condo in the right part of town, especially if you are remodeling

Before you jump all-in and buy a condo, you want to make sure you are buying in the right place. The goal is to find a neighborhood that is on the upswing, with rising or stable prices over the past year or so. This might seem counterintuitive, but a neighborhood with flat or declining prices likely has that trend for a reason. You have a better chance of riding a trend on the upswing than picking a neighborhood that is due for a turnaround. 

Other tangible and positive things to pay attention to include planned redevelopment nearby, new or expanding employment opportunities, and extensive public transport, or plans for public transport.

You also need to decide if you are planning on remodeling or not. If you are, it’s important to find a neighborhood with a large difference between the lowest priced and highest priced condos (per square foot). For instance, if you see a new condo in a neighborhood that is for sale for $1000 per square foot, and an older condo across the street is for sale for $400 per square foot, the difference is $600 per square foot. This “price differential” is a decent stand in for the maximum possible profit on a per square foot basis that you might stand to make with a remodel, although it will likely be much less than the full differential. Why is that? Well, even if you completely remodel a condo, if it’s in an older building with less amenities it won’t command the same price as a fancy new condo.  

Get your financing set and stay away from PMI

Like any home purchase, you’ll need to line up financing if you don’t have enough to purchase the property outright. Unfortunately, even with the lower costs of condos compared to single and multi-family homes, it can still be difficult to find enough for a 20% down payment. That would ordinarily mean you would be headed for PMI, or private mortgage insurance. PMI isn’t a huge deal, but it does add an additional payment to your mortgage every month which makes it harder to make money off of your condo. That’s why it’s so important to avoid PMI even if you don’t have 20% to put down.

Luckily, there are some other options that you can pursue so you can get around PMI and secure financing for your first condo purchase. Many lenders have no or low down programs available that you can take advantage of at any time. Some of these programs even allow you to put 0% down - obviously you’ll have a higher monthly payment which will make it harder to get cash flow positive, but it allows you to jump into the market without a huge outlay. 

List of lenders with programs for low or no down payment

• Bank of American Affordable Loan Solution

• San Francisco Federal Credit Union POPPYloan

• Flagstar Professional Loan

• Citi HomeRun

• SoFi

• Suntrust Agency Affordable Financing

• NACA (Neighborhood Association)

• Chase DreaMaker

• New American

Other ways to get around PMI

You can also use an equity partner like Point or Unison to front you a portion of the down payment in exchange for a percentage of the upside in home appreciation over time. These programs don’t often allow for renting your home out, so if you plan on renting your condo you probably will need to pursue more traditional funding.

Be conservative in your business plan and stay cash flow positive

As with all rentals, it’s imperative that you stay cash flow positive in your new rental condo. This basically means that all of your expenses on the unit will be covered by the rent you expect to take in (with some room to spare for surprises and vacancies). Although you will make some paper profits due to principal pay down, depreciation and whatever appreciation might come your way, you don’t want to be shelling out money every month for a unit you aren’t living in.

If you’re having trouble figuring out what you can charge for your rental, my advice is to stay as conservative as possible. If you see a comparable listing for $2000, pencil in $1850 at the most when you are doing your due diligence. 

Make sure you are aware of condo-specific documentation

In addition to the normal due diligence that you would do before purchasing a single family home, there are some condo specific things that you need to look out for. Here are the most important ones:

HOA Reserves and reserve study

Any condo association will have something called “reserves” which are set aside to fund future maintenance and capital expenditures to the common areas and facilities (like elevators, halls, roofs, parking lots, etc). The nice thing as a condo owner is that you usually don’t have to pay for the upkeep on those things out of your own pocket, but it is important that the condo association has enough set aside to address the expenses that they expect in the future. 

Keep in mind that seemingly large amounts of reserves can go frighteningly fast. An elevator replacement, for example, will almost never cost less than $200k, and they can be much much more expensive. Siding and roof replacements on a large building can also be incredibly spendy.

Nervous about trying to figure out “how much is enough”? You shouldn’t be. If the condo association is responsible, they will have completed a reserve study sometime in the past 2-4 years that outlines the expenses the association expects and whether or not the reserves will be able to meet those expenses. If there is no reserve study or the reserves are low, run away. 

Special assessments

Remember when I said that condo owners don’t have to pay for the maintenance and upgrades to the common areas and facilities (except through their HOA fee)? Well, that was only partially true. If the reserves are too low to fund necessary improvements (e.g. fixing a leaky roof or an elevator that doesn’t work), then the association will need to levy a “Special Assessment.” Basically, all of the owners in the building will pay out of pocket to make up the deficit. If a condo is for sale, the realtor is required to disclose special assessments, but be sure to ask if there is a current special assessment or they expect one in the future. 

Take a close look at the common areas

There are some things that you just can’t see on a piece of paper. Even if you have a great reserve study and you’ve got confidence that the building isn’t going to fall apart around you, it’s still a good idea to stroll through the halls, laundry rooms, common areas, use the elevators, etc. 

If you see worn carpeting, flickering lights, dirty common spaces, haphazard and flimsy fixes, cracked windows, exposed siding, mold, or other concerns, you may want to step back from the purchase. If the visible components of the building aren’t in great shape, you can be pretty much guaranteed that the things you can’t see are in even worse shape. 

Lead paint, vinyl windows and popcorn ceilings

Watch out for older buildings where you might have to spend a lot of money upgrading the interior of your unit. Popcorn ceilings can be particularly expensive due to asbestos remediation requirements.

Make sure you have the right documentation

Since condos are legally more complex than SFH or multi-family properties, you want to be sure you have all of the right documentation before you buy. As annoying as it is, you will want to look over all of this in detail, as well.

• Declaration of condominium

• Articles of incorporation

• Bylaws for the HOA

• Rules of the Association

• A copy of the most recent financial report for the HOA

• The most recent investment, replacement or capital expenditure report (this is called many things in different places, but basically you are looking for the condo boards plans for spending over the next ten years)

• A copy of the condominium governance report

• Sellers disclosure statement

If you are remodeling, make sure you can make the changes you expect to be able to make

If you are buying an older condo, chances are you will want to upgrade your carpet to hardwood, and maybe even add in-unit laundry. Keep in mind that changes like these are often highly regulated by the condo association, and in some cases you may not be able to make them at all. For instance, hardwood floors may be banned due to noise for all of the units that aren’t on the ground floor. Not all HOAs are that restrictive, but pay attention to these requirements.

Take the plunge

If you’ve found a place in the right neighborhood, you’ve secured financing, got a good business plan, and you’ve checked all of the documentation you need, it’s time to decide whether or not you want to take the plunge into owning a rental condo. 

This last step you’ll have to make on your own, but if you’ve ticked all the right boxes you can buy with confidence and put your first step on the property ladder.

Condos are the easiest way to get on the property ladder in expensive cities

Now you have the tools to get started finding your own condo and starting on the investing ladder - even if you live in a city with expensive real estate. Even if you live somewhere with more affordable real estate, the hands-off nature of condo ownership might still appeal to you. After my own experience renting and remodeling a condo I can tell you that you can definitely make money with condos, and they are extremely easy to take care of compared to single family homes or multi-family properties.

One of the main reasons real estate is so attractive as an asset class is its privileged tax treatment. Understanding the full implications of real estate taxes for both primary residences and income properties is a vital part of being a real estate investor. Now, since I am a condo owner I've approached this all from that perspective, but you could use most of this for single family homes as well. 

Primary residences

The mortgage interest tax deduction is one of the most famous tax deductions in the entire tax code, and it has the potential to be an enormously powerful one too.

At its heart the deduction allows anyone to take the interest payments that they make on their mortgage (for primary and secondary homes) and deduct them from their top line income to reduce their tax bill. For instance, a homeowner that has a $2000/mo mortgage payment -split evenly between $1000 in interest and $1000 in principal- will rack up $12,000 in interest payments a year (12x$1000). If their tax rate is around 33%, that means that they will save around ($12,000 * .33)=$4000 on their taxes the following year. 

This deduction is highly regressive: the more you make, the higher your tax rate, and the more it benefits you. If you have a second home, it benefits you even more! High earners, especially those nearer to the beginning of their careers, should take out as large a mortgage as they are comfortable with (and can safely afford) to take maximum advantage of the tax credit. There is a cap on the deduction, so keep that in mind.

The side benefit to a large mortgage (which is certainly a burden) is the leverage on the potential growth in the underlying value of the home. With 20% down, every 1% of value growth in the underlying property yields a 5% paper profit in the underlying home. Keep in mind, that’s about the average long run real estate growth rate, and that math only works out as a long run investment because the transfer costs are so high in real estate.

I am keeping this relatively simple in the interests of brevity, but it's important to note that people with home offices, and people who rent their home out will have reduced or different tax benefits with regard to mortgage interest. I'm sure there are plenty of other caveats I am missing as well, so consult an accountant... but you get the basic principle.

Depreciation and other tax benefits of rental properties

Alright, time for some brutal honesty. I am a finance blogger, but I never took accounting. The word depreciation sends chills down my spine. As I’ve covered previously, last year we purchased a condo and remodeled it with the intention of living in it permanently. When we moved for work, we had to switch plans and rent it out, which altered the tax situation a little bit because the condo is a business now instead of a home. We still get to deduct the interest on the mortgage, but as a standard business deduction against the income of the property. Along with that we can deduct real estate taxes, out of pocket expenses, and depreciation, which is the most valuable of these deductions.

I was a little afraid of calculating my condo depreciation but it's actually really simple. We can take depreciation on the value of the “structure and improvements” invested in the building itself. In other words, nearly everything except the value of the land can be depreciated. And YES, condos do have land value! The total “structure and improvements” value is generally whatever the purchase price is + any additional capital improvements made to the structure. Whatever you have borrowed against the home doesn't come into play.

A standard depreciation schedule is 27.5 years, and each year an equal amount of the total depreciation value is deducted. For instance, a $600k house with $100k land value and $50k in remodel costs has a total depreciable value of $550k ($600-$100+$50). Divide $550k by 27.5 and you get $20k in depreciation every year.

Of course, this is a deduction, so using the same 33% tax rate we arrive at an actual value of $6666 each year. Not too bad. 

One huge caveat to this: once you sell, and log a capital gain, the depreciation is owed back to Uncle Sam. I am not a tax attorney so I’m not going to go over this. I will say that it’s certainly another very good reason to hold real estate for the long term; if you never sell, it's never a consideration.

Because of the other deductions (like expenses and real estate taxes), it's actually quite conceivable to have 0% taxable income from a rental property. If you needed proof that businesses are taxed more favorably in the US than individuals, look no further.

Takeaways

Real estate is an incredible investment opportunity over the long haul. Interest rates are near historic lows, so the cost to borrow is exceptionally low. What little interest that is actually due is deductible, most of the time. If you rent it out, then you get to deduct depreciation and a host of other expenses as well.

I’ve created a real estate tax deduction and depreciation calculator below for myself that allows me to plug in the stats for any property (including whether or not I am generating rental income with it) and calculate the potential first year return on the property. It’s relatively rudimentary, but as a broad instrument it’s quite useful. Keep in mind this isn't certified, and I am not an accountant, so I make no assertations that this is even close to accurate.  Happy calculating!

Real estate tax deduction calculator and condo depreciation calculator

For some reason, people get confused about condos. I think it’s because most Americans -myself included- grew up in a single family home and the idea of owning only a piece of a building is weird. But, condos are a great way to get started on the property ladder and they don’t have as many downsides as you might think!

Today, I am going to take a look at the most common questions people have about condos.

Why do I have to pay an HOA fee?

People hate homeowners association fees. It’s only natural to have a visceral reaction to the idea of a fee on top of the already high costs of a mortgage and taxes that go along with homeownership. I think it’s also because people don’t know what they are actually getting with an HOA, which is substantial.

HOAs, at their simplest, are simply a way to spread the costs of maintenance and repairs on a building across many people and across time. You pay HOA fees as a single family homeowner as well. Anytime you replace the roof, reside the outside of the house, replace the deck, or even plant a new garden. With a condo, these costs do not come out of your pocket, but instead are taken from the HOA as needed. The HOA simply amortizes the cost of maintenance. Crucially, HOAs also take care of the ADMINISTRATION of the maintenance… in other words you don’t have to go and call the roofer when your roof needs to be replaced.

So, yes. You need to pay your HOA fee. But, you should get something of equal or greater value from it.

In some condo’s, HOA’s can even cover utilities or other costs, as well. To make it easy on you to compare how the costs of maintenance and common spaces are shared in different types of homes, you can take a look at the chart below, or read my more comprehensive post about HOA fees.

Can you renovate a condo or a co-op?

Yes! Since you own a condo outright, you are generally allowed to make changes to the unit. You can paint, replace the carpet, fix the old windows, put in a new kitchen, what have you.

The big difference with condos and single family homes is that you won’t be allowed to change the exterior of the building, because it is a shared space that isn’t completely owned by your unit. Sometimes, there are small exceptions to this where an HOA will allow owners to enclose a balcony or improve a yard area that the unit has access to. No matter what, you want to be sure to ask the right questions before buying a condo to be sure the renovations that you want to make are actually possible.

Another difference that is important to note is that there are often protections made by the HOA to ensure that owners do not adversely affect other owners. For instance, you may not be able to add hardwood floors if they are too loud for the unit below you (or, at all).

The bottom line? You can renovate a condo or a co-op. In fact, I love condos as an entry point to the real estate market in expensive cities. And, you can even take out a HELOC to finance your remodel.

Having just purchased a condo and renovated it (see pic to the right), I can tell you with confidence that you can renovate a condo and make a profit, but you need to know what you are doing -and what you CAN do- before you get started.

So how would you find a condo? Luckily, the right place can be fairly easy to find if you follow these guidelines. 

Can you rent out a condo?

Yes! If you own it, then you have the right to rent it out. Generally, condo owners have the flexibility to choose to rent out their unit if they choose to. After renting out my own condo for the past two years, I can also report that it is a relatively easy and pain-free way to start making investment income off of real estate, and profitable as well.

Before you run off and buy a condo to rent out, there are some important and common restrictions HOA’s will place that are important to be aware of. You should be able to get the bylaws of the HOA to see if any of these restrictions apply to the condo you are interested in BEFORE you buy it. Consider that a tip, as well ;)

• The most common restriction is on the number of units in the building that can be rented out at any given time. For instance, my associated limited this to 4 units, but recently raised it to 9 to give owners more flexibility. They also recently changed the bylaws to state that owners must have lived in the unit for at least two years before renting it out. I think they did that because of me, lol.

• Another common restriction is on the amount of time a unit can be rented out, whether that be in terms of years or in relation to the total time of ownership

• Generally, there are exceptions for close family that make it easier to rent out condos

Can you have a mortgage on a condo or co-op? Can you have a second mortgage on a condo or co-op?

Just like any other home, you can have a normal 30 year mortgage on a condo, and you can even take out a HELOC to access the equity that you have in your home for a renovation or other purposes.

There are a few differences between a condo mortgage and a “normal” single family home mortgage that are important to know, to set expectations.

• Mortgage rates will usually be a little bit higher on a condo mortgage than a SFH mortgage

• If you have PMI on your condo mortgage, it will likely be a tad more expensive than on a SFH home

• HELOCs usually have higher equity minimums with condos

All of these restrictions exist because lenders have traditionally seen condos as higher risk than SFH mortgages. Over time, this may change, but either way it shouldn’t make condo ownership too much more expensive than SFH for you.

Hopefully condos are a little less intimidating now

Condos just haven’t been as common as a form of home ownership until recently, so people don’t know too much about them. However, they can be an incredible way to get on the property ladder. You can get a traditional 30 year mortgage on them, renovate them, and rent them out, even. Not a bad way to get on the property ladder.

 If you’re interested in learning more about condo remodeling, subscribe to RFG to read more.

I enjoy my job, but I am guessing if I had the opportunity to simply “manage my own affairs”, I’d jump at it. I guess I’d like the ability to choose not to work. Or, do something more meaningful.

It’s a nice dream. But, without a job I will definitely need to increase both the number and the volume of my passive income streams. As you can see from the screenshot from my Personal Capital below, retirement on my 401k and investment streams alone is a long way off at 53... best case scenario. 

Given the recent volatility in the market, I’ve been realizing that passive income is also an incredibly effective hedge against a recession, if and when it comes. If I lost my job, even a small passive income stream could give me the extra month or two I need to find a new one during a recession.

Maybe someday I could grow my passive income to the point where I don’t need a job at all. Either way, it’s an investment worth making. But to grow my passive income streams, I have to take stock of where they are at currently.

In this post I will do a full review of how much passive income I am making from each source, and set myself a realistic action plan for improving it ASAP.

State of the union: My passive income investments

Right now I have three sources of passive income: the condo, my stock portfolio, and this blog. 

The Condo

Current status: As I documented earlier this year, the condo has been a fantastic source of wealth creation, but it isn’t an income generating machine. Like… not even close. 

Currently, rent is $2400 with monthly expenses (ex. maintenance) coming in at $2300 after my HOA fee was raised. I know, yowza. If the property value hadn’t appreciated so much in the past two years I would be a bit concerned.

• Monthly income: $1000

• Yearly income: $1200

Goal: I did recently raise the rent with the existing tenants (who are great). When/if they leave next year, I hope to be able to raise it to $2500 or $2600 at which point it will be a more significant income generator for me.

To be fair, the condo is useful beyond income generation. It is an amazing vehicle for tax savings, thanks to depreciation. The slow but steady paydown of the mortgage is also a clear wealth generator, although it has no affect on my passive income.

Plan to achieve passive income goal: I will have to wait to see what the current tenants want to do before I know if I will be able to raise rent. It will also be interesting to see if there is a recession because it could negatively affect rents and property values. If the economy stays on track I should be able to get $2500 or more out of the condo and clear $150-$250 a month in income. Not great, but not awful either.

Investment portfolio

Current status: As I wrote up in my yearly report, I made a 2.6% yield on my portfolio which totaled up to around $1800. 

Goal: That 2.6% yield is pretty good for an 85% stock portfolio, but that doesn’t meant it couldn’t be better. I think I can probably reallocate a little bit to increase income without distorting my allocation. I’d like to reach a 2.75% yield, and with additional investments increase my passive income to $2500 a year by the end of the year. 

Plan to achieve passive income goal: Quite simply, I need to save. The more money that’s in the portfolio, the more I earn. I have a plan to be able to put around $1500-2000 per month away in passive income investments within my portfolio. That means every month I will grow my passive income by $20-40. Again, not great, but powerful over time.

Other than saving more, the only way I can increase my income is by increasing the yield on the portfolio. Conveniently, I was already planning on trying to skew my new investments towards bonds this year. In my view, the economy is in the last year or two of a very very good run, and it wouldn’t hurt for me to be a LITTLE more conservative right now. That also has the advantage of increasing yield in the portfolio as a whole (since bonds are the highest yielding components of the portfolio). REIT’s are the second highest yielding element of my current portfolio, and they’ve gotten hammered recently.

The BLOG

Current status: Right now, the blog is my largest passive income generator, but it is hugely inconsistent. Most of my income comes from AdSense and affiliate ads, and my income can vary from $750-$1500 a month depending. I didn’t start the blog intending for it to be an income generator, but as traffic has picked up so has the revenue. To be honest, I am a finance blogger and I’d be a HACK if I wasn’t at least trying to make some money from my time investment.

Goal: I don’t really want to set a goal for the blog right now, because it’s so early and I make so little. All the same, to cover my hosting expenses from Squarespace and at least offset the considerable time investment, it only seem reasonable to shoot for a monthly goal of $2000, or $24,000 annualized. 

Plan to reach goal: This one is simple. Make great content, and promote it. If user growth increases the way it has been recently, I should be able to make that goal without a sweat. I will also continue to optimize my AdSense placements as much as possible (and take advantage of their awesome in product optimization tools). 

Am I ever going to have some freedom with my passive income portfolio?

Right now, I am making a total of around ~$20,000 a year from my passive income streams, almost all of that from my investment portfolio and the blog. If I am able to juice my investments, raise rent on the condo, and keep making great content for the blog, I think I’ll be able to get that to $30-35k annualized a year from now. That’s not life changing, but it is significant. If I’m able to build on that number little by little, year by year, I should have the freedom to choose not to work by around ~45. 

After a long, long week at the office, I can confidently say that is a goal worth grinding for. 

Diversification is one of those words that just SOUNDS GOOD. It practically rolls off the tongue… “I’m going to buy bonds so I can have a more diversified portfolio.” Surely these were words that were spoken by someone intelligent. But, diversifying isn’t as easy as it sounds.

I’ve written before about the dozens of different types of diversification, and I am sure there are dozens more that I didn’t even think of. With all of the potential complexity around diversification, things can get confusing. That’s why it isn’t a bad idea to pursue some professional assistance from a financial planner.

But, since I am a finance nerd I like to experiment with different model portfolios and see how different investments might help me to diversify and develop a portfolio that will perform well in the good times and the bad.

Here’s the process and tools I use for portfolio analysis and diversification.

Step 1: Before I start experimenting I need to know my goals!

This is actually the most important step, and it has nothing to do with portfolio analysis or diversification. I've written in detail about my own process developing my investment beliefs, and how that led to the portfolio I have now.

For those without the time to read that post, I have an easy button. I start by imagining a simple sliding scale: 0 is no risk with no potential gain, and 10 is extreme risk with extreme potential gain (and losses). 0 would be an all cash portfolio, 10 would be all Bitcoin, or diamond mines in the Congo, or something equally ridiculous. 

Obviously, most people want to be investing someplace in the center. I approach this from the perspective of "how much could I lose before I start freaking out". Since my portfolio is only for long term capital appreciation, I could lose 30-50% and still sleep at night. On the sliding scale, I am an 8. Someone who would be comfortable losing 20-30% would be a 6. 

Step 2: Using Personal Capital to find a base allocation for a diversified portfolio

I talk a lot about Personal Capital because it's my favorite financial tool. I keep track of my spending, investments, real estate, loans, credit cards and everything else in my financial life in one location. Plus, it's free. They make money off of clients who choose to buy wealth management services, but for those of us that just want to use their algorithms, it doesn’t cost anything.

Remember the sliding scale from step one? Personal Capital has essentially the same one under the "Investment Checkup" area, and after entering a number into the scale it will suggest a target allocation across all of the different facets of diversification. To use the Investment Checkup tool, there have to be investment accounts loaded in Personal Capital, which can be done by clicking the + icon in the top left hand side of the screen. It’s on the right hand side in the image below.

After connecting accounts, the investment checkup and portfolio analysis area can be reached through the menu under "Planning". Then, it spits out a current allocation based on all of the accounts that have been connected to it. Personal Capital will automatically include all of the accounts that are connected to it, but it is also possible to deselect the accounts that shouldn’t be included in the calculation.

Personal Capital breaks everything out into an easy to understand comparison of current allocation and target allocation. Directly below the checkup, there's a slider to enter the desired risk/return ratio. I like to try different variations to see how the target allocation changes. 

At the very bottom of the page, PC displays some suggestions for changing allocation to better match the optimized allocation they've developed with their algorithms and backtesting. After all, it isn't just about diversification but how to diversify in a way that will help me achieve my goals without exposing myself to tons of risk.

Step 3: Using Portfolio Visualizer to tinker with my allocation

Now, technically step 3 is optional but as someone who is really interested in investing, I think it's crucial. Portfolio Visualizer is the second free tool that I use on a regular basis to check on my investments and optimize my allocation and diversification.

I love Personal Capital but Portfolio Visualizer is a little less cookie cutter. It makes it easy to choose and compare thousands of different investments over time. In the aptly named "Backtest Portfolio Asset Allocation" page, you can select investments and different parameters to look back at investments over time, as you can see below. 

For index based investors, this tool is incredible because it enables you to reference any asset class that you might want to invest in. There's also a page for comparing ETFs or stocks to one another, but I prefer to use the asset class page because it's simpler. 

They have also a broad range of existing model portfolios that can be compared against any other portfolio. Of course, there's detail info and backtested performance at the bottom of the page once everything is selected.

How do I put this all to use? I test and test and test. What's the easiest way for me to expose myself to the most potential upside while limiting my potential downside. It also adds important context to the suggestions that Personal Capital makes. Both tools, if used together, can give you a really good insight into your portfolio and help you to have an informed decision with a professional investment advisor.

It’s never a bad time to start a portfolio analysis

It's actually incredible that either of these tools exist. Ten years ago, no one except professional wealth managers had access to backtesting tools this robust. They can even run Monte Carlo simulations. It's a little like a new toy store opened and everything is free. Have fun!

Investing is scary. I'll be the first to admit that at times I am scared of investing; and that's after years of reading about the topic and even working at a wealth management company. Because investing is so scary, and it's something that is so important to our future, it’s only natural to look to someone with deep experience in the area.

It’s not too different from other areas of life. Although many people do their own taxes, there is a certain feeling of security that comes from entrusting your taxes to your accountant, knowing they will “take care of it.”

A good financial advisor will help you get to where you want to be

So what does a financial advisor do? A good one will do a lot of things!

• An initial financial review and discussion about life goals, expenses, etc

• Help creating a budget and savings plan

• Assist with selecting investments and asset allocation

• High level tax minimization techniques

• Advice for large purchases (e.g. home, wedding, etc)

Sounds awesome, right? There’s just one problem…

There is one thing that is important to keep in mind: investment advisors are paid help, and many people will never be able to pay them enough to get really meaningful and personalized advice. What’s more, there are a lot of people who market themselves as investment advisors but who are only thinly veiled salespeople working for large insurance and investment companies.

Although I think it is a good idea for everyone to seek investment advice, it is very hard to pay them enough to get the in-depth and personalized attention that everyone deserves. This leads to templated, cookie-cutter advice. Plus, there are tons of useful tools that can help to achieve some of the same benefits of investment advisors without their return-sapping fees.

Let’s start at the beginning, though. Why is it so hard to get good advice from investment advisors?

Why it’s hard to get the attention you deserve from investment advisors

Let me outline an enormously depressing fact for you: unless you have upwards of $10,000,000, no investment advisor or wealth manager is going to be able to spend the time and care on your investments that you deserve. If you have over $10,000,000, well then I honestly have no idea why you are reading this. Get back to your yacht, sailor. 

Anyway, as I was saying, wealth managers are generally paid either by a percentage of assets under management, or by a flat rate fee ($1000/yr, for example). I’ll take a look at both in this post.

Disadvantages of wealth management with fees for assets under management

First of all, this model incentivizes the manager to take outsize risks to increase the amount of assets under management, and therefore their fee. They might put 25% of your portfolio in a risky junk bond fund, rather than the 5% that is actually prudent. 

Second, fixed percentage fees are an enormous weight on returns: even multi-millionaires often pay 1-2% per year, and potentially even more through other fees. At the wealth management firm I worked at, only the 9 figure investors were getting a relatively fair rate: .25-.75% of assets per year. Why'd they get such a good deal? The more money you have, the less the advisor has to charge you as a percentage of your assets to cover their costs. The work an advisor has to do to invest a $100,000,000 portfolio is far far less than 100x the work it takes to invest a $1,000,000,000 portfolio.

What I am trying to say here is that even people with 7 or 8 figure portfolios can end up paying an enormous cost for traditional wealth management that is tied to assets under management.

What about advisors where you pay a flat fee? That has it's problems as well. 

Disadvantages of wealth management with a flat rate fee

First of all, a fee is a fee. If I pay an investment advisor 1% a year to manage $1,000,000, then I am out $10,000. If I pay an investment advisor a $1,000 fee to manage $100,000... I am still paying 1% a year!

The sad part is that you can't get much advice for $1000, or even $10,000.

If you have a Harvard MBA investment advisor who makes $200,000 a year (+), $1000 only buys 1/200th of their time in a given year. That's just a single workday (given that we work about 210-230 days a year). $10,000 buys you 10 workdays of effort, but who can afford to pay $10,000 a year? Someone who has millions of dollars already. This is simple math. If you have $500,000, even a relatively reasonable 1% fee is still just $5,000. 

Why am I obsessing over a 1% fee (or even less?). Over the long run, those fees compound and compound. Take a gander at the chart below. Even with a modest $100,000 portfolio, a small 1% fee could add up to over $40,000 in returns over 20 years.

What type of advice do investment advisors give?

Because most people can't realistically afford to pay very much to their fee based investment advisor without severely damaging their returns, they get cookie cutter advice and templated portfolios. I'm not just guessing on this - I actually tried out a couple of fee based advisers. Pay $500, get a consultation and recommendations. I filled out some worksheets, put in my vital financial stats, and had a 30 minute meeting with my adviser where they gave me a 4 or 5 fund lazy portfolio and advised me to save more. That ticked me off.

I told both of these advisors that I was extremely risk tolerant. I wanted to take more risks, with the understanding that I would be in the market for the long haul and I could handle a 40-50% pullback in exchange for greater returns over the long run. In both cases, they advised me to have an asset allocation close to 30% in bonds, with the majority of my investments in the US market and 10% or less in emerging markets.

Based on my age (30-ish), I'd say that allocation is middle of the road. Definitely not aggressive, but not super conservative. But I'm a unique individual. It was very conservative for me, and I don't like how concentrated it was on the US market. Even worse, if I had followed their advice, I would have around 10% less in my portfolio than I do now... and that's only over three years! 

Where can you get good investing advice for free?

Now, to be clear, I am not saying that you shouldn’t get an investment advisor. My only point with this post is that investment advisors will not have the time to give you the personalized attention you deserve unless you are a multi-millionaire. So, I plan to pay for cookie cutter advice on a periodic basis, but I also take their advice with a grain of salt and am educating myself in other ways.

Learn about index investing at Bogleheads

Bogleheads is a fantastic online forum named in the spirit of Jack Bogle, the founder of Vanguard and the father of index investing. The basic premise of index investing is that, on average, it is very hard for individual investors to correctly choose the right stocks to outperform the market. It’s better to just buy an index.

The forum has now expanded to cover everything related to investing and personal finance. It’s a great read!

Create and test your portfolio with Portfolio Visualizer

Portfolio visualizer is an incredible, free tool that you can use to test the theories and investment strategies you learn at Bogleheads. Go on, take a look and model a few portfolios! Obviously you’ll want to read my full post on the subject, as well.

Keep track of your portfolio with Personal Capital

I use tools like Personal Capital to provide me with customized investment advice tailored to my risk profile. Using Personal Capital I can connect all of my accounts and see my performance over time, for free.

Pay for the advice once or twice, but do your own homework too

In summary, investment advisors are an important resource that everyone should consider and periodically use. However, it is important to remember that they cannot always give the attention or time to give customized advice. That is why I always do my own research and budgeting as a supplement to professional advice. Maybe some day I will have enough money that I can get the personalized attention I deserve, until then I will have to stay engaged with my own financial plan.

I’ve made no secret that I love condos. With real estate in most urban locations becoming more and more expensive over time, condos can be one of the most accessible and easy ways for people to get on the property ladder. As long as you ask the right questions before you buy a condo, they can be a really great way to enjoy painless home ownership in the city. And, they can be great investments as well, as I have seen with my own condo in Seattle.

But, whenever I tell someone I own a condo the FIRST THING they say is “Oh no, I am so sorry! You have to pay all of those homeowners association fees!”. I will admit, I don’t enjoy paying my HOA every month, but I do think people have the wrong attitude about HOA fees. Although they are an expense, they usually pay for a number of important things that you would ordinarily have to take care of yourself with a SFH or a townhouse.

For the visually inclined, I will start off with a chart going over the USUAL items that homeowners associations fees do and do not cover. I’ll dig into each of these down below.

One note of caution

The statements I am making here are assuming that the HOA fund for a given condo is fully funded and prepared for the maintenance and capital replacements that will eventually come around. If not, condo owners could be subject to something called a “special assessment” when big things like a roof or siding need to be replaced. Make sure to do your research and ask the right questions before buying a condo so you can avoid this.

Inside maintenance

No matter whether you own a house, a townhouse or a single family home, inside maintenance is going to be the responsibility of the owner. Even though a lot of maintenance is taken care of by the HOA in a condo, you will still have to take care of the floors, paint, appliances and other upkeep within your unit.

Outside maintenance

Some of the largest expenses that homeowners face are the costs of maintaining the exterior of their home. The elements can be incredibly tough on homes, and over time the costs of maintaining the paint, siding, roof and deck can amount to tens or even hundreds of thousands of dollars.

The same is true for condos, except usually this exterior maintenance is entirely taken care of by the Homeowners Association. Although it stinks to pay the HOA fee every month, a large chunk of it is going into the reserve fund to help pay for the replacement and maintenance of these features.

Common area upkeep

Townhomes and condominiums generally have some amount of common space that is shared between all of the owners. This could be anything from a hallway inside the building to a parking lot, garden, or amenity like a pool or exercise room. In a townhouse, these types of things are the responsibility of the owners to share between themselves (if they do not have an HOA). In a condo, the HOA will generally pay for them.

Capital replacements

Condos, and particularly larger condos, may have additional elements that single family homes and townhomes don’t, like an elevator or laundry room, for example. In the case of a condo, when these items need to be replacement the HOA will generally take care of them out of the reserve fund.

In my condo, the association recently paid nearly $200k for the replacement of the elevator. It was a significant cost, and I didn’t have to pay anything out of pocket. However, having an elevator is a big cost for the building and it is something you don’t have to worry about with other types of home. Running, maintaining and replacing the elevator in my building probably costs me $25-50 a month in HOA fees. It’s not a cost I am happy with, but it is part of owning a condo in a larger building. If you find a condo in a smaller, walk up building you can avoid this cost altogether!

Power/sewer/garbage

Many homeowners associations will pay for power, sewer or garbage, which is a significant savings that people often overlook when buying a condo. Keep in mind, this is on a building by building basis so there is no way to be sure a condo HOA will pay for these things unless you ask or see it within the association documents. Generally, it is more common for garbage and sewer to be handled out of the HOA and power to be paid by the individual condo owner.

TV/cable/internet

It may surprise you, but HOA’s will often cover or heavily discount TV/cable or internet, particularly in larger buildings. If the HOA can get a group discount that covers the entire building, often the owners will decide to join together within the HOA to purchase these items as a group. Again, this is not the case for all or even most condos, but it is true in some cases.

Amenities

Many condos have significant and meaningful amenities that can be of benefit to the owner. For instance, a condo may have a pool, game room, common area or rooftop, garden, exercise room, laundry room or any number of other potential amenities. One of my friends have a bowling alley in their condo. Admittedly, these amenities will often lead to higher HOA fees, but you cannot deny that a pool sounds nice on a Summer day!

Are HOA fees worth it? In my opinion, you bet.

It’s definitely annoying to pay HOA fees, but you cannot deny that they offer significant advantages and value to people who would rather have someone else take care of their maintenance for them. With a condo, you pretty much only have to worry about your interior maintenance (along with whatever utilities the HOA doesn’t cover). Although you need to make sure the capital reserves are funded so future capital expenditures can be dealt with, HOAs can make your life as a homeowner much easier.

A nice house can ruin your fatFIRE aspirations

If you follow the blog regularly, then you know that I am doing my best to retire at 50 with as comfortable a lifestyle as possible. As much as I respect the determination of the frugal FIRE (Financial Independence Retire Early) crowd, the truth is that I’d like to be able to have a nice house, fancy vacations, and maybe even a sports car. I could cut my expenses and retire earlier, but with only one life to live I’d like to have my cake and eat it, too (as much as is possible). This means focusing on income, being diligent about saving, and investing smart.

I’m not alone. In fact, many of my friends and co-workers are at least theoretically attempting to achieve early retirement of some kind. Since people know I write the blog, I often get into conversations about finances, investing and, real estate. Recently I was talking about the real estate market with an acquaintance I met through work. As we were discussing the insane prices for real estate in the Bay Area, he happened to mention that if it weren’t for his home, he would have been able to retire early.

That’s when I dug in to get the rest of the story…

Your housing decisions will define your ability to retire early

The friend I was speaking to is in sales management at a tech company in San Francisco. By all accounts, he is an incredibly intelligent and “smart” person, who has managed to move up the ladder in a highly competitive job and industry year after year. In his current role, he pulls in over $750,000 a year, and he has been earning high six figures for quite some time.

With that kind of income over that time frame, you would assume he would have been able to save a significant chunk of change over time. But, at 48 he is unlikely to ever be able to retire early.

He lives pretty large, as you might expect from a sales guy. His young kids are in private schools. He has a nice car, fancy watches, and the same for his wife. But the real FAT for him is housing. He has a $2m+ place in Cabo and a $4m+ house Bay Area as his main family home, both bought within the past 5 years on typical terms (but largely financed).

The bottom line? His PITI costs are close to $20k per month. He still saves in his investment account and maxes every retirement account he has, but with $240k-ish in annual mortgage payments, and other significant lifestyle expenses, he is having trouble setting aside the massive chunk of change he will need to retire early. Using the 4% as a guideline (which basically says you need 20x your annual expenses in long term investments in order to retire), he would need to save close to $5m just to cover his housing costs.

Although housing is the largest chunk of his expenses, it is by no means the only expense he has to pay. His kids private school, as an example, will probably end up costing him $500,000 or more by the time they are through college. All in all he’d probably need somewhere between $6 and $7m saved up to retire early with his current expenses and lifestyle.

He didn’t share all the details, but I get the sense he has more like $1-2m saved. It’s a great start, but that’s all it is.

Housing choices are stickier than you might imagine

You might be thinking that this is an imaginary problem. He can just downsize his main home, or sell the Cabo place and retire. That’s what I said, anyway.

As he started explaining in more detail, it became clear that things are a little more complicated than they seem. The kids are best friends with the neighbors kids. Their commute is less than 30 minutes, and school is only 5 minutes away. Plus, they designed the house from scratch as their “forever house”, which is ironic since it’s probably the biggest reason he has to work for the foreseeable future.

That leaves the Cabo place. Unusually for second home owners, they actually use their home a fair amount, at least 10 weekends plus a two week vacation per year. They rent it out to offset costs, but have had some bad experiences, so now they only rent to friends three or four times a year.

Of course they could sell or downsize either one of their homes and retire early, but as with all lifestyle inflation it’s much easier said than done. They like their houses. They like their life. So they’ve chosen to keep working until a normal retirement age and keep their housing situation as is.

Don’t feel sorry for my friend, but only buy as much house as you need

At this point I should probably be clear that my friend wasn’t complaining - he’s happy with his choices and he understands that he is fortunate to have what he has. But what he did say to end the conversation was much more interesting.

He said if he had to do it all over again he would have tried to spend at least $1m less on their main house and $750k less on the Cabo place, setting their lifestyle at a lower level from the start and making a quasi-early retirement at 55-57 a possibility.

Although it would feel like a huge downgrade if they made those choices now, it probably wouldn’t have changed their lives much if they had made more affordable choices in the beginning. But, they bought the max of what they could afford (maybe over), and he’s gonna be slugging it out till he’s 65 or the kids are off to college and they can downsize or move full time to Cabo.

How much house can you afford if you want to FIRE?

At this point you may be wondering how much house you really can afford. Traditionally, there have been a few schools of thought on the topic.

If you walk into a bank, the discussion will immediately swing to how much money you can afford to borrow and service. Mortgage brokers and banks are incentivized to try to get you to borrow as much as they can legally lend you, so it’s easy to walk in and end up getting financing for way too much house than you would otherwise want (financially speaking). Obviously, the “how much you can get approved for” method isn’t the best.

Some people say that you want to have your housing costs equal to a third or less of your take home pay. If we look at my friend who is taking home around $750,000, we can assume he pays at least $300,000 in taxes per year, leaving around $450,000 net. With mortgage costs of $240,000 -and maintenance costs of $10-$20k per year on top of that- he is a lot close to 50%. By all accounts, he is spending much more than he should on his housing.

To be fair, the 30% rule is more reasonable for the rest of us who aren’t making as much as he is. When you are making close to a million dollars a year, you are never going to need to spend 20% of your income on food and clothes, so it leaves a higher percentage for other things.

Because of this I like to take a different approach when it comes to figuring out how much house I can afford. It has nothing to do with how much I make, or how much money the bank will lend me. Instead, I step backwards and approach the subject from a different angle.

Step 1: Determine net income

This is obviously the easiest step, but don’t write it off. How will your income change over time? Don’t assume raises will come out of nowhere. Have a keen eye on any variable compensation like bonuses, stock, etc that you have recently been paid that you may not have in the future. You won’t be able to perfectly guess what your income will look like in the future, but be conservative.

Then, subtract your expected taxes to arrive at your net income.

Step 2: Subtract your retirement and investment savings

If you are making decent money, you should be maxing out every tax advantaged savings account you have including IRA’s, 401(k)s and even HSAs. Once you have done that, you will likely need to save even more on top if you want to retire early. I have a full chart that I’ve made showing the total amount that I should be at every single year until my fatFIRE date at 50.

You might need to save extra to catch up, so be sure to include that in your number as well.

Step 3: Subtract your living expenses

After you have arrived at your actual net income, which I define as income after taxes, retirement and investments (ITRI), you can subtract your expenses for utilities, food, clothes, fun, vacations and other miscellaneous expenses.

Step 4: Subtract to arrive at your maximum total payment

After you have subtracted your living expenses you have arrived at the yearly amount that you can safely spend on mortgage, interest, taxes, insurance and the maintenance on your home. If you have a large down payment, you may be able to afford more home than you would otherwise based on this number.

The bottom line: save as much as possible, buy the cheapest house you can

After reading all of this, it should be clear. For anyone that wants to farFIRE, the only way to get ahead is by reducing housing expenses as much as possible.

Also, Other Real Estate Posts

• Investing in real estate when real estate is expensive

• How to find a condo to remodel

• Crowdfunded real estate

• How to avoid PMI (Private Mortgage Insurance)

You might assume that once you have gotten your offer, started at your company, started to exercise and sell your options then most of your decisions are already done. Unfortunately, the hardest decision is left to be made: when to leave. 

Since most companies continue to grant stock options to their employees every year or two, at some point you will have to make the decision to leave the stock option gravy train and move on to new pastures. When you are making an extra 25% on top of your salary (or more) from stock, that can be an incredibly difficult decision to make. 

I thought I would take some time today to dive into this concept and discuss the way I think about this.

The decision to leave for me is the exact opposite of the process of evaluating a company to join, which I do by looking at these three criteria: 

• Are they good people?

• Are the customers in love with the product?

• Is the company a good investment?

When I am thinking about leaving, I ask those questions in reverse. Maybe the people are less good than they used to be. Maybe the product is less transformational, and the customers are less excited about it. Or, maybe the company and your stock just simply isn’t as good of an investment as it used to be. It might have appreciated to the point where you don’t think there is much potential gain left in the shares. 

When any of those conditions change, it might be the right time for me to leave. Although I can’t tell you when the right time might be to leave your company, I can tell you about the time when I chose to leave my golden handcuffs at Tableau behind and move on to greener pastures.  

Are they good people?

By 2017 when I had been at Tableau for 8 years, a lot had changed since I started. Although I loved many of my co-workers, we had also hired some Microsoft middle-managers that had begun to change the nature of the organization by introducing more bureaucracy and inter-departmental competition. It really killed the vibe, and introduced a negative competitive element to every discussion. There were Jabber (old-timey Slack…) channels just for bitching about other people, and the primary motivation of the rank and file was to see how early we could leave and still keep our jobs. There were a lot of people who were keeping a nice cushy 10-4 schedule (with no negative repercussions). In fact, there were no negative repurcussions for anything - it seemed like it was impossible to get fired. Now, this isn’t always a bad state of affairs as some companies fire way too quickly and ignore the possibility of developing lower performers, but Tableau took it way too far. Awful people kept their jobs for no reason, and it hurt the great people.

Are the customers in love with the product?

At the same time, Power BI (a Microsoft product) had been aggressively chasing after Tableau and was beginning to eat its market share. Tableau was still better, but it was much harder to explain why it was better. Compounding that was the slower pace of development caused by years of technical debt.

Less new stuff to talk about and more competition makes the day to day job a lot less fun as a marketer. Simultaneously, the company was trying to switch to a new subscription based model which was confusing to customers. Add it all up and Tableau as a product just didn’t look as good as it did before.

Is it a good investment?

Although Tableau was still a good investment when I left, it also wasn’t a “10x” investment. My shares weren’t going to be worth 10 times what they were within any reasonable time frame. As you can see from the image of Tableau’s share price below, I had been through quite an emotional journey over the course of the previous 4 years, and with the stock price at a new low my existing stock options were worth far less than they were before. Of course, over time they would go back up - something I felt fairly confident of even at the time I left - but it could take years. I knew it was better to focus on finding a new opportunity with more shares and better prospects than continuing to pour time and effort into Tableau.

Any one of those changes would be fine on their own, but all three changes together made it clear that it was time for me to leave. 

When should you leave your startup if you have golden handcuffs?

There’s no way for me to tell you exactly when you should leave, but hopefully you will have developed enough intuition to know when the time is right for you by applying the evaluation criteria in reverse. You also have the tools you need to find someplace new, which is just as important as knowing when the right time is to leave. The two decisions are closely linked.

When I started my first job out of college, I had no reason to be overly optimistic about my financial future. My offer from Tableau Software as a “Marketing Data Analyst” was a little underwhelming: $29,000 per year with a 10% bonus based on company performance.

And 1000 stock options.

Truth be told, I wasn’t very excited about the job. As an economics major, I had been working hard to make it into the financial industry and had even interned at a wealth management company in the Summer of 2008 with the hope of eventually doing something similar when I graduated. I had always been interested in economics, money and investing, so I was excited by a career that could let me focus on all three and potentially gain insight into the tools that wealthy people used to get ahead. If you want to learn how to make yourself a hamburger, get a job at McDonalds and make someone else one first.

In my role as the intern I was largely responsible for putting together the quarterly statements we sent to our clients. These people had a lot of hamburgers. Like millions and billions of them. Although I could only gain a small amount of underlying strategy and technique by looking at the quarterly reports, I did learn a lot about the different tools that wealthy people had at their disposal. Interest rate swaps, margin facilities, hedge funds, private equity, fund of funds, and options. One client was a board member of a large insurance company, and as part of his compensation he had over 3,000,000 shares of stock options. I didn’t really understand what they were at the time, but I did understand the tally at the bottom of that statement: $15 million. It was a figure I would remember, and a tool that I would log in my memory.

Unfortunately, as I started looking for a job in the summer of 2009, the entire financial industry was falling apart around me. I interviewed for 9 months and had little to nothing to show for it. I had been eking by on $10 an hour at a temp job as a reporting analyst at another wealth management company in the hopes that it might turn into a full time job. Obviously, that didn’t happen.

After months of fruitless applications -many of them for jobs selling insurance on 100% commission- I finally landed two promising interviews. The first one was at a two person wealth management company as an assistant. It paid $35,000, and my life would be spent sending faxes and printing quarterly reports. It was in the industry I wanted to be in, though.

The other role was at Tableau Software, a small analytics software startup, where I would be using the analytics skills I practiced at my wealth management internship as a data analyst in the marketing team.

Surprisingly, I got offers from both. Even though Tableau paid less and wasn’t in the finance industry, it seemed like a company on the move. My day to day life would be significantly more interesting. The lower pay stung, but I took the Tableau offer. I figured I would have more opportunity to stand out analyzing data at a fast moving company than sending faxes at a tiny wealth management company.

Plus, I was intrigued by the stock options. I remembered the client from the first wealth management company who had added $15,000,000 to his already sizable fortune with stock options. It wasn’t just outright greed that piqued my interest (although as an insanely poor college student I have to admit that greed did play a part). I grew up in a family of real estate entrepreneurs, and I was excited about the potential to own part of Tableau. Even if it was an infinitesimally small portion of the total company, I would be an owner (no comma) and I would benefit from the success of the company in the same way that the founders and early stage investors would.

I knew next to nothing about how my stock options worked, how much they would be worth, or how they were taxed. I didn’t even know that those were questions I should be asking. I did remember a couple of classes in college that briefly discussed financial derivatives, so I broke out my old textbooks and re-read the section on options at a high level.

What I learned wasn’t surprising: they give you the choice (hence “option”) to purchase an underlying asset (the stock) at a fixed specified strike price up until some point in the future (the expiration date). Naturally, if the price of the stock rises over time to a level above the strike price, the options have value: you can use the option to buy low, and then sell at the current price.

My own grant from Tableau was fairly easy to decipher. I received 1000 shares at a strike price of $1.00. These shares would vest (become usable) over the course of 4 years, with 25% of the shares vesting after 1 year and 1/48th of the shares each month after that. My options expired in 2019, meaning that I had to exercise  (use them to buy the stock) before that date.

I had no idea at the time, but this is basically the most bog-standard ISO grant you could possibly receive.

Although the vesting part was still a little confusing, my brain started chewing on the concept immediately. If the stock price went to $10, then I could purchase my 1000 shares for $1 each. That meant I would make $9000 if I sold my shares:

$10 x 1000 shares (sale price) - $1 x 1000 shares (cost to purchase) = $9000

Although that was exciting, it was also a little depressing. My dream was to make enough money to start investing in real estate like my family. To get started doing that, I’d need a lot more than $10,000, and that just wasn’t going to happen. To make $100,000 off of my 1000 share grant, I would need the share price to go up by over 100x. To make a million it would need to go up by a staggering 1000x.

Expecting the company to grow 100x in value was a crazy expectation, and I knew enough at the time to temper my expectations.

I put my stock option folder away in the closet for safekeeping, and focused on working as hard as humanly possible. I wasn’t going to make a fortune from my stock, so I might as well try to get a promotion and a raise. Since I made so little I was working from paycheck to paycheck, and you could say that I was highly motivated to change that.

Almost a year and a half later, all of my hard work paid off. My boss called me into her office and sat me down: I was getting promoted to “specialist”, whatever that was, and I had received a 24% pay bump to $36,000 a year. Of course, I would also be receiving an additional 2000 options.

“Wait… what?” I said to her, a little surprised. I had been working under the assumption that I would never get another option grant. She sat me down and explained to me that each year every employee received a new grant which would start vesting under a new 4 year schedule. My new grant started vesting in 2011 and expired in 2021. In this way, I would never “run out” of options and would always be incentivized to remain at the company and work hard. There were even grants for promotions, and special grants for outstanding service to the company.

This totally and completely changed my attitude towards my options.

If I continued to get more shares each year, and managed to snag a few promotions and special grants along the way, I could potentially rack up thousands and thousands of options. Plus, after two years at Tableau the company’s prospects were looking significantly brighter. The economy was pulling out of the recession and companies everywhere were investing heavily in data, analytics and efficiency.

Assuming all of these things continued as planned, I might be able to walk away with a significant amount of money. Not tens of millions, but maybe a million or two. Enough for me to start investing in real estate and start “managing my own affairs.” For a kid making $36,000 a year, that was pretty exciting.

I got back to work. I wanted every option I could get my hands on. I also started doing some more research into how stock options actually worked, particularly in regard to taxes. My assumption had been that they would be taxed the same as income, but it turned out that this wasn’t the case. If I could scrounge together enough money to purchase (aka exercise) my shares before I sold them, I might be able to significantly reduce the taxes I paid on the options. Instead of paying income taxes for the whole amount, I would pay something called the Alternative Minimum Tax on part, and income tax on the rest. It was confusing -which is why I devote a whole section to taxes in this book- but the potential savings was certainly worth the mental exercise.

Although it would come back to haunt me later, I never did exercise any of my options early. With only $36,000 a year in income, it was hard to scrounge together $1000 worth of extra change to purchase even my initial grant. I knew I should, but I couldn’t, and I was way too busy to worry about it.

Everyone at the company was focused on a much more important goal: the IPO (or Initial Public Offering). Up until the IPO, as a private company there was no way any of us could sell any of the shares we were accumulating. The moment we went public our options would turn from theoretical slips of paper to something of real value, because we would be able to sell the shares on the stock market.

I continued to work hard and managed to get promoted a few more times. By 2013, I had received grants totaling over 11,000 shares.

-2009: 1000

-2011: 2400

-2012: 4000

-2013: 3600

None of them were at a strike price of more than $7. Although no one knew what the shares would be worth on the open market, the initial IPO filing said that we were shooting for a price somewhere in the range of $20-$30. Feverishly working the math in my head, at $30 a share, my stake in the company would be worth around $330,000. Not too bad for a 26 year old kid making $50k a year! Even with crazy Seattle real estate prices, that was enough to get started real estate investing.

As it turns out, my shares would be worth significantly more than that.

The day we went public in May of 2013, the entire company was camped out in our offices, awaiting the first trade with baited breath. Our executive team had flown to New York to ring the bell at the NYSE where the company would be listed. They had even flown every single employee that started before September of 2009 out to the NYSE to witness the event in person. As it turned out, I was the very first employee to be hired after that date. I had just missed the cutoff. Although I should have been disappointed, I didn’t care at all. The markets were about to determine the fate of my options, and the sentiment was bullish.

All of us employees waited in Seattle, glued to CNBC, eager to see how much our shares were actually worth.

If you’ve never been through an IPO before, it’s an amazing experience but it’s difficult to explain. It’s a little bit like Christmas morning as a kid. You know that there’s something special sitting under the tree, but you don’t know what. You’re excited, but you’re also a tiny bit nervous, wondering if you got what you wanted.

The market opened, and we started watching the bid price of $DATA (our new stock ticker) go up, and up. On the day of an IPO, the rest of the market starts trading before the new issues. The market puts in their orders while insiders and investment banks who hold the shares wait as the price goes up to try to maximize the value of the shares they sell. No one wants to be the first person to give up their shares.

Tableau was off to the races. First the bid hit $31. Then it creeped up to $37. $41. At first people were happy. Then they were excited. Then they were exuberant. It felt like a scene from The Great Gatsby, or some other roaring 20’s movie where everyone stares at a ticker tape spewing higher and higher numbers.

I remember looking at my colleague and telling him I hoped it would start trading soon. I didn’t want it to go so high on the open that we would spend years “earning back” the valuation, and potentially exposing ourselves to big selloffs if we didn’t meet the extraordinarily lofty expectations of the market. Although it didn’t play out like that, my intuition would end up being correct later on.

Tableau finally opened at $47 and closed the day at $50. That day, every employee of Tableau Software got exactly what they wanted, and a whole lot more.

I was stunned. We opened the champagne and started celebrating. It was complete and utter euphoria. Dozens of people in the room and on the NYSE floor had been made into millionaires almost instantaneously. Even me, a 26 year old kid that still hadn’t quite figured himself out, was sitting on over $550k in stock options. My hard work (and incredible superhuman luck) had turned out in my favor.

You can’t imagine how happy I was I didn’t take the wealth management job. Now, instead of tinkering with someone else’s portfolio, I had to start worrying about managing my own (extremely nascent) wealth.

It was also a little nerve-wracking. Although our shares had value, we couldn’t sell them until November of that year, 6 months after the IPO. This “lock up period” is a standard component of stock option compensation. If the company let everyone sell their shares right after the IPO, the stock price would tank, so insiders were restricted from sales until later. I just hoped the shares would stay above $50. I had already baked that price into my mind, along with my fancy new net worth, and it would be seriously disappointing if it went down before I could sell. As luck would have it, the price was going up, and by the time the lockup period ended my shares were worth $65 a piece. But, I’d need to exercise my options before I could sell them and turn them into cold hard American dollars.

You might think that this is “the easy part,” when you’ve vested your shares, the IPO has happened and the lock up period is over. Let me tell you, it’s not. Although it’s nice to be able to sell the shares, there are numerous considerations I had to grapple with at the time.

First of all, I needed to get the money to buy my shares. I hadn’t exercised my shares earlier, so I needed to purchase every share I wanted to sell. I was still completely broke even though I had gotten a few raises since I started, so I had to do something called a “cashless exercise” where a portion of the shares I had were used to pay for the exercise. Because I needed the money, I also immediately sold the shares I exercised.

Then Uncle Sam came into play. I ended up owing income tax on the entire amount that I had sold. Although I only made $50k a year at the time, the sale was large enough that it catapulted me into the higher tax brackets. I’ll go into detail later, but for now suffice it to say that the tax bill was significantly more than a years earnings for me.

To try to reduce my tax bill for future stock purchases, I also used a large amount of the proceeds from the stock I sold to exercise some of the rest of my shares. This way, if the stock appreciated further from $65 -and I didn’t sell for a year and a day- I would only have to pay capital gains tax on the appreciation above $65. Don’t worry, I will explain all of this in excruciating detail later.

After exercise costs, taxes, the new tranche of shares I exercised, and setting aside some money to pay taxes on the new set of shares I had exercised, I had used up almost 85% of the dollar value of the shares that I had exercised.

This is what can be so confusing and dangerous about stock options: just because you see a huge number in your brokerage account doesn’t necessarily mean you can turn those numbers into an equal amount of dollars. You are always in a hamster wheel of paying to exercise, paying taxes, exercising more, and setting money aside for taxes the following year for the shares you exercised the year before.

While I was figuring all of this out on the fly, the stock price was gyrating wildly, with a similar effect on my emotions. In early 2014, our stock had rocketed up to $100 per share. The shares I had remaining (along with the new grant I had just received) totaled more than $1,000,000 on paper. But, I couldn’t sell.

Remember the lock up period? Well guess what. There are 4 lock up periods a year once a company goes public. In an effort to avoid the potential of insider trading, most companies restrict their employees from selling shares except for within a brief period after each quarterly report. As I salivated over the prospect of $100 a share I watched as the price started falling, and falling, and falling some more, back down to a low of $54 in May. Now I was worth $500k on paper, half of what I was worth a few short weeks before. It was absolutely heart wrenching to watch. Luckily, that was just one leg of the roller coaster.

In July of 2015, Tableau hit an all time high of $130. My net worth, which was almost entirely Tableau stock, was well above $1m. I was 29.

Unfortunately, this was also during a lock up period, so I couldn’t sell. Truth be told, I wasn’t even sure if I wanted to sell. What if it went up to $200? Or $300? I was smart enough to know I should sell some to lower my exposure, but it was a hard decision to make. The fear of missing out is an enormous elephant that will always be on your back while you hold stock options in a publicly traded company.

By the time I was finally able to unload some shares, the stock price had crashed back down to $100. For a while it stayed around there, until the beginning of 2016, when it cratered to $40 - significantly less than the IPO price. I was able to offload a large portion of my shares at higher prices, but I certainly didn’t get the best price I could have for all of my shares.

By February of 2017, I had been through a wild ride. Even though I had been worth more than $1m on paper, I had only turned the 11,000 shares I had been granted into around $600,000. With exercise costs, taxes, and the wildly gyrating stock price, it was a huge challenge to turn my paper million into a real million.

Although it wasn’t the best outcome, it was still several orders of magnitude better than I had expected to do when I had seen my initial 1000 share grant. It’s a windfall that 95% of Americans would salivate over. I was able to buy an investment condo like I had dreamed of, pay off my debts, and set aside $100k for investments in the stock market.

With a relatively small amount of options left to vest, and Tableau becoming more corporate by the minute, it felt like the right time for a new company, a new role, and a new startup adventure. Having had a taste of the startup experience, I wanted to try it again. This time, I knew what a future success looked like. I knew how to use my options to the greatest advantage. I was also more senior and could secure a significant initial stock option grant. This time, I was resolved to turn my knowledge of the startup game into a much more significant fortune.

Around the same time, I also had an important realization. Although many people will never have the desire, the money, or the skill to become entrepreneurs in their own right, almost everyone can find a company to work for that grants stock options to their employees. There’s nothing special, or even really that interesting about what I was able to do with my options at Tableau. It happens every day. And unlike entrepreneurship or investing, it doesn’t require special skills or money to invest. Anyone can do what I did.

“But, I am not a software engineer,” you will probably say. Neither am I! Startups need salespeople and marketers, operations and project managers, HR, finance, accounting, legal, product management, support and hundreds of other jobs I haven’t even heard of.

“But, I don’t live in San Francisco.” No problem. There are startup scenes all over the country, and startups hire people all over the world to perform different tasks in their local market.

“But, I want to work for a bigger, established company… I don’t like tech companies.” No problem. There are plenty of companies outside of the startup scene and world of technology, like pharmaceuticals or biotech, that offer options as an incentive. They may not offer as much upside potential, but there are certainly opportunities to be found.

Although there will be some that have trouble finding the right company with the right job for them in their market, the vast majority of people can find a way to work for a company where equity is offered as an incentive.

The real question you should be asking yourself is “how could I let myself work for a company I am not a part owner in.” By definition, your time is incredibly valuable. You need to put it to use generating as much money and a much future potential as possible. Every minute here is a gift, and it’s silly to waste it.

Blogging may not be the sexiest side hustle of all time, but it does have it’s allure. There you are, in your socks, writing something for all the world to see. And, you can use the power and weight of online advertising networks and affiliate relationships to monetize your site for a stream of consistent passive income. The holy grail? When you’ve written dozens of posts that are ranking on Google and driving thousands of dollars of passive income back to you.

Although I am not there yet, over the past year I have successfully grown Real Finance Guy from less than 1,000 to over 20,000 pageviews a month. I’ve also been able to simultaneously grow the income the site generates from $0 per month in January of 2018, to close to $2000 a month in December of 2018.

Traffic to Real Finance Guy from June to December of 2018

These aren’t amazing headline figures; I won’t be retiring on my blog any time soon. What’s amazing about what I have accomplished is that I have done it with less than 10 hours per month of actual work. The math whizzes amongst you have already done the calculations: that’s around $200 an hour. As someone who has had some really shitty side hustles in the past, I am pretty happy with that figure.

What’s more, because the majority of my traffic (90%) is from Google, even if I quit tomorrow the majority of that traffic and income would continue to flow in for some time to come.

All you need is persistence, and good tactics

Want to learn how to do it yourself? This post is going to delve into the specific techniques I used to build my blog income from nothing to $2000 per month in a year with less than 10 hours per month of work. Everything I’ve done is replicable. There’s nothing particularly special about me, beyond a passion and knowledge for everything with a dollar sign.

However, to build consistent organic traffic from Google, you need to consistently use the best tactics and persistently apply your skills for at least a year. Maybe two.

When I was starting the blog in 2017, I wrote and I wrote, but nothing happened. There was no traffic from Google, there was no traffic from RSS, there were no email subscribers. Finally, in July of 2017 I decided to call it quits. Although it felt good to write about the financial topics that interested me, I will be honest in that I needed the external validation of traffic to feel really good about blogging. As you can see below, that never came. So I stopped.

Ironically, after I chickened out and threw in the proverbial towel, things started to turn around. Although I wasn’t even looking at it, the blog had started to attract some traffic to a post I had written about how much it costs to remodel a condo.

Traffic to Real Finance Guy in 2017

One day in October I looked and I realized… it was actually a pretty decent amount of traffic, and it was continuing to grow. In fact, I was #1 for that search on Google! My original plan was working, it was just taking longer to work than I had patience for.

I am telling you all of this before I describe the methods I you can use to replicate my success because it WILL NOT MATTER if you do not keep it up. You need to be persistent.

Got it? Ready to learn how to build a $200 an hour blog? Let’s get started.

Note: I am already assuming you have a domain and a hosting provider, but if not I use Squarespace and I cannot recommend it enough. And no, I don’t have a paid relationship with them, or any of the other tools I will recommend in this post.

Step 1: Start with great content

It probably won’t surprise you, but it turns out that you need amazing content for people to actually read your blog. This is especially true if you intend to build your blog largely from organic traffic (aka traffic from Google). One of the most important ranking indicators for Google is the time that people spend on your content, and their propensity to return to Google after reading it. The goal is to create something so good and so engaging that no one ever has to go back to the search results page.

So how do you make sure your content is sticky? You have to write about something that you know about AND that you’re interested in. Both of them are equally essential to great content.

Here’s what I mean: If you are writing a cooking blog but you can’t cook, it really doesn’t matter how passionate you are about food because you can’t offer anything of value to the audience. On the same token, if you are a line cook who knows everything about cooking but you absolutely hate it, then your posts will be salty as hell and unpleasant to read.

So, before you even begin, you need to find a range of topics that you are really passionate about that you also have unique and interesting insights into.

Step 2: Use keyword research to find your target

Let’s say you’re taking a trip to Vegas and all of your friends want to go to a shooting range. You walk in, sign some release forms,and they hand out guns to your whole group (presumably with some instructions on how to use them). Then, they send you into the shooting gallery and turn off all the lights. What do you do?

1. Start wildly shooting as many bullets as you can in every direction

2. Ask them to turn the lights on so you can see the target

Hopefully, you said B. Blogging is exactly the same way: you need to know what keywords to target -the things that people are actually searching for- before you start writing your post. So many bloggers sit down to the blank page and start wildly producing posts that will have little to no impact because no one is looking for them.

I know because when that’s exactly what I did when I began my own blog. Luckily, by accident my condo remodel post found some success. After that I realized that I could be way more successful if I were able to identify keywords that people were actually searching for… hopefully topics with relatively little competition.

How do you do that research? Simple. Sign up for a free Moz trial, which will get you ten free searches per month in their Keyword Explorer. That tool will enable you to type in any keyword or phrase and see how many people are searching for it, as well as how difficult it will be to rank for that term (aka the competitiveness of the keyword). You can also see similar terms along with the number of searches per month for those terms and similarity to the original term. Keep in mind that the data isn’t perfect, but it is directionally accurate and it can help you to be significantly more targeted with your posts.

For instance, I recently had an idea to write a post about how to avoid PMI. When I typed that into the Keyword Explorer, the phrase itself had a ton of traffic but it was highly competitive. There was no way I was going to get my content to rank above Forbes and Wells Fargo. When I searched in related queries (again, using Moz) I saw that “how to avoid PMI without 20% down” had a decent amount of traffic, but way less competition. The same was true for “heloc or refinance” vs “heloc or refinance”. Even the smallest variations can have a big impact.

The other thing that is important to keep in mind is that people generally search for relevant topics in the form of a question. That is why you will see a lot of my posts take the form of a question, things like “Am I rich”, “when is the best time to buy bonds”, and “where to start remodeling a house.”

Once you have your key term or phrase, make sure that your title, URL, H1 tag, and at least 2-3 paragraphs use the term. But, you don’t want to overdo it either. It should read naturally.

Step 3: Write and enhance your post with images and multimedia

Once you have the term that you want to go after, go nuts! You can write a great post in as little as 500 words, or as many as 3000. I generally try to shoot for something that you can read in 5-15 minutes, around 1000-2000 words.

It isn’t just words that matter, though. Remember that you are looking to catch people’s attention and keep it for AS LONG AS POSSIBLE. That means you should be inserting images (that you have the right to distribute), videos, and interactive visualizations as much as possible.

Interactive visualizations? That is absolutely right. It I had a secret to my success, something that I do that no one else really does, it would be the numerous Tableau Public visualizations I have created for my blog posts. The interactive and immersive nature of the visualizations and calculators I use make my posts so much more interesting to read than something with just images or video.

Don’t believe me? Still don’t care about interactive visualizations? Get this: my posts WITH a Tableau Public visualization are 75% more likely to rank in the first 10 positions on Google for their target keyword than the posts that don’t. And, if I removed all of the posts on my site with an interactive visualization my traffic would drop by 90%.

If you haven’t already, download Tableau Public and start learning how to make your own today. And yes, it’s free, and no, I don’t get paid by them either.

Step 4: Monetize!

Hopefully, after you have created your posts and worked for a couple months you will start to see some traffic coming in through Google Analytics. Then, it’s time to monetize with advertising and affiliates.

By far the easiest and simplest way to monetize your site is with Google Adsense. You apply on the Adsense website, and then you can take a simple snippet of code and place it onto your site. Then, Adsense will fill the inventory on your site with ads. You’ll get a small amount of money for each visitor (like, a tiny sub-cent amount of money), as well as money for each person that clicks on an ad on your site.

The easiest way to get started with Adsense is with auto ads: you only need to place the code once on your page and it will automatically optimize with the best placement. However, auto ads didn’t work well for me so I manually embed the Adsense code on my page.

You aren’t going to get a lot of revenue from Adsense, but once you have 5-10,000 visitors a month it is more than worth setting up because it’ll be worth $20-$50 a month to you. What’s more, Adsense is totally “set it and forget it” income. If you have a blog with at least 1000 pageviews per month, go get started with Adsense today. It’s free money you’re giving away, even if it’s not much.

The REAL money in blogging comes from affiliates, however. Since I am a finance blogger, I have a lot of posts about money management and investing, so I have a relationship with Personal Capital. I also write about real estate, so I am also working with Lending Tree. Both of those programs can be accessed through Flexoffers, along with thousands of other affiliate programs. I am not a huge fan of Flexoffers, but it is easy to get started.

If you are unfamiliar with affiliate marketing, the easiest way to think of it is as a referral fee:  I place ads on my site for Personal Capital and Lending Tree, and if people end up clicking through those ads and signing up for Personal Capital or getting a loan with Lending Tree, then I get paid. In the case of Personal Capital it’s $100 per referral that tracks over $100k through their tool, and with Lending Tree it’s a small commision on the total loan value, which for me averages out to be around $30 per loan, although it can vary wildly.

The only downside to affiliate links is that they need to be maintained and optimized. Sometimes, product die out or affiliates end their program, meaning you will have to remove or change the posts where you have promoted those products. You’ll also have to spend some time tweaking the offers and promotions you use: there are usually dozens of potential landing pages and images you can choose to promote the affiliates on your site, and some will be more effective than others.

Many bloggers also monetize with self-published books, paid posts, or even direct advertising relationships (someone pays a fixed fee to put a display ad on the blog). Beyond Adsense, there are other advertising networks like Mediavine. I’ll probably pursue all of these monetization methods in the course of the next year, but for now it’s just Adsense and affiliate revenue.

No matter what you are using to monetize your site, you need to always keep in mind that it is a numbers game. You need more eyeballs on your content to generate more clicks to get more conversions. Simple as that.

Is all of this worth it? For $200 an hour… you bet!

After reading to yourself, you might be thinking “that sounds like a ton of work for a side hustle.” But it’s easy. You can spend as much or as little time on your blog as you want to. There are no rules! I know people who do it as their full time job, but I only spend 8-10 hours per month working on the blog and creating 1 post per week. I am only continuing to work on the blog because I want to see it grow, if I quit today I would still get income from the posts that are organically ranking on Google, perhaps for years to come.

How much income?

Well, in the past six months I’ve averaged around 25,000 pageviews per month, and I will generally see revenue of about $700 from Personal Capital, $600 from Lending Tree, and $200 from Adsense. That’s $1500 per month for less than 10 hours of work. My hope is to double all of those numbers this year.

Even though it is frustrating at times, blogging is by far the best side hustle because it gives you the leverage of passive income. All online jobs have the advantage of enabling you to work from home and make your own hours. But only blogging lets you leverage your past efforts even YEARS after you have put them in. For instance, my post about how much it costs to remodel a condo is still generating a ton of traffic. It’s still generating Adsense income and affiliate revenue every month, and I wrote it years ago. Yes, I’ve probably spent 30 minutes tweaking it for additional profit this year, but generally I don’t have to do anything to keep on seeing that money.

With other jobs and side hustles, you only make money once. But, if I stopped writing today, I would be making money off of the blog for years and years to come. And if I continue to invest in the blog, the sky is the limit.

So even though I am stalled out right now, I know that blogging is worth my time investment. And even if I stay right where I am (which I won’t), I know that I am still making $200 an hour for my time.

Not bad.

I am an independent person, so the idea of an online, work from home side hustle has always sounded nice. The idea of being able to make my own hours -and work in my socks if I want to- has always appealed to me. But, as an ambitious person, it’s also about controlling my earnings. If I want to make more, then an online job or side hustle would allow me to work more and make more.

It’s a simple concept, but the problem is that there are so many potential online jobs. Over the years, I’ve tried a few and there was always something that just didn’t work for me. And frankly, they all paid so little that it wasn’t worth my time. I did eventually come around to blogging -which has been a fantastic, $200 an hour side hustle for me- but this post is about the missed steps and fuckups along the way. Usually, those are more interesting anyway.

My first attempt at working from home: The commission only sales job

When I was in college, I needed money. Badly. At the time, I had a mentor through the house that I lived in who was working in a little corner of the shipping industry called “less than truckload” or LTL shipping. It’s not complex: less than truckload shipping is when someone pays to ship a pallet from one place to another.

Anyway, my mentor was a scrappy, young, good looking guy who was a quintessential salesman. He worked as an independent contractor for a number of LTL companies and air freight forwarders, the biggest of which was a company called Earthtrans. At the time, as a pimply college junior with absolutely no money -but the desire to make some and be an entrepreneur- he looked like a badass. He had his own condo on the beach, and drove a blue BMW 330ci. Girls loved him. I mean, this guy had made it, right? He made his own hours, worked however and with whomever he wanted to, and seemed to always be onto some other scheme in shipping that would make him even more money.

So, when he offered to take me under his wing, teach me his tricks, and get me into the LTL game working for Earthtrans I was DOWN.

The only catch? I was going to be an independent contractor on 100% commission. Basically, I would call around to manufacturers and other people who might ship stuff, and quote them shipping through the Earthtrans portal. Hopefully, over time I would actually sell a few shipments and maybe earn permanent customers who would call me up and give me business every day. In return for my efforts I would get 5% of the total value of the shipping cost. Of course, my mentor would get a few bucks for every sale I made as well.

He taught me a few tricks, took me out cold calling on a few customers, then set me loose.

I immediately bought a headset and got to work, calling every single manufacturer I could find on Google Maps. I called and called and called. But, with no sales experience I was totally screwed. I probably put in 200-300 hours working the phones and striking out every day. Finally, I made a sale when a friendly shipping manager at a steel extrusions company let me ship a pallet for her. It was a $200 sale, of which I was owed $10.

The catch? Earthtrans would only pay out if I earned over $200 total. Feeling bad for me, my mentor took me out for coffee and gave me my $10 out of his own pocket. It was a nice gesture, really, but all I could think was “Screw this guy.” I felt betrayed that he had made it all seem so easy, promised me the moon, and left me to figure it out and fail on my own.

The bottom line? I realized that I wasn’t cut out for sales, but more than that I saw that I needed something where I was guaranteed to be paid to make it worth my time. I was giving my time away to someone else, and it felt like I was selling myself short in the process.

After I graduated with my degree in economics in 2009, I looked for a real career job in finance but there was just nothing available after the financial crisis. Luckily… VERY LUCKILY as it would turn out, I was able to use my Excel skills to land a job as a marketing data analyst in working for a small startup called Tableau in Seattle’s Fremont area, making a smoldering $30k a year.

My second attempt at an online gig: Reviewing Google results

With so little in my pocket, I was just as desperate for cash as I was in college. And the idea of an online job or work from home gig still sounded pretty nice!

Enter Leapforce. Leapforce was a contractor to Google who was paid to evaluate search results. Working for them I would log into their portal, and then I would be shown a query and two search engine results of which I would then choose the most relevant and pertinent to the query. It was basically training the algorithm. In return for my efforts, I would be paid a very small amount for each query I reviewed. Over hundreds and hundreds of queries, I would make around $10-15 per hour. Not a fortune, but certainly enough to make it worth my time given that I made less at my day job.

So, I worked and worked at Leapforce and managed to take home an extra $500-800 per month, which made a huge difference when I was making so little at my day job. That went on for about a year, but over time I got a few raises, and ended up spending more time at work, so Leapforce made less sense as time went on.

Although Leapforce was guaranteed money, it wasn’t good money for my time. What’s more, there was no leverage. Every query that I reviewed I got paid for, but I would always have to invest more time to make more money. As I moved up the ranks at work, time became my most valuable asset, and it wasn’t something I was willing to part with for so little. Then, when Tableau went public I suddenly had a windfall from my stock options (LUCKY, I know), and I was able to focus 100% on my day job.

What I learned from the worst work from home jobs

As those of you who read the blog know, I am obsessed with how much my time is worth. Quite frankly, I think it’s worth a lot. Even when I made way less money than I do now, I always inherently valued my time significantly more than I was getting paid, which is why I worked so hard at my day job to get ahead.

My first online job, the commission only sales job, held the promise of high earnings if I worked it hard and built a customer base. But, with limited sales experience there just wasn’t any way I was going to convert enough people with little to no differentiating benefits to the product I was selling. The bottom line: I had absolutely no guarantee of income. By the time I quit with my $10 bill in my pocket, I had made maybe five cents an hour over the course of a very long and fruitless Summer. But I had learned an important thing: never, ever work for someone else for free. If you’re on the job, you’re getting paid.

Leapforce was a better experience, admittedly. I was taking in a decent amount of money each week, and at the time that was an important supplement to my rather disappointing day job earnings. But like I said, I have always valued my time highly, and I knew $10-15 per hour was a wage that was much lower than I deserved, which is why I quit once I started to make a little bit more at work. At the end of the day, the total lack of leverage made Leapforce unattractive. Although I got paid for every hour, after I was done working that hour I would never get paid for it again.

In the end, the lessons I learned at mu crappiest online jobs led me to blogging. I’ve been determined to devote myself to blogging every week, and over time I have built a consistent stream of traffic from Google that I convert into income with online advertising. It’s simple, it allows me to work in my socks, it lets me make money in my sleep (because there are visitors to the site at all hours, whether or not I am “working”), and at $200 an hour it is very much worth my time.

Ask yourself: is my side hustle worth my time?

The only way that you can know if your side hustle or online job is worth your time is by knowing how much your time is worth. Luckily, I have a calculator for that. Below you can input your responses to a few questions that attempt to get at the value of your time. What would you pay to avoid waiting? How much would you fork over to get home early? These questions will give a range of values from your time, from the lowest per hour to the highest, with an average in the middle that you can use as your everyday value for time.

So, are you making enough from your online gig? Is it REALLY worth your time? Only you can know.

tl;dr: NSOs (non qualified stock options) are the right to purchase shares in a company at a fixed price, with the expectation that the price in the underlying shares would rise. They usually vest over time, meaning that small portions of the grant become usable (exercisable) over time. Unlike ISOs (Incentive Stock Options), they are not tax advantaged.

As the startup world has become larger, stock options have become a common method for incentivizing employees, founders, board members, and even contractors. For all but the most senior employees, and those outside of the US, incentive stock options (or ISOs) are the most common vehicle for delivering this important incentive. ISOs have some potentially large tax benefits that make them very attractive, however there are restrictions on who can be granted ISOs. When a company wants to grant a stock option, but they can’t use an ISO (for various reasons I will describe below), they will issue an NSO, or non-qualified stock option.

The nice thing about NSOs is that they are a little simpler and easier to understand than ISOs, however stock options in general can be a confusing concept. This article will dive deep into what NSOs are, who gets them, how they are taxed, and how you can make the most of them. Keep in mind, I am not a tax attorney or a financial advisor, so you should research this for yourself as well.

What is an NSO stock option and how do they work?

NSOs are the simplest of the stock options to explain. The defining characteristics of an NSO are:

A) They can be granted to anyone

and…

B) They receive no specialized tax treatment

Otherwise, they function as a fairly typical stock option. All stock options (including ISOs and NSOs) have three components: quantity, price, and time. These components will change from startup to startup, and with each grant. Typically, a grant offer will look something like this:

Subject to the approval of the board, company XYZ grants [Your Name] 1200 shares of XYZ stock. ¼ of these shares will vest on 1/1/2018, with 1/48 to vest monthly thereafter.

You probably noticed that there isn’t an explicit mention of price in the above. There’s a reason for that. In closely held companies (like most startups), the price changes month to month or quarter to quarter, and it is usually set by the board with the assistance of external auditors and consultants. That means that you won’t know the exact strike price of your grant when it is offered to you, although you should try to determine the most recent price. If you’ve received a grant and you want to dig into the value, you can do so with my interactive calculator.

Let’s say for simplicity sake that the value for the grant in this example is $1.00 per share.

What is the difference between non qualified stock options and vs ISOs?

If you received NSOs, you may be wondering what the difference is between them and ISOs. The most important difference is the tax treatment. No matter which type of option you have, you will be subject to tax on the difference between the grant price and the fair market value of the stock at the time of exercise (an exercise is when you purchase the underlying stock with the option). For instance, if your strike price -also referred to as the grant price- is $1, and you exercise when the stock has a fair market value of $10, then you will have a tax liability of $9 per share ($10-$1=$9).

The difference between NSOs and ISOs is how that spread is taxed.

With ISOs, the grant can be exercised without incurring ordinary income tax liability. ISOs are still subject to AMT (alternative minimum tax), but depending on circumstances it is possible that exercising the shares may generate no tax liability at all. It is important to note that any exercise or sale of ISOs must be qualified to ensure this special tax treatment, so do your homework.

NSOs are taxed at the higher ordinary income tax rate, and an exercise of an NSO will incur a tax liability no matter what. What’s more, NSOs are also subject to payroll taxes for both the employee and employer.

With either NSOs or ISOs, once you own the shares they are taxed according to typical capital gains tax rules. This generally means if you keep the shares for more than a year, you will pay the capital gains rate instead of the ordinary income tax rate on the difference between the price at purchase and the eventual sale price.

NSOs can also be granted to anyone.

Why did I get an NSO grant and not an ISO grant?

If you are wondering why you got an NSO there are a couple of potential reasons. ISOs have several restrictions that sometimes make it impossible to grant them:

• They can only be given to people who are paying taxes in and employed in the US

• They can only be given with a total exercise value in any given year of $100k or less

• They can only be given to employees

This means if you are a foreign employee (or working for a foreign subsidiary), or if you don’t pay taxes in the US, you will probably get NSOs instead of ISOs. Big shot employees who are given massive stock grants are usually given NSOs as well, since the favorable tax treatment of ISOs can only be utilized on grants that have an exercise value of $100k or less per year. If a company grants 100k shares at a $5 per share strike price, vesting over four years) that is going to have to be an NSO. Each year is $125k of exercisable value. If it was granted with a typical 1 year cliff, the second year would likely be $250k in exercise value, since that year would see two years worth of stock become exercisable in the same time calendar year.

Since ISOs can only be given to employees, NSOs are also often used for contractors, consultants, board members, “friends of the company”, and whoever else needs to be incentivized but isn’t on the payroll.

Exercising non qualified stock options: How do you make money on NSOs?

Note: in this example, I am going to use the same grant mentioned earlier in this post.

• 1200 shares

• ¼ of these shares will vest on 1/1/2018 with 1/48 to vest monthly thereafter

• Let’s also say, for simplicity sake, that the strike price (or grant price) is $1

Basics of an NSO Exercise #1: Quantity

This is by far the simplest component to understand. You have been granted a fixed number of shares. In this example it’s 1200.

Basics of an NSO Exercise #2: Price

As you can see above, the STRIKE PRICE, or the price you pay for each share, is $1.00. It is also important to know the EXERCISE PRICE which is what each share is worth on the day you purchase it. The spread between the exercise price and the strike price is the amount you stand to make per share if you sold at exactly the same time that you exercised. For instance, if you exercise the stock when it’s value is $10 per share:

Exercise price: $10.00 per share - Strike price: $1.00 per share = $9 per share profit

Then, you can multiply the number of shares by $9 to figure out the total profit. If you sold the whole 1200 share grant, it would be 1200 x $9 = $10,800. But remember, you pay ordinary income tax on that!

This also shows one of the most important fundamental concepts of NSOs (and indeed all stock options): you want to strike price to be as low as possible. If another employee had joined the company two years later and got the same 1200 shares but at a $8 strike price, they would only make $2 per share ($10-$8=$2).

Stock options are meant to be an incentive to take the risk of joining an early stage company. The earlier you join, the more you stand to make.

Basics of an NSO Exercise #3: Time

What I outlined above is a fairly typical grant. You will VEST, or be able to buy, 300 shares (¼ or 25% of the total grant of 1200 shares) one year from the date of the grant. This is referred to as the VESTING CLIFF, which you can see illustrated visually below: on a chart it really does look like a cliff. After that, 1/48th of the grant vests each month (25 shares) until the whole 1200 have been vested, which will occur exactly 4 years from the date of your grant.

Sometimes it’s easier to see this stuff visually. Here's the same view from the top, but now you have some more context.

So, what does it all mean when you put it together?

Stock options are supposed to be an incentive to stay, work, and make the company successful. That is why they vest over time. The cliff is intended to ensure that you are putting in some time before you are able to see a financial benefit from your options. Once the cliff passes, you get a big chunk of shares followed by a little every month going forward.

Theoretically, the value of the company will rise over time and as the number of share you have vested is also rising, the total value of the grant can grow quite dramatically. In the example shown above, the stock price 10x within the four years of the grant. Although that is very, very good, it is not unheard of in the startup world. Regardless, it’s best to keep your expectations of any gains firmly rooted in reality.

However, this does illustrate the power of NSOs as a wealth generator and incentive. If the company does well, so will you.

Exercising, selling, and monetizing your NSO employee stock option shares

If you want to benefit from your NSOs, then eventually you will need to exercise and (eventually) sell your shares. You are able to exercise as many shares as you have vested at any given point. In the example above, you would be able to exercise 300 shares on 1/1/2018, 325 on 2/1/2018, 1075 on 8/1/2020, or the full 1200 on 1/1/2019. The time that you choose to exercise your shares is incredibly important, as is the time that you choose to sell your shares, and both can have a large degree of bearing on your tax liability (although luckily this is simpler with NSOs than ISOs).

After you exercise your employee stock options, you need to sell them to turn your ownership into money. In the past, if the company who issued the grant wasn’t publicly traded on a stock exchange like the NYSE or Nasdaq, it was almost impossible to sell shares from an ISO grant. This is why IPOs are glorified in technology circles: without one, no one can sell the shares that they own and realize their gains. Nowadays, and especially with the rise of the Unicorn companies (private tech companies who have not gone public), there are a host of private markets that make selling privately held stock easier. However, it’s still difficult and comes with it’s own set of challenges.

Assuming the company has gone public, then the process of exercising and selling your shares is actually extremely simple. There are two basic types of exercise:

1. Straight Exercise: You pay the strike price ($1.00 per share in the example above) from cash, and all of the shares you exercise are then deposited in a brokerage account.

2. Sell to cover: You pay the strike price for your entire exercise by exercising and selling a portion of the shares. For instance, if you want to exercise 1000 shares at $1 a share, as in the example above, and the stock price is currently $100, then 10 shares will be sold to cover the exercise cost ($1000=$100x10). After selling the shares needed to cover the exercise, 990 shares are deposited in your account.  

With either option, and again assuming the stock is publicly traded, you can choose to sell or hold the stock you purchase.

Do you have a stock option grant? Keep track of it with Personal Capital

If you have been granted a stock option grant, it is imperative that you keep track of its value over time. You can sign up (and use) Personal Capital to create your own vesting schedule for free. You can also monitor your other investments, along with your home and any debts so that you have a complete picture of your financial situation and net worth at any given time. Here’s what a vesting schedule looks like in Personal Capital: if you don’t know what yours looks like, then you are flying blind with your stock options.

Want to learn more about stock options?

There are a multitude of things you need to understand in detail in order to take maximum advantage of your ISOs. In this series, I’ll be going into each one in detail:

• Part I: Incentive Stock Options

• Part II: Valuing a stock option grant in an offer

• Part III: 3 ISO tax mistakes and how to avoid them

• Part IV: Planning the exercise of your options

• Part V: Planning the sale of your options

I write quite a bit about buying and remodeling condos, because they are the best way to get into the market in expensive cities. But what questions should you ask before you pull the trigger on that beautiful new home?

Although condos have the advantage of needing less maintenance than detached homes or townhomes -amongst other benefits- they also come with their own quirks and idiosyncrasies that are important to understand. So, what should you ask your real estate agent about before you buy the condo?

1. Has the unit itself been well taken care of?

Just like buying any other home, the first thing that you want to ask when you are buying a condo is whether the unit itself has been well taken care of. Go inside and take a look around.

• How is the unit presented? Is it clean and tidy, or a bit of a mess? Remember, this is the owners presenting the best side of their unit, if it isn’t spotless they clearly did not care for it.

• Do the floors and carpets need replacement? These can be big expenses.

• Are the appliances in good working order, or will they need to be swapped with new units? Appliances are a big ticket item and you will need to account for that when purchasing.

• Is the water heater modern, or nearing a time when it will need to be replaced? Water heaters only last for 15 years or so, and it’s not an item you want to have to replace right off the bat.

• Is there mold? If so, please run away.

• Are there leaks or water spots in the roof or on the walls? Again, please run away if so.

This is not an exhaustive list of things you should be looking for inside the unit, but it’s definitely a good start.

2. Are there lead paint, vinyl windows or popcorn ceiling?

A lot of older condos come with some issues that you will probably end up fixing (at large expense) at one point or another.

Lead paint is super common in condos built before 1978, and although it is generally harmless if you don’t eat the walls or any paint flakes that may fall off of them, it is an important consideration if you have children.

Vinyl windows are also incredibly common in older condos, although luckily most older condos have had them replaced by now. You can usually tell vinyl windows because they have bare metal frames around the outside, whereas more modern windows typically have white frames (they are still metal just not visibly so). If in doubt, ask your realtor. At some point vinyl windows will need to be replaced if you have them.

Popcorn ceiling is similar to lead paint in that you don’t HAVE to fix it, but you will probably want to. The disappointing thing about popcorn ceilings is that most of them before 1982 contained asbestos, so removing them can be riotously expensive. You need a team in hazmat suits to do it, and it cost me around $10 per square foot to get it removed from my condo. Costs have probably gone up since then, as well.

3. Has the building been well taken care of?

Although you will not have to personally pay for the maintenance and upkeep of the building, you are still technically responsible for a portion of the upkeep. For that reason, you definitely want to take a walk around the building and all of the common rooms before you buy your condo.

• Do you see leaks or water damage?

• Do you see mold or rot?

• Are the carpets and common areas well presented?

• Is the elevator old or recently replaced (note that you can’t always tell this by looking, you may have to ask)

• Does it generally look “kept up” or is it unclean, messy, smelly, or otherwise unpleasant?

• Are the siding, roof and parking lot in good condition?

If you see any problems, make sure to take note so you can ensure they are disclosed by the sellers and the association in the sellers disclosure documents.

3. Do you have the right documentation?

Although this is not an exhaustive list, you definitely want to be sure that you have all of the documentation that you need to make en educated decision about your condo purchase. This should include, but isn’t limited to the following:

• Declaration of condominium

• Articles of incorporation

• Bylaws for the HOA

• Rules of the Association

• A copy of the most recent financial report for the HOA

• The most recent investment, replacement or capital expenditure report (this is called many things in different places, but basically you are looking for the condo boards plans for spending over the next ten years)

• A copy of the condominium governance report

• Sellers disclosure statement

You might be in a little bit of a panic right now, because that is a lot of information! However, it is important to read through. There are a few things that you are trying to understand.

First of all, is the HOA well funded and can the building fund its own operations and replacements or renovations in the near to mid-term future? Second of all, is the condo well run and organized. If you are having trouble getting those documents or they don’t exist, it isn’t a great sign. Third, you want to know whether or not there is going to be a special assessment anytime soon.

4. Are there special assessments on the horizon?

A special assessment occurs when the balance in the HOA fund is not great enough to cover the necessary repairs or renovations to the building itself. For instance, if the condo needs new siding, the HOA fund has to pay for it.

If there is a special assessment currently on the unit, the seller is legally required to disclose this to you. But, you also want to be looking at plans that the building has for upkeep and replacement in the near future because they could trigger a special assessment as well. Elevators can cost $100-$500k to replace, for example, and it needs to happen at least once every 40 years. Food for thought, and also a great reason to avoid buildings with elevators!

5. Are you allowed to alter the things I will want to renovate or change?

Assuming your condo is well run, and well funded, but there are a few things you’d like to change about your condo, it’s important to look through the by laws and incorporation documents to make sure that you are allowed to make the changes that you want to make.

For instance, in my condo below you can see I put in hardwood floors. Not that big of a change, you would think. However, because the by laws in my building had very specific requirements for the amount of noise the hardwood floors could make, they had to be rated to a certain level and also needed to be installed with extra padding underneath them to ensure the neighbors below were not disturbed. This is the kind of stuff you would never think of asking about with a single family home, but it’s important in a condo.

Some HOAs simply don’t allow hardwood floors, or the alteration of walls or interior spaces, or the addition of in-unit laundry. Make sure whatever changes you want to make to your condo are possible!

If you want more info on how much it costs to renovate a condo, or more specifically condo kitchen kitchen remodel costs, make sure to look at my detailed posts on the subject. 

6. What is the noise profile of the unit in relation to the other units?

Most condos share walls or floors with other units, just like apartment buildings. Before you buy, you want to be incredibly aware of what the noise profile in your unit will look like from day to day. Is your upstairs neighbors kitchen or living room above your bedroom? Does your bedroom wall border your neighbors bedroom wall ;) These are the kinds of things you want to know about.

You’ll also want to think the “best spot” in the building, which is generally a corner unit on the top floor. The worst spot, noise wise, is usually a middle floor bordering two or more units.

7. How are you going to do your laundry?

This one gets people all the time. If you don’t have in-unit laundry, you are going to want to know where the laundry room is in your building. You will also want to think about how many flights of stairs you will need to climb to do your laundry, and how many other people are sharing the same laundry machines.

There’s nothing worse then spending your Sunday going up and down flights of stairs, waiting for other people to finish their laundry, and then coming downstairs to find someone has piled your half dry underwear on top of the dryer.

Obviously, in-unit is preferred (and people will pay a premium for it). In many buildings you CANNOT renovate to add in-unit laundry, however, so if your unit doesn’t have it don’t think you can just add it on later.

8. What utilities will you be paying for?

One nice thing about condos is that the HOA will often pay water and garbage utilities, and sometimes even taxes. I have also seen HOAs that pay for internet or TV, pools, activities, etc. Although it sucks to have to pay an HOA fee, you do usually see something for your money.

Tips for making the most of your condo investment after you buy

Even after you’ve bought your condo, you're not quite finished asking questions: you always will want to be asking how much you owe and how much it is worth. Make sure to keep track of your costs for tax purposes and keep an eye on your properties market value. 

Keep track of your investment

As you likely put a large amount of money into your condo, I highly advise you find a way to keep track of the value of your condo over time. I use the free tools at Personal Capital - they have a Zillow z-estimate connector to keep the valuation of your condo handy. Simply sign up for Personal Capital, then enter your home as a new asset. Then enter your mortgage as a separate account and you will see what I see in the image above.

Why do you want to track all of this? It's fairly simple - if you put too much money into a home, you can easily end up underwater. Make sure you know where you stand. 

Know your tax deductions, particularly if you are renting out your new condo

If you are planning on renting out your condo, make sure you keep track of every single expense! You can depreciate the cost of your condo over the next 27.5 years, and significantly reduce any tax you may owe due to your rental income. Depreciating the cost of our renovation gives us about $4,000 a year in rental income that we don't have to worry about paying income taxes on ($100k/27=$4k~).

Also, Other Real Estate Posts

• Investing in real estate when real estate is expensive

• How to find a condo to remodel

• Crowdfunded real estate

• How to avoid PMI (Private Mortgage Insurance)

Even some of the most intelligent and successful people struggle with money. In fact, it’s downright common. One of my favorite movies of all time is “Broke”, the ESPN documentary that shows in epic detail how so many athletes at the top of their game with multi-million dollar salaries end up completely bankrupt. Although this is a totally dramatized angle on the problem, lots of people with high incomes struggle with money.

It may seem counter-intuitive. Theoretically, making more money makes it easier to pay your bills and keep your debts in check. And, if you’ve seen the movie you know that many of the athletes depicted had little to no formal financial education (or, frankly, formal education of any kind). Obviously, doctors and lawyers and successful business people GENERALLY have more of a financial education to lean on. But still, they struggle with their finances.

Why is it so hard for high earners to keep their finances in line?

“I make good money… why am I always broke?”

There are three big reasons that high earners struggle with money: they are ignorant about their financial situation, they maintain a belief that their income will always support their lifestyle, and they make risky decisions because they have only known success.

Financial ignorance is the genesis of money problems

Recently, I have been a little obsessed with the idea that financial fitness is a lot like fitness in general. If you want to be fit, you have to work out, you have to manage what you eat, and you have to monitor your weight. The last part is crucial. If you are working out but you’re eating like a complete pig, you might still be gaining weight. If you never check your weight or look in the mirror, you can’t spot the issue before it becomes hard to handle.

It’s exactly the same with money. You have to work, you have to manage what you spend, and you have to monitor your net worth and cash flow. If you are making a ton of money but spending like crazy (particularly with credit cards), you could very quickly have a debt problem. Or, you might never be able to save.

This problem also shows itself in smaller ways. More often then you might think, high earners have a single checking account that they deposit their income into, pay their bills out of, and use for their discretionary spending. Then, they never really know how much money they have at any given moment; some of it is set aside for bills, some is discretionary, some might be savings but it’s all commingled into a big confusing pot. It looks like this:

As you might imagine, this makes overdrafts much more likely, along with overspending and undersaving. You have GOT to know where you are to get where you want to go.

Then, lifestyle inflation rears its ugly head

If you aren’t really sure how much money you have, it’s pretty easy to overspend. It’s even easier for high earners, because they know they are making a lot of money and that provides a false sense of security that their income will bail them out of any spending or commitments they might get themselves into.

Not to exempt myself from all of this, I’ll give my favorite personal example of how this looks in real life. A couple of years ago, I was looking for a new car. I had recently gotten a big raise and I really wanted to reward myself for all of my hard work. Now, I should mention that even though this raise was big in percentage terms it only amounted to around $800 a month in actual take home income. Here I was, shopping for cars, thinking “I make $xxxx, and I will totally keep on getting raises every year so I can easily spend $700 a month on this car lease.”

Of course, I ended up getting the car and for the next three years EVERY SINGLE MONTH it hurt so much to pay that bill. I loved the car, but in no way was it worth it. Just because I could afford it doesn’t mean I should have bought it. Over the course of the lease, I estimate that I threw away around $15,000 that I could have been saving instead. Stupid.

This also illustrates the other issue that makes this hard for high earners: you can get the financing to make the stupid decision even easier.

The invincibility complex compounds the problem

It isn’t just ignorance and lifestyle inflation that makes it hard for high earners to manage their finances, they also have a nasty habit of making risky or generally bad investments. When you are great in your field and you make a decent amount of money, chances are you have a lot of confidence. Although that is a good thing, it’s a really bad thing when it comes to investing.

In “Broke”, you can see a lot of the athletes pouring money into investments, loans, and businesses that are just plain stupid. “Normal” high earners make some of those same mistakes too, or they throw half of their net worth into high risk tech stocks or maybe their friends startup. They make a lot of money so therefore they must be good with money and logically that means they must be good at investing! All in on the options and TSLA stock! Then, when it inevitably takes a dive, they sell in a panic and lock in their losses.

The invincibility complex is often compounded for those who struggle with money in the first place. If you make a ton of money but you can’t seem to save enough, then taking a big risk on a stock or investment that might take off and clear all of your debts looks pretty attractive.

How to start getting your finances under control

At this point, you might be a little depressed. But, you shouldn’t be. Money is really, really hard, and just like going to the gym it’s something that you have to intentionally focus on to improve at. Here’s my three step process for getting your finances under control.

Set a solid financial foundation and monitoring system

My very first real post, and one of my favorites of all time, is my description of my financial system. Quite simply, instead of having a single checking account where all of my bills and discretionary spending go out of, I have TWO checking accounts. The “operating account” where I get paid in and I pay my bills out of: everything that is consistent and predictable. Out of that account, I pay myself my spending money into my other checking account, so I always know EXACTLY how much I have to spend at any given time.

As you can imagine, I also keep a hawks eye on what is happening in the operating account at any given moment. I also use my free Personal Capital account to keep track of all of my accounts, my house, my mortgage and even my incentive stock options so I know how much I am worth at any given time.

Combating lifestyle inflation with knowledge and budgeting

Keeping lifestyle inflation at bay is a difficult task, and for me it’s honestly the thing that I find the hardest. Of course, knowing where you are and what you have to spend makes it much easier to combat lifestyle inflation. Having a great, realistic budget helps make your decisions for you in the sense that you can easily identify what you really can afford, and what is out of reach. I also recommend simply getting rid of your credit cards if at all possible.

Invest intelligently and consistently

If you know where you are and you are combating lifestyle inflation, it shouldn’t be too hard to start making good investment decisions. You should definitely be prioritizing setting money aside for investing above and beyond your retirement contributions, since even exceptional post-tax retirement savings for high earners will likely not cover their bills in retirement.

Once you are setting some money away, you can use Personal Capital to generate model portfolios based on your risk tolerance for free. The best thing you could possibly do is stick to index funds, and invest a little bit every month over time. Be consistent and over time your balances will grow. If you’re lucky, you might even see some numbers like Jim, below.

Conclusion: Go to the financial gym

Although high earners theoretically have it good financially, that doesn’t mean they have it easy. It takes work to monitor, prioritize savings, and invest intelligently. The more money you make, the more work it takes.

It takes a lot of money to retire. It takes even more money to retire early (because, as it turns out, it has to last longer). And if you want to retire early without a restrictive frugal lifestyle (aka #fatFIRE)? Well… it takes millions.

As you can see below, even with a relatively aggressive 4% withdrawal rate, it would take over $2m of invested capital to replicate a $100k/year salary. Want $200k a year? That’s a lot closer to $5m.

Although this is pretty intimidating, with some conscious effort you can significantly reduce your effective income tax rate in retirement, reducing the amount you need to save by 10-20%.

Best ways to reduce effective tax rate for early retirement and FIRE

So. We have established that you need a lot of money to fatFIRE. How can we make that number a little bit smaller? By being smart about taxes, of course. Here are some of the best ways to get your tax rate down.

Live someplace without state or local income tax

This one is pretty obvious, but it’s important. Some states have income taxes approaching 10%, which increases the amount you need to save for retirement by an equal amount. The only way around it? Live someplace without a state income tax! Here are the states without income tax for easy reference:

• Washington

• Texas

• South Dakota

• Nevada

• Florida

• Alaska

Luckily for me, I am originally from Washington so it wouldn’t be a hardship for me to return home. For others this may present a bit of an issue, as the rest of the states on the list are decidedly RED. The point is, if you can stomach the politics - or move to Washington - you can significantly reduce your effective tax rate.

Can’t move? Don’t worry, there are lots of other ways to lower your taxes for retirement.

Take advantage of tax free securities

Having a low tax rate is great. Having NO tax is amazing! Luckily, the US government does treat some investments preferentially when it comes to taxes, specifically municipal bonds.

Municipal bonds are bonds that are issued by state and local governments to fund their capital improvements or operations. For instance, a city might need a water treatment plan and issue a bond to finance it’s construction. It pays interest just like any other bond, but that interest is tax free.

Because munis (as they are referred to), have lower tax rates they often trade at a lower yield than other bonds, but I still think they are more attractive overall. Why? Because even if you make the same as you would buying a treasury or corporate bond, the taxes you pay on those investments have the effect of raising your taxable income which could also raise your effective tax rate. The point is, even if returns end up being the same with a tax free muni vs a taxable corporate, you still want the muni because your total income will be lower.

Increase your post-tax retirement money

Hopefully, you have been taking advantage of the post-tax investment accounts that are available to you including Roth IRA’s and 401k’s. Even with a higher tax rate now than I expect to have in retirement, I would much rather pay my taxes now so that my effective tax rate when I retire is as low as humanly possible. This is the same logic I am applying to the municipal bonds above: all things being equal, I would rather make a choice that lowers my overall taxable income in retirement so any income I HAVE to take is taxed at a lower effective rate.

But, not everyone can contribute to post tax accounts.

Use a backdoor conversion to increase your post tax money if you cannot contribute

At a certain point (around $140k for individuals) the government stops letting you contribute to post tax accounts. It’s a bummer for those who are trying to FIRE with high incomes.

Luckily, there is a way to get at least some money into a post-tax account. It’s called a backdoor IRA contribution, and it’s pretty simple. You open a normal IRA, contribute as normal, then convert it to a Roth IRA. You need to pay income taxes on the original contribution, as well as any gains since the regular IRA was opened. But other than that, you have an easy method to convert pre-tax contributions to post tax. Here’s a post from Nerd Wallet with more details.

Invest in real estate

Real estate is by far the most tax advantaged investment vehicle in the US. It’s actually incredible how many tax advantages real estate gives you as an investor.

First of all, mortgage interest (up to a certain amount) is tax deductible. That means that you can buy a house or condo, rent it out, and then you can deduct what is probably the largest single expense on your income statement. For this reason alone, I believe that everyone should own at least one property with a mortgage, but it gets even better from there.

You can also deduct depreciation on real estate rentals. To oversimplify, this means that you can deduct the cost of the capital improvements in the property (the physical building, not the land) over time. A standard depreciation schedule is 27.5 years, and each year an equal amount of the total depreciation value is deducted. For instance, a $600k house with $100k land value and $50k in remodel costs has a total depreciable value of $550k ($600-$100+$50). Divide $550k by 27.5 and you get $20k in depreciation every year.

Pretty nice, huh? Well it gets even better. Lets say after a while of renting out your property (it cannot be your primary home), you want to buy a new one. Well, the 1031 exchange lets you sell your old one and buy a new one without paying capital gains on any appreciation in your initial property. This gives you a lot of flexibility with real estate investment that you don’t have with taxable investment accounts. You can’t sell 10 shares of Tesla and buy an equivalent amount in Apple without paying capital gains first. With a 1031 exchange you can continue this “rollover” process indefinitely, although keep in mind that you may be subject to something called depreciation recapture, so it’s not all roses.

I write a lot more about real estate taxes in the post here, if you want to take a look.

What does it all add up to?

With all of the tricks above, you should be able to ensure that a large chunk of your income in retirement is low or no tax. Furthermore, you should be able to lower your effective tax rate on the income that you do have, so that you pay as little as possible in total income taxes. But… what does that mean?

If you add up all the potential benefits from above, it can be quite substantial. Let’s assume the following:

• Current income: $200k

• Location: San Francisco, CA

• Effective tax rate: 34%

• Take home pay: $131k

Now, my assumption is that you would need $5m to replicate this income at a 4% withdrawal rate. But, with a lower effective tax rate it could be much easier to reach the $131k in take home pay.

New location: Seattle, Washington (no state income tax)

Portfolio: 30% real estate, 50% stock market, 10% corp bonds, 10% municipal bonds)

• Income from muni bond portfolio:

  • $5m*10%=$500k at 2.1% = $10.5k tax free

• Income from stock market VTSAX:

  • $5m*50%=$2.5m at 1.9% yield = $47,500 at 15% qualified div. rate

• Income from corp bond portfolio:

  • $5m*10%=$500k at 3.7% = $18,500 at income tax rate

• Income from real estate portfolio:

  • $5m*30%=$1,500,000 investment at 6% cap rate yields $90,000 per year

  • Depreciation of $36k per year (assuming $1m capital value) = $54k in taxable income

Here’s what all of that adds up to:

• Total income: $166,500

• Total taxable income: $72,500

• Total Income taxes: $15,000

• Total qualified dividend taxes: $7,125

• Total taxes: $22,125

• Total take home: $144,375

Now, I know what you’re thinking. $144k isn’t that much more than $131k. But it is! That is pure income. None of the principal for any of the investments was touched to generate that income. What’s more, I didn’t even add the benefit of having some of that money in a Roth account (which it would probably be).

$144k in income comes out to a 2.88% yield on the $5m invested. That means that if you want to draw down your assets in your 401k, you could take home way more.

Conclusion: If you are smart, you can get way more from your money

If you use the advantages available to you, it isn’t hard to make a smart portfolio that is incredibly tax advantaged. Even though I completely eliminated any drawdown in principal in the scenario above, and I ignored the benefit of post-tax retirement accounts, I would have been able to shave off around $500k in savings needed to retire (or about 10%), just by being smart with taxes (I could generate $131k in income with only $4.5m at 2.88% yield).

No matter how you look at it, it pays to be smart about your taxes in retirement.

Mortgage recasting lets you pay down your mortgage and secure a lower monthly payment. You keep your original term, your original loan and the interest rate that you started with, but you have a lower principal value (because you paid it down), and therefore you have a lower monthly payment. Pretty simple, right?

Where it can get complex is when you start comparing recasting vs refinancing.

A visual breakdown: when you want to refinance and when you want to recast

Although there are no firm rules here (at the end of the day, it’s your mortgage and your choice), there are some general trends that we can easily apply to compare the attractiveness of recasting and refinancing.

The bottom line is that refinancing gives you a lot more flexibility. You can change your term. You can change you payment. You can change the equity you have in the home. You can refinance without any extra cash.

But, recasting also gives you the ability to do something refinancing can’t do, which is keep things the same. So, when you have a nice low interest rate, you can keep it!

Now, let’s make it personal. Type your info into the calculators to compare!

The only way to know which option is best for you is by using the real numbers for your real life situation. Below you will find two calculators with similar construction that can allow you to see what refinancing looks like for you, and what recasting would look like for you.

First, see what a mortgage recast would look like

The first step in comparing a recast to a refinance is looking at the numbers for a recast. In this case, the biggest lever (the principal payment) is set by you and it determines what the savings on the recast will look like for you. This calculator will show you the change in monthly payment as well as the total payments made during a recast as compared to the original loan.

Second, look at what a refinance could do for you

With a refinance, there are a lot more moving pieces. The interest rate, term, and principal are all things that you can choose to change (although you will be limited to what a lender will offer to you, of course). If you need to see what a lender would offer to you, you can use Lending Tree to compare multiple lenders at once. That way, you can find the best offer for your situation and enter the details below.

Which scenario works better for you? It will depend.

With the calculators above, you should have a decent idea of what the two scenarios would look like for you. There is no rule for when someone should recast, and when they should refinance, but the most important thing is knowing that both of those tools are in your toolbox. They are options that you can take advantage of when it’s time to change your mortgage.

If you want to learn more about mortgage recasting, my original post on the subject goes into more detail about how you can obtain a recast from your lender, and which lenders offer recasts.

Mortgage recasting is a little known but useful trick that allows you to pay down your mortgage balance and secure a lower monthly payment while keeping your original loan and rate.

The basic principle is quite simple. You keep your original loan, your original term, and your original interest rate. The only thing that changes is the principal of the loan: you pay off a portion of the loan and the amortization schedule is adjusted to give you a lower monthly payment. Your payment is lower because you paid off a portion of the principal, but the term and interest rate are the same. This also lowers your total interest payments.

Use the mortgage recast calculator to see when to recast a mortgage

Knowing when to recast a mortgage is a personal decision. It isn’t quite as clear cut as refinancing, because the choice you need to make is if the additional principal that you are paying toward the mortgage could be invested more productively elsewhere. But, there are some very good reasons why someone might want to recast a mortgage which I will get to down below. For now, type in your mortgage details below to see what a recast could look like with your mortgage.

When should someone recast a mortgage?

There are a number of times when recasting a mortgage makes a lot of sense, but no matter what the homeowner will need to have a sizable chunk of change set aside to pay down the principal. Recasting is a process, and it’s really not worth going through unless the payment after the paydown will change in a significant way. I would say that you want to pay down at least 25% of your mortgage if you are going to recast, although that isn’t a “rule” so much as a guidepost to make sure you are using your time wisely.

Here are some situations when recasting makes the most sense.

• Rates have risen - If your original mortgage is at 3% but rates are 6%, recasting is a smarter move than refinancing because you get to keep your old rate but secure a lower payment

• You have a lot of money sitting on the sidelines - If you have a big chunk of change that you aren’t investing and that’s yielding less than your mortgage interest rate, recasting is a really good way to put the money to use and increase your month to month cash flow (from your lower monthly payment)

• You need to decrease your payment to cash flow a rental - If you have a rental property with a mortgage that doesn’t currently cash flow positive, recasting a mortgage can help turn the tides. Of course, that doesn’t mean recasting is the best way to use that money (it could be that the rental just wasn’t a great investment…), but it is one way to solve that problem.

• You are about to retire and you want to lock in a lower payment - Recasting can make a LOT of sense for people who are about to retire. Naturally, it’s preferable to have lower monthly bills as a retiree on a fixed income, and housing is usually a big line item. Recasting is particularly attractive in this scenario because the returns are guaranteed: you MIGHT make 7% in the stock market, but with recasting you immediately lock in a return equal to your mortgage interest rate… and that value can’t go up or down.

No matter what, the math for recasting is pretty simple. If you are going to make more money paying down your principal than you would putting the money someplace else, then it’s probably a good idea. It can even make sense if that isn’t the case, and you just want to secure a lower payment.

What are the disadvantages to mortgage recasting?

Although there are plenty of scenarios where recasting makes sense, there are some clear disadvantages as well. First of all, you are putting a lot of cash into the equity of your home, which is probably a good investment but it isn’t guaranteed, either. Second, it doesn’t change your interest rate so if rates have dropped it may not make sense. Third, it doesn’t change the term of your mortgage. And, finally, it costs money since the lender charges a fee for you to do it.

Who can recast a mortgage? Which banks offer recasting?

Although recasting is not universally available, it is fairly common with the main mortgage lenders. Those with FHA and VA loans will not have the option to recast, however. I’ve linked to the most helpful articles I could find for the three main lenders before, but you will probably have to do your own research as the banks don’t make it easy to find.

• Bank of America

• Chase

• Wells Fargo

• Your lender may also offer recasting but I cannot list them all here…

Conclusion: Recasting is a great tool, but remember all of your options

Although recasting is a very interesting tool, it isn’t your only option to apply excess funds towards a change in your mortgage. You can always pay down your principal with an extra principal payment, which has the affect of shortening your mortgage term. You can also refinance your mortgage (I go into detail on when you should recast and when you should refinance here). And, you can always sit tight and invest your money elsewhere!

Next week, I am going to take an in depth look at when someone should recast a mortgage, and when they should refinance.

There are dozens of different articles on the internet all trying to help people figure out how much of a car payment they can afford. Suggestions range from 1/10th of gross income for a car purchase, to 50%. All of these suggestions share a common problem, however. They assume that everyone is the same! WTF!

The truth is that we are all a little different. We live in different areas that have different costs of living. Someone who is spending 40% of their income on housing in San Francisco or New York probably shouldn’t spend as much on their car as someone who is living in Detroit and only spending 20% of their income on housing.

It turns out that people also have different philosophies about finances. Some people are frugal, wanting to pinch every single penny possible to increase their savings and investments. Other people are like me, focusing on increasing income for savings and not worrying as much about cutting expenses. Neither philosophy is wrong… they are simply ways of looking at the world.

All of this means that there isn’t a single number or percentage that everyone should follow when they are buying a car. It depends! That means that we need a flexible calculator to be able to find a number for different people in different situations. Type in your information into the car payment affordability calculator below to see an estimate for the highest car payment or car purchase that would make sense in different situations. I would always recommend LESS than this number, by the way. It’s simply the highest number that could make sense.

I am using a “middle of the road” value of 30% of annual gross income as a baseline for car purchases, and 10% of monthly take home pay for loans and leases (including insurance and taxes). The inputs you select below will move those percentages up and down.

Other tips to keep in mind when you are buying a car

Besides the top line number, there are a few things that you will want to keep in mind when you are buying a car so that it doesn’t end up becoming something you regret.

• Try not to lease: I have leased cars before so I won’t judge anyone who does, but leasing is not the most efficient use of your finances. You are simply renting the car and receive no value from the vehicle at the end of the term (despite having spent a good deal of money on it).

• Try not to buy new: New cars depreciate by 20% the moment they drive off of the lot. That is an awful investment by any metric, so why buy new when you could buy a 1 year old car that is basically the same for significantly less?

• Try to buy something reliable: The initial cost is just ONE component of a car payment. You also have to keep it on the road, so try to buy something that is reliable, with low maintenance costs if something goes wrong. Here’s a list of the most reliable cars in case you are looking for one.

Don’t make a purchase until you know you can afford it

Your car should be just a small component of your overall spending, and it’s important to keep track of that spending as closely as possible. The estimates I use above are simply rough rules of thumb, and the real question should be whether you can afford your new car in the context of your monthly spending or available cash.

Of course, that means that you have to know what your monthly spending and available cash are. I think Personal Capital is the easiest way to monitor all of my accounts as well as my cash flow from month to month. From here I can see everything including:

• Mortgage and home

• Car payment

• Gym memberships

• Food subscription services

• TV/entertainment

• Spending money

This isn't my report but it gives you an idea of what the cash flow report looks like in Personal Capital (which is free, BTW). 

How much car can you afford?

It’s really up to you. How much cash flow do you have available each month? What are your spending and savings goals? What are the other commitments you have coming up that you could use the money for? The more you look at it, the more it becomes clear that the less you spend on your car, the better off you will be. But, the calculator above should give you an idea of the maximum you will want to spend on a car.

You’ve got your appraisal back… and now… uh…. well… how exactly do you read it. As you are leafing through you may see all sorts of things that are a little confusing. This post will help you to dig in on the information that is really important, what you can skip over, and what the most important things actually mean.

First of all, find the top line appraisal value

The first thing to do when you get your appraisal back is to find the top line value. It shouldn’t be too hard to find, as most appraisals will have this on the very first, or maybe the second page of the appraisal. Mine looks like this:

As you have probably already gathered, this is how much the appraiser thinks your property is worth. But, how did they arrive at that number? That’s what you can find in the rest of the appraisal.

The important information in your appraisal document

Appraisals have a shit ton of information in them, and most of it is frankly not pertinent to the overall value of your home. However, there are a few things that you need to understand in more detail to be able to decipher the reasons WHY your home was valued the way it was.

If you haven’t already, I would start with my post on how the appraisal process works. Within that post I describe all of this in detail, but at a high level the appraisal is just looking to understand the objective facts about your home (where is it, how big, etc), along with its quality and condition. Then, the appraisal will also include comparisons or “comps” -other properties that are similar to your home in location, size, condition and quality and some notes about the overall market in the area.

Most of the information in the appraisal should be pretty easy to understand, but the notes on condition and quality can be quite confusing.

Understanding appraisal short codes for condition and quality

Appraisers value condition and quality on two separate scales going from 6 (the worst) to 1 (the best). They are written as C1, or Q6.

Condition relates to the current state that the building is currently in, while quality relates to the materials and construction of the property. In other words, you could have a crappy old single wide trailer (Q5 or Q6), BUT it might be perfectly maintained and show little wear and tear (C2 or C3).

Appraisal condition descriptions

C1 - Recently constructed, not previously. occupied. Structure & components new. No physical depreciation. Includes recycled materials in like-new condition on new foundation. Not for ‘new’ dwellings left unoccupied for extended period w/ no upkeep or maintenance.

C2 - No deferred maintenance, little or no physical depreciation, and requiring no repairs. Most components new or recently upgraded. Outdated components/finishes updated or replaced. Dwelling ‘almost new’ or recently renovated. Similar in condition to new construction.

C3 - Well maintained, limited physical depreciation, normal wear & tear. Some components upgraded.

C4 - Some minor deferred maintenance. & physical deterioration from normal wear & tear. Adequate overall maintenance, requiring minimal repairs to components; needs some cosmetic repairs. Components functionally adequate.

C5 - Obvious deferred maintenance; in need of significant repairs, rehab or updating. Functional utility & livability diminished but dwelling remains useable & functional.

C6 - Substantial damage or deferred maintenance with deficiencies & defects severe. Safety, soundness & integrity of improvements are affected. Needing substantial repairs or rehab, including components.

Appraisal quality descriptions

Q1 - Architect designed unique structures. Exceptionally high workmanship, quality & high grade materials, components, refinements & ornamentation.

Q2 - Custom designed for owner site or in high quality development. Design, workmanship, materials, components, ornamentation are all high or very high quality.

Q3 - Higher quality in above-standard development or on owner site. Significant ext. ornamentation; interiors well finished. Workmanship exceeds acceptable standards. Materials & components upgraded from ‘stock’ standards.

Q4 - Standard or modified building plans. Adequate ornamentation with interior refinements. Materials, workmanship, components are mostly stock/ builder grade with a few upgrades. Meet or exceed applicable building code.

Q5 - Economy of construction with basic functionality. Plain design with minimal ornamentation and limited interior detailing. Mostly stock materials. Upgrades are limited, and stock quality. Meet minimum building code.

Q6 - Basic quality; lowest cost of construction & materials. Possibly built by unskilled people. Utility items may be minimal or non-existent. May have non-conforming add’n. May not be suitable for year round occupancy.

What do condition and quality codes actually correspond to?

OK. Even if you read the codes above, it may still be a little unclear what they actually correspond to, so I have added some visuals to make things easy. First of all, let’s start with a Q1 C1, the best of the best. Cream of the crop.

As you can see, this home is fully custom, with insanely expensive materials and features and it is in new or like new condition, immaculately maintained. Most of us will never own a Q1 C1 or see one on an appraisal because it is basically a state of appraisal perfection… and reality is rarely perfect.

What about something a little further down the line, like a C2 Q3. My own condo fits this description fairly well since it was recently remodeled (so C2) using relatively nice components and materials, but certainly built to a price (Q3).

Don’t take the condition and quality codes personally

I have to admit, when I saw that my newly remodeled condo was a Q3 I was pretty pissed. I had just sunk a bunch of money into the place and I was thinking it was super high quality. But, I realized that a lot of the materials were bought to a price point, and a Q1 really is supposed to be exceptional in every way. The same is true with condition. Since my property was remodeled and not new, there was no way it was going to be a C1.

In summary

Although there is a lot of information in an appraisal, it’s important to focus on the things that are really going to drive the value of your property: it’s location and size, condition and quality, and the comparable properties in the area.