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“And then there is the most dangerous risk of all — the risk of spending your life not doing what you want on the bet you can buy yourself the freedom to do it later.” – Randy Komisar

Some people won’t live long enough to make good on that bet. And if you are raising kids like I am, even if you do live long enough and have the money later, you’ll still have missed your kids growing up. #livefortoday

Trading the present for future security, in my opinion, is a behavior we’ve inherited from thousands of years of human history in which daily survival itself was at stake. If you are going to freeze to death or starve to death, it makes sense to put today’s joys on hold for tomorrow’s security.

But our brains haven’t caught up with the new reality in America: our toil and fretting really aren’t making THAT big of a difference in the true measurements of quality of life that matter: clean water, shelter, healthcare, and food. Most of us will have these amenities for the duration of our lives, even if we take a little break here and there to enjoy the “now.”

I’m not writing this to preach, I’m writing it to remind myself of this truth. It takes a daily reminder in order to re-calibrate and fight back against the “monkey brain” that only cares about toil, toil, toil, survive, survive, survive.

Everyone hopes to contribute something original to their chosen writing niche. For me, on this blog, it’s pretty hard to contribute something original. There are many smart financial bloggers out there.

But I’ve done it at least once; and my most original and important post so far has also been pretty life changing for me. It is an idea I came up with after staying up way too late multiple nights in a row trying to figure out how to “have my cake and eat it too” when it comes to using retirement accounts (IRA’s, 401k’s) to fund early retirement. You may have just yawned when you heard me say retirement accounts, and I admit, it isn’t a very fun topic. But if you realize that optimizing your retirement account strategy can help you retire EARLIER, it becomes a lot more fun.

Here’s the post I wrote.

Shortly after I wrote the post, there was a flurry of activity with podcasters and bloggers contacting me and writing articles about my discovery. Here are some things that happened after I wrote the post:

  1. A few weeks after I wrote this post, while I was wondering if anyone else had noticed this math, I got a call from a financial podcaster who had millions of listeners. He was pretty adamant that my math was wrong. Then, a few days later, he called me back with great excitement and informed me that he thought my math was RIGHT, and he wanted to discuss my findings on his show immediately, which led to this podcast episode.
  2. Shortly after that, a very popular blogger wrote a post based mostly on the above podcast episode and my discovery.
  3. Various forum posts broke out debating my findings (here is one of them, I’m too lazy to find the others).
  4. Just a few days ago, this financial independence blogger picked up and shared my idea.
  5. There have been other emails, posts, etc that I’m just too lazy to dig up right now.

Moral of the story: if you haven’t already read my original post, read it. It’s a game changer.

In recent months, my publishing company has slowed down.

I’ve always known this was coming. In fact, my revenue has been dropping over the past 5 years.

In reality, the company still makes plenty of money to pay our bills. But if the trend continues, I’m not sure I’ll be able to count on that in 3, 5, or 10 years. My last kid won’t be out of the house for 16 more years. I can’t retire quite yet.

So, naturally, I’ve decided to dive back into real estate sales. Not because we need the money now, but because I don’t want to wait until I get to that place. Real estate has always been my “backup career” in Tahoe.

Real estate is very hard work. I mean, hard. It is more mentally taxing than physically, but you are basically on call, and your days just get eaten up to the point where you are drained at the end of the day and don’t have anything left for other activities. Many articles I’ve read say real estate is in the top 10 most stressful jobs.

My publishing company was hard work, but much easier than real estate.

So, since I’m also running my publishing company, I now have a double workload.

Jumping back into real estate has caused me to reflect on a few things.

  1. When you have to work more to make more money, it is a very inefficient, unpleasant, non-linear benefit. You may make more money, but you also have less time to shop for deals, to clean your house, to communicate with your spouse about purchases. Pretty soon you are hiring house cleaners and paying for conveniences you never used to pay for because you are just too tired to do stuff yourself. So for every dollar you make, you really only get to keep say 80 cents of that dollar because 20 cents is going toward conveniences and inefficiency. Not to mention taxes.
  2. When you are working more and harder, you really start to see the value in MMM principles and a frugal lifestyle. You start to put a higher premium on freedom, and become more willing to do what it takes to get freedom.
  3. I’ve also started to become much more interested in my passive income portfolio. When you are working your ass off, it’s amazing how much passive income can help. For example, I’ve closed about 5 real estate deals so far this year. They have been pretty gruesome and tiring, and really drained a lot out of me this summer. Yet, amazingly, my passive income portfolio has managed to collect about 50% of the amount of real estate income I’ve taken in. MMM has said that it’s cool to watch your passive income portfolio make more money than you even could if you were working full time, hard. I’m not quite there yet, but still, my passive income does add up and it all comes in with no stress or fuss.

To sum it up, I’m getting a small taste of what most Americans feel like ALL the time. Busy, inefficient, frustrating life. The days just melding together, one day after another. Hoping that something will change, but not seeing any way out.

Of course, thankfully, I don’t have to live here forever. There are lots of escape routes we can take. We can start living off of passive income instead of reinvesting it. I can cut back in real estate and drop into a lower tax bracket. We could even do something extreme, sell our house, and move to a cheaper city.

You have escape routes too, and if you read MMM’s blog, you’ll see many average joes making incredible changes in their lives to get out of the squeeze.

It’s not all bad. Being back to work and busy has felt good in many ways, instead of languishing in boredom at home. My friend Clark always says that men will always wrestle with work. Poor men will wrestle with stress and money pressures. Rich men will wrestle with boredom, emptiness, and lack of purpose.

I think the goal should be as follows. I mean, we all wrestle with work, but I think the goal should be to have the space to wrestle with it and find the right balance, rather than have the wolves at the door and never get the chance to take a step back and really figure out what healthy work looks like.

For the time being, I’m in the lion’s den. I’m in the “typical American” boat. I don’t like this boat much at all. I hope to not stay here long. Maybe deals will slow down over the winter. Maybe I’ll do one of the other escape options mentioned above. The question is, when I’m in the lion’s den, will I have the guts, awareness, intentionality, and plan to escape? After all, strangely, escaping the lion’s den is actually HARDER than sitting around and getting eaten by lions. Getting eaten by the lions is the path of least resistance. Climbing out of the den requires ingenuity, a plan, an awareness, and a willingness to take the road less traveled.

I’m grateful for this time in the lion’s den. It gives me better insight into what most Americans are feeling, and it will allow me to put the MMM principles to the test in a real life scenario.

The jury is still out on how all this will end. I’ll keep you posted.

Are you stressed out by money? Are your money fears really founded? This post won’t apply to everyone; there are certainly many people who don’t stress about money. But, I have a feeling this will apply to the great many.

Thousands of years ago, humans struggled to survive. We developed a very strong survival instinct. In ancient times, death was always near. Lack of shelter, food, medicine. If you had just finished dinner and you saw a rabbit running across your farm, you would surely get up, and go kill the rabbit, and store it for another day’s dinner — even if you weren’t hungry when you saw the rabbit.

This behavior is, of course, a good trait when survival is at stake.

However, this survival instinct has run amok. In modern times, even when survival is not at stake, we still often behave like it is.

We make trades. We trade our time and our peace and our energy, for more. And then when we get the more, we keep making trades to get more of more. And on, and on, and on. I’m not talking about more luxury or more material wealth. I’m talking about more security, more nuts stored up for the winter.

Of course, there are many people on planet Earth whose survival is still uncertain. And even in the USA, there are many people who struggle to maintain a reasonable quality of life. But there are also many people who are dreading being “poor,” when really, what they define as “poor” used to be a pretty good lifestyle, before they achieved so much more.

The problem occurs when we reset our barometer for what security is. Each time we get more, we reset that new position to zero, and try to get even more, instead of being grateful for what we have. While greed may play some role in this, I think the bigger culprit is the unrestrained survival instinct of our ancestors. There is simply never enough more to satisfy. More is always needed. And it is greatly feared when more seems out of reach.

The truth is, most people will never have enough earning power to buy total and complete financial security. So with each new milestone of more achieved, of course the next milestone is going to look mighty appealing.

So, we keep trading. We keep trading finite resources like our time and our inner peace, to pursue more. The first few mores we pursue in life may be important — a buffer in the checking account, home ownership, a wardrobe. But each subsequent more gets a little bit less important: a bigger home, more investments, more stored up nuts for further and further out into the future, until the present moment becomes irrelevant.

Yet, even while the subsequent mores get less important, the cost to get them gets increasingly costly, as we pile on the work, the stress, the toil. Adding 10 hours per week to a 20 hour work week isn’t so bad, but adding 10 hours to a 50 hour workweek is a deathblow to the soul.

If the pattern of endless more seeking goes on for too long, pretty soon we forget where we’ve been and we fail to be grateful for what we have.

Reigning in the Beast

OK, enough negativity. So what do we do about this primitive and powerful subconscious survival instinct gone haywire?

I think we need to retrain our brains. We need to use thoughts and behavior to counteract the thoughts and behavior which are the default. One of the exercises I’ve found most helpful is to look at people who have achieved less security than I’ve achieved, and also the people who have achieved more security. Interestingly, both groups of people still seem to be just as preoccupied with getting more security. This doesn’t really make sense…shouldn’t the more successful people think less about security, if security is a linear progression? I mean, when you are mowing your lawn, you certainly feel more accomplished when you are 90% done compared to 10% done.

This exercise shows you behind the curtains of how the human mind works… actually achieving more security does not help control the beast! The beast is irrational and never satisfied. This helps me to reign in the beast, seeing his weakness and that he is really just a wild emotion gone crazy.

Also, it helps me to picture myself in the position of having less security than I do now, and realize that it wouldn’t be that bad. Sure, life would change, but it wouldn’t be as bad as living in constant fear and anxiety over the future. Tim Ferriss calls this “fear setting” (as opposed to “goal setting”).

Another helpful tool for me is to put boundaries around the worry. Force myself to participate in other activities; go have fun with my kids and not check my phone; limit the number of times per day I am allowed to check my email or my stocks or whatever it is that is stressing me out.

Lastly, another very helpful tool for me has been to make a plan. I think endless need for security comes when you lack a plan. If I don’t understand my finances, my expenses, and my true needs, how can I ever feel secure? Having a plan — seeing what my true expenses are on a spreadsheet, and understanding what income is needed to meet them — will give me a true barometer for the level of security I actually have.

Have I solved the problem yet, in my own mind? Not even close. But I feel that just identifying the beast and chasing him down, is half the battle. Keep chasing him, and you’ll win with increasing frequency. One victory I’ve recently had in this mental game is the willingness to spend passive income for living expenses rather than always feeling like I need to reinvest it. The “more more more” mentality says you MUST keep reinvesting investment earnings until you are old and gray and catheterized in the hospital, to ensure you don’t run out of money before you die. Of course, there IS real wisdom in compounding investment returns, but I’ve learned that having a year here or there where I spend the returns to make life better, is just fine. In fact, tomorrow isn’t even guaranteed to any of us, so counting on old age is also a gamble, and for sure by then my kids will be grown and I’ll never get back this time to spend with them. So if I go a year or two sucking down investment earnings to pay for life and my portfolio doesn’t grow, who cares? It was worth it.

My example above is just one of many ways this awareness has affected my life, and of course, everyone is in a different position in life so awareness of the beast will take on different forms in your own life. The most important thing, I think, is to realize there IS a beast in your mind, and that he is harming you beyond what you can even imagine. This realization sets things in motion for healing, whatever healing might look like for you.

I had a friend recently ask me about hard money loans. I lend money as “hard money”; this constitutes about 33% of my investment portfolio. It’s hard for me to talk about hard money without backing up a bit and putting it in a broader context. And disclaimer; this post is going to be a very 30,000 ft birds eye view. I’m not fleshing out a lot of important details here.

Gurus like Mr. Money Mustache say all we really need to do is put our money in index funds. Which I would mostly agree with. Over the next 50 years, it’s unlikely any of us can beat index funds by our own “super smart” “active investing.” However, I see things a little bit differently.

First, I am self-employed. My income isn’t guaranteed. And I REALLY want to avoid going out and getting a “real job.”

Second, I am raising my kids NOW, not in 50 years. It’s more important for me to ensure the next 10 years freedom, than to ensure I’m free in 50 years. If I can preserve my freedom for 10 years, even if that means I don’t maximize my long term profit, that’s a trade off I’m happy to take.

So that brings us to what I call “Income investing.” Income investing isn’t just investing so that I get my 7-10% stock market returns over the long run. The stock market could have a crappy next 10 years, for all we know. It may all even out eventually, but the next 10 years could be down. That means I can’t use the income now.

Income investing basically says the following: I’m OK giving up some potential for principal growth, in return for a safe and steady income now. Yes, there is some income to be had even in index funds – around 2-3% in the form of dividends. But if you aren’t super wealthy, 2 or 3% of a nest egg doesn’t amount to much income. Dividend growth stocks work the same way – your Coca Cola’s, or Boeings, or Johnson & Johnson’s don’t pay much more than 3-4%.

So, there are a few strategies I use to gain more income. I generally look in the neighborhood of 6-12% as being ideal. And I’m willing to give up some principal growth to attain that income. Remember, right now I’m mainly focusing on the 10 year horizon. And yes, I do own growth stocks and index funds too. We are just talking about the income portion of my portfolio.

The very best income ivnestment I have is my duplex, which I bought in the market crisis in 2012. This thing is a cash cow. It makes me 10-15% cash-on-cash return, and that’s not even counting the appreciation it’s experienced, the tax depreciation I get to take, and the amortization (paying off) of the loan. In short, this duplex has been badass! Of course, the duplex does have some issues. It takes a lot of time and headache to manage. I do enjoy this time and headache much of the time, it’s a fun project. But I am not sure I’d want to own 10 of these duplexes.

So that brings us to more passive income investing, of which I partake in several types. We’ll look at hard money last.

First, preferred stocks. These are a special type of stock where a really solid company like JP Morgan Chase says to the investors, “we’ll pay you a huge dividend of 6 or 7%, but you never get to grow your principal.” I love preferred stocks and own a lot of them. There are some risks, including interest rate risk. But these stocks are senior to common (regular) stock, so as long as the company stays afloat, they are very safe.

Second, covered calls. This is a fancy stock option trade that basically works the same way. You get an income but give up upside potential. I don’t do much of this anymore because it is very labor intensive. While I’m happy to put labor into the duplex because it is a stellar investment and kind of fun, the covered call plays aren’t that fun for me and they have less return.

Lastly, hard money loans. This is basically where you play the bank to people who can’t get loans from the bank because they have bad credit or they are doing some kind of business / real estate deal that banks don’t like. As such, these can be risky deals. They are, however, safer than owning equity in many types of real estate, because debt is higher in the capital stack (higher seniority) than equity. In layman’s terms, this means that if the market drops 10%, equity holders will take the hit before debt holders.

There are some rules to hard money lending which will prevent many people from participating. First, you aren’t allowed to loan money to people against their primary home; all the deals have to be against investment property. And second, and this is a big one, in order to do most hard money lending, you have to be an “accredited investor,” which means you have to meet certain government guidelines for being rich enough to participate. I think this is a super dumb rule; the government shouldn’t assume that rich people are “smarter” than less rich people, and anyway, the government shouldn’t even have a say in how we invest — way too much big brothering if you ask me. Harkens back to, “don’t tread on me.” But anyway, we have to follow the law. So to become an accreddited investor you have to have an annual income of more than 200,000 / year, OR you have to have assets (not including your primary home) of greater than $1M. Yes, this rule will cancel out many people who would want to do this.

There are two ways to do hard money lending, and I do a little of each. You can lend to individuals, through a broker. I have one loan out that is secured against collateral of two buildings in South lake Tahoe; a house and a commercial building. The loan pays 10%, and they haven’t missed a payment in the 4 years we’ve had the loan out.

There are some disadvantages to doing these individual loans. If they default, you sort of have to handle things yourself and pay for attoreyes, etc, to get your money back. But even worse, if they pay you back and everything goes as planned, you still have to then get your cash back and look for another loan. Between looking, headaching, time involved, etc., let’s say your money is only invested 50% of the time. That means your real annual return is only 5% instead of 10%. So I reserve these kinds of individual loans for only the best situations.

The second way to hard money invest is with a manager. This manager pools investors together, so there is a lot more money to invest, But more importantly, it gives you a lot of diversification. If you put $20,000 into a $100,000,000 pool of 300 loans, you instantly get a slice of ALL the loans. So if they have 300 loans, you own a bit of each. If one defaults, you only lose one of 300. Also, the manager handles all the headaches; it is totally passive to you. I love this structure. Diversification and passivity. Of course, there are downfalls. One of the downfalls is that you have to trust management. They may be crooks, or they may just not care as much as you do, or who knows, a tornado could knock out their headquarters and you could be left with no one to manage the fund. Also, you worry about geographic diversification; what if their 300 loans are all in downtown seattle and a tidal wave takes out the city.

For this reason, I try to spread out my hard money loans into several different managers in several different locations. Right now, I have done this with 3 managers, one in Tahoe, one in Seattle, and one in Colorado (though the Colorado one is under the same parent company as the Seattle one). They all send out monthly updates and keep us investors up to date on what the latest problems and victories are. And they all do pretty wide areas; the Seattle one does WA, OR, ID, and the CO one does CO, WY, AZ, etc. So I have some good management + geographic diversification. These are very illiquid investments, meaning you can’t always get your money out easily. (Note: For the Tahoe company mentioned above, I know the people who run it personally, and they’ve been family friends for years. This is the kind of credibility you might look for when you pick who is allowed to manage your money).

I generally do all of my hard money investing in my IRA’s, which requires that you go beyond simply having a normal IRA brokerage account such as Fidelity or eTrade. Instead, you have to establish an account with a “self-directed IRA,” which is another stupid hoop the government makes you go through. I use Quest IRA, who I like, but who has pretty high fees (though they all have fairly high fees).

You’ll note, if you read my blog, that you should do income investing in an IRA whether or not you want the income NOW or in RETIREMENT. It’s always better to do it in your IRA. In fact, I wrote an interesting article on this a few months ago (I’d link to it but I’m feeling lazy) and may article got picked up by some radio stations and other blogs because it was so important and apparently novel.

What I like about income investing is that if you don’t need the income, you can still reinvest it. You can even use it to buy index funds if you want to. I’m sitting on some cash right now from 2016’s income investing, and I can spend it, reinvest it, or let it sit there. It provides a lot of flexibility.

If you aren’t an accredited investor, you can do a version of hard money lending through the stock market; you can buy stocks that are publically traded that emulate hard money activities to some degree. Just be careful, they can be squirrly. Some of them use “leverage,” where they don’t just lend out your money, they lever up by borrowing more money, so their victories are sweeter but the risks are higher. That’s not my thing. I only do “unleveraged” income investing. You could consider buying into some REITs (real estate investment trusts) which are just like owning real estate, only through the stock market. Some of them, such as LXP which I like a lot, pays a 6 or 7% dividend and has good chances for appreciation. You could also buy LXP’s preferred stock. While I generally recommend staying away from MREITS (mortgage REITs), because they tend to be very risky, lately I’ve been dabbling in CMREITS ( long acronym!! Commercial Mortgage REITS). These are similar to hard money lending where you are providing cash for businesses and against commercial buildings, and you get paid a steady stream of income but there’s not much chance for capital appreciation, similar to hard money loans or preferred stocks.

Also, with new technology and the internet, there is a massive inflow of online based hard money lending operations. These are super promising and interesting. Because they are online, they can cut management costs, increase diversification, increase investor data, and even slice down minimum investment amounts from $20 to $100k down to about $2 to $5k. Some require you to be an accredited investor, some don’t. Some big names I follow in this segment include PeerStreet and RealtyMogul. You can hit up their websites and check out the real estate they lend against. If I do more real estate debt investing, it will likely be through one of these outfits. Right now, my portfolio is pretty heavy into real estate, so I’m not super keen on getting deeper into hard money loans. Don’t confuse these outfits with the consumer lending companies like Lending Club. I’m not a fan of lending club because it gives loans with no collateral. Hard money loans have the real estate as collateral so if the borrower stops paying you have some where to go to get your money back. The world of online lending via PeerStreet, RealtyMogul & many others, is a huge promising area and will likely reward investors handsomely. Similar outfits have popped up for index investing, such as Wealthfront; where certain little hassles are automated like tax loss harvesting.

So there’s my little primer on hard money lending. Feel free to ask any specific questions about this topic. And when you are new to this stuff, never put too many eggs in any one basket. I have my money spread out very thin over many of these kinds of plays, because I don’t have any dilusions that I’m a genius and can’t lose. Instead, I know I’m not a genius, and I can lose. So I want to make sure I’m not too exposed to any one risky area, whether that be geographical risk, interest rate risk, management risk, bear market risk, or bull market risk. And remember what your goals are; those will help steer investing choices. For example, if you are 20 years old and you only care about growing your money for when you are 60, you may just be fine with index investing. But if you are like me and your income is variable and your top goal is maintaining income integrity while you raise your kids so you can go camping and bike riding with your family instead of work your ass off, then maybe income would be more of a goal for you.

Please share any comments, questions, or promising discoveries you make, in the comments section!