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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!

Ebb and flow (also called ebb and flood and flood drain) are two phases of the tide or any similar movement of water. The ebb is the outgoing phase, when the tide drains away from the shore; and the flow is the incoming phase when water rises again.

The last few months have been very hard on me. I’ll go into that another time.

I’ve been thinking a lot about 2017. Many driven people spend all their time storing up acorns. They forget to enjoy the acorns. Fear usually drives this more than greed; fear of being poor or running out of money.

But maybe what should drive us isn’t the fear of running out of money, but the fear of running out of time. Life doesn’t go on forever. We shouldn’t just allow finances and assets to “flow” into our possession, but we should also allow the tide to “ebb” out, as well.

My friend Clark talks about a gap year. A sabbatical. A time away from the grind. To rejuvinate, refocus, figure things out.

I’ve talked about this many times before, but before the industrial revolution, everything about work ebbed and flowed. The planting of the seed, the waiting, the harvest. The rhythms of day and night – before electricity and computers, people didn’t work after dark, and often didn’t work in bad weather.

This ebbing and flowing of work, just makes sense to me. It’s how I want to live my life. 2016 was a good year to build up resources for us. I busted my butt in my side hustle (selling homes) and put away some money. We made some big purchases that needed to be made, without much regard for money.

For 2017, I want to do the opposite. I don’t want a steady pace year after year. I like the pace to vary. For 2017, I want to work less, spend less, and unplug more.

 

There are some pretty nifty financial ninja moves to help make doing this financially advantageous. I’ve gone over a number of them in this blog, and if I get motivated maybe I’ll edit this post and add some links here. But if you plan correctly, you can really ebb and flow well, not just in terms of lifestyle but in terms of optimizing and greasing the financial machine.

I think we all need to make choices. We can’t just let life drag us along. I’m not a big fan of goals, I’m usually too impatient for setting detailed goals. So I’m not going to flesh this out a whole lot. I’m just going to put it out there in general terms – my goal for 2017 is a year of rest, refocus, and relaxation.

I’ll end with this interesting fact. If you can really unplug and rejuvinate – I mean, really – You may actually end up making MORE money over the course of your lifetime. See, this rest, this ebb and flow, is how we are wired. When we really unplug, destress, and get distance from the grind, it renews our energy and our creativity. It prevents burnout. It puts us back on track. So even for those type-A overachievers, we can still rest assured that our productivity when measured over time, won’t suffer, and might even increase. Such good news that is!

This is a huge reason why I advocate being self-employed. While there are many downfalls of being self-employed, it does allow you to choose when you ebb and when you flow. That’s the problem with the 9-5 grind — it puts humans in a completely artificial schedule, out of tune with hard work and rest, and in tune with turning humans into efficient widgets of capitalism.

Going a bit further, I’ve also been pondering the next 10 years of life. This article is super fascinating and life-impacting.  It basically lays out the shortness of life, but goes a step further and lays out the shortness of time we have with our kids before they move away. Accordingly, I kind of want to retire and take a gap year not just for 2017, but for the next 10 years. We’ll see how that goes 🙂

Many schools of thought say, don’t invest in fixed income investments (like preferred stocks which pay 6 or 7% but have no appreciation potential). The conventional wisdom says, instead you should invest in growth stocks (like an S&P 500 index fund or Google or other growth stocks).

Now, I do understand that every portfolio does need some growth stocks for a hedge against inflation and for a future nest egg.

But one parallel I’d like to draw to shed light on this topic is the story of owning a business. Let’s say you own a T-shirt store on Main Street. You use this store to pay your bills, so your family can survive.

Let’s say your store is doing well, and it is making enough money to pay your bills. Do you know what your store is even worth? Is it gaining or losing value? Do you care? Most business owners don’t actually know what their businesses are worth. In fact, the values of their businesses are fluctuating all the time, depending on economic conditions, and other factors. I am a business owner and I meet with other business owners regularly. We almost never talk about how much our businesses are worth. We always talk about how our businesses can make more money.

Yet, with stocks, we do it the other way around. We almost never talk about how much usable income our stock portfolio is bringing in, but instead, we always talk about whether our stocks are “growing” (whether their values are higher). Like I said, there’s nothing wrong with buying stocks for growth. The problem is, you never know which stocks are going to grow, and which aren’t. And you never know when the market as a whole is going to have a 10 year slump.

Again, the T-shirt store owner doesn’t care if his store maybe is worth a bit less this year than last year, as long as he is growing his sales and paying his bills. Likewise, I choose to see my stock portfolio in the same light. Sure, I want values to creep up, but I’m more interested in the income – because it pays my bills now, or if I don’t need the money, I can reinvest it in similar or different investment vehicles.

How you look at this topic is determined largely by if you are a “now” person or a “later” person. Do you want to live an awesome life now, or wait until the years or decades pass for your portfolio to appreciate and “grow”? Personally, I’d rather live life now. Tomorrow isn’t guaranteed. So I treat most of my investing like a business – I’m less concerned about what my businesses (stocks) are worth, and more concerned about how many T-shirts (dividends) I can swing to pay my family’s bills, today.

There’s a lot more to talk about on this topic, a lot of other pros and cons to both income and growth investing. Ultimately, doing a little of both types of investing can be prudent. For me, I first endeavored to set up my income stream, and secondly endeavor to set up a growth portfolio. This is the strategy that made the most sense to me.

Lately, annoyances around my house actually bring a smile to my face. They are reminders. Reminders of a life I’ve chosen. And reminders of a life I haven’t chosen.

There’s a laundry pile in my bedroom. I haven’t had time to fold it. I used to be annoyed by this. But now, it’s a reminder that I’ve chosen to go on a bike ride or spend time with my kids.

There’s a camping trailer in my garage, taking up way too much space. It used to annoy me, but now I think of it as a reminder that having a cozy, organized, home-oriented garage isn’t my priority. Travel and adventure are my priorities.

My home phone lines are cancelled (I know, I know, the younger generation laughs at the idea of having a land line at home, but it used to be the norm). It’s no longer an annoyance to miss this – now it’s a reminder that we’ve chosen to streamline our expenses so we can live more, work less.

There are other examples, but these get the point across. Life is all about trade-offs. You can’t have it all. Even rich people can’t have it all, because they still have limited time and energy. The above examples are trade-off’s I’ve made. They make my life better, even though they require a sacrifice. But in most cases, the sacrifice isn’t really something THAT MATTERS TO ME. Instead, it’s just sacrificing a stupid societal norm, which means nothing. Such as folding laundry.

These things are reminders that I’m trying to do my own thinking. I’m trying to use my resources (time, money, energy) on what matters, not on where the herd is going.

They are the strings around my finger that remind me what road I’m taking, in case I forget. Because we all forget sometimes.

I love the work of Tim Ferriss, and on a recent podcast episode he interviewed someone who talked about choosing our failures instead of our successes. (I highly recommend Tim’s book – life changing)

We often ask ourselves, “what do I want to succeed at today?” Maybe it’s going grocery shopping. Or maybe it’s something much more grand – finishing a college degree so that you can get a good job.

What we don’t realize is, every time we pick something to succeed at, it means we are also picking something to fail at. Life has limited time, money, resources. By succeeding at something, you are ignoring something else. Maybe that’s OK; maybe you aren’t ignoring anything important. But just maybe, you are ignoring something important.

So, instead of asking yourself what you want to succeed at today, ask yourself what you are OK with failing today. This frames the question in a way that you can identify things you are ignoring in your life, which you wish you weren’t ignoring.

An example for me, is that the men in my family have always been relatively guilt-stricken over doing a “perfect” job at work. We stress about making sure we are always making the best choices and treating those who work for us perfectly. OK, this is a worthy goal. But the obsession over perfection here, may mean that I’m failing in other areas – like raising my family. Framing it this way, it helps me to see things in a new light, and to realize that actually, I’d rather succeed in raising my family and fail sometimes at work. I’m not talking about making any really bad decisions at work or being lazy, I’m just talking about dumping the perfectionism. What are you willing to fail at today?

As you can see (below), this week I succeeded in buying my kids two awesome new mountain bikes. This means I failed at putting that $1000 into a retirement account. But when I frame it this way, it’s easy for me to see which I’d rather fail at. I’d definitely rather fail at investing than fail to pass on to my kids the joy of mountain biking, my favorite sport.

Bonus topic: The question of what to fail at becomes harder and harder to answer the older and more successful you become. When you are young, it’s easy to put off big purchases because you don’t have kids yet, and you don’t have any money, and the goal of getting financial stability is all-encompassing. You save, invest, buy a house, eat beans. Great. But as you get older, the numbers become more abstract. Will it really make that much of a difference to put 5% more in my retirement account this year? Will that be better than buying mountain bikes? Not such an easy question. Because saving for retirement is a very volatile proposition, and depends on a lot of things like – how the stock market will do, how long I will live, etc.

Therefore, since I can’t predict the future, I simply have to choose what I want to fail at today. I can’t succeed at everything. Today, I succeeded in getting my kids on some dirt trails. Honestly, I don’t really care what I sacrificed to achieve that goal, because it was worth it!

(and yes, maybe disc brakes for a 5 year old is a little overkill, but the bike is geared fantastically for Tahoe hills and it has 2.8 tires! Duh!)

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