Credit Card 101: The Basics

Despite your established career and long list of accomplishments, there is one area that may need a little fine tuning…personal finance. While you may be getting along okay right now, you can do better. Here is a reminder of some credit card basics:

Try to get the lowest interest rate you can. A credit card allows you to borrow money, usually up to a certain limit. It can be convenient during times when you don’t have access to cash or need to quickly get yourself out of a financial bind. However, whenever you use credit cards to purchase things, the bank charges you a fee. This fee is called “interest” and the amount of interest you pay is deemed your “interest-rate.” The lower the interest rate, the less of a fee you pay to borrow the money and use the credit card. Since most people end up needing a credit card every now and then, banks typically give you a small window (up to 1 month) with which to pay back the money you charged to the card. If you pay back the money within that amount of time, then you are not charged an interest fee on the money you borrowed. Your goal is to get a card with the lowest interest rate you can so that in the event that you do use the credit card and are unable to pay off the full balance by the end of the billing cycle, you aren’t charged a huge fee.

Be wary of 0% interest rates. Now this advice may seem counter to what I just said, but hear me out. Oftentimes, when you first sign up for a credit card, banks will offer you a 0% interest rate for the first 6-18 months. This means that you can borrow money “interest free” for that amount of time. While this is a good deal if you plan to pay off your balance quickly, more often than not, it’s a trap.  When college students, young professionals, and any adult in a financial bind realizes they can borrow money to purchase things now with no penalty for doing so, they tend to borrow more than they would have otherwise. Once the 6-18 month interest-free period ends, the interest rate often skyrockets to almost 20%, which can be a recipe for disaster for anyone seeking to get out of debt or build wealth in the near future. If you have one of these credit cards, you need to practice self-control to make sure you are not borrowing more than you can pay back.

Consider getting a credit card from a credit union instead of a commercial bank, if you can. Credit unions (like Navy Federal, USAA, etc) are nonprofit banking institutions. Because of that, they have several advantages over typical commercial banks (like Bank of America, Chase, Wells Fargo, etc). One advantage of credit unions is that they tend to charge lower interest rates on credit cards and bank loans. I can tell you from personal experience that the interest rate on the credit card I have from a credit union is DRASTICALLY lower than the interest rate on the credit card from a commercial bank. In fact, the interest rate is so much lower that I never even use the other credit card.

Another advantage of credit unions is that they usually have better customer service and are more forgiving when you make a mistake. When I first got a credit card in college I was terrible at keeping track of things. I would sometimes forget to pay off my credit card balance, not because I didn’t have the money, but simply because I forgot to do so. If I had made that mistake with a commercial bank they might have charged me a late fee for not paying my balance on time. However, since I was part of a credit union, I just called them and explained my oversight. They “forgave me” and removed the late fee EVERY. SINGLE. TIME.

You should know that you cannot just walk into a credit union and ask for a credit card. In order to receive services from a credit union and use them as one of your banks, you have to meet certain requirements in order to become a “member.” For example, some credit unions are only available for teachers and their families, another credit union may only serve members of the military and their families, and other credit unions may be strictly for hospital employees and their families. You just have to search for credit unions in your area, find one you are eligible for, and sign up.

Pay more than the minimum balance each month. When you charge money to a credit card, they usually don’t demand that you pay off the full balance right away. Oftentimes they only demand a small amount called a “minimum payment.” What they don’t tell you is that if you only pay the minimum payment each month, you will still be charged interest on the amount that’s left over. As a result, they will charge you even more money in interest and it will take you much longer to pay back the full amount. Moral of the story: pay more than the minimum payment and try to pay off the entire balance at the end of each billing cycle if you can.

Find out when your billing cycle ends each month. If you are going to be diligent about paying off your credit card balance each month or even just making sure you aren’t late on any payments, it is essential that you know when your billing cycle ends each month. Why is this important? Well because if you happen to use your credit card near the end of your billing cycle, then you must pay off the balance much sooner or else you will be charged interest on the amount you borrowed. For example, if your credit card interest rate is 14% and you purchase something for $100 on your credit card the day before your billing cycle ends, then you must pay back that $100 the same day or else the bank associated with your credit card will charge you an added fee of $14 and your bill will now be $114. I should note that most credit card companies will give you a grace period of about 25 days after you charge something, but not all credit card companies provide that benefit. Check to see if your credit card has a grace period and figure out when your billing cycle ends each month so you can coordinate your payments in a way that prevents you from paying interest.

Look at your statement each month. This may sound a little basic, but trust me it bodes reminding. If you have your credit card payment set up for automatic withdrawal from one of your checking accounts you may be tempted to occasionally forgo looking at your bank statements. Let me caution you against that. It is important to check your statement, even if you have very few charges, to make sure there are no errors. The people who process your statements are human and sometimes mistakes are made. You’ll never know they are there unless you check. Plus, sometimes you may be charged extra fees you are unaware of.

Check your FICO score periodically. Along with checking your statement, it is essential that you periodically check your credit score aka your FICO score. This score is a credit rating from 300-850 that determines how reliable you are as a borrower. The higher the score, the better. Your credit score is what is used to determine whether or not you qualify to rent an apartment on your own (without having your parents cosign for you). A higher score will also allow you to purchase a car or a home for a lower interest rate or fee. Check your FICO score periodically to get an idea of where you are at. Any score above 750 is pretty good, scores under that can use some work. Most credit card companies will give you a free estimate of your FICO score with each credit card statement.

Call the bank once a year to lower your interest rate. It is essential that you do what you can to lower the interest rate on your credit cards. Technically, your interest rate doesn’t matter as much if you pay off your credit card balance each month, but you want the interest rate to be low just in case. If there is one thing I’ve learned, it is that life can be unpredictable at times. We plan as best we can, but sometimes expenses can still catch us by surprise. Whether it’s a toothache that turns into an urgent dental procedure or an acute injury that turns into an expensive doctors appointment, you never know when you may need to use your credit card to cover an expense. Do your best to get the interest rate on your credit card as low as possible. While you may not be able to immediately alter the interest rate a credit card company starts you off with, you can however, ask for them to change the rate once you have had the card for awhile. In fact, I make a personal habit of calling my bank once a year to politely ask them to lower my credit card interest rate. Even with my status as a full-time medical student with no salaried income, they lower it EVERY. SINGLE. TIME.  Some times we have not because we ask not. Call your bank and ask them to lower yours as well.

Avoid Cash Advances. When you get a credit card, they may offer you something called a “cash” advance. This means that you can get a certain amount of money in “cash” for a particular fee. The problem with this convenience is that it ends up costing you a lot of money. Many credit card companies charge you a higher interest rate to do a cash advance than they do to purchase something directly with the card. Plus, they usually have rules that prevent you from paying back this cash advance (that is costing you lots of money) until after you have completely paid off your credit card balance. This means that you could easily fall into the trap of being stuck paying a super high fee for the cash advance for much longer than you would have liked. The bank profits a lot, which is why they offer it, but you end up paying a lot more than you may have anticipated which is why it’s best to avoid that option if you can.

Consider using credit cards for points and free perks. If you are at the point where you consistently pay off your credit card balance in full each month, then you may want to consider something else: using credit cards for points and perks. Many rewards credit cards from companies like American Express, Chase, Citi bank, Capitol One, and Bilt allow you accumulate credit card points from normal purchases that you can transfer to airline and hotel loyalty programs for tremendous value. For example, I was able to accumulate points and transfer them to the Virgin Atlantic airline (a Skymiles partner of Delta) and get a first class flight to South Africa on points. Many other people transfer points to hotel and resort chains to get free stays at international resorts and Caribbean vacations. Recognize that although using these travel rewards cards can result in huge perks, they can also be a huge risk and financial catastrophe for anyone who doesn’t pay their credit card balance in full each month.

To summarize, if you are like most people, you probably didn’t take a personal finance class in school. No worries. I’m here to help you learn the basics, especially when it comes to credits cards. When you first get a credit card, try to get one with the lowest interest rate you can (that way you won’t be charged as much money when you use it). However, be careful when you get 0% interest credit cards, because the interest rate tends to skyrocket to almost 20% after a certain time period which can get you into trouble if you aren’t careful. If you can, try to get a credit card from a credit union instead of a commercial bank. Chances are the interest rate will be lower and the customer service is usually better. When you use your credit card, try to pay more than minimum balance each month. Find out when your billing cycle ends each month so that you can pay off your balance before the added interest payment hits. Also, don’t forget to check your bank statement each month (to make sure there are no false charges or hidden fees) and look at your FICO credit score periodically since your FICO score is what apartment buildings will look at to see if you can get an apartment without needing someone to cosign or buy a home without paying a high interest rate. Be aware that you can call your bank once a year to get your credit card interest rate lowered. Lastly, try to avoid cash advances if you can and consider using credit cards for perks and rewards if you are someone who pays off your balance in full each month.

7 Main Types of Real Estate Investing

There are many ways you can get involved in real estate investing. Before you put money into a deal, you should first learn about the different types of real estate and the various ways to invest in them. While some paths require more time or result in larger profits than others, it still benefits you to familiarize yourself with different strategies so you can find the one that’s best for you. The main types of real estate investing are:

1. Land. Yep, you read that right. Owning a patch of land or an acre of grass, is a type of “real estate” if you will. Some people purchase areas of land they believe will be profitable in the future with the hopes of making more money when they sell it for a higher value. For example, if investors suspect that developers will soon build new homes near an area of land, they might buy that land knowing that its market value will increase as the area develops and increases in value. More often than not, people inherit land, especially when a relative who owned the land passes away. When this happens, people may elect to keep this land in the family as a way to pass on wealth. Other times, people build homes or commercial buildings on the land in the hopes of creating more investment opportunities. Some real estate investors specialize in finding undervalued land and selling it to contractors or other investors for a profit.  I don’t plan to do real estate investing through the purchase and sale of raw land, but many other investors prefer this method.

2. Single Family Homes. When I mention real estate investing with single family homes most people think I am referring to the purchase of a residential home or the renovation of an older home (similar to something they’ve seen on HGTV). As you can imagine, real estate investing is more complicated than that. For starters, the term “single family home” is what real estate investors call a house built for a single family (i.e. a 3 bedroom/2 bath house, a 4bedroom/3bathroom house, or some similar variation). To be a real estate investor with single family homes you don’t just buy a home and live in it. (Doing that simply makes you a homeowner). Real estate investors who focus on single family homes do more than that.

   They can purchase homes below market value (via a foreclosure or through savvy negotiations) and then sell them for a higher price (i.e. wholesaling). They can purchase an old home, renovate it themselves to increase its market value, then sell it to people looking to purchase a new home (i.e. Fix and Flip). They can also purchase a home, renovate it (by adding some modern appliances and newer fixes) and then refinance it with a bank (to withdraw some of the “equity” or value in the house as cash) and sell it. Lastly, people can purchase a home, rent it out to tenants, and use part of the tenants’ monthly rent check to pay off the mortgage in an effort to build wealth long term.

3. Small Multi-family Homes. This refers to duplexes, triplexes, and quadruplexes. Single family homes are built for one family, but small multi-family homes are build for...you guessed it: multiple, smaller families. Usually, it comprises 2-4 “sets” of 2bedroom/2bathroom family homes that are all connected to each other as a single building with separate walls and doors for privacy. Investors who prefer this type of real estate usually purchase or build these small multi-family properties and rent out each unit to a different family. For example, the owner of a duplex will have two different “families” or tenants living in the building (one on Side A and the other on Side B). Each family will pay the owner a monthly rent.

   Another way investors make money from small multi-family homes is to “house hack” or live in one side and rent out the other side. For example, if a real estate investor just purchased a triplex (3-unit multi-family home), he or she may choose to live in one of the units and rent out the other two units. Many investors like this method because it allows them to purchase a property to live in and invest with simultaneously. Plus, small multifamily investing allows them to collect a large amount in total rent money (since they receive multiple checks) without having to purchase multiple homes.

4. Large Multi-family Homes. Technically this refers to multi-family homes larger than 4 units, but usually this is just the fancy term for “apartment buildings.” Believe it or not, apartment buildings aren’t nearly as hard to invest in as people may think. Although it is unlikely that you will have the time, desire, or money to purchase an entire apartment building on your own, most of the times, people invest with others. In fact, most apartment buildings are owned by a group of people. When people decide to put their money together to invest in an apartment as a group we usually call that a “real estate syndication.”

   In real estate syndications you have general partners and limited partners. The general partners act as “active investors” and they are the people who find potential apartment buildings to purchase, evaluate the properties, and secure the financing from the bank. The limited partners act as “passive investors” and they are the people who put some of their money into the deal (along with other people) and leave all the details up to the general partners.

   Together, the general partners and limited partners invest in apartment buildings and tend to make a large profit. The details of real estate syndications can be quite complex, but essentially investors make money by purchasing undervalued apartment buildings. They then increase the value of these apartments by renovating them and raising the monthly rent. After a few years, these investors will either sell the building for a higher price or refinance it with the bank. Either way, the investors make a profit.

5. Commercial or industrial buildings. This type of real estate typically refers to strip malls, warehouses, or commercial buildings (ie. doctor’s offices, grocery stores, etc). Investors purchase these buildings, or build them, and then rent them out to companies or business owners who need the space. It is very similar to renting out a house. Instead of your tenants being ordinary people who want the space to live in, your tenants are business owners who want the space to sell products or services to consumers.

   The lease that tenants sign to rent space in these types of buildings is for a longer period of time (multiple years) and the business owner usually takes care of most maintenance problems and repairs him or herself (instead of calling the owner of the building every time the toilet gets clogged or the lights need to be replaced). As a result, owning these buildings gives you more assurance that you will get your monthly rent regularly and requires much less hassle.

   The downside is that these buildings are expensive to purchase. Unlike apartment buildings, there aren’t nearly as many syndications available. Investors typically purchase the building on their own, or with very few partners, which may cost them several hundreds of thousands of dollars, if not millions.

6. Real estate funds. This is when people put a certain amount of money into a large fund to invest with other people. Unlike real estate syndications, the managers of these funds use the money to invest in a variety of different real estate deals, not just one large deal. These funds are operated through companies and are officially called “real estate investment trusts (REITs).”

   Through these REITs people get to invest in more real estate deals than they would have been able to do on their own. As a result, REITs help investors diversify their investments and protect them from risk. If one real estate deal doesn’t work out, then they can count on the other deals in the fund to protect them from losing money. Many people prefer to invest in real estate using REITs because it is “passive.” You are not someone’s landlord, you do not have to do repairs or collect rent payments. You simply put your money into the REIT and let the manager of the fund handle all the details.

7. Debt servicing. Instead of finding deals, raising money, and managing the property some investors want to be much less involved. They like the high returns and profits that can be made through real estate but loathe everything else. As a result, they may choose to work on the debt side as a private money lender or tax lien investor. A tax lien investor typically pays the property taxes on a home that someone else has failed to pay. In order to prevent the home from going into foreclosure (being seized by the bank or the state), the homeowner must return the property tax money to the tax lien investor who paid them, with interest. Thus, the tax lien investor makes a profit from paying the property taxes of someone else.

   Private money lenders, on the other hand, are investors who loan money to other people that want to purchase real estate deals. Even though many people get loans from banks, real estate deals can be expensive and banks may refuse to loan you all the money you need. For example, a bank may loan someone 70-80% of the purchase price for an investment property, but then require that person to bring in 20-30% of his/her own money. If the person doesn’t have all of the money they need, they may choose to seek a private money lender instead. Typically private money lenders are sought out by people seeking to renovate an old home and sell it within a few months. Many wealthy people prefer to be private money lenders because they can get their money back much quicker and often times they can make a much larger profit lending the money at a high interest rate than they would have made if their money just sat in a savings account.

To Summarize, there are many different types of real estate. Your first step as a real estate investor is to familiarize yourself with each of them so that you can choose the route that is best for you. You can buy land on which to build or purchase it with plans to sell it to someone else. You can focus on single family homes and seek to rent them out, purchase them wholesale (for a low price) and sell to someone else for a higher price afterwards, or fix and flip them. You can try to house-hack, rent out small multifamily deals, or instead choose to focus on apartment buildings through real estate syndications. Once you have a decent amount of money, you may want to look into commercial and industrial buildings that you can rent out to other business owners. If you want to be much more passive and invest some of the retirement money you got from your job, REITs might be good option. Lastly, you can choose to be more on the debt side and invest in real estate through the purchase of tax liens or by being a private money lender. As you can see, there are many ways to invest in real estate. These are just some of the main types. All you need to do is pick the route that best fits your goals and lifestyle.

Tell me, which route of real estate investing do you think would be best for you? What questions or concerns do you have before getting started?

8 Reasons Single Young Professionals Pay A Lot In Taxes (and what they should do about it)

It’s tax time and if you’re like most Americans you’re either hoping for a refund or praying you don’t owe Uncle Sam money you already spent. Unfortunately, many single young professionals are in the latter group, my brothers included.

After doing some research, asking other young professionals, and talking with my father (who is a government auditor) I began to learn several key reasons why my brothers’ tax rate, and yours too, may be much higher than the average. Here’s what I discovered….

1. They make a lot of money. This first reason is self-explanatory. In order to pay a high amount in taxes you usually have to be earning a high income. While everyone’s definition of “high income” may vary, it’s safe to say that if you are a single young professional making at least 6 figures per year (in any city except San Francisco, LA, DC, or NYC) then you are probably doing pretty well for yourself. Our tax code is progressive, which means that the more money you make the higher percentage you pay in taxes. While this may be a huge drag for many people in the higher tax brackets, the government provides services and protections we all benefit from and we can’t expect those struggling to provide for their basic needs to fund it. Much of the burden falls on the high earners.

2. They earn most, if not all, of their income from their employer. Earned income, such as the salaries we get from our jobs, is taxed at a much higher rate than passive income or investment income. So, if you get all of your money from your job and have not started generating other revenue streams from various investments or business ventures then you will be taxed at a higher percentage. Some young professionals make a good portion of their income from commissions due to sales or may earn end-of-the-year bonuses from their job. If these bonuses or commissions come in the form of a separate check, they are taxed at an even higher rate (22% in 2018). This means that nearly a fourth of the extra money they earned went directly to the government in taxes. Whether it’s all “earned income” from salary or a combination of salary, bonuses, and commissions, the issue is that the type of income they receive is taxed at a high rate.

3. They are single. It is no secret that married people have lower tax rates than single people. Just look at the tax brackets and you’ll see that a married couple making the same amount of money as a single person will pay much less in taxes each year. Why? Well because back in the day it wasn’t as common for both adults in a marriage to be employed. Typically, only the male worked and the wife stayed home to raise the kids. Thus, the government gave a tax break when people got married because it assumed that there was only 1 person working and didn’t want to overtax that one person who had to also use part of his (or her) earnings to financially support the non-working spouse. Nowadays, it is much more common that both people in a marriage work, but that tax benefit is still in place. Many young professionals are single and have waited longer to get married, thus they end up paying a higher portion in taxes. (Of note, this rule is reversed for couples that make over $600,000 a year, but for most folks, married couples pay less in taxes than single people.)

4. They do not have kids. The government wants people to procreate. Having kids that grow up to be productive members of society benefits the country as a whole and solidifies our viability as a nation. But kids cost money. Those little humans have so many needs and require a plethora of resources that can be quite expensive. The government understands this fact and has various tax breaks in place for people who have kids as a way of saying “here’s a small token of our appreciation for taking care of the little people.” Parents get a tax credit for raising kids, additional reimbursements for childcare costs, and other tax deductions for educational expenses. This does not make up for how much parents spend since kids are quite expensive, but it does help. Many single young professionals don’t have kids, so they are ineligible for these credits and tax breaks.

5. They do not have any dependents. Along with receiving a tax credit for having kids, there are also tax deductions for taking care of other people. Anyone who takes care of someone who can not, or does not, care for themselves (such as a child, disabled person, non-working relative, or elderly parent) can file his or her taxes as “head-of-household” instead of “single” which makes them eligible for larger tax deductions that save them even more money. Now I’m not suggesting that young professionals become fiscally responsible for other people, but I am pointing out the noticeable difference in tax savings that come from changing one’s tax filing status from single to Head-of-Household.

6. They do not own a home. Many young professionals prefer to live in major cities. They like being close to their jobs and having the convenience of apartment-style living (i.e. free maintenance repairs, in-house gyms, the freedom to move to another place after the lease ends, etc.). As a result, they pay rent. The only bad thing about paying rent and living in an apartment is that they are ineligible for one of the largest deductions in the tax code: the mortgage interest deduction. Many people who own a home have a monthly mortgage payment (since they didn’t pay the full cost for the home up front). While a portion of this mortgage payment is used to pay off the amount they borrowed from the bank, another portion of this monthly payment goes towards “interest” (the fee that the bank charges for loaning you money for the home). The government wants people to purchase homes and have reliable housing so there is an incentive in the tax code that allows homeowners to deduct the portion of their monthly mortgage payment that is “interest” from their taxes. When you first buy a home the “interest” portion of the mortgage payment is a fairly large percentage, so the mortgage interest deduction adds up to a large amount in tax savings. Thus, while many single young professionals are paying rent, some of their counterparts have purchased a home. Even though the monthly payment for the person who lives in a home may be the same or slightly higher than the cost of rent, the person who lives in the home is able to deduct a large portion of their monthly payment from their taxes and could be saving tens of thousands of dollars each year.

7. They are not putting much money into retirement accounts. Although some jobs may not offer a 401K, the majority of salaried jobs have a retirement account in place for their employees. The advantage of these accounts is that many of them are “tax-deferred.” This means that when you contribute to retirement plans like a 401K, you aren’t taxed on the money you put into the account until years later. As a result, the more money you put into your retirement account now, the lower your tax rate will be when you file your taxes each year. Despite these tax savings, many single young professionals don’t put as much money into their 401Ks as they can. To be fair, it is usually because they prefer to have more money available to them during each pay period. They might have other uses for that money, want to prioritize paying off their student loans, or may simply desire to live a more affluent lifestyle. While these are all understandable reasons, the fact that they are not contributing more to their 401Ks raises their tax rates.

8. They do not have enough money coming in from investments. The profit you make from investments (whether it is investing the stock market, real estate, or various businesses) is taxed at a much lower rate than earned income from your job. Sometimes it can even be shielded from taxes entirely. If single young professionals really want to lower how much they pay in taxes, they may need to invest the money they have in ways that can decrease their tax rates and add to their monthly incomes.

Despite all of these reasons for a high tax rate, my solution isn’t necessarily to get married, start having kids, or quickly buy a home or condo. While those are all viable things to do, I don’t advise that anyone rush into a decision like that. Making a decision in haste could have endless repercussions that could far outweigh the tax savings.

Instead, single young professionals should start actively investing more of their money. I am not suggesting that they randomly buy some stocks they saw on Bloomberg, or start investing in things they barely understand (like Bitcoin). Single young professionals should strongly consider starting a side business or begin investing in things like commodities or real estate. They will have to increase their knowledge on whichever route they choose so that they make educated investment decisions. Nevertheless, becoming an active investor or business owner will not only lower their tax rate, but it will also increase their monthly revenue and make them less dependent on the salaried jobs that keep taxing them at high rates.

To summarize, many single young professionals pay a lot of money in taxes. While each person’s situation may differ, there are usually 8 main reasons their tax rate is so high. They make a high income, they get most of their money from their jobs, and don’t actively invest a significant portion of their income. They also are single (and forgo the tax benefits of being married), many don’t have kids or dependents (which may save them money overall, but still make them ineligible for the plethora of tax incentives available to parents). Plus many of them prefer the perks of apartment style living (and are ineligible for deductions available to homeowners). Lastly, they do not contribute as much to their retirement accounts (which would further decrease their tax rates). Until these single young professionals decide to get married, procreate, and find a home, they should strongly consider investing more of their money. Profit earned from investments can not only add to their monthly incomes, but it can also substantially lower the amount they pay in taxes. A pretty sweet deal, if you ask me.

Do you agree? What things do you think you could start doing to lower your tax rate?

10 Things To Remember Before You File Your Taxes

It’s tax time and most of us are getting ready to gather documents for one of our family members or a rep over at H&R block. Wait a second though. Instead of paying someone to file your taxes or merely hoping the person doing them doesn’t make any mistakes, why not try to learn a little about taxes (and how to reduce them) for yourself?

Learning how to do your own taxes probably isn’t number 1 on your bucket list, but face it.  No one is going to care as much about your money as you are.

The more you know, the more you can make sure you’re getting all the tax credits and deductions you can. Plus, learning about taxes helps you rethink how you can better structure your money next year to pay even less than you are paying right now.

As you think over the idea, here are a few things to remember to help you get through tax season this year:   

1. Many people will pay less money in taxes this year. With the new tax law, there are a few allowances that many people benefit from. First, the tax rates are lower for people in each income bracket. For example, last year the marginal tax rate for single people with an adjustable gross income of least $38,000 was 25%, this year it will be decreased to 22%. Last year, the marginal tax rate for married couples with an adjustable gross income of at least $165,000 was 28%, this year it will be reduced to 24%. Along with lower tax rates for everyone, the standard deduction was increased this year to $12,000 for singles and $24,000 for married people. This means that many people will be able to deduct even more money and pay much less in taxes this year. 

2. Consider filing taxes if you have student loans and are about to graduate. Although many full-time students don’t need to file taxes since they probably don’t have any income, there is an entirely different reason you may want to file taxes. Oftentimes, your student loan payments are based on how much money you made the previous year. In other words, they are “income-based.”

   If you can show an income of zero dollars this year when you file your taxes, when you graduate from your school in a few months and have to start paying back your student loans there is a very real possibility that your required payment will be zero dollars for the first year. How is this possible? The initial payment calculations are based on the income you made the last time you filed your taxes, so if you file taxes this year with an income of zero dollars then your student loan repayment for the first year may be zero. (This has happened for many graduating medical students who entered residency training programs as doctors so I strongly advise you to consult a student loan advisor and at least consider filing taxes. Many tax preparers will do it for you for free.)

3. If your refund is large, then you should consider adjusting the amount you have deducted from each check throughout the year. Although it can feel nice to get a large refund each April, it may not be the wisest thing. Most of the time when you get a huge refund from the government after filing your taxes it is because you paid the government too much in tax money throughout the year. In other words, you had too much deducted from your check each month and the government is now returning the excess amount. Basically, you let the government use and invest your money as it wanted to and then return it back to you a year later.

   Because the government has this excess amount of YOUR money, you weren’t able to use that money during the year as you would have liked. Because the government had your money you were not able to invest that money in stocks or real estate etc. which would have allowed you to earn a profit on that money as interest. So even though the large check feels good, why would you allow the government to have access to your money just for them the return it back to you in April interest-free? It may be better to stop giving them the excess in the first place. Talk to the person who does your taxes. Consider having less money deducted from your check each pay period and instead use that money to increase your monthly income or invest it to make a profit.

4. Tax credits and tax deductions are the key to helping you save money. Tax credits offset the amount you owe to the government in taxes “dollar-for-dollar.” Tax deductions reduce the amount you owe the government by a “percentage of each dollar.” Even though they are different, both tax credits and deductions are government incentives that lower your tax rate. They are the ultimate key to helping you save money in taxes so double check to make sure you have claimed all of the tax credits and deductions you are eligible for. Some examples of tax credits are: the family credit (for having kids), the education credit (to help offset the cost of college tuition), and investment tax credits (for business owners and investors who build low-income housing, do research, or develop innovative products and services). Examples of tax deductions are charitable contributions (money you give to charities, non-profit organizations and churches), health savings accounts, student loan interest, home mortgage interest, etc.  

5. Make sure you’ve contributed as much as you can tolerate into your IRA (if you have one). I went through the basics of an IRA in a previous post, but in case you missed it (or skipped it), I’ll do a brief overview here. An IRA is an Individual Retirement Account that allows you to save and invest money for retirement in a way that lowers your taxes. When you save for retirement you don’t just let money sit in a savings account. Instead, the money in the retirement account is usually invested in the stock market with the hope of it making even more money in profits. When people invest money on their own, they must pay “capital gains” taxes on the profit they make. However, when people invest money inside of retirement accounts like and IRA or 401K, they are taxed at a lower rate and often don’t have to pay taxes on this money until years later.

   Since IRAs and 401Ks allow you to save money in taxes and delay paying some of the tax money you owe, it is best to put as much money into these accounts as you can afford. The deadline to contribute to a 401K was December 31st (unless you filed for an extension), but you can still contribute into an IRA up until the tax filing deadline and use that contribution to lower the amount of money you owe in taxes this year. Of note, the IRA and 401K contribution limits will increase for 2019 so you may be able to save even more money through these accounts next year.  

6. Get proof of any charitable donations. It might seem a little weird to go calling your church about the tithe money you donated on Easter Sunday, but it can save you quite a bit of money on your taxes. The government likes when we give to those less fortunate or to charitable organizations so it gives us a tax deduction for doing so. When people file taxes, they can opt to reduce the amount they pay in taxes by taking a “standard deduction” (which is $12,000 for a single person or $24,000 for a married couple) or they can choose to “itemize” their deductions. As you start making more money and your income rises, the amount you pay in taxes may increase as well. One way to combat that it to itemize your deductions, especially if the total amount you “itemize” is higher than the default “standard deduction.”

   One of the things you can itemize is charitable contributions (including donations to nonprofits and churches). Most churches keep decent records and should already be mailing you a statement of your contributions over the past year, but if your church hasn’t sent you a copy of this record then you should definitely ask for it. In general, make sure you are keeping track of donations to churches, especially your tithes, in some sort of record-keeping book or app if you donate using cash. In order to deduct what you paid from your taxes, the government needs proof that you actually donated. It’s much harder to provide this proof if you pay with cash and/or if your church or organization doesn’t have the best accounting methods. Keep your own records, just in case.

7. Be sure to deduct any mortgage interest you might have paid on your home. When you take out a mortgage to purchase a home, the bank charges you a fee when they loan you the money. That fee is called “interest” and you will pay a small percentage of it each time you send in your monthly mortgage payment to the bank. Since this “interest” is not being used to pay back the loan and is money that the bank receives as profit, the government allows you to deduct most, if not all, of this interest from your yearly taxes. In fact, you can deduct up to $750,000.

   Now you obviously cannot deduct what you didn’t pay. So, if you only paid $10,000 in mortgage interest last year, then you can only deduct $10,000 from your taxable income. Nevertheless, the limit is pretty high which means that most of the interest you paid will be deductible and work to lower how much you owe in taxes. This is important because oftentimes when you first buy a home, the mortgage payment you send to the bank each month is mostly interest. Thus, you can deduct this huge amount in interest from your taxes.

   This is one of the main reasons young, single, professionals who are high-income earners are encouraged to purchase a home or a condo instead of renting. The argument is that they could be paying off a mortgage and deducting a huge amount of that monthly mortgage payment from their taxes which would save them thousands of dollars in taxes each year. Now there are lots of other costs and fees associated with buying a home that you have to keep in mind and I briefly mention them here. Long story short, I don’t advise anyone to simply rush into buying a home just for the tax benefits, but I am saying that it can be a huge tax savings, everything else being equal.

8. Get a statement of how much you’ve paid in student loans (particularly the interest). You may also be able to deduct the money you paid in student loan interest from your taxes. In fact, this deduction is similar to the mortgage interest rate deduction explained in above. When you pay back your student loans you are paying back the amount you originally borrowed (the principal) along with the fee the bank or the government charged you for borrowing the money in the first place (the interest). According to the tax law, you can deduct up to $2,500 of interest you paid towards your student loans from your taxable income (as long as you make less than $80,000 a year for a single person or $160,000 as a married person). 

9. Calculate your business expenses and be sure to deduct them when you file. If you are self-employed, contract out your services, own a business, or have just launched a new website, you are eligible for deductions that can help lower your tax rate. For example, if you work from home, you can deduct a portion of your rent, internet, and electric bills as “business expenses.” You can even deduct the cost of gas as you travel to and from clients and include any educational materials or resources you purchased when you first started. Although you also must pay taxes on any income you get, the bonus of getting to subtract out any business expenses or materials you purchased is a decent deal. Just be sure to keep good records and/or download an app on your phone that makes it easy for you to scan and save receipts & invoices from clients.

10. Real estate Investors can deduct even more money from their tax bill. If you are new to the world of real estate investing then you’ll be pleased to know that real estate investors can deduct a lot more money from their taxes than most other people. Notice I said real estate investors and not “homeowners.” If you simply own a home then you can usually only deduct the mortgage interest, BUT if you invest in real estate you can deduct a lot more than that. Real estate investors can deduct the cost of things like property taxes and insurance, repairs and maintenance (up to a certain point), transaction costs in the form of “amortization,” etc. Plus, with the new tax law, there are even more deductions. For example, real estate investors can now deduct even more depreciation sooner through new forms of cost segregation and may even be able to deduct a large percent of the purchase price (via the 20% income pass through deduction) if they meet certain qualifications. The nuances of tax deductions for real estate investors can get quite complicated and I won’t pretend to know them all. My point is that if you invest in real estate you are probably eligible for more deductions than you think, which would drastically lower the amount of taxes you owe. I’d strongly advise you to get a tax advisor that specializes in real estate.

To summarize:  You should consider learning a little bit about taxes. Even though you may not want to actually file your own taxes, learning some basics will help you figure out how to structure your life to save more money in taxes each year. Students graduating from undergraduate, masters or doctoral programs should consider filing their taxes this year so that their income-driven loan repayment is zero dollars for the first year. Everyone who files taxes should know that qualifying for more tax credits and tax deductions are the key to saving you more money.

If you are going to get a big refund in April, you are probably having too much money deducted from each of your paychecks. You should speak with a tax advisor about reducing it, so you can have more money on your check each pay period. Contributing more money to an IRA account will save you more money in taxes and you still have the chance to contribute to this account before you file your taxes this year. If you give to charity or pay tithes, get proof of how much you gave because it can lower how much tax money you owe.

If you bought a home or have paid money in student loans get a statement of how much money you paid in interest because you can subtract that interest money from the amount of taxes you owe. Anyone who owns a business can subtract “business expenses” even if the business just began and hasn’t started making money yet. Lastly, real estate investors are eligible for many deductions this year so they should be sure to consult with a tax advisor that specializes in that particular area and use the IRS website as a guide.

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Benefits of Real Estate Investing, Part 2

In addition to helping you purchase assets, increase your net worth, and lower your tax rate, real estate has other benefits as well…

1. You can invest in it using leverage aka “other people’s money.” When you purchase real estate, either as a home to live in, or as an investment property, you don’t have to pay the full cost of it upfront.

   When people buy a home, they usually pay a small percentage of the cost as the “down payment” and then get a loan from the bank (i.e. a mortgage) to cover the rest. This method can be used in the investment world as well.

   For example, you can buy a home to rent out to family members or even buy an entire apartment building in your local city with the help of a loan from the bank. In fact, many investors fund a majority of their real estate deals using other people’s money (whether that’s money from the bank or money from investment groups, private funds, grants from local city governments, or small loans from family and friends).

   Experienced real estate investors raise money for the down payment from other rich people and then get a loan from the bank to cover the rest. By using other people’s money to fund the down payment and securing a loan from the bank to cover the rest, these investors get to own real estate properties even though they didn’t use any of their own money to purchase them. Quite a deal, if you ask me.

   Although they have to pay back these funds eventually, there are several investment strategies (like refinancing) that allow these investors to pay back that money much sooner while still keeping a big profit for themselves. You can do this too.

   Having the ability to use other people’s money to make a decent profit for yourself, and for them, is a pretty sweet deal.

   Investing in the stock market doesn’t really offer this kind of advantage. Banks, private funds, and wealthy businessmen are far more willing to loan you money for a real estate deal than for almost any other kind of investment.

2. You can protect your assets. As you can imagine, the more money you get the more you are going to want to protect it.

   The last thing you want is to get into a car accident or make a costly mistake on your job and have someone sue you for every dollar you’ve ever earned (yes, people do this). Thus, “asset protection” or protecting your net worth from creditors and lawsuits is an area of extreme interest for wealthy people in America. Real estate can be great for that.

   Oftentimes, when people purchase a piece of real estate with the goal of making money from it, they don’t purchase it the way you would normally think.

   Instead of having money in their checking account and simply paying for all or part of it, they set up a protection entity called an LLC. The main goal of setting up an LLC and buying the property through that LLC is that it protects the value of your investments from lawsuits.

   Thus, if someone sues you personally they cannot get any money or value that is within the LLC and if one of the tenets in your property decides to sue to the apartment that is held within the LLC, he or she is not able to get any of your personal money or net worth.

   In other words, the LLC separates your personal money from your investment money, even though you are in charge of both. In fact, many rich people and smart investors set up tons of LLCs.

   For example, they may partially own 20 houses and set up a different LLC for each home. That way, if someone sues them personally or someone sues one of their LLCs, that person cannot get any of the money in any of the other properties.

3. You have the freedom to decide how involved you want to be in the investment. You can invest in real estate “actively” and use it as a job OR you can invest in real estate “passively” in your spare time. You get to decide. It caters to everyone.

   Many of us enjoy our day jobs. We like the work we do and the impact it has on others. However, our jobs often take up a significant portion of our time and don’t leave much room for anything else, especially for those who have a spouse or kids.

   One of the things I love about real estate investing is that once you learn some investment basics, it doesn't have to take up much of your time.

   If you’re the opposite of me and you hate your day job entirely, there are other types of real estate investing that are more active and can be used to completely replace your old job.

   In other words, if you want to quit your job and instead make real estate your career, then you can invest actively. However, if you love your job and just want to use real estate as an additional stream of income then you can invest passively.

   Both types of investments make money, you just have to decide which side you are going to be on.

   Theoretically, the active investors put themselves in a better position to make more money (or use less of their own money in the deals) than the passive investors, but believe me, both types of investors walk away from the investments very happy (provided they found the right deals in the first place).

My point? In addition to things like extra monthly income, lower taxes, and appreciation, real estate offers several other benefits. It gives you the chance to invest using other people’s money which makes it less of a risk and a much lower financial burden for you. Real estate investing also has several entities, like an LLC, which will allow you to protect the money in your investment from lawsuits and creditors. Plus, there are so many different forms of real estate investing that you can choose how involved or uninvolved you want to be in a way that caters to your lifestyle and competing demands.

Tell me, are you considering real estate investing? Which advantage of real estate investing appeals to you most?

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Benefits of Real Estate Investing, Part 1

There are several different investments you can make, but I think real estate is one of the best.

1. It allows you to buy an asset (something that goes up in value). Now I know some of you may be thinking back to the housing market crash of 2008 or the impending downturn many speculators think will happen in 2019, but hear me out.

   Even though the housing market may experience dips here and there, it always recovers. As a whole, houses, apartments, and commercial buildings increase in value over time, even when you factor in inflation.

   In 2009, studies showed that the average cost of a 3 bedroom house in my home state of Florida was around $175,000. Although prices dipped in 2012 to $125,000, they recovered soon afterwards. As of January 2019, the average price for a 3 bedroom home in Florida was around $230,000, an increase of $55,000 from 10 years ago.  

   Since houses increase in value over time, they are a great investment to have. So instead of using your money to buy liabilities like cars, clothes, and phones that decrease in value from year to year, investing in real estate allows you to buy something that increases in value.  

2. It can be used to increase your net worth through “appreciation.” For those new to real estate investing, appreciation is the fancy term used when something increases in worth. When you subtract your debts (student loans, credit card bills, and any bank loans) from your income and assets (things you own) what is left over is deemed your net worth.

   Investing in real estate gives you the chance to further increase your net worth through a principle called appreciation. In general, there are two forms of real estate appreciation, “forced” appreciation and “unforced” appreciation.

   Forced appreciation is when real estate increases in value due to circumstances you can control. Examples of this forced appreciation are when people buy rundown properties and renovate them afterwards (in an effort to increase their value) or when apartments increase the monthly rent (in order to increase their revenues).

   Unforced appreciation, on the other hand, is when real estate increases in value due to circumstances you cannot control. For example, a person may purchase a home and then 5, 10 or 15 years later he or she may realize that the home is worth significantly more than what they originally paid for it.

   Many times, the homeowners didn’t do anything special to cause the value of the home to increase besides pay their mortgage and mind their own business. The value of their home increased simply because more people were looking to buy in their area, the local economy had improved as whole, or the land on which the house was built became more valuable. Either way, the homeowner didn’t have much to do with the appreciation. It occurred do to factors he/she had no control over.

   Thus, whether it’s forced or unforced, as real estate appreciates in value your overall net worth increases as well.

3. Investing in real estate can increase your cash flow. Cash flow is what real estate investors call the money that is deposited in their bank accounts for investing in certain deals. It’s their profit or the money they get to keep after subtracting their expenses from their revenue.

   Since it typically shows up as a check or a direct deposit into one’s bank account, investors call it “cash” and since it happens periodically (every month or quarter) it “flows,” hence the term “cash flow.”

   Real estate investors usually generate cash flow by charging their tenets a monthly rent. After investors collect their rent money, they pay for any expenses or repairs, send a check to the bank to pay the monthly mortgage, and keep whatever is left as their cash flow. This cash flow ends up serving as an extra stream of income to supplement the money they already make from their day jobs. It’s a pretty sweet deal that puts more money in their pocket each month.

4. Investing in real estate can help you save money on taxes. For the most part, any time you sell something, or make money from providing a service or job, you owe the government taxes.

   The government provides several free services and protections we all benefit from (ie. firefighters, police officers, schools, national defense, social programs, etc) so when we make money, we must pay a certain percentage back to government in return.

   Technically speaking, a real estate owner is supposed to pay taxes on the profit or cash flow they collect in rent. However, not many of them do, legally.

   The reason real estate investors don’t pay taxes on this profit is because the government actually wants people to invest in real estate. It understands that citizens need a place to live and housing options can be scarce. Thus, it wants to incentivize its citizens to rent to each other.

   One way it does this is by allowing real estate investors to subtract out any real estate losses from real estate gains. The real estate loss that most investors claim on their tax returns in order to minimize the amount they pay in taxes is something called “depreciation.”

   Depreciation is the real estate concept used to describe the reality that the materials (bricks, windows, pipes, etc) used to make a home or apartment building will wear out over time and need to be replaced.

   Because of this fact, the government allows real estate investors to subtract a percentage of the real estate that “depreciates” or wears out over time from the profit they make. By the time most investors subtract out this “depreciation” they end up reporting a much lower amount in overall profit and this allows them to pay a much lower percentage of taxes than they would have otherwise.

   Plus, many good real estate investors take advantage of other government incentives, in addition to depreciation, that virtually wipe out most of the taxes they would have had to pay. In other words, real estate investors put money into deals, make a profit from those deals, and avoid paying taxes on most, if not all, of that money due to various government incentives in the tax code. If you start investing in real estate, you can begin taking advantage of some of these incentives as well.

My point? Real estate investing offers many benefits. It allows you to purchase something that increases in value and gives you the opportunity to raise your net worth through different types of appreciation. Plus, it can serve as a second stream of income by providing you with monthly cash flow. With the help of a good advisor, it can also make you eligible for government incentives that lower your tax rate.

Now that you know some of these incentives are you willing to give real estate a try? Are you more open to the idea of looking into some real estate deals?

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