Wednesday, February 24, 2021

Strategy: 1031 Exchange for Real Estate

Recently, in a chat with a friend that also owns rental property, she came to the realization that she might expand her thinking outside of her original plan. She realized that if she sold her current rental property and purchased a multiunit dwelling, she would be in an even better position than she is currently.  I briefly mentioned that a transaction of this sort could be performed without paying taxes on the sale of the original rental property by way of a 1031 exchange.

Let's dive into a bit about how that works.  First, it's important to know that there are multiple types of 1031 exchanges.  A Delayed 1031 Exchange is the most common, and the one we'll explore.  There are four basic steps to the process of this transaction.

Sell the Original Property

This step is pretty straightforward.  The one tricky part is that you have to decide that you're doing a 1031 exchange before the closing of the sale and identify a qualified intermediary.   The timing of a 1031 exchange is delicate and once the sale of the original property is complete, the timer has started!

Find a Qualified Intermediary

Once your property is under contract, you should be sure you identify a qualified intermediary.  You can't do a 1031 exchange otherwise.  A qualified intermediary is a company that holds the funds from the sale of the original property and is responsible for assisting you with the related paperwork.  They will also hold you to a timeline.  

Identify a New Property Within 45 Days

You will have 45 days from the sale of your original property to identify up to three replacement properties.  As long as you stick to the allotted three, you may identify properties of any value above the original sales price that you like, but if you identify a fourth property, some other special rules kick in.  So, shopper beware!  

Close Within 180 Days

There is a second timeline the qualified intermediary will hold you to, and that's the purchase date.  You must close on the sale of the new property (or properties) within 180 days of the sale of the original property.   If any of the applicable timelines are not observed, your 1031 exchange fails.  The worst-case scenario is that you end up paying taxes on the sale of the original property.  

Inspired action is at the very center of a successful law of attraction practice.  Knowledge and imagination often provide the best fuel for inspired action.  Without a little knowledge, how do we know what experiences to try on through imagining?  Continuing to learn and grow our knowledge base gives us something to get inspired about.  Now, whether or not my friend will pursue a 1031 exchange remains to be seen.  If she had never been educated about a 1031 exchange in the first place, she certainly wouldn't be inspired to pursue one.  Now that she knows, she can try it on through research, meditation, imagining, and eventually discover for herself whether or not it might be right for her.

Tuesday, February 16, 2021

Thinking Outside of the Plan

A wise person recently drew my attention to the notion that there is a certain "hustle mindset" that has become predominant among those in pursuit of personal finance.  It's certainly no surprise, as this messaging is consistently embedded into our culture.  "Where are you going?" is often asked of us, but "How are you getting there?" is not.  There is an emphasis on the speed by which we arrive at a particular destination, but little attention is paid to the manner in which we transport ourselves.  Perhaps it is also worth considering the idea that if more attention was paid to the journey, it might actually alter the destination.

The journey toward financial independence is often prescriptive, and for good reason.  There are tried and true methods that have produced results over and over again.  Now, I can't help but wonder: What if there's actually a better destination than the one you had prescribed for yourself?  I was in the periphery of a conversation recently where an individual was expressing concern about the state of their finances, and whether or not they were on track to meet a certain goal.  As this person listed all of the various things they had invested into, and the sums they had accumulated, and the payoff dates of the various things in their lives a myriad of questions began to gnaw at me.  I wanted to know: What did this person absolutely love to do?  What brings them joy?  When was the last time they felt truly inspired, and what made them feel that way?  Did they even know?  Any adjustment that anyone could offer to this person with regards to their financial plan would be minuscule at best.  This person genuinely has everything on lockdown, and yet I felt a nagging sense that perhaps they might need to look at things a bit differently.  I'm not sure they need much of a financial checkup, but perhaps a lifestyle check-up.  I'm not referring to spending.  I'm referring to inspiration.  Sometimes, we get so locked into our plans that we fail to make room for inspiration.  Inspiration needs room to breathe.  When life becomes destination-oriented we run the risk of missing out on gains that are even better than we could imagine because we've only left room to do exactly as the plan dictates.  

I know a person that has a nearly paid-off rental property.  She has long since perceived this property as part of her long-term financial plan.  She loves the idea of having passive income and real estate that's paid in full.  She uses a management company, a move which simplifies her life and is well worth the expense. Truly, this plan is flowing for her.  If she stays the course, she will do quite well.  Because she knows this and it's all flowing for her, she has literally never even entertained the idea of selling it despite the fact that if she did, she could easily fetch 4x her purchase price for the property.  Besides, then she would have to pay taxes on it, and her passive income would be gone.

What if this person were to allow their minds to wander; to frolic among the possibilities?  She's been so married to her plan, that in all honesty, she hasn't really entertained a variety of options where her rental is concerned.  One day, I was chatting with her and we decided to take a hike into the hypothetical.  What if she sold that property?  She could defer the taxes by doing a 1031 exchange (this allows you to avoid paying taxes on it if you sell one property and purchase another within a specified period of time; there are a lot of rules involved, so don't try this until you've done your homework on it).  As it turns out, this would allow her to put 50% down on a 4-plex in her area.  The remaining mortgage on the 4-plex would be covered (including taxes) consistently by having two units rented.  The income on the other two units would be hers.  Interestingly, the income from the remaining two units would be almost double the amount she will receive from her current rental property even after it's paid off.  To be truthful, this woman was flabbergasted by the entire idea and how doable it actually seemed.  She's not a huge fan of debt if she can help it, and may stick with her original plan.  That's absolutely fine.  But by being so intent on her original plan, she wasn't even allowing herself to engage in an experiment of the mind.

A mental experiment can be tremendously valuable because it lowers the stakes and subsequently invalidates the mind's automatic fear of failure and making room for natural curiosity to plant the seeds of inspiration.  Fear is often what keeps us from deviating from a plan.  We don't speak up at work because we fear losing our jobs.  We don't learn about investing in the market because we fear losing everything in a crash.  We don't quit a job to start our own business because we fear losing the perception of security.  The mind utilizes fear as a tool in order to keep us safe from harm, but when misused, it can prevent us from exploring the possibilities around us.  This woman may actually stay the course and keep her current property.  She may decide at some point to sell it, do the 1031 exchange, and invest in a multi-unit dwelling.  Either choice is a very smart money move.  She's winning either way.  That's one of the key takeaways here.  This isn't necessarily a win-lose scenario where if she chooses "X" she'd clearly be making a mistake.  She is likely to win either way! How fabulous is that?!  By opening her mind to possibilities outside of her original plan, she has discovered that there may be something out there for her that turns out even better than she imagined it.

So, please don't be in such a hurry that you miss out on the opportunity to flow into something better.  No doubt your plan is amazing, but there might just be something even more amazing just around the corner.  Don't be so blinded by racing against an invisible clock that you miss it.

Wednesday, February 10, 2021

Preconceptions of Wealth

Interestingly, there is a topic that keeps being brought to my attention lately.  I've heard it mentioned in a podcast, two different books that I'm currently reading, and in multiple conversations with people.  I haven't been the one to bring it up on any of these occasions, which is interesting because I'm frequently the culprit of such things. I can't help but wonder if there's something in the collective psyche that's making this topic burble to the surface.  The topic: preconceptions of wealth.

In the course of an otherwise casual conversation, I was surprised to encounter a preconception of wealth held by someone in my life.  This person believed that certain types of assets were designed only for the rich.  My initial reaction was that of surprise because I feel very differently.  I don't necessarily feel that there are asset classes that are inaccessible to me or designed for someone else.  While I prefer some asset classes over others, I believe that I have the freedom to use whatever inspires me provided I do my homework sufficiently to understand it.  A lot of my work is at the intersection of personal finance and the law of attraction which subsequently has to do with the relationship between mindset, emotions, and behaviors.  So, naturally, I was curious about the history of this idea and the narrative being built around it.

We all have some preconceived notions when it comes to the subject of money, and they often influence our behaviors in the form of limiting beliefs.  In the book Invested, Danielle Town was most certainly smacked in the face by hers when she realized that they were impacting her investing practice.  According to Town, the first step to reducing the power our preconceptions about money have over us is to face them.  I couldn't agree more.  In the course of the discussion I was having earlier this week, the person articulated that they hadn't ever experienced anyone in their life having assets in the particular class we were discussing.  For them, it seemed inaccessible.  Now, I couldn't help but wonder about this and found myself with a reoccurring thought.  Is it possible that this wasn't even true, that people in their life did in fact have investments of this nature and never spoke about it?  There are many segments of American culture that hold to the belief that we shouldn't discuss money, an idea that in my opinion does more damage than it does good.  When we are young we learn about finances experientially and through things we hear people say. As we go through life, we often look for things that support the narrative we build around those early experiences.  But is it possible that we create evidence that supports that narrative?  

In The Illusion of Money, Kyle Cease draws the reader's attention to several commonly held beliefs about money.  One is that "money is the root of all evil."  He goes on to suggest that one of the dangers of holding on to this belief is that it can create resistance to abundance.  It's quite the realization.  Presumably, most people don't want to be evil.  So, if there is a belief that the possession of money somehow creates evil, there's certainly room for resistance to creep in: resistance to holding it, saving it, utilizing it as a tool, or allowing it to flow into your experience.  Once a limiting belief is discovered, is there a way to challenge it or feed it as a new idea?  The opposite idea might be that "money is the source of so much good!"  Is that true?  Can you find evidence of the new idea?  I can think of a lot of good that can and is done with money all the time.  Money can fund a plethora of things ranging from schools to charities to valuable experiences, all things that are good.  

One commonly held belief that I remember hearing growing up is that "money doesn't grow on trees."  Cease mentions this one as well.  Unlike the previous example, this one resonates with me a bit more.  Cease goes on to suggest that people with this limiting belief might "overlook opportunities where money seems easy."  Ouch!  If you've been reading my work for any amount of time, you know that I've had to deal with that one.  I wrote a piece about it, actually.  While it takes practice overcoming our limiting beliefs, I feel that I've made tremendous progress.  Gratitude, which is central to my law of attraction practice, has been instrumental in helping me overcome self-imposed limitations.  Again, I look for evidence of the opposite being true.  If my limiting belief suggests somehow that things related to money are supposed to be "hard work," can I find evidence where the opposite is true?  Has money flowed to me easily?  Actually, it really has!  I am nearing the end of the planning phase of my new business, and clients are flowing to me relatively easily.  I'm so engaged in the work I am doing that it feels joyful, not hard.  The service I am providing is very much adding value to people's lives, and the people that are ready to benefit from it are flowing to me.  I'm so appreciative of that, and it supplies me with ample evidence that suggests that my preconceived notion about money isn't really true.  I love that.  Not only is it wonderful that this abundance is flowing to me, but it's also amazing that it is allowing me to shed a belief that doesn't add value to my life. 

I would like to invite you all to challenge yourselves in the days to come.  What preconceived notions do you have in the areas of finance, wealth, or overall abundance?  Is it possible that the opposite is really true?  Can you find evidence that refutes that idea?  Is your behavior suggesting to you that you may have built a narrative around an idea that isn't serving you well?

Wednesday, February 3, 2021

Planning to Defy Societal Norms

What do you do when you want to make a change?  A big change, like the kind that turns your whole life upside down...  What do you do?  Do you even let yourself go there or do you slog on day after day, doing exactly what you've always done?  Society's script often pressures us into leading lives that may or may not be our best.  But who made those rules, and why are we blindly following them?

I'm the kind of person that has lived their life outside of the box more often than within it.  I find myself happier marching to the beat of my own drum.  When I started college, I spent the first year going part-time, while working a professional job I could change my residency status to in-state.  I moved to New York to study musical theatre, spent the better part of two years living bi-coastally in my late twenties, and the examples go on.  Right now, there are parts of my life that seem to be following society's script, and if I'm honest with myself, I'm not sure it's entirely me.  Despite being almost a decade older than the last time I made a ginormous leap into the unknown, I believe it can be done at any age.  It might just look a little different than it did before.  So, here are the basic steps to creating a plan to defy societal norms at any age.

Step 1:  Dare to Dream

If you had literally zero limitations, what would you do with your life?  Where would you work?  Where would you live?  What would you be doing with your days?  What would your hobbies be?  How much stuff would you have?  Who would be with you?

As you know, over the course of my life this has happened multiple times for me, and it's in the process of happening again.  We're living beings that are constantly changing.  Our visions for our lives must also change.  About ten years ago, I was living on the west coast when I had the realization that I wanted something a little different than my life at the time.  My life was pretty good really.  I had bought a house, had a lovely partner (whom I am with to this day), and wonderful friends.  I produced art and had a steady job.  But a piece of my heart was still in New York.  I felt like I was selling myself short by staying where I was; it was a lovely life, but I wanted to give myself a chance to succeed at some things that would be incredibly difficult where I was living.

I feel the winds of change coming again as my desire for a higher level of freedom sets in.  As I design my own life, I let myself dream without limits.  I picture my home base in New York always, but lots of slow travel to places where my loved ones reside, and plenty of places I've never experienced.  I see myself writing, teaching in some fashion, and producing art again. When we were kids, we allowed ourselves to dream without limits.  Why did that change?   Who decided that once you passed a certain age, all of your dreams had to fit some unknown entity's definition of practical?  While some of the finer details of the individual dreams will fall away, others will inspire action.  I am not 100% sure of where this will take me, but I know there are certain elements present in all of them and that it involves me producing more art, and moving toward greater location and time independence.  

Step 2:  Find Support

There are so many people in life feeding you a script about the way your life should be.  If you are going to defy the way life's being prescribed to you, do so unapologetically! If you plan to go against the grain, you'll need to surround yourself with people that are either going against the grain themselves or respect and support the fact that you want to live your life a little differently.   

When I decided to move back to New York, my partner very nearly had a heart attack "We just bought this house three months ago!"  But I laid out my reasons and ideas, and within about three days she was fully on board. My family and friends were also fully supportive.  They all know that I march to the beat of my own drum and have no desire to make me be the perfect model of societal expectations.  Thank goodness, because I'd be miserable.  I also had some support in the destination I was headed toward.  I lived in New York City many years before that and had a few friends that lent support.  A couple of them let me stay at their places for a night or two while I was in town for interviews.  A couple even let me move in with them for a bit while my partner and I transitioned from one place to another.  Sometimes, your friends, family, and partner provide the majority of the support you need.  Other times, you need to seek support in other ways.   

Currently, I am participating in a group coaching program that falls under the category of "lifestyle design," which is conducted by my friends, the Fioneers.   The magic of participating in this kind of program is multifaceted.  It challenges people to dream big and without limitations as I described in Step 1.  While this hasn't been an issue for me, the group process requires me to prioritize this in my life.  It's entirely too easy to decide you should be doing the dishes rather than daydreaming, right?  Group coaching also provides a structure and time frame for those dreams to be transformed into inspired action.  While individuals are always in control of their own timelines, it wouldn't make a lot of sense to spend the time and money to participate in a life design program if you didn't intend on taking any action?  Additionally, the group support and coach are a huge asset emotionally, but also in terms of brainstorming options when you feel stuck.

Step 3:  Make a Plan

The best plans start with the question and end with inspired actions.  Ask yourself,  "What needs to be true that isn't right now?"  Honestly, this is where the subject of money often pops up.  We've been cultured to believe that money is the reason we are supposed to be shackled to society's script.  But what if money could actually be the key that releases us from all of that?  Does that idea feel better? 

Right now, one of the things I'm thinking is that I want to go gallivanting whenever I want in an old school VW van.  Sounds a little wild, right?  The good news is that I have my partner's full support on this.  How much of the year would we go?  I'm not sure.  Maybe just summers at first.  What has to be true that isn't true right now?  Well, we don't have a cool VW van.  So, we need to research that and prepare our finances to add a vehicle into our lives.  Currently, we don't have a vehicle at all. We would buy one outright; I'm not interested in any loans.  But, we'd still need to prepare for fuel, insurance, and parking fees.  So, there's probably a savings goal that needs to be considered, and a budget review to understand where this monthly financial commitment would fit into it.  Would this replace our monthly metro passes?  Be in addition to that?

What if we wanted to (hypothetically) start doing this for more of the year?  We would need our income sources to be such that allowed for location independence. Thus far only a small portion of our income meets that standard in a long-term sense.  What would help us to achieve this?  We could pay off the mortgage on our rental (Hmmm...  that seems to keep coming up), ramp up our side business...

Now, what takes this from the realm of idea to a plan?  Time.  I've identified four things to do: create a savings goal, mortgage payoff goal, business ramp-up goal, and finally, revising our budget to determine how quickly we can achieve these items and with which funds.  This will help facilitate your desire to live outside the box in the near future, but what about planning for the distant future?

Step 4: Consider the Future

I realize this dreaming and planning is about your life in the near future, but it's important to also consider the more distant future.  I'm a Slow FI kind of gal, and I'm all about improving my lifestyle along the way to financial independence, but that does not change the fact that financial independence is actually a goal too!  I am about two years from my Coast FI number.  So, in about two years, I will have secured a traditional retirement for myself and my partner.  This means that we won't really have to worry about putting more funds into retirement accounts (though we likely still will), and our retirements will be secure.  This provides the freedom to focus primarily on generating enough income to meet our regular monthly expenses.  If you haven't met your Coast FI goal yet, retirement savings should still be a part of your planning.  If your dream life doesn't involve a regular 9-5, consider what retirement vehicle you will want to use to continue to save toward that portion of your future.  This might include SEPs, solo 401ks, IRAs, or simply some bridge investing.

And the final step:  Let Go! 

Trust that you've been deliberate in the creation of your life and reality because you have.  You've dreamed, found support developed a plan, considered your future.  At some point, you just have to spread your wings and fly.  Just think of the places you'll see.