California Student at Home? Check Your Mail for $738 Per Student

During the pandemic there have been a number of programs created to support workers, families, and students. In California P-EBT 2.0 is currently being distributed – funds for many California students. (P-EBT is a SNAP / food stamps program providing money for grocery purchases.) The cards are being mailed out to California families from early August 2021 through November 2021. I recently received two of the P-EBT cards for my elementary school children, with a value of $738 each.

The California Department of Social Services has a good summary of the current P-EBT program and who qualifies. The program covers a broad swath of students and schools and there is no application process – you may be sent a card without expecting it, as our family did.

I wanted to write up a brief post on this program specifically because the program doesn’t seem to be widely known, applies to families that likely haven’t received this sort of benefit in the past, and because the cards come in very non-descript envelopes that I imagine are being thrown away as junk mail by many.

Here’s the envelope our card arrived in – it came from South Dakota and no mention of P-EBT, schools, or even the state of California. When I picked it up I thought it was a credit card solicitation.

The letter inside has quite a bit of information and the process to register and activate the card is pretty simple, as long as you have the personal information for the student receiving the card.

The San Diego Hunger Coalition has a helpful post with information about the distribution timing for the P-EBT cards, phone numbers you can call for help, and more.

I had not used a food stamp / P-EBT program in the past and was surprised at how easy the card is to use. You simply swipe it like a debit card, enter the PIN, and payment is processed for any grocery items on your bill, with non-grocery items needing separate payment. I’ve used the card at Vons, Target, and even on Amazon. If you receive P-EBT but don’t want to use the funds personally, I’ve found a few websites where you can donate P-EBT funds online, but none in California. (Perhaps there are ways to do this locally in San Diego – if you can drop a Comment on this I’d appreciate it.) Or, as this Chicago story notes, you can purchase items to donate if you like.

I hope if you live in California and have school-aged children you’ll keep an eye out for these benefit cards, and that yours doesn’t end up in the rubbish bin. The money is a significant amount and can be a great help for many children.

So excited to be back in school!

Ask JPA – When do you choose to sell a rental property?

Ask JPA is an irregularly scheduled question-and-answer series of posts. Have a question for JPA? Send it to john.patrick.anderson@gmail.com. Cheers!

Hi John,
I know this is not a one-size fits all question / answer. When do you choose to sell a rental property? Let’s assume that I own property that is a good area that is appreciating in value, it’s also easy to rent (positive cash flow), and say that I’ve paid it off. When do I choose to sell it? I know that depends on a lot of factors: what would I reinvest etc? Just wondering what some of the models that you use for exit strategy? Maybe never sell – just C/O refi and reinvest in another unit? 

Dear Thinking of Selling,

Deciding when to sell a property will depend on many factors – current market values, current interest rates, needs or plans for the equity in a property, among others. If you generally think you want to sell or tap the equity in a property there are a few major options that I would associate with various motivations:

  1. Sell the property, pay capital gains taxes, and have the funds free and clear for anything. Probably the best bet if you’re tired of owning property and being a landlord or want the money to be liquid and available for travel, spending, or non-real estate investments. Paying taxes isn’t fun, but capital gains rates are lower than ordinary income tax rates which is a benefit.
  2. Do a cash out refinance and use the proceeds to invest in additional real estate, or for other uses. In the current mortgage environment interest rates are very low and you can both lock in very low rates for decades to come and access the equity in the property (up to 70% or 80% loan-to-value) and take the funds to do anything – pay off credit card debt, go shopping, or buy another property. The cash out refinance will increase the monthly mortgage payment so you may want to look at the current property performance and if the property will still cash flow well for you.
  3. Sell the property and do a 1031 exchange. A 1031 has some specific rules to it but basically you sell the property as normal but the funds go to a 3rd party administrator and have to be reinvested into another property within a relatively short time period. A 1031 exchange defers any capital gains taxes, so you don’t have a tax bill until the new replacement property is sold. 1031 exchanges are popular with real estate investors for the tax deferment, and as a tool to scale up in size. If your property has had good appreciation you can take that appreciation and lever it up with a new investment property mortgage. (For example a typical investment property will require 25% down payment so if you have had $100K of appreciation that will allow you to buy $400K of property.)

If you want to continue being a real estate investor I’d highly recommend Option 2 or 3 above. If you don’t, then Option 1 is probably your best bet. Option 3 will be best if you want to grow your real estate investments and Option 2 is better if you’re not sure if you want to invest in real estate or other areas.

I personally plan to keep investing in real estate consistently for many years to come so I would likely do the cash out refinance if there is a good amount of equity in the property, and given the current low mortgage rate environment. I’m not sure where your property is located, but that may also play into the picture as some places like California can have substantial tax benefits to holding a property long term rather than selling and reinvesting in another property.

Hope this helps and thanks for asking!

. – JPA

Some current multi-unit properties for sale in San Antonio, TX (from Redfin website). Scaling up from a single-family home to a four-unit building would be an option for a 1031 exchange.

COVID Financial Planning

Dividend Yield Funds – A Couple I Like

Sharing a couple of funds I’ve been investing in, as recent conversations have included this discussion.

Relentless fixation on gas prices is probably not going to yield strong returns but you do you.

I’m currently investing in a couple of funds focused on dividend yield. The funds are shown below, but I agree with the many articles that point out chasing dividend yield is dumb. In general I prefer a “total market” fund – like Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) – as long-term growth / appreciation is likely to be better than dividend funds that lean toward mature or potentially declining companies. I like the below dividend funds because of a personal preference for accessible dividend payouts, though this likely reduces the overall long-term return. I also enjoyed the perspective by Jeremy Jacobson of Go Curry Cracker on Episode 169 of the Meb Faber podcast – highlighting that absolute dividend payouts per share typically don’t fluctuate in the same way that stock values do. Essentially, values influence the stated yield on a percentage basis but the dollar amount dividends don’t usually change, at least for healthy companies.

1. Vanguard Total World Stock Index Fund Admiral Shares (VTWAX). Current yield is 5.19%, included in chart below. I have a bent toward international investments in general, given that most of our income and assets are tied to the U.S.

2. Vanguard High Dividend Yield ETF (VYM). Current yield is 2.96%, included in chart below.

With investing in general, a huge part of the equation is simply taking funds and putting them to work. Whether you invest in the above options, or other funds, or start a business, or other productive use matters far less that simply taking dollars away from spending and directing to investing. I like Vanguard in general for investing but also put money into real estate, businesses, private loans, and a variety of other productive uses. Take whatever path(s) suit you best, just make sure you are regularly making investments.

Cheers,

John

Latte Investing (Becoming an Everyday Investor)

The term “Latte Factor” was popularized by David Bach in his best-selling book, The Automatic Millionaire. The concept highlights how small purchases everyday add up to big money over time – in this case exemplified by a daily $5 latte. It’s a specific example of how opportunity costs work. When you use your resources for one thing you are giving up alternative uses for that money. Per Webster Merriam the formal definition follows.


Opportunity Cost

the added cost of using resources (as for production or speculative investment) that is the difference between the actual value resulting from such use and that of an alternative (such as another use of the same resources or an investment of equal risk but greater return)

https://www.merriam-webster.com/dictionary/opportunity%20cost

Bach’s book popularized the art of slamming Starbucks purchases as extravagances for spendthrift millennials that have no long-term financial sense. It’s a good concept, and the math works. If you take the $5 a day and instead put it into low-cost index funds or other investments the accumulation over time is enormous.

Here’s a July 2018 example post, using the $5 latte example, from US News. Over 50 years, $5 a day invested across the stock market would yield you an $800,000 portfolio balance. It’s a great, powerful example of how returns compounded over years can add up to big money. The big missing piece of getting these returns, however, rests upon actually investing the $5 a day. Opportunity costs only really matter if the alternative uses are uses that one will actually take. You may not like Starbucks at all so you never spend $5 a day on coffee, or you may have incredible willpower and forego your treasured cup of mocha java daily for years on end. Unless you take those individual $5 savings and everyday invest them you will not see the $800k pot of gold at the end of the 50-year rainbow. If the money sits in your checking account and is then used for a trip to Disneyland, or a shopping trip, or the monthly dozen streaming service bills it has not been saved, nor invested. It’s been spent on a different consumption use. Unless one is very diligent or budget-focused it is hard to monitor each dollar and actively redirect from spending to investing.

I had the Latte Factor in mind when I was considering how to be a better, more consistent investor about a year ago. It was shortly after the New Year and resolutions were on my mind. I decided to use the idea of the Latte Factor in reverse – by starting with investing and making a daily investment the priority. My thinking was that if I made the $5 investment a priority each day, and automated it I would be embracing the investing side of the Latte Factor which is the most important part. Getting your money to work for you is the goal, not self denial at the coffee counter. They are both part of the equation, flip sides of the coin, since we all deal with finite time and money. Although they are related, I view the investment side of the coin as more important than the saving side. And knowing myself, giving up my daily coffee just isn’t in the cards.

I used my existing Vanguard account to create a recurring weekly investment for each day of the week. (Since you can’t create an automatic investment on a weekend day I doubled up on a couple of week days to have 7 total investments a week.) Here’s my current latte investing setup – there’s an additional 8th weekly transfer to a money market fund as an emergency savings additional goal.

I’ve blanked out the amounts above as I don’t think it’s relevant and will depend on each person. For you, the $5 a day may be a great start. Perhaps you earn a lot more money than I and $500 a day would be a better fit. The important bit is to start, and automate, your investing so that you remove the need for active attention and willpower to ensure it happens. This is likely already the case if you have a 401k or other employer investment plan – you set it up once and rarely think about it again. Adding an investment plan for yourself individually can be a great complement and remind you that your financial future is ultimately in your hands, and needs to be on your mind.

In addition to the power of compounding, I’ve enjoyed the psychological element of having a daily investment habit. When I’m winding down at the end of the day I can tally a small win, every day, that even if I did go out for coffee, or dinner, or booked an expensive trip I was also investing for the long-term. That little bit of positive reinforcement and encouragement has been meaningful to me. My wife and I both set up our own daily investments in this vein. It’d be a bit cleaner and simpler to just lump the investment dollars together and do it once a day instead of twice. However, just as you can’t have another person eat well for you, or do your daily exercise routine I find it important for us each to be invested in the process and have a daily win.

Our first year of latte investing went well, and with the calendar turning over we took a few minutes to discuss and update our daily investments. Things have been going pretty well, so we were able to increase our daily amounts a bit. Maybe in the future we’ll need to decrease the amounts. Either way, I plan on continuing this daily habit to have our small daily money wins and to remind ourselves that everyday we are going to be investors. Hopefully, as the years go by, the returns will grow and our balances will accumulate.

Bean counter by trade, bean lover by nature, bean stacker by choice

I hope sharing this daily habit is helpful to you, and if you have ideas to share about building wealth for the long-term I’d love to hear them. Cheers.

Short-Term Rental Properties – A Few Useful Tools

So you want to operate a short-term rental for your vacation home, in-law flat, previous home, or other property? Sites like Airbnb and VRBO have made the idea of second home or investment property a reality for many. These sites make the marketing and management of a property much easier than in the past. However, there are a number of additional tools and considerations to take into account.

We recently stayed at an Airbnb in South Lake Tahoe. It was great and a day at Angora Lakes was a highlight of our trip. (Photo is of Fallen Leaf Lake.)

Here a few recommendations for getting your short-term rental up and running smoothly.

Open a Checking Account (and potentially Credit Card) – If you are running a rental property, you are operating a business and will need to report the earnings and expenses on your tax return. Open up a checking account at a minimum to make tracking your net income easier. You may also want to open a credit card to earn rewards or cash back, depending on the amount of activity you have.

Check (And Modify As Needed) Your Insurance Policy – You may need to get an additional or different insurance policy for the property. There are a number of insurance providers that offer policies for short-term rentals, I use Foremost. Additionally, you may want to add an umbrella policy or consider setting up an LLC to address liability exposure.

Utilize Additional Tools – I currently use the following add-on tools for my Airbnb listings.

  • BeyondPricing – This tool adjusts the nightly rate to account for prices in the area, occupancy rate, seasonal factors, etc. There are a number of similar tools but I’ve been happy with BeyondPricing. The company charges 1% of gross for the service but I’ve found that just being able to pick up higher rates for large events like Comic-Con or conventions pays for itself.
  • Smartbnb – I really like this tool for managing multiple properties and team members. You can set up automated messages for check-in, check-out, etc. You can also set up text reminders for your housekeeper, manager, or other service providers.

Utilize Service Providers – Depending on your situation and goals, it may be well worth it to hire a property manager for your short-term rental, especially if you don’t live in the area. Guests often need in-person assistance for various needs, repairs, or other reasons. You may also want to consider a housekeeper unless you’re typically in town and have a flexible schedule to clean yourself.

Hosting on Airbnb for over a decade has been a great financial help for my family. I hope these suggestions are helpful to you and if you’re looking for more specific advice please contact me and let me know. Cheers!

A sample of Airbnb listings on the website

Raising An Investor

Raising children entails a lot of trial and error, and hoping that you aren’t screwing things up too much along the way. As our kids have gotten older we are moving into new subject areas, one of which is money. We want to expose our kids to good money habits while also giving them agency and discretion. Investing has been an area that has been going well so far so I wanted to share our experience with others in the same boat.

We set up an investment account at Betterment for each of the kids when they were born and have put in $25 a month since then. Now that the kids are old enough to be involved there is an account history and returns that we can go over together and learn together about expenses, how returns from appreciation and dividends work, and that there is risk involved in investing. Although we primarily use Vanguard for our own investments I like the aesthetics and diversification into multiple index funds / ETFs that Betterment makes more automatic – it seems to connect with the kids better and is more straightforward for them to understand.

Here’s the actual performance of one child portfolio over the past few years. The right graph includes a comparison to the S&P 500. Betterment currently charges a .25% management fee on top of the fees for the funds invested in.

[Note: We have chosen to hold the investment accounts for each of our children in our name so that we have control of the funds until we decide to give over full control. We’ve done this for reasons related to age and maturity, impact on college scholarships, and other considerations.]

Now when the kids receive some money for a birthday or we cash in the coins in their artisanal hand-crafted wooden banks we let them decide what to do with it – spend it, give it away, put in the bank, or invest in their Betterment account. It’s been fun and over the past year they’ve mostly chosen to invest their money, roughly 80% of their “earnings” going into their respective Betterment accounts. We sit with them at the computer but let them use the mouse, type in the contribution and notes, etc.

Here’s the current default allocation within Betterment for one of our child accounts, at a 95% stocks / 5% bonds allocation.

We’ll see how it goes in the future when there are more dollars at stake and more competing options vying for their attention and funds. From the early returns it’s been a simple and effective way to introduce investing for our family.

You can check out Betterment at: https://www.betterment.com/

Calculating compound growth rates like a boss (baby)

Traditional IRA vs. Roth IRA – It Doesn’t Matter (Tax Rates Do)

Employees often have the ability to contribute to an employer sponsored retirement plan (typically a 401(k) plan) – also known as a Traditional IRA.  To contribute to this plan, the employee selects a percentage of income to contribute each pay period and this amount is taken out of their paycheck and sent directly to the plan administrator to be deposited in the individual’s IRA account.  When contributing to a Traditional IRA no taxes are due at contribution.  When the funds are distributed in the future, typically during retirement, income taxes will be due on the full amount distributed – both the earnings growth and the initial contributions.

Separately from a Traditional IRA, workers can on their own open and contribute to a Roth IRA (subject to income limitations).  In 2019 an individual earning less than $122,000 can contribute up to $6,000 to a Roth IRA.  With a Roth the individual pays taxes up front, when the money is earned, and then contributes the money after taxes have been paid.  When funds are distributed in the future, typically during retirement, there are no taxes on the distributions.

Deciding between contributing to a Traditional IRA or a Roth IRA, or the relative amounts to each, is a frequent topic on personal finance blogs and talk shows.  An important bit that doesn’t get enough coverage is this:

** Income Tax Rate Changes Are What Really Matters **

The are other factors to consider between these types of IRAs outside of tax treatment.  A couple of factors, among others, include:

  • Employer contributions – Traditional IRAs often include employer-matching of employee contributions.
  • Liquidity – Ability to access contributions differ, with Roth contributions being accessible without penalty in some situations.

However, the biggest impact is made by the change in income tax rates between contribution and distribution.  If tax rates are higher in the future at distribution, a Roth IRA is better – you paid at a lower rate when contributing and get to withdraw and avoid taxes at a higher rate.  The converse is also true – lower rates at distribution favor a Traditional IRA.  You avoid higher taxes at contribution and then they are applied at lower rates at distribution. Let’s repeat and then look at a few simple example calculations.

  • Higher income tax rates in future = Roth IRA better
  • Lower income tax rates in future = Traditional IRA better

If there are no changes in income tax rates, there’s no difference between the two types of IRA.  Here’s a calculation example showing the net total distribution is the same if there are no changes in tax rates.

If tax rates are lower in the future than now (lower at distribution) then the Traditional IRA is better and yields a higher total distribution. Here’s the same example, with only the future tax rates decreasing.

If tax rates are higher in the future than now (higher at distribution) then the Roth IRA is better and yields a higher total distribution.  Here’s the same scenario again, but with higher future tax rates.

There are two primary reasons for a change in income tax rates, both of which are difficult to predict over a long-term period.

  1. Changes in Tax Law – changes to the rates and brackets in the IRS Code enacted by Congress
  2. Changes in Income – changes in individual earnings resulting in a change in the applicable tax bracket (whether or not the tax brackets are changed by law)

Planning for the long-term is difficult but remember the impact that tax rate changes can have should be a prominent consideration.


Note: The content of this post is for informational and discussion purposes and is not financial or tax advice. Consult with an advisor before relying on this or any information.

Transient Occupancy Tax in San Diego – Airbnb Overcharging Visitors

Airbnb has collected and remitted Transient Occupancy Taxes (TOT) for hosts in the City of San Diego since July 2015, making collection of these taxes easier for both hosts and the City Treasurer.  Per the City TOT FAQs, TOT is charged for the following stays:

“If you are renting a room for less than one calendar month, the rental is subject to the TOT.”

The exact rules of the TOT can be found in the San Diego Municipal Code (SDMC) §35.0101.  Here the City states there is a TOT:

“It is the purpose and intent of the City Council that there shall be imposed a tax on Transients”
And to whom that tax applies in the definition for Transient:
“Transient” means any Person who exercises Occupancy, or is entitled to Occupancy, by reason of concession, permit, right of access, license, or other agreement for a period of less than one (1) month. A month is defined as the period of consecutive days from the first calendar day of Occupancy in any month to the same calendar day in the next month following, or the last day of  the next month following if no corresponding calendar day exists.”
This definition does not rely on a strict number of days to qualify as a month – it is dependent on the number of days in each month.  A stay of 28 days (or 29 or 30) in February (of a non Leap Year) are not subject to TOT  but a stay of those durations in July would have TOT since July has 31 days.

The City of San Diego TOT is 10.5% for small short-term rental operators, those with less than 70 rooms.  An additional TMD assessment used to apply to small operators but now applies to large operators only, effective September 1, 2016. Rates and additional information available on City website for TOT.

Airbnb has not correctly implemented the definition of a calendar month in collecting the TOT in San Diego and instead is applying the tax to any stays of 30 days or less.  Per an email from Airbnb this week the company is collecting “10.5% of the listing price including any cleaning fee for reservations 30 nights and shorter”.

The Airbnb site can be used to see how the TOT calculation is being applied by entering dates and then clicking a property to see the reservations details, where the TOT is listed as a separate line as “Occupancy taxes and fees”.  Below are a few sample results showing the TOT being charged when it should not be.  The erroneous TOT charges are for hundreds of dollars each. I also called the TOT help phone number at the City (619-615-1530) to confirm that TOT should not be applied to these specific date scenarios.

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I’m a big fan of Airbnb both as a host and as a guest.  Having the company collect and remit TOT for hosts is a nice convenience, as previously short-term rental hosts on the platform had to complete and file a monthly return to report TOT.  The incorrect application of the TOT rules and resulting overcharging of customers is not right and needs to be corrected.  I’ve reached out to the company a number of times requesting this and either due to a difference of understanding or other reasons a correction has not been made. I’m hopeful that this article may result in corrective action being taken.

Creating a Passive Income Symbiote

dollar bills

One of my favorite websites is the fantastic Mr. Money Moustache (MMM).  This website and the book Early Retirement Extreme (ERE) by Jacob Lund Fisker caught my attention a few years ago and the concept of financial independence has been stuck in my head ever since.  There are a number of great podcasts, books, and articles, on the topic and the “FIRE” movement (financial independence / early retirement) has grown into a semi-mainstream concept.

The biggest lesson I took from MMM and ERE is the impact that a person’s savings rate has on the ability to grow wealth.  The flip side to the savings rate is the consumption rate – together they equal 100% of earnings.  The money you earn is either spent and disbursed to another party via consumption – the pizza place, daycare, car payments, etc. – or it is kept and accrued in your accounts – savings, investment account, real estate, etc.

The impact of the consumption / savings rate is laid out most excellently in this post from MMM:

The Shockingly Simple Math Behind Early Retirement

I decided to take a stab at making a simple calculation along the same lines – using a few basic inputs to see the time required to create a “Passive Income Symbiote”.  The goal is to create a passive stream of income equivalent to gross earnings – to entirely replace wage earnings with passive income.  If you can live on what you currently earn then it’s easy to imagine living on that same amount, but with all of your time free to use as desired.  I chose the word symbiote with the idea that the goal is to have the Passive Income Symbiote be the “host” and the person becomes the “parasite”, living on the efforts of the host.

The basic elements for the calculation (spreadsheet attached, feel free to use and share if you like) are:

  • Income / earnings – how much you make
  • Consumption rate – how much of your earnings you spend
  • Return on investments – what you earn on your savings
  • Earnings increase – if you expect an annual raise, how much it is
  • Earnings increase spent – how much of any earnings increase you spend (also known as lifestyle inflation)

Many of these factors are hard to change or controlled by outside forces – bosses, annual evaluations, how the stock market performs – the spending / saving ratio is the factor easiest to quickly adjust.  It’s also the factor that has the most impact on the time required to fully fund a PI Symbiote.  I’ve included some suggested ranges for items like return on investments and annual earnings increase.  There’s a relative limit on some items and I’ve tried to based the suggested ranges on my perception of those general limits. (You might get a 100% raise at your job but it’s more likely to be a moderate increase of 3-5%, for example.)

Good luck on your journey and creating your own pet Symbiote. Cheers!

Screenshot of sample Symbiote calculation

a journey of a thousand miles starts with a shaky bridge

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