Lisa Green
Appearances
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
For infinite banking, the right candidate would be a person who is very disciplined and willing to put a lot of money into the cash value of their policies year after year. This is not a casual endeavor. You would need to pay a lot of attention to your policies and really make this a lifestyle. I want to share a direct quote from the creator of the infinite banking concept.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
He was an insurance agent named Nelson Nash. And in his book, Becoming Your Own Banker, he said, it is going to take years to get started and it needs to be a lifetime commitment.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Oh, there are definitely downsides to James' suggestion. of buying life insurance in order to borrow against it. First of all, permanent life insurance is expensive. It can easily cost 10 or 20 times as much as the same amount of term life insurance. And that is basically the minimum payment.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
People who advocate life insurance as a source to borrow against will encourage you to put in more than the minimum required premium or as much as the policy will allow. For infinite banking, it's typical to put 10% or more of your take-home pay into your life insurance policy on a continuing basis. That's a big commitment that many people may not want to make or be able to make. Second,
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
It takes a long time to build up enough cash value to borrow against, often 15 or 20 years. Third, the cost of insurance acts as a drag on the financial performance of a permanent life insurance policy. Part of your premium is used to pay the insurer for the risk that you'll die and they'll have to pay out a death benefit.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
And fourth, this requires a really high level of financial discipline that can be tough to maintain. Your premiums can be very large. And if you fall behind on paying them, your policy could lapse. And all this assumes that you can get reasonably priced life insurance in the first place.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Sure. First of all, all life insurance policies have one thing in common. They are designed to pay out a sum of money to survivors when the insured person dies. Term is the simplest form. It lasts for a specific number of years. If you don't die during those years, the coverage ends and no one gets a payout. You can think of this as similar to having an auto insurance policy for a year.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Yes, James has $10,000 or $20,000 to invest. That's great. So does James need life insurance? The first question to ask is whether James's death would have financial repercussions on the people in their life. If the answer is yes, then James should look into life insurance for that reason. Term life insurance may be the most cost efficient way to do that.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Then James may want to consider other financial priorities for that $10,000 or $20,000. Are there student loans or credit cards that need to be paid off? Does James have an emergency savings fund? enough to cover several months of living expenses? And is James setting aside money for retirement?
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
It may make sense to direct 10% or more of income into a tax advantage retirement account, like a 401k or a Roth IRA. before exploring something like infinite banking. If James has this money available to invest, then James is in a position to make some smart financial decisions for the future. And I wish him all the best.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Thank you for having me.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
If you don't crash your car, the policy doesn't pay out. Permanent life insurance, on the other hand, is designed to last your entire life. These policies often mature at an advanced age, like 95 or 120. The primary reason to have life insurance is to replace your income if you die. Now, if you're like me, your family relies on your paycheck to pay the bills.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
If that paycheck were suddenly gone and you still want your family to have food to eat, clothes to wear, and a home to live in, you'll probably want them to have a payout from your life insurance policy.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Yes, actually, for most families, term life insurance may be all that you need. Let's say you buy a 30-year term life insurance policy when you're young and starting a family. It's designed to cover you during the working years when you're the primary breadwinner, perhaps. By the time that policy ends, your family may not be relying on your paycheck anymore. Your mortgage is paid off.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Your kids are grown and out on their own. You have some money in the bank. You just don't need life insurance anymore. And when might permanent life insurance be a better idea? In some cases, people do need permanent life insurance. For example, let's say you have a child with a disability who will need financial support even after you're gone.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
You might want to use life insurance to fund a special needs trust for them, and you might want permanent life insurance for this so that the coverage does not expire in 20 or 30 years. Here's another example. Paying for your funeral would cause financial hardship for your loved ones. You could consider a small permanent life insurance policy that would cover your final expenses.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Sure. Whole life insurance is the most common type of permanent life insurance. And you may also have heard of some other types like indexed universal or variable life insurance. These have differences in how the policies are funded. and how the cash value grows, but they are all permanent life insurance that are designed to last until you are very, very old.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Some of these policies can become very complex and require careful monitoring. I also want to note that not everyone even needs life insurance. The point to keep in mind is that you need life insurance if someone depends on you financially.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Yes, people might be surprised at the price difference. Permanent life insurance can be much more expensive than term. For example, let's look at a 40-year-old applicant for a new life insurance policy. Let's say that this person is in excellent health and they want to buy a 20-year term life insurance policy for $500,000 payout. That policy might cost them about $300 a year.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Now, let's say this same person wants to buy a whole life insurance policy. That might be $6,000 a year. That's 20 times more expensive than term life. But term versus permanent is not the only factor. For example, if that person above is a smoker, For that same term policy, the smoker might pay $1,300 a year compared to the $300 for the non-smoker.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
So that's already more than four times the rate of the person who's in excellent health and doesn't smoke.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Lots of factors. go into setting life insurance rates. Here's just a few examples. First of all, your age. And this makes sense. Somebody who's 70 years old is quite a bit more likely to die in the next 20 years than someone who's 30 years old. So that 70 year old is going to pay higher rates than the 30 year old. Your sex is another issue.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Women tend to pay less than men because men tend to die sooner. Your health can be a big issue. If you have a pre-existing condition or even a family health condition that runs in your family, that could cause you to have to pay higher rates. And your lifestyle and habits can also be an issue. We mentioned smoking a moment ago.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Other habits could be a risky hobby like skydiving or even having a dangerous job. Those could raise your rates as well. So it's sometimes tough to compare the cost of term versus permanent life insurance because some types of permanent Permanent life insurance have flexible premiums where you get to decide within limits how much you want to pay in.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
But overall, permanent life insurance is more expensive than term for several reasons. First of all, it lasts longer. That means it's more likely to pay out. The insurance company is more likely to have to pay money on you. And also, it may build cash value. Part of the premium that you pay can go into building a cash value that you could in the future perhaps consider borrowing against.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Absolutely. When you buy a term life insurance policy, what you pay in premiums is to cover the cost of insuring your life. Sure, there are some administrative costs because the people who work for the insurance company have to be paid. But for the most part, you're paying for pure insurance coverage.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Term life insurance would not work for what James has in mind because it doesn't build up any cash value to borrow against. Permanent life insurance is different. It has higher premiums and part of the premium pays for the cost of insuring your life. The other part of the premium goes into building cash value. You can think of cash value as being similar to a savings account.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Every time you pay your premium, some of it is saved. Your cash value grows slowly over time from the money you pay in and also from the amount that that money can earn. There's different types of permanent life insurance because there are different ways to earn money on that cash value. Some policies, like whole life insurance, pay a guaranteed rate of interest.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Other policies may pay based on the performance of specific investment options that you choose. And then when the cash value has grown enough, you can borrow against it. But keep in mind, it can take 10 or 15 years or even longer to build up enough cash value to borrow against.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
I have a personal example I can share of putting extra money into cash value. I have a small permanent life insurance policy that my parents bought on me when I was a child. Interest rates were higher back then. And so this policy was guaranteed to pay interest of at least 4%.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Now, you probably remember a few years ago when interest rates were so low that if you put your money in the bank, you could only get like 0.0000001% interest on it. Okay, that's a little bit of an exaggeration, but yields were very low. So I put some money into the cash value of my life insurance policy where it would earn 4%.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Recently, I took a look at how that policy had performed over the past couple of years, and here's what I found. I did earn 4% interest on my cash value. One year, I also got a small refund. But remember the cost of insurance? Over those couple of years, several hundred dollars went to pay for the cost of insuring my life. That money is not in the cash value anymore.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
So after removing that from the equation, I was left with a return of about two and a half percent a year on the money that I put into the policy.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
kind of depends on what you compare it to. It's better than that teeny tiny return that I would have gotten by putting the money in a bank account. Of course, interest rates have risen since then. Right now, I could go get a 5% certificate of deposit at a local bank. So the life insurance policy is not as good of a deal now as it was back then.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
So what if I had put the money into a mutual fund instead? Let's say an S&P 500 index fund. I ran those numbers and I saw that I really would have come out ahead, mostly because of not paying the cost of insurance. The expense ratios on an index fund are typically a lot lower than the cost of life insurance.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
But I also would have risked losing money if the market declined, which it did for part of that time.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Variable life insurance is one way that some people use. To achieve their investment goals, it is permanent insurance that combines an investment and an insurance policy. You can allocate its cash value to different investments through sub-accounts that are similar to mutual funds. You can choose sub-accounts from the options that are presented to you by your insurer.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Depending on how those investments perform, your cash value can gain value or it can lose value. So this type of policy can be very risky. In fact, the federal government requires people who sell variable life insurance policies to be registered to sell securities such as stocks, as well as life insurance. That's a signal that variable insurance is more complex than a standard policy.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Absolutely. The infinite banking idea has been around since the 1980s. And recently, it has just really gone viral on TikTok. It involves treating the cash value of a permanent life insurance policy as if it were your own personal bank. Here's how it typically works. You buy a whole life insurance policy and you put as much money as you can into its cash value.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
You keep doing this for several years. It typically takes... 10 years or more to build up enough cash value to borrow against. Then you can borrow money against the cash value and repay it so that the cash value continues to grow. You may have heard this described as borrowing from yourself and paying yourself interest. That isn't exactly what's happening.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
You're borrowing from the insurance company using your cash value as collateral for the loan, and you're repaying the loan with interest to the insurance company. Your policy does continue to accrue interest during this time, according to the terms of your contract, but probably at a lower rate than what you're paying on the loan.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
Now, there is an advantage to borrowing against the value of your life insurance. You don't have to qualify for the loan in the same way that you do for traditional loans. You don't have to go through an extensive application process to prove your credit worthiness. You can simply request a loan against your cash value and get it regardless of your credit score or other factors.
NerdWallet's Smart Money Podcast
Navigating Life Insurance Choices: Investing, Variable Policies, and Financial Growth
You won't have access to all of your cash value, though. If you took all of it out, it would crash your policy and it would end. And you also have a lot of flexibility in repaying the loan, which is another advantage for some people.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
This can be fixing the other person's car. It could also mean repairing fences or buildings or government infrastructure like road signs or guardrails that you might have taken out. In a car insurance policy, you'll typically see your liability coverage written as three numbers, something like 100, 350. Here's what that would mean.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
The first number, 100, means that you would have $100,000 of bodily injury coverage for each person injured. But then the second number, 300, means that there's a $300,000 cap on the total bodily injury expenses per accident, no matter how many people are injured. So let's say four people are injured in the same wreck, and they each have $100,000 in medical bills.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
That adds up to $400,000 in medical bills, and your policy is covering a maximum of $300,000 per accident. So here you are exceeding what your policy will pay for that accident. And then that third little number, 50, that means your policy would cover $50,000 in property damage per accident.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
The first tier would be the minimum liability coverage required by your state. You must have at least this much liability coverage in order to legally drive. States don't necessarily agree on what that amount should be. As an example, Georgia requires $25,000 in property damage liability coverage, while Florida, right next door, says you can get away with just $10,000 of this coverage.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
So you'll need to check the requirements of the state where you live. But that's the first tier. Let's talk about why that first tier probably isn't enough for most people. Let's say you live in Colorado. Nice state. I was just out there this past fall for my niece's wedding.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Colorado requires $25,000 in bodily injury liability per person, $50,000 in bodily injury liability per accident, and $15,000 in property damage liability per accident. So now you're driving along in Colorado and you get distracted by an elk and you run a red light and you cause an accident and this crash is your fault. The other driver is in the hospital and you are liable for the costs.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
How far do you think your $25,000 policy will go toward covering that other driver's hospital bill? Have you seen a hospital bill lately? And you're also responsible for fixing that other driver's shiny new SUV. Your policy says it'll pay $15,000. What will that get you? A bumper and a headlight, maybe? I don't think it's going to get you where you need to go.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
So for the hospital bills, for the car repairs, you may be personally responsible out of your pocket for whatever the insurance does not pay.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Okay, so for a second tier, let's look at what you might get with a typical full coverage policy. Here at NerdWallet, we publish sample rates for the 100, 350 policies that I mentioned earlier. That's 100,000 in bodily injury coverage for each person injured, up to a total of 300,000 in bodily injury per accident, plus $50,000 in property damage liability. And by the way, you don't have to get
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
full coverage in order to get these higher liability limits. If you drive an old car like mine and you don't think it's worth having collision and comprehensive coverage on it, you can still get a liability-only policy with a limit that's above your state's minimum requirement.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
So this bigger policy will hopefully get you closer to paying those costs that you would otherwise have to pay out of your pocket. And maybe that's still not enough. Medical expenses are high these days, and so are vehicle repairs. It is possible to go to an even higher tier of coverage. One suggestion is to buy enough liability insurance to cover your net worth.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Now, your net worth is the amount of assets you own after you subtract your debts. Sort of like the money you could get your hands on if you absolutely had to. It could include your cash, the equity you have in your house, your investments, or anything else of value that you have.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
The idea here is that if you don't have enough liability insurance and you cause an accident, you could have to give up those things you own in order to pay the cost of the wreck you just caused. If you have enough liability insurance, your policy can pay the costs instead and you get to keep your stuff. Personally, I prefer to have the extra coverage.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
I have an auto insurance policy with liability limits of 250, 500, 100. That's the highest standard limits that my insurer offers. And then I layer an umbrella policy over that.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Umbrella insurance is an extra layer of liability coverage that starts where your regular car or home insurance policy ends. I'll use my own situation as an example. As I mentioned, I have an auto insurance policy with limits of 250, 500, 100. My home insurance policy also has $500,000 in personal liability coverage for things that I might be liable for that aren't related to my car.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
And then I have a $3 million umbrella liability policy that stretches over both of these policies. That's pretty typical for an umbrella policy to supplement both auto and home insurance at the same time. But since we're talking about auto insurance, I'll use an auto insurance example to explain how this works. Let's say I cause an accident that looks like one you might see in an action movie.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Now, I'm going to leap to safety just like the stuntmen do, but my car keeps going and it crashes into a building and the entire building explodes and it burns to oblivion. The $100,000 limit for property damage on my regular car insurance policy is not going to cover the cost of the problem that I just caused. Let's say it's going to take $2 million.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
So my regular policy would cover up to its limit of $100,000 in property damage. And then the umbrella policy would kick in to cover the rest. And nobody is going to be coming after me for $2 million. Umbrella policies also sometimes cover things that your underlying policy doesn't. For example, it might cover legal fees and damages if I'm sued for libel or slander.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Sean is right. An umbrella policy can be surprisingly cheap. Mine gives me anywhere from six to 30 times as much liability coverage as my base auto insurance policy, but it only costs a few dollars a month. You can kind of see why it's cheap. Chances are I am not going to drive my car into an exploding building.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
If I file an insurance claim, it will probably be small enough that my regular car insurance policy will cover it. So the umbrella policy probably will never need to pay out. It's just that extra measure of coverage in case of a catastrophe. So do you need it? Kind of depends on your circumstances.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
A lot of everyday activities can put you at a higher risk of being sued, like owning a dog that might bite or coaching kids sports where parents might get angry. If you end up in a lawsuit, having an umbrella insurance policy can be a relatively cheap way to shield your assets against the possibility of a legal judgment against you.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
That is a good question. If you have the types of coverage that we've already talked about, you have most of your bases covered. But I will mention some coverage options that you might be grateful for if you get into an accident that is not your fault. These are called uninsured and underinsured motorist coverage. It's a sad fact that a lot of drivers out there don't have car insurance because
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
or don't have as much as they need. Where I live in Tennessee, more than 20% of drivers don't have insurance, according to the Insurance Research Council. It's illegal for them to drive without insurance, but they're on the road anyway. They have to get to work or school or the grocery store. So if I do get hit by someone, there's at least a one in five chance
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
They won't have insurance to pay my expenses that they are liable for. So to deal with that, my policy has uninsured and underinsured motorist coverage. Uninsured motorist coverage is for cases where the other driver doesn't have auto insurance at all. And underinsured motorist coverage is for cases where the other driver does have some insurance,
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
but it's not enough to pay for the damage they caused. For example, maybe they caused an expensive accident and they only have the state minimum required coverage, which, as we've already discussed, is typically pretty low. Now, the last time that another driver crashed into me, I was lucky. He had insurance.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
But the next time, I might not be so fortunate, so I'm glad to have this coverage in place.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Sean, it is tough to see those premiums keep on rising. In this environment especially, I think the most important advice is to shop around. Every insurer has its own formula for setting rates. And when we crunch the numbers every month at NerdWallet, I'm always astonished at how widely the rates can vary for the same driver.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
For example, one company might really penalize you for getting a speeding ticket, while another one might not raise your rate at all. One company might think you're really risky because you drive a red sports car, while another company might just think you're cool, and on and on. So the cheapest company for your neighbor may not be the cheapest for you.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
And the cheapest company for you last year may not be the cheapest company for you this year. Don't be afraid to switch insurers. NerdWallet recommends comparing quotes from at least three insurers once a year to make sure you're getting the best rate.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Yes, absolutely ask about discounts. Insurers don't always volunteer this information. For example, I save $200 a year by taking advantage of my insurer's auto pay discount. You can also take a look at your policy and see if you're paying for coverage that you don't need. I dropped roadside assistance and towing coverage after I realized that they just duplicated coverage I already had elsewhere.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
And you can consider raising your deductible, the share of a comprehensive or collision claim that you pay. By choosing a deductible of $1,000 instead of $500, I was able to reduce premiums by more than 10%. Now, be careful if you try this. It can make your policy cheaper, but you're now responsible for paying a lot more money up front if you do have a claim.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
So only raise it to a level that you're confident that you can pay in a pinch. And of course, NerdWallet has an insurance finder that lets you compare rates in just a couple of minutes. We'll link to that in today's show notes or just search online for NerdWallet auto insurance finder.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Well, thank you so much for having me.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
I'm glad to be here and chat about insurance.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Let's start by thinking about why you should have car insurance at all. Driving is a pretty risky business. I mean, think about it. You're whizzing along at 50 or 60 miles an hour, driving a 3,000, 4,000, or 5,000-pound machine. and so are thousands of other people. So think of it like a giant bumper car situation. Bad things are going to happen sometimes.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Sometimes those bad things might happen to you. Even if you are the safest driver ever and you obey every rule of the road, remember those thousands of other people? Some of them might be texting or eating a sandwich or putting on makeup in the rearview mirror. I I had a neighbor tell me once that he read an entire book while driving from Tennessee to North Carolina.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
He just propped his paperback up on his steering wheel.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Exactly, Sean. When you start thinking about how much car insurance you should have, think about it this way. What's the worst that can happen if your two-ton hunk of metal crashes with another one somewhere out there? Maybe you're in the hospital with really bad injuries and you'll need months of rehab.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Maybe the other person is in the hospital and you are held responsible for paying their medical bills because you were at fault in this accident. The amount of car insurance you should have is the amount that makes you feel you could even dare to get behind the wheel of a car when you think about what could happen there.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Absolutely, Elizabeth. Let's talk first about liability insurance. Liability means that you are legally responsible for damage that you cause as a driver. So if you hit a person with your car, you are probably liable for their injuries. You are legally responsible, and so you may be required to pay for their medical treatment. If you hit someone's property with your car,
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
you are probably liable for the property damage that you caused, and you may be required to pay the cost to repair that damage. Because of this, liability insurance is the first type of coverage that you'll buy. Liability insurance is designed to pay the expenses that you are liable for if you cause an accident. In most states, you must have liability insurance in order to legally drive.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
That's right. Liability insurance is mostly about protecting other people from you. If you smash into someone else's car, liability insurance will pay to fix the other person's car. But for fixing your own car, you're on your own. This is why a lot of people will want two other types of car insurance. First, we have collision insurance.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Collision insurance will pay to fix or replace your car in a crash that you cause. You'll normally have a deductible to pay, like let's say the first $1,000 of repair expenses, and then the collision insurance will cover the rest. Collision insurance will also pay to fix your car in certain other situations, like if you're the victim of a hit and run. And then there's comprehensive insurance.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
This helps replace your car if it's stolen or fix it if it's damaged by something like a tornado or a fire or hitting an animal. So there you have the three major types of coverage, liability, comprehensive, and collision. A lot of times people will buy these three types together, and that's called full coverage.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
If you have a loan or a lease on your car, your lender will probably require you to have full coverage.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Sometimes people may not understand why liability insurance is so important. It doesn't pay to fix your car, right? So people may not see the value of it. But in truth, liability is where you run into huge financial risks. Let's say I cause a wreck and my car is totaled. Now I drive a 10-year-old Altima and now I have nothing to drive. And Kelley Blue Book says that my car was worth about $6,000.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
So I've lost $6,000 and that's bad. If I had been driving a brand new car, maybe I would have lost $50,000. But what's really bad is if my wreck caused a lot of injuries and property damage to other people and I had to pay for these. That is where the costs can run into hundreds of thousands of dollars or more. And that is why liability is the most important coverage of all.
NerdWallet's Smart Money Podcast
How to Get Ready for a Recession and Choose Enough Car Insurance
Bodily injury liability insurance covers other people's medical costs when they are injured in a crash that you caused. In addition to medical bills, it can also cover things like pain and suffering, lost wages, and even funeral costs. And then there is property damage liability insurance. Now, this pays to repair damage to other people's property after a wreck that you cause.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
Hey, Sean. Hi, David.
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Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
Yeah, David, I think that's a great question. I have several rental homes myself, including a couple that I used to live in. And in my experience, you know, keeping a home, a previous residence as a rental property has been a really strong investment.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
You continue benefiting from house values appreciating and your rents will also typically go up over time while your mortgage payment stays the same.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
So meanwhile, while you're enjoying this nice cash flow from your property, tax laws let you depreciate the property, which means that even while you've got positive cash flow money coming in, you may show a loss on paper that can save money on your taxes. And if you ever want to go back to your previous area to visit, check on your property while you're there.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
And now you have a tax write off for the travel because you had to travel back to check on your property. 10 years from now, when your house is paid off, most or all of that $2,200 monthly mortgage payment will go away and that turns into an income stream for you. So I would definitely look at trying to hang on to the house and try renting it.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
There are some caveats to renting out your house. Tenants don't take care of a property typically the way you would take care of your own property. And being halfway across the country, it's a little bit hard to keep an eye on it. And vacancies are expensive because you'll lose your rental income at the same time that you have to shoulder expenses for maintenance and repairs between tenants.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
So you need a cash cushion. And most of all, I think that you need a property manager. a good property manager. When we were first getting started with rental properties, we managed them ourselves, screened the tenants ourselves, dealt with the phone calls ourselves about something being broken.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
And then we finally hired a property manager and we have not really had to deal with those kinds of issues at all. The property manager will typically charge about 10% of their rental income. And for that, they will find and screen your tenants. They will collect your rents. They'll handle the maintenance, keep records, and send you money every month.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
I think that this is especially important for a long distance rental because you don't want to get a call in the middle of the night about a clogged toilet 2,000 miles away. The property manager will be equipped to handle things like that.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
absolutely it's good to have a cash cushion. Another option is to kind of tap into the equity in the property that you already own. When we were first getting started, one of the first things that we did was set up a home equity line of credit on the house that we lived in. That gave us a way to get money if we needed it when something broke or we had a vacancy.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
If you want to go that route, I would suggest you may want to get that home equity line of credit set up on the house that you're currently in while you're still living in it, it's going to be easier and you'll get better terms as an owner-occupant to get that home equity line of credit set up. And then typically, you can just continue to keep it even after you move out of the house.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
That's what we do.
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Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
Our properties, our rental properties are not out of state, but they are probably over an hour from where we live. And since we've had a property manager in place, we really essentially have not had to drive that hour and go up there at all. It's been a life changer.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
I can share a story from my sister's situation. She lived in one state and had just bought a new house and furnished the new house in that state when she got a grandchild in another state and decided to move to be near that baby. So since she had just purchased all of this new furniture, Of course, she thought the thing to do would be to take it with her.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
And that turned out to be not perhaps exactly her best move. She hauled all of that furniture down there and then it didn't fit the vibe of the house. It didn't fit the vibe of the new state, which was coastal rather than inland. It just didn't work. She ended up having to get rid of the furniture down there and get new furniture.
NerdWallet's Smart Money Podcast
Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
Exactly. The table just won't fit in that corner here, you know?
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Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
I'll toss out one more thought on your furnishings as well. You have a fully furnished home that you are thinking of renting out. There are opportunities to rent it out with the furnishings in it. I think this is a bit of a niche, but there are short-term rentals for travelers, for traveling nurses, for vacationers, etc.
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Cross-Country Moving Tips and What a CFPB Shutdown Could Mean for You
It may not be suitable for your location, but it's certainly something you could think of.
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Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
Exactly. The table just won't fit in that corner here, you know?
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
I'll toss out one more thought on your furnishings as well. You have a fully furnished home that you are thinking of renting out. There are opportunities to rent it out with the furnishings in it. I think this is a bit of a niche, but there are short-term rentals for travelers, for traveling nurses, for vacationers, etc.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
It may not be suitable for your location, but it's certainly something you could think of.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
Yes. Thank you for having me, Sean.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
Yeah, David, I think that's a great question. I have several rental homes myself, including a couple that I used to live in. And in my experience, keeping a home, a previous residence as a rental property has been a really strong investment. You continue benefiting from house values appreciating and your rents will also typically go up over time while your mortgage payment stays the same.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
So meanwhile, while you're enjoying this nice cash flow from your property, tax laws let you depreciate the property, which means that even while you've got positive cash flow, money coming in, you may show a loss on paper that can save money on your taxes. And if you ever want to go back to your previous area to visit, check on your property while you're there.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
And now you have a tax write-off for the travel because you had to travel back to check on your property. 10 years from now, when your house is paid off, most or all of that $2,200 monthly mortgage payment will go away and that turns into an income stream for you. So I would definitely look at trying to hang on to the house and try renting it.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
There are some caveats to renting out your house. Tenants don't take care of a property typically the way you would take care of your own property. And being halfway across the country, it's a little bit hard to keep an eye on it. And vacancies are expensive because you'll lose your rental income at the same time that you have to shoulder expenses for maintenance and repairs between tenants.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
So you need a cash cushion. And most of all, I think that you need a property manager. a good property manager. When we were first getting started with rental properties, we managed them ourselves, screened the tenants ourselves, dealt with the phone calls ourselves about something being broken.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
And then we finally hired a property manager and we have not really had to deal with those kinds of issues at all. The property manager will typically charge about 10% of their rental income and And for that, they will find and screen your tenants. They will collect your rents. They'll handle the maintenance, keep records and send you money every month.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
I think that this is especially important for a long distance rental because you don't want to get a call in the middle of the night about a clogged toilet 2,000 miles away. The property manager will be equipped to handle things like that.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
Absolutely, it's good to have a cash cushion. Another option is to kind of tap into the equity in the property that you already own. When we were first getting started, one of the first things that we did was set up a home equity line of credit on the house that we lived in. That gave us a way to get money if we needed it when something broke or we had a vacancy.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
If you want to go that route, I would suggest you may want to get that home equity line of credit set up on the house that you're currently in while you're still living in it, it's going to be easier and you'll get better terms as an owner-occupant to get that home equity line of credit set up. And then typically, you can just continue to keep it even after you move out of the house.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
That's what we do.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
Our properties, our rental properties are not out of state, but they are probably over an hour from where we live. And since we've had a property manager in place, we really essentially have not had to drive that hour and go up there at all. It's been a life changer.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
Hey, Sean. Hi, David.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
I can share a story from my sister's situation. She lived in one state and had just bought a new house and furnished the new house in that state when she got a grandchild in another state and decided to move to be near that baby. So since she had just purchased all of this new furniture, of course, she thought the thing to do would be to take it with her.
NerdWallet's Smart Money Podcast
Should You Keep Your Old Home? The Financial Case for Selling vs. Renting
And that turned out to be not perhaps exactly her best move. She hauled all of that furniture down there, and then it didn't fit the vibe of the house. It didn't fit the vibe of the new state, which was coastal rather than inland. It just didn't work. She ended up having to get rid of the furniture down there and get new furniture.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
It kind of depends. In our area, it typically runs eight to 10 percent of the rent. It's worth it, in my opinion.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
If you're living in the home, it might be a lot easier for you to manage the property yourself, because if a problem were to arise right there next door in your own property, you are already right there. So yeah, if you're living in it yourself, you might want to try it on your own first, see how it goes. You can always decide later to put it under a property manager.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Oh, yes. Very much so it is. The lending rules favor people who are owner occupants. And so I think it's easier to get a loan if you're going to be living in the property. It's easier to get a lower interest rate or a lower down payment. Those options tend to be for owner occupants.
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And you can be considered an owner occupant and get that type of mortgage on a property that is a multifamily, like two to four family home, a duplex, a triplex, a quadplex. And so that can really be a really good way to get started. You still get the owner occupant benefits and you also get several doors that you can rent out.
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We were. And I think a lot of people do get into it by falling in the same way that you have. For us, I think it was easier to get started than I thought it would be. We drafted a rough business plan. It wasn't really much to it, but we took it to the bank. we were looking for short-term funds to acquire the first property. They looked at our business plan. They said, okay.
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They gave us a short-term loan to get started. The banker actually showed up at one of our properties once and found us there with hammer and nails and, you know, fixing up the house. And I think at that point, the banker said, okay, these people are for real. They really are fixing up the houses that they're buying. They seem legit. And so after that, it was,
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fairly easy to get the funding that we needed. So the way we operated was take a short-term loan, acquire the property, then go in and fix it up, get a tenant in it. And now that it's fixed up and rented out, It has a higher value than it had at the beginning.
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So at that point, I go and look for the permanent mortgage based on that new higher condition that the house is in and get enough money back from that refinance to pay off the original loan and the costs of rehab. And then your money is freed up to start over.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
We usually would get a loan for like a year. We would ask for enough to pay for the whole house.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
This made it fairly easy to be competitive when we would bid on the house because it could be treated almost like an all-cash deal.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Having really good credit is very helpful. Having a home equity line of credit against the house that you're currently living in is also very helpful because that gave us a source of funds for remodeling and updating the house. And then we could just pay that back once we got the permanent loan.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Now, you remember that I started on this 20 years ago, so I cannot swear what it is like today, but we were essentially able to avoid the down payment issue by the method that we used of buying the property at a discounted rate up front with this short-term money and then paying it back later with a permanent mortgage.
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When we would get the permanent mortgage, we could get like 80% of the value of the house, but we had added so much value to the house that 80% of the value at that time was typically enough to pay back everything that we had borrowed previously. So we really did not have to deal with a down payment.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
the most recent ones we required were a few years back and we were not able to find like the really good deals that we wanted just off of the realtors multiple listing service the way we used to. When we first got started, real estate investing was not as big a thing as it is now. There weren't as many people competing for the bargain properties and we were just able to pick them up off the MLS.
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Now to find discounted properties that would really fit our business model and We kind of need to look at other sources like local investor groups who are tuned into that market who can help us find distressed properties or discounted properties. And how do you find those groups? Are they Facebook groups? They often are Facebook groups.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Rental associations, I think probably in most communities are more than one in the area where I live. So we have multiple ones to choose from. And you'll find different groups in these larger groups. Like there'll be people who specialize in lending funds. You know, you can find people there who will help you with that short-term money to get started.
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You'll find other people who specialize in finding the bargains, finding the discounted properties. They don't maybe have the money to buy it themselves, but they can bring you the lead and get, you know, a little bit of money from you for the lead, and then you can buy the property. So there's different specialties there.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
It sounds like a great plan. There's even a name for that. They call it house hacking. Buying a property and living in part of it, renting out part of it and building from there.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
That is very true. And over time, you learn to look for the right things wrong. I mean, you don't want the house that has foundation problems and is starting to slide down the hill. Yeah, no. But I remember one property that we bought, and it had a roof leak, and the roof leak had damaged the ceiling completely. in the main bedroom and the ceiling had collapsed.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
So there's insulation and drywall debris and- Asbestos maybe? Yeah, from the attic, all over the floor. Okay, so most people would come in and look at that and like scream and run away, right? They don't want any part of that. This looks terrible.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
And we looked at that and we said, okay, it's not that difficult to fix the roof, patch the ceiling and clean up the floor. And so we were not afraid of this house that looked like a disaster. We ended up getting that one and that one was a good deal for us.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
You probably pull up the carpet and kind of peek underneath it before you buy to see how extensive the water damage is. But you can also get help. You know, you can get a home inspector to help with these kinds of things. If there's a roof leak, you can get a roofer to fix it. You don't have to climb up there yourself.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Yeah.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Yeah, you're right. The IRS considers this to be passive income sort of in the same category of like saying owning and trading stocks or whatever, as opposed to income from a job. But you're right. There is still some work involved. And I think that you have some latitude to how much you want to do that work personally versus how much you want to hire experts to do it for you.
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So if you manage your property yourself, There's definitely work involved. You have to maintain the property. You have to collect the rent. You have to find the tenants. If you hire a property manager, then your income really does become more passive to you because the property manager can handle all those things. For me, these days, I still spend several hours a month on record-keeping work.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
making the mortgage payments, that sort of thing. We also stay in touch with the property management company, especially on any decisions about major expenses like replacing an appliance or repairing a roof. They would consult with us if anything like that came up. And then sometimes for certain properties, we've still been actively involved in property maintenance.
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With a property manager, it's largely our choice whether we want to be involved at that level or not. But since we're talking about taxes, be aware that personally participating in the work can have tax benefits for you. There are several different tiers of participation in the IRS rules from active participation to material participation to being a real estate professional.
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And each one of these tiers has its own tax rules. And as you can imagine, when you're dealing with the IRS, the qualifications aren't always straightforward. But in general, more participation by you equals more favorable tax treatment. So there is at least a reason for you to keep records of the amount of time that you spend.
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I think that's a great idea to hire the pro who is an expert in rental properties and they can show you what you need to do in terms of record keeping. If you're working with a property management company, they probably handle most of the record keeping and send you a monthly statement that shows all of the expenses and income that you have. And so that makes it easier.
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And for many people, when you're starting to own investment property, rental property, it actually benefits you on your taxes because tax law allows you to depreciate the value of the property over time. Not all of the property, the land doesn't depreciate, but like you can depreciate the value of the building over time.
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And so that's a tax write-off for you, even though you're still getting the money in your pocket. So for the first 10 years or so that we owned rental properties, we would show a loss on those properties every year, even though our cashflow was positive. And we were able to write that tax loss off against our regular job income and reduce our taxes.
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Yes, you'd have to pay a higher tax when you sold the property. But hey, I'm not going to sell my property.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
Exactly.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
And be aware that your ability to write off your losses against your regular job-based income depends on your situation. So this may not apply to everybody. It depends on what tax bracket that you're in and your level of participation in the property and other factors. Just be aware of that.
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I have considered that as well. I have not done it yet, and I still might. I think there's some definite advantages of an LLC, especially the ability to shield your other assets from any judgment that arises from one of your properties.
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There's also some disadvantages. It costs money. It means more paperwork. And you have to follow some really specific rules. If you don't follow the rules, then anyone who has a judgment against you can, what they say, pierce the corporate veil and come after your assets anyway. I happen to live in a state where LLCs can be expensive.
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So a lot of property owners where I live will tend to get a big umbrella liability insurance policy instead of going the LLC route.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
No, no, no. Don't do that.
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Absolutely. I think that one of the biggest benefits of a trust is to ease the transition to your heirs when you're gone. Because anytime that you move ownership of property from one person to another, a lot of paperwork is involved. Everyone who's ever bought a house can tell you about that huge stack of papers that they have to sign at the attorney's office.
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A trust lets you take care of that paperwork now and instead of just leaving that burden on your heirs. So yes, I do favor a trust for that purpose. And I've started the paperwork to move my properties into one.
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Oh, well. Thank you for that, Sean. And I will say I'm getting close to the stage when the mortgages will all be paid off. And that is sweet because thousands of dollars a month that have been going to lenders will finally become income to me. So my advice is pretty similar to what you would hear for any other type of investing. First of all, start young if you can.
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to allow plenty of time for growth and to get those mortgages paid off. Second, make wise purchases. Buying an overpriced property is not likely to be a winner for you. Number three, I would say hang on to that low-cost mortgage. And then finally, I would just say stick to your strategy. You just keep building your portfolio in a slow and steady manner, and it's going to pay off in the long run.
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Well, thank you, Elizabeth and Sean. I am delighted to be back and excited to hear about your new venture, Sean.
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Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
I know a lot of people get into having a rental property the same way that you are. They live in a house and they move out of it. They keep it and rent it instead of selling it. And then some people get into it by acquiring a multifamily property like a duplex or a triplex and living in part of it while they rent out the rest. For me, it was a little bit different.
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My husband and I knew that we wanted to own multiple properties. We intentionally set out to acquire rental properties in order to build an income stream, especially for retirement. And we started about 20 years ago. And so now we're almost finished paying off the mortgages on most of these properties. I have a couple dozen.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
I think most of all, I wish that I had known that I would want to hang on to every property I could get my hands on. I mean, keeping your former home seems like such a smart move for you, Sean. Every time I've sold the house, pretty soon I have wished that I had it back. And we did sell a few. Flipping houses was all the rage for a while. And we thought we could do that.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
So we flipped three or four properties. And yeah, we made a little profit by fixing them up and getting them back to a high standard of quality and then selling them. But you know, that's a one-time paycheck. If I had just held on to those houses, they would still be making money for me today. So I really only see a couple of reasons to sell an asset that can generate money for you.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
One is if you really need that money to live on right now, or the other is if you think you can earn even more with that money by investing it in something different. And neither of those was true in my case. So I really wish I had held on to the properties.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
We started out by managing our properties ourselves. And it was a very good learning experience because when you're managing them yourselves, you have to deal with everything. You have to... fix things when they break and the tenant calls you in the middle of the night. You have to um, find a new tenant to occupy the property.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
If the tenant doesn't pay the rent, you have to chase them down and get the rent. And so you really learn a lot by doing this. However, you also learn that you don't particularly enjoy doing all of these things. And so a few years back, we did decide to go with a property management company.
NerdWallet's Smart Money Podcast
Recover from Vacation Overspending and Avoid Costly Rental Property Management Mistakes
And so now they are staffed to answer those problem calls from tenants in the middle of the night, they find us tenants. They collect the rent. So, yeah, life has been a little easier for us since we brought a property manager into the picture.