Questions for the Author

[BookClubEditor]

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[steveokeefe]

Susan,

What about real estate as an investment? I read the whole book, and it is incredibly inspiring -- it really got me to seriously track my expenses for the first time in years, and that revealed numerous ways of saving money. Thank you.

My investment strategy for some time has been to sell my primary residence every few years because the IRS lets you keep the gain tax-free without having to roll it over into another home. If property appreciates faster than the average return on a mutual fund -- and the gains on real estate are not just tax-deferred -- they're tax free -- wouldn't this be just about the wisest way to invest?

I realize it is a drag to sell a house you love and move every few years, but the opportunity to cash in on the gain tax-free is just too compelling for me. Am I setting myself up for trouble down the road, such as liquidity problems?

Thanks for Your Help,
STEVE O'KEEFE

[SueFeitelberg]

Hi Steve,

Thanks for your question, it's a very ambitious approach you have! Most people couldn't fathom the idea of
moving that often no matter what the profit. However well real estate markets have performed, remember markets never move
one way. Most recently there is plenty of concern that the real estate markets are softening. It's also very important
to consider all the costs of buying real estate. Your closing, moving and opportunity costs. If you can earn 5% tax free
from a municipal bond fund you should remember that historically real estate has averaged 5% per year and that's before these
costs.

I would advise that you tread very carefully into these waters...past performance is no indication of future returns.

Sue

[emily_card]

---

SueFeitelberg wrote:
Hi Steve,

Thanks for your question, it's a very ambitious approach you have! Most people couldn't fathom the idea of
moving that often no matter what the profit. However well real estate markets have performed, remember markets never move
one way. Most recently there is plenty of concern that the real estate markets are softening. It's also very important
to consider all the costs of buying real estate. Your closing, moving and opportunity costs. If you can earn 5% tax free
from a municipal bond fund you should remember that historically real estate has averaged 5% per year and that's before these
costs.

I would advise that you tread very carefully into these waters...past performance is no indication of future returns.

Sue

---

I agree, and also isn't there a limit on the amount of tax-free capital gains? I supposed that Steve is saying he doesn't reach that limit every time he moves, but let's hope that he stays put over the next couple of years. Emily

[caroline88]

Steve,

I have moved 4 times since moving out of my parents home. Though I only lived in most of these homes a few years, I lived there free of charge thanks to the booming real estate prices. Financially, I have done really well on this investment.
Unfortunately, the health and happiness price tag was higher than the ROI. Moving is a very stressful event and the cost of moving is not just the cost of money either. You have to take the time to sell your old home. You need to find and be able to buy a new home. The physical move and then the time and energy needed for settling in. Not just the drapes and the gardening, but the time it takes to find the right places to go to. Plumbers, restaurants, etc.
And if you have children, you would also have to find new schools and dry a lot of tears.

Our tax situation is different from yours. I do not pay capital gains taxes on stocks or on houses. I only pay 6% tax on every house that I purchase. Right now I do not plan to move any time soon. Not because I am so happy with my current home but because I want to save and invest and then move straight into my dream home. My main investments are real estate mutual funds. They have increased in value 14% in the past 7 months. Much more than the few % that the real estate prices have increased.

Congratulations for being here, just the fact that you are thinking and asking questions, sets you way ahead of most people!

Caroline

Message Edited by caroline88 on 10-28-200610:58 AM

[steveokeefe]

Wow, thanks for the feedback. Emily, you're right, there is a $250,000 limit on tax free gains on the sale of a primary residence. Just last week, a friend sold his house, which he paid $40,000 for 20 years ago, for half a million dollars. He will have to pay capital gains tax on the amount over $290,000. Isn't it true, Sue, that if my friend had used the strategy of selling his house every few years, he would have an extra $40,000 to $50,000 in his pocket today (the capital gain tax he's going to pay)?

I agree with Caroline, too, that I sometimes underestimate the full costs of selling and moving. Although, if you move within the same school district, as we have done, there's not nearly as much disruption in terms of the kids and finding contractors, etc.

In fact, I am trying to decide whether to sell my primary residence next year -- when I hit the two-year mark -- or hang onto it. The sooner I sell, the sooner I get access to my tax-free gain so I can invest again. My main concern is that housing prices are so high that if I sell, I'll never get back in the market again. Any advice?

[BookJunkie]

Hi Sue,
I'm so inspired to get my act together! I have my debt under control, but I know it's not enough. I'm in my 30s and other than my 401K, don't have any investments. I don't have a ton of money to invest, but I'm still curious to see what a financial planner / financial advisor (is there a difference?) could do for me. I have some long term goals and some short term goals. Is there a minimum amount of money you have to have in order to start working with a financial advisor? Are there any basic things to look for in a financial advisor? Is there some kind of reporting agency like the BBB to turn to? And how much do they typically charge for their services? As you can tell, I'm ready to take my financial life to the next level!

[SueFeitelberg]

Hello BookJunkie,

That's really great you're inspired to get your finances in shape, I commend you for that and should mention that the added benefit to having more money is that you'll feel alot better about it! I'd like to answer your questions about financial advisors (at the age of 30 I became concerned about not having enough money to retire on, something about those 30’s! The general rule of thumb is 10% of your gross income should go towards retirement savings by the time you’re 30) but first let me mention something else.

When I was doing the research for the book I did some Focus Groups and I talk about this more in the book. At the end of the 10 week Focus Group there were 2 distinctive groups, the active ones who followed the exercises and the passive ones that listened but didn’t read the chapters and actually do the exercises. What amazed me was the active group hey were much more financially savvy and their assets had really grown the in 10 short weeks. The passive group hadn't grown their assets at all because they never read the book or did the exercises. So before you go out and meet with an advisor I'd recommend that you go through the course and then pursue a financial advisor.

Financial Advisors can take on a client with a $5000 IRA or they can have a minimum account size of $1,000,000. It often depends on their tenure in the business, who they work for, and what their expertise is. For your purposes at this stage I would suggest you find someone who you like, trust, are comfortable asking questions of and believes has your best interest at heart and takes the time to help educate you about investing. You could pay someone a fee to do this or go to your local bank or brokerage office. they can set up a systemativc investing program where you can invest as little as $50 a month.

As you grow your net worth to larger amounts you may decide you want an advisor who focuses on certain types of investment accounts. At this point getting the basics in place and a systematic investing program is what I would concentrate on.

[SueFeitelberg]

Hi Steve,

Though i'm not a tax adviser I believe that leading your investment decisions by minimizing taxes first is putting the cart before the horse. first, there's the hassle of moving that often and the more often a house is flipped the higher the chance that you can lose money as well as make money. (Remember it's always a two way street) Most importantly there are many costs when you buy or sell a house, many which we have already mentioned. Closing costs, moving but also broker's commissions. If you sell your house and buy another be sure to negotiate with your broker for a lower commission. Typically it's 6% of the purchase price. You can also do this if you're just buying or just selling, most millionaires are quite good at doing this and most of them live in their homes for 30 years.

[emily_card]

Hi Susan,

Let me take this moment to thank you for all your interesting comments to date. We all have much to be thankful for this time of year, and I want to acknowledge how helpful an addition to the finance literature your book is.

Hope you and all our readers will have a great Thanksgiving!

Best,

Emily