Blog Archives - PFwise.com

3 Ways to Save on Utility Costs by Using Solar Power

5/31/2015

Q. What's the best way to pay for solar power system and save on utility cost?

A. There are 3 ways a family can pay for solar power installation and use solar power to save on electric bills, which way works for your family depends on many factors, though.

1. Purchase Solar Power System Outright
Cost
In this option, you will invest upfront on a solar power system that could cost $10,000 to $30,000 after Federal tax credit (actual amount varies with size of the system required).

Return
For most families, the solar power system can save your monthly utility bill from $100 to $200.

Conclusion
The payback time will be 5-10 years. If you will stay at the house for a long time and have the money to invest, this gives you the best ROI.

2. Lease Solar Power System
Cost
You lease the solar power system from the provider, which means you won't be able to claim any Federal credit, but you don't have to pay anything upfront. You pay the solar company a monthly fee or preset discount price for the power generated.

Return
You will be able to lower your monthly utility bill by 10% to 20% ($10-$40 a month).

Conclusion
This option is great for people who don't have the cash and/or don't play to stay at the house for too long.

3. Financing a Solar Power System
Cost
You don't have to pay your own cash upfront, instead, you finance the solar power system through a loan (10-20 years loan with interest rates similar to mortgage rates), and you pay the lender with interest.

Return
You will be able to achieve higher monthly utility savings - after loan payment. Typically, you can cut your electric bill by 40-60% (or $40-$120 a month).

Conclusion
This option providers greater savings over option 2, but not as good as option 1.

3 Ways to Save on College Tour Costs

5/30/2015

Q. How can I save on college tour costs?

A. Here are 3 ways parents and high school students can save on college tour costs:

1. Research at Home
There are websites that enable you conduct virtual college campus tours from the comfort of home, for example: youvisit.com/colleges. You can also join web chats with financial aid officers and admission officers via collegeweeklive.com.

2. Attend Organized Tours
College-visits.com offers trips by region such as New England and California.

3. Let Colleges Pay For It
If your child is in high demand, you can ask for colleges to pay for the travel costs, it's called "fly-in" program. You can find many more such tips from College Secrets for Teens.

How Ordinary Investors Can Invest in Start Ups?

5/29/2015

Q. I am not an accredited investor, is it possible to invest, like venture capital firms, in high growth start ups?

A. Yes, soon it will be possible. There are many crowdfunding sites popping up as a platform for ordinary investors to invest in high growth, pre-IPO start ups, an example is WeFunder.com.

The Official Answer to "When to Start Receiving Social Security Benefits"

5/28/2015

Q. When is the best age to start receiving social security retirement benefits?

A. While the answer to this question is definitely personal, the attached official answer from the Social Security Administration provides a framework for you to make the best decision - given your unique situation:

3 Top Ways to Save on Air-conditioning

5/27/2015

Summer is coming! What's the best way to save on air conditioning cost? The June issue of the Money magazine recommends the following 3 top ways for families to save on air-conditioning costs:

Clean and replace air filers - this could cut a/c cost up to 15%
Buy a programmable thermostat and keep it at 78 degree when you are home - this could save cost by 10%
Install ceiling fans - this could reduce air conditioning cost by up to 4%

3 Steps to Backdoor Roth IRA Conversion - Part IV

5/26/2015

In our previous blog post, we showed from tax filing perspective, it's best to do the contribution to traditional IRA and backdoor conversion to Roth IRA at the same year. In fact, there could be more complications, see discussion below.

You have decided to make a non-deductible contribution to traditional IRA this year, then do a backdoor Roth IRA conversion, but alas, you already have a traditional IRA, SEP-IRA or SIMPLE IRA account with money inside it. Now what? You have two options.

a. Convert all of them to Roth IRA
This makes the whole thing easy, just follow the 3 simple steps as we outlined and you are done. However, you will owe tax on the entire amount of conversions because they are all pre-tax contributions.

b. Do Not convert the pre-tax contribution to Roth IRA
In this case, you need to first rollover all these pre-existing and pre-tax contribution money to another place, such as your employer-sponsored 401k, 403b or 457 plans. The good news is IRS allows such rollover and most employer-sponsored retirement plans accept such rollover money.

3 Steps to Backdoor Roth IRA Conversion - Part III

5/25/2015

In our last blog post, we showed that it's really easy to do a backdoor Roth IRA conversion, now we will discuss what you need to do at the time of tax filing to account for this conversion.

Form 8606
For the non-deductible contribution to the traditional IRA, you will need to include Form 8606 when you file your taxes. It’s a very simple form. If you use tax software, it will be included automatically if you answer the questions correctly.

1099-R
When you convert to the Roth IRA, you will receive the 1099-R form from your broker. Note, any conversion is accounted for on that conversion year's tax return, even the money could come from previous years' traditional IRA contributions.

To avoid unnecessary mess, you should try to do the contribution to traditional IRA and conversion to Roth IRA within the same year, even though there might be a small risk of IRS coming after you for the abuse of tax system.

Complications
If at the time of backdoor Roth IRA conversion, you have IRA money other than the $5,500 you contributed to the non-deductible traditional IRA account, there are complications and you need to deal with them first.

How to Invest in China's Stock Market From USA?

5/25/2015

Q. I am in US and want to invest in the Chinese stock markets, what's the best way to do it?

A. Unlike the US stock market, the Chinese stock market is still emerging and developing, and more importantly, heavily influenced by the government's policies. To minimize the risks, you can invest through the funds that cover a group of Chinese companies.

Below is an incomplete list of funds that US investors can use to profit from the Chinese stock market's ups and downs:

Chinese A-share Market
Long the Market

AFTY: CSOP FTSE China A50 ETF - invest in the largest 50 A-share stocks (super blue chips)
ASHR：Deutsche X-trackers Harvest CSI 300 CHN A - top 300 A-share stocks (blue chips)
HAO: Guggenheim China Small Cap ETF
ASHS：Deutsche X-trackers Harvest CSI 500 - 500 smallest (small caps)

CNXT: Market Vectors ChinaAMC SME-ChiNext ETF - top 100 stocks in SME board
CAF：Morgan Stanley China A-share closed end fund
CHAU: 2X Shanghai/Shenzhen 300 Index
XPP: 2X ProShares Ultra FTSE China 50
FXI: iShares China Large-Cap (super blue chips)
GXC: SPDR S&P China ETF
CHIQ: Global X China Consumer ETF (invest in consumer sector stocks)
YINN: Direxion Daily FTSE China Bull 3X ETF
EWH: iShares MSCI Hong Kong H-share market

Short the Market

CHAD: Direxion -1X Daily CSI 300 China A Share ETF

YXI: ProShares -1X Short FTSE China 50

FXP: ProShares UltraShort -2X FTSE China 50
YANG: Direxion Daily FTSE China Bear 3X ETF

3 Steps to Backdoor Roth IRA Conversion - Part II

5/24/2015

In our last blog post, we explained who should do backdoor Roth IRA conversion and why to do it. Now we will describe the 3 simple steps to do backdoor Roth IRA conversion:

Step 1. Open a non-deductible traditional IRA account
As long as you have earned income, doesn't matter how high your income is, you can make a non-deductible contribution to a traditional IRA.

The annual contribution limit could change every year as well as change with your age, see our previous blog post.

Step 2. Wait a While
The law does not impose any waiting period between a contribution and a conversion. However, as we have discussed previously, there is a step transaction doctrine, which implies the best wait time is to convert prior year's non-deductible IRA to current year's Roth IRA.

For the money sits inside the non-deductible traditional IRA account, if it has unrealized gains at the time of conversion, it will be taxed at your income tax rate, rather than the typically lower capital gain tax rate. A good strategy is to keep the money in cash format, because out of your entire portfolio, it's wise not to put 100% of your money into investment, so you will have enough ammunition in case of a market crash! This is a good place to park that cash, and avoid any potential higher income tax.

Step 3. Convert to Roth IRA
Call your traditional IRA provider how to do this, some could do it for you over the phone, some require you to sign a form. There is no income limit for the conversion. Because your money is from the after-tax traditional IRA account, except on the unrealized gains, there should be little tax on the conversion.

In our next blog post, we will discuss the tax treatment of backdoor Roth IRA conversion at the time of filing your tax.

3 Steps to Backdoor Roth IRA Conversion - Part I

5/23/2015

Q. How do I do backdoor Roth IRA conversion?

A. Backdoor Roth IRA conversion is quite easy and could be completed in 3 steps.

But first, what is backdoor Roth IRA conversion and why one should do it?

What is Backdoor Roth IRA Conversion?
Backdoor Roth IRA conversion is a tax-smart strategy for people who are not eligible for Roth IRA contribution, but still have money sit aside in taxable account for investing purposes. After the backdoor Roth IRA conversion, the same amount of money will no longer have to pay a single dime of tax anymore!

Why Backdoor Roth IRA Conversion?
There are two reasons one should consider Backdoor Roth IRA Conversion:

1. You are no longer eligible for Roth IRA contribution!
For 2015, the modified AGI phaseout starts at $116,000 for single, $183,000 for married filing jointly. If your income is above those thresholds, you cannot contribute to Roth IRA anymore.

2. You have money on taxable account to invest.
You have at least $5,500 sitting in a taxable account invested in stocks, bonds, mutual funds, etc. of course, any gain out of it, you will have to pay tax year in and year out.

Furthermore, you probably will continue to add money to the account and you will not need such money till you enter into retirement time.

If you meet both above two conditions, the good news is you can backdoor convert that $5,500 into Roth IRA so you will never have to pay tax on any gain again! The bad news is you can only backdoor convert up to $5,500 each year ($6,500 if you are above 50 years old).

And, the backdoor Roth IRA conversion is very simple, just take 3 steps to complete.

Green and Cost Effective Cleaning Supplies

5/23/2015

Many common cleaning supplies contain harmful chemicals. Below is a list of greener options that are easy and cost effective to do your spring cleaning.

1. Baking Soda
Useful against mold and stains.

2. Hydrogen Peroxide
Use it in a spray bottle to clean surfaces.

3. Borax
A laundry booster, fungicide, herbicide, and general household cleaner.

4. Rubbing Alcohol
Use it to clean sinks, stainless and chrome. Dilute with water to wash windows.

5. Coca Cola
It cleans toilets, rusty parts, and even laundry.

Find Location Specific Crime Reports

5/23/2015

Q. How to find crime reports for a location I am interested in?

A. You can use CrimeReports.com which is a free service.

You enter the specific address, it will show a map and various crimes in the neighborhoods clearly mapped out.

If you want to do other community-based research, try zoomprorpector.com, it's built for businesses to find a place to locate, but also has very useful information for real estate investors who want to do research about any specific community.

Differences of the 4 Types of Real Estate Investments - Part III

5/22/2015

In our previous blog post, we discussed the Public Equity method of investing in the real estate market - investing in REITs. Now we will discuss the Public Debt method of investing in the real estate market - investing in mortgage securities - the debt equivalent of REITs.

What are Mortgage Securities?
Mortgage securities are a special class of REITs - various mortgages are bundled together to form a single investment trust (mREIT). These mortgages are securities by the underlying properties, but these REITs do not own or operate the properties. So if you invest in them, you are not owning properties, you earn interests from real properties (that's where the "debt" of the Public Debt comes from).

How to Analyze mREITs?
If you want to analyze mREITs, it could get technical very quickly because an agency mREIT buys and holds agency residential mortgage-backed securities (MBS), financed through repo, and hedged with a variety of derivative or cash positions. Don't think there is no risk because these assets are already backed up by MBS, there is huge interest rate risk because borrowers of the mortgages could prepay if interest rate drops!

For a better analysis, I recommend this seekingalpha article - How To Analyze The Value In Agency Mortgage REITs.

Differences of the 4 Types of Real Estate Investments - Part II

5/21/2015

In our previous blog post, we discussed the 2 real estate investments that happen outside of the public exchanges. Now we will focus on the Public Equity part of the RE investment - investing in REITs.

What is a REIT?
REIT stands for real estate investment trust, it is a company that owns and operates income-producing real estate, and sells shares to the public. By investing in a REIT, you become a real estate owner, that is why we call investing in REITs a type of Public Equity participation of the real estate investment.

What Makes REITs special?
There are two features that are special to REITs:
1. A REIT's main business is to manage a portfolio of properties, in other words, rental properties are its product.
2. A REIT must distribute most of its earnings to shareholders in the form of dividends, in this way, a REIT can enjoy favored tax status as a business entity.

How to Analyze REITs?
REITs could be analyzed from 2 angles -

Buying a REIT is similar to buying a renal property, your analysis should focus on the REIT's income growth potential, occupancy rates, leverage ratio, etc.

Buying a REIT is also similar to buying high-yield bonds and dividend-paying stocks, so you want to look at some of its financial metrics. Unfortunately, Net Income is not a good measure for REITs because of something unique to real estate - depreciation. A depreciation is treated as an expense, which reduces the Net Income. However, depreciation does not impact cash flow, therefore the cash flow from operation is a better measure of the business as it removes the distortion of depreciation.

Net Asset Value is another metric worth noting - NAV is calculated by dividing operating income by cap rate of the property, then subtract mortgage debt. The NAV is a better measure than book value of a REIT, as it reflects the changing market situations and the impacts on the value of the properties. Unfortunately, it requires lots of due diligence to get fairly accurate analysis of a REIT's NAV.

The Bottom Line
Like investing in individual stocks that carrier higher risks and potentially earns you higher returns, so does investing in REITs. Also, in order to be successful in investing in REITs, it takes lots of homework, just like if you want to succeed in investing in individual stocks.

In our next blog post, we will discuss the Public Debt part of real estate investment.

Differences of the 4 Types of Real Estate Investments

5/20/2015

In our last blog post, we described 4 different ways of investing in the real estate market. Now we will take a look at the differences among them.

First, let's clarify what do we mean Public vs. Private markets and Equity vs. Debt.

Public vs. Private
In the public market, you can buy publicly traded real estate related securities and derivatives. While in the private market, you strike deals with individual parties.

Equity vs. Debt
Equity refers to the fact that you own the real property, while debt means you are lending money to other investors who will own the real properties, and you will earn interests from your money.

Now, let's take a look at each of the 4 types of real estate investments based on the above combinations.

1. Own rental properties - Private Equity
You buy investment properties from the sellers and take ownership (equity) of such properties. Such transactions do not occur at the public security exchanges. When people talk about real estate investment, they typically refer to this type of investment, however, there are two sub-markets within this type of investment:

a. Own Your Own Rental Properties
If you do it right, or the luck favors you, you might have both positive cash flow each month and appreciated property value over time, even better, if you are use leverage (other people's money) rather than full cash for the investment, you could have substantial return.

However, many people overlook the downside of this investment - owning a rental property is like taking on a part-time job, don't underestimate the work, frustration, and addition investment you need to put in, as well as the middle night call from the tenant reporting the leaking pipe!

b. Invest in Private Equity Funds
There is another type of owning real estate through private market transactions - investing in Private Equity funds that invest in real estate markets. You have the benefit of owning but not managing the properties, also, by pooling many people's money together, the PE fund could diversify and find better deals than individual investors could find. Obviously you have to pay other people to do all the work for you!

2. Lend private mortgages - Private Debt
In this case, you are lending your money to other investors to enable them to purchase investment properties. You don't take ownership of the property, instead, you earn interest from other people's debts. There are quite a few ways to lend money to other people so you can profit from the real estate transactions. Below are two common ones:

a. Hard money lender
As a hard money lender, you lend your money to house flippers to enable them to achieve short term and quick profits. As a return, your profit will be handsome too - you will earn both upfront points as well as higher than normal interest rates. If the flipper fails, you will take title of the house and become the new owner!

b. Tax lien investor
You lend your money to county governments by helping them fill the tax holes created by residents who are delinquent on property taxes. Most counties require a minimum interest rate and time period for those people to pay you back, otherwise, you can take possession of the property! If you think this is a risk-free investment, it almost is!

In our next blog post, we will discuss the remaining 2 types of real estate investments.

How Many Ways to Invest In U.S. Real Estate Market?

5/19/2015

Q. What are the different ways I can invest in the U.S. real estate market?

A. While it's debatable whether real estate investment is better than other types of investments or not, the fact is, based on CoreLogic data, as of spring 2015, 27 U.S. state's average real estate market prices are within 10% of historical highs, and 7 states' average real estate prices have exceed 2006's historical highs!

To invest in the real estate markets, your options are more than just buying a rental property. In the matrix below, we used the Public/Private markets vs. Equity/Debt investments and outlined 4 different ways one can invest in the real estate market.

Public Market Private Market
Equity Buy shares of REITs Own rental properties
Debt Buy mortgage securities Lend private mortgages

In our next blog post, we will discuss the differences among these 4 types of real estate investments.

How Much Income to Earn 4 Social Security Points in 2015?

5/18/2015

Q. How much income will qualify me for full 4 social security points?

A. In 2015, the amount needed to qualify for coverage increases to $1,220 per quarter. So earning $4,880 anytime during 2015 will net you the full four quarters of coverage.

7 Items It's Best to Buy Used

5/18/2015

Q. Which items are the best to buy second hand instead of new?

A. It is a smart move to buy the following 7 categories of items used rather than new -

1. Cars
A new car will lose 20% of its value after 1 year, and lose 40% of its value after 5 years. It's wise to buy a 1-2 year new car.
2. Books
This is especially important for college students, and we have shared an extensive list of ways to save on college books.

3. Furniture
If you are renting for a short period of time, it's wise to buy second hand furniture from places such as:

Craigslist
Freecycle
Consignment shops
Garage sales

4. Tools
Garage sales, Craigslist, and eBay are all good sources for second hand tools.

5. Baby clothes
Consignment shops and garage sales are good places to shop used (or even new!) baby clothes.

6. Fitness tools
If you want to save on gym fees, find used fitness equipment at Craigslist.

7. DVD and game consoles
GameStop, eBay and Amazon are good places for used items in this category.

AMT Changes for 2015

5/17/2015

Q. What are the AMT related changes in 2015?

A. AMT exemptions for 2015 increase to $83,400 for couples and $53,600 for both singles and heads of household.

The phaseout zones for the exemptions start at higher income levels as well - above $158,900 for couples and $119,200 for single filers and household heads.

Also, the 28% AMT tax bracket kicks in a little later in 2015 - above $185,400 of alternative minimum taxable income.

Kiyosaki's Top New Money Tips

5/16/2015

The author of Rich Dad, Poor Dad had a new book in 2015 - Second Chance: for your money, your life and our world.

In this book, Kiyosaki offered a few new money tips, some non-conventional ones are below:

1. Save Less
Maintain an emergency fund, but that's it, don't go above that.

2. Don't Consider Your House an Asset
Remember: homes cost money to maintain, and the odds of making money when you sell aren't a sure thing anymore.

3. Seek Out Passive Income
Real Estate investing is still Kiyosaki's favorite, but other businesses should be considered - such as writing an e-book and start a web-based business.

I like many of Robert Kiyosaki's books, my favorites are below:

Can Term Life Policy Be Used As Collateral For a Loan?

5/15/2015

Q. I am trying to secure a $150,000 small business loan for which the lender requires collateral. Can I use my $500,0000 term life policy as collateral?

A. Yes, both Term and Permanent life policies can be used as collateral.

An Example
Assume you need a 20-year $150,000 business loan, and you need proof of collateral to pay the loan balance should you die.

You go ahead purchasing a 20-year Term life policy with a $500,000 death benefit. In this way, the premium is within your budget, and you have a term life policy that can be used to provide more than enough for the required collateral.

You then work with your insurance company and sign a release form with the lender as the assignee. If you die before the loan is paid in full, the death benefit will be used to pay the balance of the loan. You should still name a beneficiary because any remaining death benefit balance will be payable to the beneficiary. If you don't die and pay the loan balance before the 20-year period, the collateral assignee should release the assignment.

How to Screen Rental Applicants?

5/14/2015

In our last blog post, we showed a few popular websites that help landlords to generate tenant reports. But what's the most important information a landlord to use to screen rental applicants? Below is a list of items you should use, arranged in order of importance:

Complete application form (including social security # and authorizing you to run the applicant's credit report)
Most recent 2 pay stubs (to determine their affordability)
Most recent 2 bank statements (to make sure they can pay the deposit and first month rent)
Credit score (to determine their credit worthiness)
Credit history (don't automatically rule out a low credit score, a credit history report can show you the details on why the low score)
Eviction report (if they have done it before, chances are they could do it again!)
Bankruptcy report (understand what drove the person to bankruptcy)
Past year's tax-return (you might get resistance for this)
Criminal records report
Previous landlord's contact number

How to Check a Tenant's Credit History and Background?

5/13/2015

Q. I am an new landlord, how do I check a tenant's credit scores and background?

A. There are a few websites you can use to screen tenants, here is a list of popular ones:

https://mysmartmove.com
You send the applicant a link through this website, the tenant pays for the service directly, and you will receive a report with details about this tenant's credit history and criminal background.

http://ctcredit.net
You will pay for the service first (you can always collect the money from the applicant first), there are quite a few options to choose from, depending on how much information you want to collect.

http://www.rentprep.com
Semilar to CTCredit.

But, don't expect the websites to make the decision for you. You need to do your own due diligence, in our next blog post, we will discuss what are the most important information you need to collect and the order of importance of the information.

Hope vs. Plan

5/12/2015

Q. We are in the 30's with young children. My husband works full time and I work part time and take care of kids. My husband doesn't want to pay premium for life insurance as he thinks that's something unlikely to need. What should I tell him?

A. All of the insurance products are for the rare but financially crushing events in life, because these events are rare, premiums tend to be affordable (especially for your age), if the event does happen, a financial disaster is avoided. In other words, one can not hope such event won't happen to him or her. Hope is not Plan!

What you should do is carefully evaluate the financial needs in case such rare events happen and get just enough coverage, for example, a 20-year Term life policy is surprisingly affordable.

Please feel free to contact us for a quote sheet that includes all of the insurers' rates so you can pick and choose the best plan that matches your needs.

Also, life insurance application is a risk-free process for consumers today, you don't have any obligation when you apply, and you can always walk away at the last minute, even when a policy has been issued.

Can Long Term Capital Loss Offset Dividend Income?

5/11/2015

In our last blog post, we discussed the different tax treatments of qualified and nonqualified dividends. We have found that long term capital gain and qualified dividends are taxed at the same rate, which leads to the question - if I had a long term capital loss, can it be used to offset dividend income?

The answer is not directly. Although dividends and long-term capital gains are taxed at the same rates, capital losses can NOT be used to offset dividends.

However, if you have a net capital loss after offsetting all capital gains, up to $3,000 per year of capital loss may offset ordinary income which may include dividends.