Getting Term Life Insurance – Step by Step

Once we found renters for our condo, the next item on our list of financial to-dos was getting life insurance.

Here are the steps we went through:

  1. Contacted a life insurance broker and told him what kind of policy we wanted to buy (30 year term with death benefits that were 10 to 12 times our income). We chose 30 years instead of 20 because we don’t have any kids yet but plan to within the next few years and we wanted the insurance to last until our kids were all out of college and all the mortgages were paid off.
  2. Our broker sent us some estimates from different insurance companies and we picked the company with the lowest annual premium.
  3. Once we made our decision, our broker sent us a series of questions to answer (full names, home address, Social Security numbers, etc.)
  4. He then prepared an application for us to sign with some additional questions for us to answer. We signed and returned the application back to him.
  5. Shortly after, a medical examiner called us to schedule an appointment for our medical exams. Your medical exam determines your health class and your health class determines your annual premium. The better your health class, the lower your premium. We scheduled the medical exam for a Saturday morning.
  6. About 10 days after the medical exam, our broker let us know that my application was approved and what health rating I was in. My husband’s application is still pending because they’re waiting on medical records from his doctors.
  7. After I was approved, our broker sent me the official policy to sign. I returned the signed documents along with a check for the first premium payment.
  8. The check was deposited and my life insurance policy is now active.

 

Buying a Condo in Los Angeles for Under Market Value

We bought our condo in Los Angeles for under market value thanks to preparation and luck.

By the time I stumbled upon the listing on Redfin, a buyer was already in escrow but the seller was taking back-up offers. We submitted a back-up offer but was quickly outbid. We pretty much gave up on this property right away. But a month later, my mom saw that it was relisted because the first and second buyer both fell out of escrow. We immediately contacted the seller’s agent to find out why and it was because the previous buyers had issues with the property during inspection. We were willing to accept those issues as long as we could get it for a good price. We submitted a really low offer and at first, the seller was hesitant to even negotiate with us. But because it had been on the market for several months and she already had 2 buyers back out, we ended up agreeing on a price about halfway between our offer and the listing price.

Below is a timeline of how everything played out. Feel free to skip to the end for some final thoughts.

August 16, 2016 (my birthday!) – Saw the property on Redfin.

August 29, 2016 – Found out that the seller had already received an offer but is accepting back-up offers. We submitted an offer a little higher than listing price but was outbid.

September 29, 2016 – My mom informs me that the property has been relisted.

October 2, 2016 – Found out why it was relisted. First and second buyer changed their minds for different reasons but they both offered way above listing price. The first buyer offered $54,000 above listing price. The Second buyer offered $26,000 above listing price.

October 3, 2016 – Submitted our first offer ($39,000 under listing price).

October 6, 2016 – Received the seller’s first counter offer ($6,000 under listing price); sent our counter offer ($19,000 under listing price).

October 7, 2016 – Accepted the seller’s second counter offer ($12,500 under listing price).

October 10, 2016 – Opened 45 day escrow.

October 31, 2016 – After the inspection, the seller decided to lower the purchase price even more instead of paying for the repairs. So the final purchase price ended up being $25,000 under listing price.

November 22, 2016 – Closed escrow.

Final thoughts:

The listing price was already under market value because the seller was betting on a bidding war. Today, the property is worth about $84,000 more than what we purchased it for. But this estimate is without taking into consideration the complete remodel that we’ve done.

We got lucky because my mom happened to see that the property was relisted and told us right away. Preparation was important because we had all our paperwork ready to go and were able to move quickly. Even if we got lucky with the timing, if we weren’t prepared to move forward right away, the seller probably would’ve moved on to another buyer. But because we had everything ready, the seller could see that we were serious buyers and there was a very good chance this escrow would go through.

So if you’re in Los Angeles (or any major city) and buying a house for “a good deal” seems pretty much impossible, I just want to encourage you to be patient. Keep looking and stay on top of all the listings, even the ones in escrow. Have all your paperwork ready and make sure your real estate agent and lender are also ready to go at a moment’s notice. In the meantime, pile on the savings. You can never have too much savings. There’s probably going to be repairs needed, closing costs, remodeling costs, etc. so it helps to have a bunch of cash ready to go. And if you happen to buy a move-in ready home, you could use that cash for a bigger down payment or maybe even to buy your property completely debt free :)!

Reverse Mortgages

I’m not that familiar with the intricacies of reverse mortgages but one of my clients recently asked if it was a good idea for him to do one so I did some research. Here’s what I’ve learned about them so far:

When you have a traditional mortgage, you take out a loan and pay the lender payments so that after a period of time (30 years, usually) you own 100% of the home. With a reverse mortgage, you start off with a house that you own 100% and then borrow against it and the lender pays you. Now why would that be a bad thing? Because you’ve traded having no debt on your home for increasing debt on your home and when you pass away or decide to sell your home, you have to repay the loan and could end up with nothing (i.e. no home) depending on how much you owe and how much your home is worth at that time. Not to mention there are a bunch of fees involved and you’re still responsible for all the carrying costs – property taxes, HOA dues, insurance, etc.

You have to be over 62 to even qualify for a reverse mortgage so this obviously doesn’t apply to us millennials right now. However, this could apply to our parents. Most of our parents are over the age of 62 (or will be within the next decade) and they’ll likely have a paid off house. If they’re in retirement and running out of money, someone might tell them to do a reverse mortgage. And now that you know that it’s not a good idea, you can advise against it and try to convince them to consider other options instead like downsizing or selling their home and renting.

Dave Ramsey’s 7 Baby Steps

I was first introduced to Dave Ramsey in 2009, when I was still in college. My roommate at the time let me borrow her copy of The Total Money Makeover. Even though I had always been an avid saver and didn’t have any credit card debt, I wanted to learn more about money.

I didn’t retain a lot of the information I read at the time, but I remember agreeing with most of Dave’s principles. The book also helped me realize the importance of giving, which I had never thought much about before.

After reading that book, I didn’t think about Dave Ramsey or his 7 Baby Steps again until very recently.

At the end of the last year, my husband and I bought our third rental property. And when I finally filled out a net worth statement and realized just how much debt we had once we combined all three mortgages (plus a HELOC), it was a rude awakening to say the least.

Even though our net worth is still very much positive thanks to increasing home values, we don’t like having so much debt, or any debt, to be honest.

So shortly after we opened escrow, we started listening to The Dave Ramsey Show every day. Listening to all the Debt Free Screams has inspired us to finally take his 7 Baby Steps seriously and make a plan.

We are technically in Baby Step 2 because we have small car loan. But we should be able to jump to Baby Step 4 & 6 within the next 2 months (we’re skipping Baby Step 5 because don’t have kids yet) and here’s why:

Even though we have the cash to pay off the car, we are in the middle of a major home remodel for the new rental property we just bought. And since home remodels often come with expensive surprises (like suddenly all the pipes need to be replaced!), we want to have enough cash on hand to cover any of those surprises, rather than resort to borrowing more money.

Once the home remodel is compete, we should have enough cash remaining to pay off the car (Baby Step 2) and have a 3-6 month emergency fund in place (Baby Step 3).

My husband and I are currently saving about 10% of our gross income into our 401(k)s but as soon as the home remodel is done, we will bump it up to 15% (Baby Step 4). We will also be redoing our budget to make sure we can pay extra principle on our mortgages & HELOC to get out of debt faster (Baby Step 6).

Based off our current income and expenses, we are projected to be in Baby Step 6 for over 25 years (yikes!). But by reducing our expenses immediately and increasing our incomes over time, our goal is to get out of Baby Step 6 in 15 years or less. The average family takes 5-7 years to finished Baby Step 6 but since we have 3 rental properties, 15 years might be more realistic.

If all goes well, we should be financially independent the same time we pay off our last mortgage.

I know things won’t work out this way exactly because, you know, life happens. But that’s our plan and if we’re delayed by a few years, we would still be out of debt a heck of a lot sooner than if we had no plan at all.

Coverdell ESA (Education Savings Account)

If you’re a parent who wants to save money for your child(ren)’s education, you might want to consider opening a Coverdell ESA for each child.

For each child under the age of 18, you can contribute up to $2,000 a year to a Coverdell ESA. Contributions are not tax-deductible but the money in the account does grow tax-free and qualified distributions are also tax-free, kind of like a Roth IRA.

Qualified distributions include using the money for postsecondary tuition, fees, books, supplies, and basic room and board or $2,500 per year for off-campus away-from-home students. The Coverdell ESA can also be used to pay for K-12 expenses like tutoring, computer equipment, room and board, uniforms, and 529 contributions. We will talk about 529s in depth another time.

If the money is used for non-qualified education expenses (getting your nails done, watching a movie, Disneyland tickets…), you will have to pay taxes and penalties.

The balance of the account has to be completely distributed when the beneficiary (your child) reaches the age of 30. But if you don’t want to give your 30 year old child the remaining balance, you can roll it into another Coverdell ESA for a family member that’s related to them (i.e. their sibling who is still in school, their child/your grandkid, etc.).

A couple other things to note:

  • If you’re married and your modified AGI is over $220,000, you are considered phased out (i.e. you can’t make any contributions).  If your modified AGI is more than $190k but less than $220,000, you can make a contribution but not the full $2,000.  If you’re single, the limits are $95,000 and $110,000.
  • The annual deadline to make this contribution is when your tax return is due for that year (not including extensions).  For example, if you want to make a 2016 contribution, you have until April 15, 2017 to do so.

Good Personal Finance Reads

Murdering Your Consumer Debt (Millennial Revolution) – Great advice on how to tackle your consumer debt!  I don’t have consumer debt, but if I did, I would definitely follow his advice.

Marrying Your Equal Is Better Than Marrying Rich (Financial Samurai) – I can definitely see the validity of this statement in my line of work.

Guide to IRA Contribution Limits, Deadlines and Deductions (Get Rich Slowly) – A helpful article on IRAs.  This would’ve came in handy for my 2013 return.

 JL Collins’ Stock Series – Basically everything you need to know about investing.  I haven’t decided if I agree with 100% of what he says but Mr. Collins does a solid job of breaking down investing into to simple, easy to understand terms.