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You could do Everything Right in Managing your Wealth yet still end up Declaring Bankruptcy

Right, this couldn’t have happen.

Yet it did.

Over the weekend, I listened to a very good interview by Joshua Sheats over at Radical Personal Finance.

He was at Camp Mustache, which is a gathering of folks who aspired to reach financial independence earlier than most. He chanced upon an interesting conversation of a lady striving towards financial independence but with an unique past.

You can listen to the interview here. (If you are a podcast Listener do subscribe to his podcast. There are much standard financial planning, wealth management stuff but also alternative stuff such as hacking funeral, insulating your home and investing in ammunition)

This lady’s situation is unique because from the start, her husband and herself have subscribed to good personal finance information, and practicing them well.

They lived a very financially concious life and was able to build up a portfolio of 20 real estate properties that provide an income of $4000/mth.

Yet they still end up filing for bankruptcy and divorce.

Some of the tidbits covered:

  1. How they got a deeper interest in their own finances
  2. Some of the books they read very early
  3. How they build their 20 real estate properties initially
  4. Their progression in living and flipping real estate, becoming an agent and then mortgage lender
  5. What got them to declare business reorganization bankruptcy
  6. Why they got divorced
  7. What did they do to keep things alive
  8. The downside of real estate that many do not talked about (recapture depreciation, active management when you are 25 years old versus 45 to 55 years old, effort difference)
  9. The nuances of difficulty in managing rental properties
  10. Why she prefers index investing versus real estate

Here are some reflections after listening to this podcast:

What you deemed as doing right might not be foolproof

I always feel a certain sense of insecurity that while the plans that I worked out is well thought out, these plans will still fail in actual application.

The actual implementation is often not so straight forward. I have to agree that they did a lot of things right, but it is scary how actively managed leveraged real estate can unravel.

The ability to suffer well is a very good skill to accomplish

I find it remarkable that people in difficult situations can push forward and work out their problems one by one. Through the interview, you can sense that keeping a marriage together, negotiating with lenders, managing very young kids finally took a toll on the couple.

I believe the lady develop a rare skill of being able to suffer well, or what we termed stoicism.

It is perhaps something that many folks that is trying to build wealth to work towards financial independence need because you will face many setbacks. These range from disagreeing spouse, family that are incredulous this can be done, making hard choices by forgoing stuff common in normal society.

Financial independence is still a worthwhile goal, if you understand it very well

It turns out that, she didn’t lose her head in this ordeal and was still enlighten to push for financial independence despite her setback.

Some goals, if you understand what you want, how realistic they are, is still worthwhile to pursue, despite the difficulties that you face.

You should always reserve taking your opinion all the way because there are some exceptional situations

Case studies like this taught me that, sometimes despite how well you could try to understand the situation, there will be situations you cannot fathom.

I have seen people I considered very smart make decisions that does not make sense. Circumstances pushes us to carry out irrational decisions.

It is easy for us to label people as irresponsible, it might be more worthwhile not to jump the gun and come to a conclusion, and to listen to what happen exactly.

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Unintelligent Nerd

Wednesday 1st of February 2017

Hi Kyith,

Thanks for sharing. I have the same concern as well. What if all I have done eventually amounts to nothing?

There are many known unknowns in life, and I've not even started trying to identifying the unknown unknowns and prepare some form of defensive measures against them yet.

Still, like what you say, it is a worthwhile journey (or is it I am trying to console myself?)

ThumbTack Investor

Wednesday 1st of February 2017

Just curious... 20 properties only give $4k/mth? Means each property monthly rent = $200?


Wednesday 1st of February 2017

hi TTI, perhaps i can explain abit. usually in the USA each property cost can be lower. in the 1990s i suppose they are cheaper at $50,000 or $100,000. The expenses includes insurance, maintenance, property tax. The cap rate then could be 5% to 10% depending on the deals you are able to find. But if you include the principal and interest, you should have some amount left over. if its positive, it means its cash on cash positive. the down payment could be 24,000 so that would make each of these a 10% cash on cash yielding investment.

their way to financial freedom is to keep collecting all these properties. if you compute your expense to be $4000, that means you need the equivalent of 20 of these properties. then the next phase is to pay down the mortgage with the cash flow so that there is no debt (if you are conservative). it is common for them to hold 2 mil worth of properties, but the networth is 1 mil due to the leverage.

each property, once paid off is free and clear.

abit different from over here, where it is usually cash on cash negative. they would never have bought a property in singapore with this critera.

this article is from a person who is in the FI space who reaches FI through real estate rental. it explains her criteria of looking for a 1% property, which means if she pays $100k for it, it has to rent for $1k monthly. The usually the net property margin is 50%, so the yield is about 6% ( i believe they include the mortgage paydown but i could be wrong)


Wednesday 1st of February 2017

Sometimes when we invest in low risk product. It does not mean no risk. You can still lose all your money. And some times when we invest in high risk product, it does not mean 35% chance you can lose money. It may means 80% chance you will lose everything or 95% you will 50% of your investment.

The problem with FA is they could not exactly define them. There is not enough data or reliable info to judge or limited by level of person. Is not a math thing.


Wednesday 1st of February 2017

Hi cory I agree, but I hope when you say FA you are referring to fundamental analysis. I hope i am not misunderstanding.

Finance Smiths

Wednesday 1st of February 2017

That's an unfortunate story. I have been meaning to get into podcasts, something useful to do especially when I'm taking the train to and from work. I guess we do what we can to achieve financial independence and hope that we can sustain it. There's a lot of luck involved in that!


Wednesday 1st of February 2017

It is a good way to consume content if some part of your work is mundane. And i do agree a lot of luck involve but there are also deliberate actions.

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