After more reading and searching around, I decided to file a Florida LLC for a few reasons (besides the asset protection and income passthrough provisions)

1) First I am already here, so I can act as my own resident agent.  When you file for a corporation in a different state, you need to have a resident agent there with an address local to that state.  If I wanted to file a second Nevada Corporation in the future, I would need to pay a resident agent in Nevada.  Filing in Florida saves me that fee.

2) LLC allows special provisions such that the if I later want to have silent investors join in, ownership and income from the LLC can be made very flexible.  They do not need to take ownership in the company in order to invest.

3) The traditional downsides of LLC, which is that if I were to take a salary from the company, I need to pay self employment tax, does not apply here.

4) Filing is easy.  Secretary of State in Florida uses a web-based system that makes filing very simple.  You can search for “Secretary of State” and the name of your state in google.  Your state may also already have a system in place.

As a REI, you probably have a lot of expenses.  If you are like me, it’s be a shame to pay those costs with hard earned after-tax dollars from your day job.  So a lot of people set up business entities to take advantage of tax deductions.  They are not hard to do and the savings will easily more than pay for the initial upfront costs.

Gas costs from driving to potential investments, repairs costs of existing properties, and even that camera you bought to snap pictures of potential investment properties can all be tax deductible if you have a business to pass through those expenses to your personal tax.

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My friend forwarded me this article which I thought really nailed it on the head regarding finding something you love to do.  Here’s a quote.

“Always produce” is also a heuristic for finding the work you love. If you subject yourself to that constraint, it will automatically push you away from things you think you’re supposed to work on, toward things you actually like. “Always produce” will discover your life’s work the way water, with the aid of gravity, finds the hole in your roof.”

You can read the rest of the article here.

http://www.paulgraham.com/love.html

There certainly are a lot of questions, the same questions I have asked myself before, that I am asking myself again after reading the article.  How do I go about finding what I love to do?  How do I find something that give me the most enjoyment and money?  People say do what you love and everthing else will follow.  It’s wisdom that I question; what if I love doing something that I am not good at. 

Tens of thousands of people go on American Idol because they love to sing.  What if I am not good enough at anything to become the best at something?  There’s so much uncertainty, but maybe that’s the best part of it.  If I already knew, getting there won’t be as sweet.

The health of the economy seems to be doing pretty ok through 2005; unemployment is down, stock market has been very healthy (until this past week), housing market hasn’t blown up, high oil prices didn’t seem to affect the market much other than the knee-jerk reactions. 

So what is in store for us in 2006?  The first two things that come to mind are still whether oil is going to go through the roof again and when the housing market will deflate.

First, oil.  Say if OPEC decides to cut supply or foreign demands like China continue to supply, the price goes up (much as it has this past week).  What really happened in 2005 is that the costs of higher oil prices were not reflected in consumer spending because  everyone with their home equity loan (either cash-out or refi) were able to get their hands on a chuck of cash to continue to spend like it’s 1999.  How is 2006 different?  Market sentiment.  Which bring us to our 2nd topic…

Housing market.  If everyone expects the slowdown in housing market to materialize, the freespending will not be as liberal.  Consumers, in aggregate, will think twice about spending rather than saving.  It’s a tough balance because a lack of consumer spending will cause ordinary business income to shrink, which leads to higher unemployment.  It’s a death spiral to recession.  But no worries, we are not there yet, consumer sentiment numbers are still in the black.

What does this mean for you?  Do what the rest of banking world does, which is to watch what the Fed does.  The Fed’s job is to promote steady growth in the economy.  You can be assured that the Fed will be watching oil prices, consumer sentiments, stock index, commodity prices, foreign investments alike to gauge the health of the economy.  If economy is growing too fast, they raise the rates (or at least say they expect to raise the rates) and vice versa.

However one thing we can be sure of is that Fed knows their history.  They know that if they raise rates too much (currently at 4.5%), then they can easily restrict the economy into recession.  The Fed knows that is exactly what happened in Japan in 1990.  Japanese central bank also had to deal with a hot housing market, one comparable to California and Southern Florida.  Japanese central bank tightened the rates too much and too fast and for the past 15 years, Japan has been in a recession and has just begun to recover recently.

From this perspective, Fed is unlikely to tighten too much, which is good for the Stock market and at least neutral for the housing market (if job creations locally can support housing prices).  I am bullish for 2006.  (Unless we get another 3 peat of category 5 hurricanes, fingers crossed, I live in Florida!)

With every job, there are pros and cons.  Some are more obvious than others.   I think it’s very important to look at those details when you choose a job.  Let’s look at some examples.

Imagine if you are a software engineer who programs the software used in microwaves.  You put in your 9-5, and you get your bi-weekly paychecks.  That’s about it.  The knowledge you learn on the job really does not help you outside of the job.  (Unless you come up with a new technology that makes microwave much better and you start a new company with your idea)

Now imagine if you are a real estate broker.  You put in your hours at work, maybe some weekends too.  In addition to the paychecks that you get from the company, you also get a very good understanding of the local housing market as well as the process of buying and selling real estate.  What you learn on the job helps you in your life outside of the job.  Another perk is that once in a while, a deal comes around for a very good price, and instead of selling the property, you buy it yourself for a easy flip.  A friend of mine works as a real estate broker and that’s exactly what he did.  An elderly woman really just wanted to sell the house fast, so he picked it up for an easy flip. 

Another perk is that as a real estate broker, you are constantly meeting different people and making connections.  You may introduce a buyer to an accountant who bought a house through you.  That buyer might run a carpet cleaning company.  You, in turn, would use their service to clean the house that you are about flip, and you would get a better deal because you had just introduced them to a trust worthy, capable accountant who you personally also use.  The point is you meet people through your job.  As compared to a engineer sitting 9-5 in a cuble, the hidden perk of a real estate broker job is much more attractive.

If you are still in college, these are very important things to look at when you decide on a job offer.  If you are already in the work force, you may consider that the job you have really isn’t helping you in the long run.  If you are young and don’t have responsibilities of children or mortgages, it’s not too late to reconsider a different field.  If you are a 9-5 guy in an engineering field, you might consider getting your MBA to make a career switch easier.  Consider this, a friend of mine made over 100k as a commerical real estate broker straight out of school. (a California State University)  It maybe scary to make a career switch, but if you don’t think you are getting much out of your current job either in the size of the paycheck or the lack of perks, you might just take the plunge and start over on the right foot.

To understand when and if the housing bubble will pop or deflate, one point of view is to look at how investors and your everyday John Doe can continue to purchase property even as prices skyrocket.  Either their income have significantly risen or mortgage companies and banks have made it easier to borrow money.  When these factors supporting continued purchases of existing and new homes dissipate, the bubble will begin to deflat.

Many articles have shown that income have not kept up with the rising housing prices in major metropolitan areas.  Still mortgage rates have been kept relatively low in the 6’s for 30 year fixed rates.  Despite Fed hiking the rate at every meeting, long term rates have not risen accordingly.  This is because overseas investors continue to puchase the mortgage backed securities (MBS) that come from the mortgage.  To understand this, we need to understand how banks can lend money continually (they don’t have unlimited supply of cash!!)  After banks make a loan, banks can either hold on to the loan on their books, or they can sell the loan to Wall Street.  When banks sell the loans, their cash is replenished and this process allows banks to make more loans.  Wall Street accumulates the loans bought from mortage companies, local banks and when they have a substantial amount, usually in the hundreds of millions, they “securitize” the loans into a mortgage backed security.  This is a bond that derives its cashflow from underlying mortgage payments.  This bond is then sold to investors.  Overseas investors in countries like China have been big purchasers of these MBS.

To best understand this, we can look at how cash changes hands.  First, Chinese investors purchases the MBS from Wall Street.  Every month, John Doe makes his mortgage payment.  That mortgage payment is passed onto the Chinese investor.  Investors essentially provide liquidity for the massive amounts of loans that have been generated in the last few years.  But that may or may not continue indefinitely.  Booming markets such as India (have you seen their Equity index in the last 3 years?? It’s ben a very wild ride) are attracting lots of foreign investors.

If there are not enough investors of the US MBS, then banks necessarily have to raise the rates to justify making the loan to be held in their books instead of selling the loan to investors.  When banks start to raise rates to 7, 8 or 9 percent, everyday John Doe won’t be able to afford that loan and the support for housing prices will weaken. 

This is not a doomsday scenario.  But just one likely and possible outcome.

As a REI, you know the power of leverage.  You buy a house by putting a 10% downpayment; two years later, the house value has gone up by 10%.  You have just earned 100% return over two years !!  (Give or take fees and minor details.)  The point here is leverage is king.

So why not leverage more by having a 5% payment and an 7/1 IO loan?  From the leverage point, this sure beats 10% downpayment and 30 year conventional loan.  Because with the same $100k equity you have in your house, instead putting down the down payment for one condo, you can put down the downpayment for 2 condos.  Further, you can have better cashflow of the IO because you are not paying down the principal.

Most people opt for IO loans because they want to live in that big house and can’t afford it.  Younger people (25-30) also get IO loans because they expect their earning to go up substantially and will be able to afford a bigger payment years down the road when their IO period ends and have to pay the principal.

Does this ultra-leveraged investment strategy work today?  Unfortunately no.  :(  There are two reasons.

First because 30 year rates have not gone up despite 13 (or is it 14 already?) rate hikes by the Fed, the difference between 30 year rates and IO rates is relatively small, and thus the advange of having an IO loan is diminished.  Second, in order for this ultra-leveraged strategy to work, you view of the the housing market must be that the it will peak within the next 5-7 years.  Why?  You bought the levereaged property because you want to flip it, but you don’t have to flip it within a month or two.  You can afford to wait, if the IO rate is low enough.

You can think of this strategy similar to buying a call option in real estate.  Essentially, you sit on the property and wait for the market to go up.  When the market goes up *sometime* in the next 5-7 years, you sell.  The downside is that if you have a flat market, your investment has just been locked up for that period.  The worst case is well, the market tanks and you bail out.

When the 30 year interest rates finally begin to rise in the next year or two, and the market bottoms out in the next 3 to four years, you might consider having enough capital saved up to use this strategy to make your big move !!

Your thoughts?

As a twenty something barely a few years out of school, I often talk to friends about career choices.  What could I possibly be doing right now that would lead to better long term gain? 

From a purely financial rewards perspective, I’ve looked at the everyday salary surveys and then there’s the wallstreet salary survey.  Besides running your own show (owning a flourishing business), there’s not many job that come close to that type of pay.  As a software developer, I luckily got my first job out of school in the finance industry.  Now at my second job at an investment firm, I am slowly moving over to the “business side.”  The financial rewards will come at some point, but most importantly, I am enjoying my work a lot more now.  Rather than being a worker drone, I feel I am learning a lot and going somewhere. 

Even so, every now and then, I wonder about the “what if’s”.  What if I spend the 11 hours at work somewhere else instead?  Maybe I can be a great real estate broker, I can meet a lot of people, make a lot of connections. And when a hot deal comes up, I can snatch it and flip it for godly profits.  What if this.. and what if that?

At the end of the day, the “what if” scenario always comes down to deciding how I want to spend (and invest!) the most valuable asset I have, which is my time.  I think of my current job right now as an investment in my future.  I am learning new skills and knowledge that will help me become a trader someday.  But at the same time, what I do give back to the company is my current skillset, computer programming.  It is as close to a win-win situation as possible. 

Time is your biggest asset (unless you have already made it and are enjoying your retirement), so look at your career wisely.  Are you investing in your future with your current work?  Or are you simply applying your current skills, but not learning.

Here’s a book Nobodies to Somebodies : How 100 Great Careers Got Their Start I am reading now.  Like the title says, it’s about how the Nobodies of yesterday became the Somebodies of today.  It answered a lot of my own doubt about career choice.  You might find it helpful too!