Critical Thinking Required

This POD is a highly requested episode from our clients: understanding the equity package that tech companies and startups offer nowadays as part of an employee’s compensation.  There are different types of equity - some of the most common ones are RSU (restricted stock units), NQSO (non-qualified stock options), and ISO (incentive stock options).  How should one decide what package to choose if the company offers multiple combos?  Tim pointed out that it really depends on whether the company is publicly traded or privately owned.  There are so many things to consider: what your spending vs. your cash flow looks like, do you need to live off the equity in the short term, do you need to bring cash to exercise the equity, and what are the tax consequences for each option…? Another “option craze” perspective is that younger generations switch jobs more frequently than their parents.  That means you are building your own little investment portfolio with all the tech/startups’ stocks/options/units.  As Tim said, a long-term mindset is especially important if you want to take full advantage of these packages.

With more and more talented females entering the workforce and playing important leadership roles, stay-at-home dads and nannies are becoming the new normal.  Today, we invited Katie Provinziano, the founder of Westside Nannies and is based out of Los Angeles, to talk about her industry.  As you can imagine, because of COVID, the demand for nannies has grown exponentially (school/daycare are closed), and yet the supply has remained quite low.  As a result, pricing has increased greatly.  Katie explained the scope of work a family can expect from a nanny, the “nanny & house assistance” combo, and the importance of confidentiality.  Nathaniel was curious about how does one decide between a nanny or daycare, and Katie gave her inciteful opinion.  She also gave some tips on how to create a successful relationship with your nanny: express your appreciation, be kind, pay them well, treat them right, and set reasonable boundaries.  As Katie said, your house is the nanny’s workplace now - you can’t just walk around naked anymore!  She pointed out some big mistakes she has seen when parents hire nannies on their own.  Overall, welcoming a complete stranger into your house to take care of the person you love the most can be a stressful process.  Do your due diligence - it shouldn’t be a shameful thing to admit that, hey, we need a professional's help to do this right!

In this episode, we invited one of Dan’s friends Skip Schrayer, a 3rd generation business owner to talk about insurance, not so much about the product, but more about the industry and its culture.  Tim started the conversation by asking about the history of Skip’s family insurance business.  Dan was interested in the changes over the year in the industry.  Skip thought technology played an important role in changing and evolving insurance companies.  Nowadays, anyone can go onto an online platform and get insurance in minutes.  So giving customized consulting to a more complex insurance need is his specialty.  As for the future of this industry, Skip said that the definition of “risk” will continue to grow.  For example, cyber risk, reputation risk, etc.  In terms of business operations and management, Skip cannot emphasize enough the importance of hiring the right people that fit your company’s culture: care about your job and clients, learn from your employees, be curious, and learn to say “no.”  As Skip said, running a business is not easy, but it should also be fun.

This is Part II of the episode where we talk about private equity investment with Brent Beshore from Permanent Equity.  Nathaniel asked about Brent’s definition of a successful acquisition and what his due diligence process looks like.  Ah well, as you may imagine…it sucks.  It’s going through never-ending papers, statements, double-checking all information, and investigating any potential frauds.  Brent added, running a business is a different skill set from understanding finance or investments.  It’s not what you know that kills you, but what you don’t know (and that you don’t know that you don’t know it) that kills you.  Nathaniel also asked Brent what he’s seeing now across the small business marketplace during COVID.  Overall, for any business, it’s crucial to find your niche and grow from there.  And remember, business is not just skill sets, but more importantly, it’s about relationships.  So, treat people well!

This is Part I of the episode where we talk about private equity investing with Brent Beshore, the CEO of Permanent Equity.  Brent's firm Permanent Equity is quite different from most private equity investors in the market: instead of buying a company and then selling it to the highest bidder within a few years for a quick return, Brent's investors have a long initial 30 years lockup period.  Everyone is in this for the long term.  What kind of business does Brent like to buy?  Underappreciated and underserved, stable growth (interestingly, not a rapidly growing company because too rapid of growth actually creates a lot of scaling issues), heavy cash flow, and capacity for reinvestment.  Brent then talked about how a business should prepare to sell itself.  He pointed out that owning a well-run business is ALWAYS more profitable than selling it.  So if you are selling the business because you think this is the way to get richer, you are wrong.  Brent summed it up brilliantly: the best route is to get rich slowly, over a very long period of time!

For this episode, we invited Cece Delgado from Fairway to talk about reverse mortgages.  Dan started the conversation by asking about the history and milestones of reverse mortgages.  Cece then explained some typical misconceptions: some people think once you sign the reverse mortgage, the house is no longer yours, or that they will leave their heirs a lot of debt.  On the contrary, reverse mortgages can be useful tools for some seniors.  You are basically utilizing the value of your house while you still live in it.  Like any product, they are not for everyone: if you consider the house your legacy or your heir has an emotional attachment to the house, or you only plan to stay in the house for a couple of years, maybe this is not the route for you.  Nathaniel was curious about what the underwriting process looks like.  Cece talked about the three key factors that determine how much credit the homeowners will get: their age, the value of the house, and the expected rate.  Cece said it brilliantly: the biggest hurdle is for people to change the "debt-free is the only way for retirement" mentality.  Talk to a professional before you say "no way!"

This is the third installment in our “Buyer Beware” series, and we are going to talk about 529 plans. A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher-education expenses of a designated beneficiary. Once you make the contributions to the account, like a Roth IRA, all the growth is tax-free if its funds are used for the beneficiary’s education. And it’s highly flexible when it comes to what is considered “education”: tuition, fees, off-campus housing, food, books, computers, etc. Tim also read off the l-o-n-g list of “family members” that you can transfer from one beneficiary to another. Of course, like any financial product, it’s not without its cons. If your beneficiary (mostly your kids) decides not to go to school, and you have no one else to transfer it to, you will need to pay income taxes and a 10% penalty to take the money out and use it somewhere else. Dan and Tim talked about how a 529 plan would affect your applying for financial aid, and what the logistics are for using the account. Overall, a 529 plan is a great tax-advantaged vehicle for education. If you have kids, we courage you to talk to your advisor and/or CPA about it!

In the last episode, we talked about 0-3% down payments.  In this episode, we are going to talk about everything else about a mortgage: interest rates, closing costs, points to pre-pay interest, cash offers, and waiving contingencies. Dan and Tim talked about fixed interest rate vs ARM (Adjusted Rate Mortgage) vs interest-only mortgages, and under what circumstances each of them makes sense.  The cash offer is something we see more and more often in this crazy market.  Other than some ultra-rich, some people are able to do a full cash offer by refinancing their first house, take the equity out and buy the second one in cash, with the hope that they are able to sell the first one ASAP in this hot market.  Although a cash offer certainly gives you an edge, it is not without risk.  Waiving contingencies is another thing we see quite regularly now.  As someone who is considering buying a house himself, Tim said he will "never waive certain contingencies like a house inspection."  If that means he can't get the dream house fast enough, then "so be it."  Like every other major purchase, before you start the house-hunting journey, educate yourself, and be financially prepared so that you can position yourself and optimize the possibilities.

In this mini-series “Buyer Beware”, we are going to give you our brutally honest opinion on a lot of financial products/services that are so common nowadays, but we believe the buyers should think twice before they get into it.  The first one: mortgages.  We have heard so much from our LA clients: “My realtor told me that I only need to put down a 0-3% payment, and get that 2 million house, is that true?”  Yes, it’s true, but most people probably shouldn’t do it.   It looks very attractive: instead of saving for $400K, now you only need to save for $0-60k.  But, there’s a couple of things to consider: you are mostly aiming for a house that’s too expensive for you to begin with (otherwise why only a 3% down payment?), so the monthly mortgage is going to be very high for you.  Your cash flow will get so tight - say bye-bye to family vacations, restaurants, gifts, that new BMW you’ve had your eye on, or any other “fun stuff.”  Second, with so little equity in the house, if there’s a real estate price correction, say the market price drops 5%, you are now underwater on your mortgage.  If some emergency happens right when the market drops, you have to come up with enough extra cash to sell the place, or you could end up in foreclosure.  Third, if you lose your job/income, you certainly can’t afford those high monthly payments anymore - you may get into a vicious cycle of late payments and penalties.  Dan briefly went over what banks consider when they approve you for a mortgage.  But please remember, what the banks see is only what’s on paper!  They don’t know that maybe you need to pay a medical bill for your mother, maybe vacation is a “must” for you considering how stressful your job is, or maybe the house you’re about to get has some “surprise” waiting for you to be fixed.  Sometimes the banks may approve you for more loans than you can truly afford.  1-3% down payment may work for Jeff Bezos because he has other assets to back it up.  But if you are doing it because you can’t afford the house, please be careful!

Starting from July 15, 2021, and for the next 6 months, some families with child(ren) will receive monthly cash as an advanced child tax credit so that you can start spending it.  Some people are either confused about what’s going on or are worried that taking the credit now will hurt them later in the year when they pay their taxes.  Here’s a breakdown (assuming one child):

2020 Child Tax Credit: $2,000 per qualifying dependent child under age 17
2020 Max Child Dependent Care Tax Credit: $1,050 
2020 Total Credit: $3,050

2021 Child Tax Credit: up to $3,600 ($1,800 advanced to you for the next 6 months) per qualifying dependent child (depends on the child’s age)
2021 Max Child Dependent Care Tax Credit: $4,000 
2021 Total: up to $7,600 (depends on the child's age)

Income restriction: The IRS estimates your 2021 income by your 2020 (or 2019) tax return, so if you know your 2021 income will significantly increase and breach the top ceiling, you might want to opt-out of the advanced credit check.  Otherwise, after you file for the 2021 tax return, the IRS will take the money back from you. 

For more information on the credit’s differences due to the child's age and your income level, please go to the IRS website: https://www.irs.gov/credits-deductions/2021-child-tax-credit-and-advance-child-tax-credit-payments-topic-c-calculation-of-the-2021-child-tax-credit

DISCLAIMER: We are not CPAs; above is just a breakdown of the numbers.  As for what’s the best practice for each individual and/or household, please contact your CPA or IRS for further advice.