The Control Your Cash 2012 Woman of the Year


(Not pictured: CYC Woman of the Year commemorative sash and scepter)

(Not pictured: CYC Woman of the Year commemorative sash and scepter)


Every year we honor someone who embodies the Control Your Cash spirit, and name that person our Man of the Year. To win, all you have to do is buy assets, sell liabilities; and most importantly, act as the primary determinant of where your money goes instead of complaining about how the world is stacked in somebody else’s favor. That describes fewer people than you’d think, despite our best efforts to change the world’s collective mindset. Previous Control Your Cash Men of the Year have included a presidential candidate, a guy whom we never met yet who managed to lead an interesting and productive life despite making little money, and a CYC acquaintance who refuses to spend money stupidly and take on unnecessary expenses.

With 2012 in the bag, we’re proud to announce that its honoree is our first Woman of the Year. And a personal finance blogger, although that’s just a coincidence.

It’s Paula Pant, who runs Afford Anything and whose attitude and acumen we’ve espoused multiple times on this site. More to the point, she’s a real estate investor whose cash is flowing at a large enough volume that a significant chunk of her income now derives from investments. Investments of her own creation, no less.

Standard, incorrect thinking maintains that anyone who succeeds in this rapacious capitalist society of ours either a) came from money or b) killed herself by working 17-hour days and never coming up for air. The first is at best a sufficient condition, not a necessary one. The second is a sucker’s game, which you instinctively know, whether you choose to acknowledge it or not.

Ms. Pant didn’t start off with gigantic privileges. She’s a 1st-generation American who grew up in a stable household of ordinary means, neither summering in the Hamptons nor panhandling for sustenance.

She didn’t even study corporate finance in college, nor neurosurgery, nor something else with a promise of immediate financial rewards upon graduation. Nor did she go to an Ivy League or other exclusive private college. She majored in sociology (of all things), at the University of Colorado. A school where most people major in weed, if you give credence to stereotypes.

We don’t know what kind of salary Paula draws, but she’s a freelance writer. Her direct income is probably closer to modest than it is to exorbitant. Yet she owns 3 rental properties, travels the world like she’s being chased by Interpol, and is still on the innocent side of 30. How is this possible, when the typical 20-something journalism graduate is

  • drowning in tens of thousands of dollars of student loans
  • often working retail, given the dubious long-term prospects for the business model of newspapers and magazines?

Short answer, Paula is a hopelessly original thinker. As proof of this, she wrote a post titled “If I Had $1 Million, I’d Go Into Debt” and wasn’t kidding. Most people are too dumb to draw a distinction between consumer debt (that monstrous VISA bill that you try to wish away the existence of) and smart leverage (borrowing money at x% so you can earn a return of x+y%, which is the only legitimate and lasting way for most of us to build wealth.) Paula is the exception.

She bought one of those houses at an 80% discount (not a typo). The house cost less than a new Ford F-150 without options, and while the house needed some cosmetic work, the effort she put into said work (her sweat, her contractor boyfriend’s sweat, the money she paid to some professionals) paid for itself several times over. And continues to, as her tenants are making her rich(er).

Last January, Ms. Pant announced that she was somewhat improbably going to invest every single penny she made in 2012. This wasn’t some character-building exercise, nor a New Year’s Resolution. It was a way to focus the “pain” of forgoing immediate luxuries in order to enjoy further and more pronounced pleasures. (Pleasures in the form of greater rental income, and ultimately greater self-determination. It also meant a year of deferring world travel, her passion.)

Wait, you mean you can invest your money obsessively and still enjoy life? Come on.

YES. What shameless self-promoter Tim Ferriss argues you can do in theory, Paula does in practice. And it doesn’t involve weighing your food to the nearest milligram, nor paying money up front to a fulfillment company and hoping for the best, nor hiring an Indian remote assistant to proofread your documents (which will invariably require another round of proofreading upon their return.)

Her priorities are specific, with flexible but detailed plans on how to get there. Contrast that with the directionlessness that most people exist under.

I hope I get a raise this quarter.
I really should ask for a raise.
Should I apply for another job? What if I don’t get it, then word gets around that I’m looking? Oh, I’ll be so screwed.
If I stay, they’ll match my 401(k). I couldn’t leave if I wanted to.
My landlady raised the rent again. So unfair. 

Look: most transactions in our society are mutually beneficial. Otherwise, they wouldn’t happen. For instance, no one likes paying rent, but it beats living under a bridge or with your parents. But fortunately (fortunately for the landed gentry, that is), there are plenty of people undisciplined enough that their very existence enriches the people who own things. And by “things”, we don’t necessarily mean high-rise apartment buildings or Class A shares of Berkshire Hathaway stock. A few single-detached rental properties in Atlanta will do.

Furthermore, it’s so easy to get to get to this position. All it takes is a tiny bit of motivation and again, discipline. Paula could have squandered paycheck after paycheck on unnecessarily expensive vacations and vehicles. Instead she travels largely on the cheap, sees no economic potential in $3000 leather car seats, and invests all the cash she has available. Not every investment turns to gold, of course, but it’s not that hard to minimize the potential risk. And as the saying goes, you miss 100% of the shots you don’t take.

When we talk about Paula’s modest background and stress that anyone with a brain can do what she’s done, we don’t mean to denigrate her nor her accomplishments. Far from it. Actually deciding to follow through on a plan, like Paula has done, is surprisingly difficult for many people to do. Most people, in fact. Better to lament one’s station in life than say, “I can do this, and will figure out how.” Paula Pant can, and did, and does. Leverage your assets into higher-valued ones, carry intelligent debt rather than stupid debt, and generate positive cash flow, and you could be a finalist for our 2013 Woman (or Man) of the Year.

Dartboard investing only works when you stand inches away

Dartboard Investing

Those ancient Mayans had one messed-up clock


Every day, people miss out on great investments because they don’t know how to quantify risk vs. return. You need written investment criteria.  Here’s a sample.

If you don’t have the energy to click the link, it’s mostly a series of questions that read something like this:

What type of investment is it?
Real estate.

This is a straightforward question with a clear answer. Knowing what classification the investment falls into tells you how liquid it is and how much its value might fluctuate. If the investment were a stock it’d be easy to sell, though not necessarily for a premium. A plot of dirt, improved or raw, has tangible value. But selling it, even in a seller’s market, can burn a lot of hours.

If I bite, how will this affect my allocation?

You don’t necessarily want your eggs in a million baskets, nor in one, but you do need to know how many they’re in. And if the breakdown among the baskets gets out of proportion, you want to know that, too. Say your portfolio starts out with 33% in growth stocks, 33% in long-term notes and 33% in real estate. Six months later, if the percentages have changed to 5, 34 and 61, you’ll want to rearrange to keep things in balance (or ride the 61% component if so inclined.)

But what if this transaction did affect allocation? What would you do to balance the imbalance? You could sell an asset, buy other assets, or decide you’re going to live with a different breakdown.

What do you estimate the return will be?
4½–8%, plus however much the property appreciates, which we estimate will be nothing for the next 3-5 years.

We keep score when building wealth. Amazingly, some people haven’t figured this out yet or refuse to acknowledge it. If you think investing has an emotional component, and that either being a nice person or playing hunches is part of the game, please stop reading Control Your Cash and find something less demanding. Seriously. See, we said “please”. Didn’t hurt your feelings or anything. You should be happy.

What exactly is the investment?
A 2
nd floor, 1-bedroom/1-bath 770 ft2 condo in an above-average part of town. The condo’s listed at $50,000 and approved for a short sale*.

Meanwhile, nearby condos rent for $650-750 a month.  Estimated annual expenses read like this. (This is something called an annual property operating data worksheet. Download it at your leisure.)

The above question is self-explanatory, right? And its relevance should be self-evident. If it isn’t, return to kindergarten and start over. We’ll be waiting.


Anyhow, this investment allows for multiple variables that affect ROI (that’s return on investment, in case you forgot.) Variables include things like rents, and whether you can buy the property as owner-occupied, which means you should be able to get a cheaper loan with lower closing costs. Here’s what we mean:

There are two primary ways to buy this condo as an investment if you have neither the cash up front nor excellent credit. Find a partner, or incorporate.

1. Find a partner (a joint venture.)

An investor lends you $50,000 interest-free to complete the sale. You buy the house and live in it.

Nothing’s free, of course. Under this form of owner occupancy, you pay the investor 70% of the house’s net operating income (i.e., the rent.) Another 10% of the rent goes into a reserve maintenance account – out of which you pay for things like appliance repair. Which you shouldn’t need to if you have a home warranty. But there’ll always be some unexpected expense that a warranty won’t cover: stucco repair, interior paint, etc.

What about the remaining 20% of the rent? That’s yours to keep. Yes, under this arrangement you pay only 80% of fair-market rent. On the other hand, doing it this way you can’t write off your expenses on your tax return.

Who would work out a scheme like this? Lots of people. It’s a perfect vehicle for a father who wants to help his kid buy a home and still earn a return.


2. Form a limited liability company (details here, here, here, and here.)

You and the person who’s lending you money are partners in the LLC, which becomes the official and legal owner of the property. Once you create the LLC and it takes ownership of the property, it’s the sole owner: nobody and nothing else. It’s not as if you own x% of the property and your partner owns 100-x%. The LLC owns it all. You own a particular share of the LLC, but that’s a different issue.

Each LLC has an operating agreement that lays out the details of the deal: such as who gets to write expenses off, how you’ll split profits when you sell the property, and specific duties for each partner. The LLC also protects you from unlimited liability in case a tenant or a visitor decides to sue. They can sue for $1 trillion if they want, and even have a case, but they can’t get more than your investment in the LLC.

With this example, the investor again lends you $50,000 interest-free. You find a tenant, charge her the going rate and again keep 10% in a maintenance account.

This scheme works for partners with disparate skills – e.g. one partner with the time and expertise to find the property (in this example, you) and the other with most of the money.

What’s the downside?

Property values could drop even further, meaning you might need years just to break even. If the property doesn’t rent immediately, your return will decline.

The renter might damage the property. This is why you qualify prospective tenants and collect a security deposit. If you really want to avoid headaches, spend 10% of the rent on a property manager. If you value your time at all, hiring a property manager will pay for itself quickly.

You and your partner might disagree on how to manage the place and, when it comes time, how to sell it. You solve this with an operating agreement, one that looks something like this:

That’s pretty much it. Just make sure that every conceivable subject of potential dispute finds its way into the operating agreement, and that you register your LLC in a state that’s business-friendly. That usually means Delaware or Nevada. Or failing that, your home state. (You can live and operate in, say, North Dakota but register in Maine if you want. It’s totally legal.) Just don’t register in California, and never New York: their LLCs don’t protect you enough.

The old pessimistic saw says you have to have money to make money. That’s not true if you leverage someone else’s.

*Selling a house short means begging the lender’s representatives to take less than they originally agreed to, on the theory that a wounded bird in the hand is worth more than a potentially rabid pair in the bush. Details here.

**This post is featured in the 1/4/11 edition of the real estate investing carnival**

**This post is also featured in the Carnival of the Road to Financial Independence**