March 2022: Net Worth, Q1 End Portfolio, Stock-Picking?

This is late.

In March, our net worth rose by 2.83% and 3.38% to $124,495 and €111,555 respectively.

Long story short: the stock market rallied in March, and my positions were brought along for the ride. I also sold off some of the camera stuff that I mentioned in February, which brought in some cash.

Here's my portfolio at the end of March:

A few notes:

• Berkshire Hathaway has grown into the largest position in the portfolio, overtaking my tax advantaged IRAs. Berkshire has done very well this year, and it's helped bolster the portfolio against some of the volatility.
• My tax advantaged accounts are still in a money market fund since the Vanguard Total World Stock Index is still below its 10 week moving average.
• A lot of positions are in significant drawdowns from their previous highs.

Do I Want to Keep Picking Stocks?

With all that, I'm considering whether I want to keep picking stocks. I devote a lot of time to this practice, and the results I get are - thus far at least - fine. Not disastrous. Not brilliant. I've basically performed as well as VT has over the past few years, while also spending a lot more time on the project.

At the same time, I have other activities I'd much rather be doing. I have a side hustle I'd like to build up. I'd like to spend more time developing my "hopes and dreams" career. When I listen to podcasts, they're usually investing podcasts. When I do research, it's often stock research. What if I could get rid of those activities and just focus on the stuff that truly brings me joy?

But then I remember I'm an expat and I'd be signing up for tax and reporting hassles. Doesn't mean I won't change this up at some point, but a decision that I could just choose were I living in the US is much more complicated.

This is the dilemma faced by American expats in Europe. I kind of want to get off this train, but the alternative is misrepresenting my actual address to a US brokerage and putting a lot of my assets in it in order to have access to US ETFs. I'm not comfortable with that, but I'm getting tired of waking up and thinking about or worrying about stocks and stock prices and trying to determine where I should put my money every month. I could just buy a few ETFs and be done with it, but then I'd be creating my own tax data and all that crap.

This is stupid. This is all so stupid, and these governments can't be bothered to actually fix the problem for us.

April Outlook

Well, April is almost over, so I have a good idea what's up.

My stocks have performed badly, but basically in line with the overall market.

We've spent some money on travel. We likely won't save much because of it. There's a family medical emergency in the US my wife is attending to, and that kind of stuff supersedes stock investments.

I've made a little money on the side, but I've also spent a good amount, so it's kind of a wash. On the whole, this camera switch has been expensive.

I also went to France for a weekend on someone else's dime. But it felt dishonorable to rely on their money the whole time, so I paid for some of it myself.

Until next time. Stay healthy, save what you can, and remember that your relationships are wealth.

Why This Expat Isn't Buying German Real Estate

As I recently mentioned, I just took out a loan to buy stocks. Right now, interest rates are temptingly low, and while the U.S. market overall is expensive, there are still undervalued companies there and elsewhere that can overcome the loan's interest rate cost.

My impression is that few people do this. Stocks are risky, and those who lever up can flame out hard. Stocks, in addition to being volatile, are nearly always available to be traded. I could get drunk, get scared at falling prices on my iPhone, and close every position in my portfolio at a giant loss with six or seven taps. Applying leverage to that is risky, no doubt, and buying stocks on leverage attracts a certain amount of skepticism and disdain.

Real estate leverage attracts much less scrutiny.

Stating the obvious, the high price of a single real estate unit usually requires a buyer to finance the purchase through a mortgage or other lending structure. That's naturally as true in Germany as in the US. And that leverage means, theoretically, that you can turn your down payment into a much more potent force, where you can reap the levered gains from rent and from the price appreciation.

For those who do this, it's possible that rental income more than covers the monthly cost of the mortgage. Indeed, one of the oft-repeated strikes against renting is, "You're paying someone else's mortgage." For a landlord who accomplishes this repeatedly, they can create an empire of rental units paying off his or her debts all while accumulating value through appreciation.

It sounds like a dream.

Expensive

In Germany however, it looks much less dream-like. To be fair, there are serious real estate investors here. I know two of them personally, and their wealth is absolutely real. But recently, both have said the same thing: everything's too expensive.

For all the complaints about costs in the US, German real estate feels increasingly out of reach. Yes, if you live in the hot American cities, purchasing real estate can be nigh impossible. But even in the not-so-hot German cities, buying an apartment can be a ludicrous amount of money for what you get.

Prices in many cases have outstripped the possible rental income you can get from the property. I sometimes see properties listed with a renter in place. That means the rental income starts immediately without having to go through the hassle of finding a tenant and doing all the necessary background checks.

But if you do the math it stops seeming so nice. I've gone through the listings and priced out mortgages for given down payments to see what kind of cash flow can come from these properties, and it doesn't work. In general, the down payment would have to be enormous for the property to have positive cash flow from the rental income. But having an enormous down payment cancels out the benefits from the low interest rates in the first place.

Tenant Protections

For an American, you might ask, "Why not just raise rents?" But we're not in Kansas anymore, and there are legal and cultural realities you have to adapt to. In general, German renter protections are much higher. And, as a renter, they're great.

Leases are continuous, and the renter can leave at any point if they notify the landlord 90 days in advance. So there's no new lease signing event to hike rents. Instead, there are prescribed rules about when and by how much a landlord can raise rent on an existing tenant, and it's biased in favor of the tenant. For the ambitious landlord, there are ways to force it, such as by doing a large Modernisierung of the unit where it's materially nicer and more energy efficient and therefore deserving of higher rents. But that's yet another cost, and do you really want to spend your time doing that?

Dealing with tenants, by all accounts, is hard in Germany. One of my landlord friends says that you basically can't raise rents once a tenant is in place. Kicking tenants out who don't pay rent is, by all accounts, difficult and lengthy. In addition, tenants are allowed to lower their rent payments for cause, such as loud construction nearby. German renters have non-profit organizations that can go to fight for them for nominal membership fees.

High Taxes and Fees

If you're versed in basic investing wisdom, you know that keeping fees low is a primary requirement of the wise investment. But for the German real estate investor, taxes and fees are deadly. When you buy an Immobilien in Germany, you pay a series of up-front fees that are an immediate loss.

If you visit a site like ImmobilienScout24, they list fee estimates for a given property. For example, the estimated fees for an apartment in Stuttgart is around 10-11%. That includes the following:

• Maklerprovision (3.57%, broker fee, and the one fee that can be avoided)
• Grunderwerbsteuer (5%, property transfer tax)
• Notarkosten (1.5%, lawyer fees)
• Grundbucheintrag (.5%, registration fee)

So in my Stuttgart example, according to Sparkasse's calculator, we get an estimate of €50,350 in Nebenkosten.

Here's an actual example in Stuttgart from a 56m² (about 603 sq. ft) Maisonette apartment with slanted walls with a property price of €298,000 where the Nebenkosten add up to €27,952, which equals a total cost of €325,952. And that's with a slightly lower Maklerprovision.

To be sure, the fees vary depending on location. The Maklerprovision and the relevant taxes depend on the local government rules. But they're all high, and the fees are purchase price dependent. The Maklerprovision gets a lot of hate despite it being the one fee that is sometimes avoidable, but the Grunderwerbsteuer by itself will bite you hard. With property values at high levels, you're getting hit twice: you're at higher risk of a fall in property values, and you're hit by the upfront fees attached to that price¹.

You're also guaranteeing yourself high opportunity cost. You'll have to save up those fees since banks generally won't finance them for you. To save up, you'll likely stick the money in a savings account earning nothing, and it might take years. You have to ask yourself if the lost potential gains in the stock market are worth it. If it takes you two years, those are two years of compounding you never get back. And when you eventually buy, your down payment might go entirely to the fees and not towards the property, leaving you financing 100% of the property value.

Those fees mean that there's never a guarantee that you earn any money from the purchase. It's an immediate hit of ~6-12% up front of the levered cost, and if you're compelled to sell for any reason before compounding has overcome that hurdle, then it's a shocking loss of potentially more than your entire down payment. That's the two-edged sword of leverage.

At the very least, it means that you'd better be damned sure that this is the best use of your money or that you have some special insight or strategy that makes those costs worth it. And you'd better be able to hold on.

Property Tax

There is property tax (Grundsteuer) here in Germany, but trying to estimate it in advance is hard. Just know this: you will have ongoing property taxes. They are not particularly onerous, which is one advantage compared to the US.

What I've divined from the online literature is this: the tax varies based on the type of dwelling and depends on an official value assessment (Einheitswert) by the state (Bundesland) you're in. This number is much lower than the purchase price and gets adjusted every six years. That number is multiplied by a small percentage (Steuermesszahl). This value is then multiplied by several hundred percent (Hebesatz) - depending on the state - to equal your yearly tax. Clear?

Expat Issues

I haven't even talked about the potential challenges of being a U.S. expat doing this. For one example, Robert Kiyosaki likes to extol the virtues of not owning anything yourself to protect yourself from liability issues and lawsuits. That would likely mean putting your properties into a corporation or other such entity. But you, the American expat, have to consider the implications back in the States and what the IRS will make of your German arrangements. Controlled foreign corporations require extra compliance and paperwork.

There's also the rule that the IRS can declare that you have capital income from your mortgage if the exchange rate changes in your favor.

Lastly, there are the normal challenges of being a real estate investor that exist everywhere. All the stuff listed above is layered on top of that already substantial levered risk burden.

High Prices, Lots of Rules, High Fees, the IRS... What's Not to Like?

If you're excited by real estate, and other options won't do, then more power to you. There are likely unexplored riches because the hurdles are so high, and there are likely strategies that can work for those geniuses who recognize and execute on them. If you're actually receiving cash from your purchase in excess of your outflows, it dulls - but doesn't eliminate - the impact of the up front fees, especially compared to owning a home as a residence.

But at this moment, I can type some numbers into my computer, get an appropriately-sized loan relative to my income, buy a diversified basket of stocks, and go on with my life. If that sounds irresponsible to you, you have to ask if losing potentially tens or hundreds of thousands of euros up front guaranteed for a likely overpriced asset to service tenants whom you can't kick out sounds responsible.

Maybe neither sounds responsible, and that, at least, would be consistent. But I want to use low interest rates to my advantage, and although I'm attracted to real estate, I look at the reality of it and am turned off in comparison to other options.

Does that mean never for this oft confused expat? Of course not. I've moderated my opinions often, even after writing negative articles. Buying stuff is fun, and property captures my imagination. I know all this because I regularly stare at property listings, after all. But there's a lot of friction in buying real estate, and I assume that I'd bail before putting my name on the dotted line.

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1. In comparison to the US, Bank of America estimates the closing costs for a $500,000 property in Charlotte, NC with a 5% down payment at $12,921. In New York City, it'd be $21,547.↩︎

Net Worth Update: June and July, 2020

In June, our liquid net worth¹ increased by 8.01% in USD and 5.7% in EUR to $68,000 and €60,606 respectively. In July, it increased 13.67% and 9.48% to $77,298 and €66,350 respectively.

The biggest factor in both months was the stock market. Like anyone who held positions similar to the overall market, we experienced terrific growth. It is counterintuitive that in such a moment, with as much economic hardship as exists, that the stock market should be on such a tear. I honestly don't know exactly what it is that the market sees, and I won't pretend to. I listen to a lot of stock market talk, and some experts claim that this is a bubble that's likely to pop at any moment, while others say otherwise. It's pointless to try and act on this chatter. I know what my time horizon is, and I hold.

Cash is King (Sometimes)

One thing I haven't been doing, however, is buying. Our savings the past few months has gone exclusively to cash. That's not a stock market timing call but rather a series of tactical moves given the relative uncertainty of the moment. I know that we have certain large expenses in the future, but I don't know what my wife's income will be, and it's hard to guess it more than a few weeks out. Therefore, I've been preemptively saving to knock out those costs whenever they arise, in order to prevent having to scramble to pay for them from that month's cashflow. You might be thinking, "Well, duh, that's the way savings works," and you'd be right. But our situation has changed enough that we have to do this for stuff that we could previously just pay for out of cashflow.

That means saving early for tax preparation costs, estimated taxes, and large purchases. We've also been continually adding to our emergency fund. An emergency fund is basically early saving for known recurring expenses in addition to surprises, after all. One unsettling aspect of this pandemic is that my industry has been especially hard hit, and my seemingly secure job doesn't feel as secure anymore.

A couple of large cash infusions also buoyed these months' changes. In June, we deposited the stimulus check that was sent out. US expats who file their taxes were also eligible, and we were happy for the money. Secondly, my employer paid me early for August, and without any message from them, I truly don't know what that was about (new employee clicked the wrong button on the bank website maybe? I've done it).

And on top of that, because most of our cash is in the euro, the recent upward spike of the euro's value has made that lump more valuable in USD.

Vacation?

Although it's summer vacation time in Germany, we have decided to stay home. And by home, I mean our apartment in Germany. We contemplated some trips, but hotel prices in Germany weren't low enough to really make it worth our while. Outside of Germany, some prices are incredible, but we quickly wrote off getting in a plane or bus or long distance train, especially since those prices also aren't all that great.

I will say, the FOMO is real. The weather's also not been very summer-like, so it's been kind of lonely and dark. We've used the time to take care of some home improvement projects, and I've been using FaceTime more often to get in touch with American family.

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1. This includes: bank accounts, investments (excluding German private pension but including US IRAs), credit cards, rewards programs valued at 1¢ per point, cash, installment plans and any other debts. ↩︎

2018 American Tax Return Sent

This is a post where I have to emphasize: none of this is advice. It's documenting my decisions and experiences, but you should do your own research and/or speak to professionals before taking any actions regarding tax decisions.

On Friday, June 14, I stuck the wad of papers comprising our U.S. 2018 tax return into a large envelope and mailed it off. My wife and I have to do this process every year, and it’s one of the pleasures of an American living abroad.

Since the US taxes people based on citizenship rather than residency, Americans living abroad are required to file every year with the IRS regardless of whether they owe anything or not. More often than not, those Americans owe nothing year after year, and the process feels completely unnecessary. It ends up being a lot of paper work to say, “Hi there, I still live abroad and pay taxes abroad, and therefore, I shouldn’t have to pay anything back in the US.”

In our circumstances, we have to take the following steps to file without problem:

Buy TurboTax

I’ve been using them for years, and the product works. It nevertheless feels silly to have to shell out any money for this every year when I neither pay nor get paid once the filing is done.

Gather the Information

Even though we exclude our income from taxation using the Foreign Earned Income Exclusion (FEIE), we nevertheless have to document it with as much precision as possible. I print out the bank deposits each of us receive and create a spreadsheet listing the pre-tax sum we earn followed by the USDEUR conversion afterwards on that day to get a total USD total.

Since we also take the Foreign Housing Exclusion, I add up those sums as well with the appropriate conversions.

Since we have stock investments, I print out our brokerage forms as well as auto-import the transactions into TurboTax via the broker itself. That’s very handy. But without any earned income, it’s very hard to actually realize enough income from investments to warrant any taxes being paid.

Apply for the Form D/USA 101

The US has a Social Security agreement with Germany saying a lot of things, but most importantly for us, it says that self-employed people who pay into the Rentenversicherung system here don’t have to pay self-employment taxes back in the US.

This is one of those things that might be confusing if you’ve never been self-employed. When you’re self-employed in the US, you have to pay the full amount of Social Security and Medicare taxes, while employees have to only pay half while the employer pays the other half. Only if you reach a certain threshold of income do you have to concern yourself with the actual income tax.

When you exclude income on the tax return, you’re excluding it from income taxes. But you’re not excluding it from self-employment taxes. That’s a different process, and it involves getting documentation from the resident country saying that you’re in their system. That document in Germany is the Vordruck D/USA 101.

We apply for this in January for my wife, and we get the form typically a month and a half later. It’s a simple form saying what her job is and the dates the form covers and that she’s paying into the German system.

But we have to include it, otherwise we’d be expected to pay self-employment taxes on her income. Instead of filling out the Schedule SE, we just add a statement on one of the lines of the 1040.

Automatic Extension

Because we live abroad and are out of the country on the normal filing date, we’re entitled to an automatic two month extension to file. One doesn’t need to apply for this, and instead you have to write a statement requesting it when filing. I write this out in a word processor, and we both sign it.

Pack it Up and Ship it Off

Then we stick all this paperwork in an envelope and send it off to Texas. Because of the paperwork, E-filing is not an option.

And in the end, TurboTax says something like “Wow, you’re neither getting any money back, nor do you have to send any. How strange.” Yes. Welcome to the world of US tax filing for US expats.

Possible Future Headaches

Some things we might have to worry about in the future but haven’t so far:

• Declaring foreign accounts worth more than $10,000. So far none of our German accounts have reached that threshold, so we’ve been spared.
• Declaring foreign assets.
• Using the Foreign Tax Credit. I’ve considered using it to contribute to an IRA (a different post in and of itself), but it so far hasn’t made enough sense. For example, if I decline the Foreign Earned Income Exclusion, I’d use the Foreign Tax Credit to avoid paying US taxes. But you’re locked into that choice for five years, so I’ve always just used the FEIE. This will definitely become a challenge when I’m paying German taxes on dividends and capital gains, however.
• Complicated income or asset sales. For example, if I ever did any serious side work as a freelancer, I’d have to figure out how to file that in the US. It’s never really been clear how to do that. Likewise, if we ever bought and sold a house for a profit, I’m concerned how that’d be handled.

Cash Flow Parasites

It's that time of the year when I'm looking back at how we spent our money, and I'm considering where it all went and how to improve things next year.

The various categories I use to budget our money does illuminate things a bit. For example our biggest expense by far is our rent plus Nebenkosten (a German term for the utilities managed by the landlord bundled into the monthly rent payment).

But beyond that, the picture becomes murkier. We have transportation costs and various utilities and our BLOW categories, but what's the glue holding that together?

I don't have a way to add this to the spreadsheet, but I'm now considering cash flow parasites as overarching spending concepts that bind several categories together. Basically, these are purchases that require other purchases over time. The initial purchase fits into the budget as a single item, but over time that initial purchase requires incremental purchases later. This is similar to lifetime cost of ownership, but it's broader.

For example, let's look at some parasites that we don't own. The most obvious example is a car. The car itself has an initial upfront cost, but there are the following obvious ongoing costs:

• Fuel
• Insurance
• Repairs
• Parking
• Registration
• If purchased with a loan, then the ongoing interest cost
• Asset depreciation

That stuff is obvious. Less obvious are the following:

• Environmental harm and contribution to air quality health problems
• Risk of accident
• Risk of regulation
• Legal risk from poor driving or impaired driving
• Risk of theft or vandalism
• Municipalities being forced to devote ever more space for automobile use
• Stress from traffic
• Overcommitment of time due to transportation flexibility
• Opportunity cost from higher amount of money in cash emergency fund to cover emergency car costs
• Opportunity cost from spent car money not invested in compounding assets
• Opportunity cost from saving the money in cash to buy the car

Whenever I think of buying a car, all this stuff pops into my head. I remember the stress of driving. I remember the major repairs. I remember the couple of accidents I was involved in (not at fault). And after considering all that, and despite the downsides of not having a car, I just can't justify buying one again.

A less high stakes example of a cash flow parasite is a television. We don't own one because a television contains the following costs:

• The television itself
• The devices attached to it
• The content played through it
• The furniture used to display it
• The floor space given over to it
• The electricity
• The time devoted to it and the feeling that it should be used due to the invested money (a kind of sunk cost fallacy)
• The ongoing maintenance and replacement/upgrading of attached devices
• The exposure to advertisements and societal propaganda that convinces us what's normal and how much money we should be spending to be like the beautiful people on TV

One reason we don't own these things is because of the high negative cash flow costs I associate with them. But that doesn't mean I don't have cash flow parasites, so where are they in our budget?

Cell phones are a big one. We use iPhones, so there was a substantial initial cost to them, which has been tolerable because of their ongoing use (we don't upgrade regularly, and I hand my model to my wife when I'm done with it). But there are ongoing negative cash flow associated with them:

• Cellular costs (contract-less month-to-month)
• App and content purchases
• Connective cloud services
• Time spent
• Internet at home
• Stress from being always connected
• Stress from the impulse to upgrade or buy companion devices
• Depreciation of the phone itself
• Exposure to what's "normal", similar to TV, but maybe even worse due to social networks functioning like a "keeping up with the Joneses" 24/7
• Maintenance (battery replacement, headphone replacement, charging cable replacement, screen repair, phone cases)
• Electricity
• Risk of theft

So what's the overall cost to it? That's really tricky. Some parasites have a clear overall cost, but some are more elusive or are shared with other cash flow parasites. I think the 30,000 foot view is probably enough to say that the costs over several years are substantial. There was a time before I had an iPhone and a time after it, and the costs before were zero since it was a whole different category of expenses. There was no parallel to what we have today.

At the same time, there are major upsides to having an iPhone. I'm just not sure that if I could get a full accounting of the exact cost that I would say they were worth that exact number. Using a smartphone means sort of stumbling into ongoing expenses, but I'm not sure how to back out of those at this point. Even if I use an iPhone for 7 years, that's still less phone-value than using a landline phone that costs maybe 30€ for potentially several decades. What exactly is the goal of having this thing? Sometimes it feels essential and sometimes it's like a casino in my pocket.

I've mentioned it before, but travel back to the US is a major expense, and it contains several categories within it. Flights and hotels are just the start when you start to look at all the costs associated with it. Most Americans don't make trans-Atlantic trips at all, but we do regularly because we live on the other side of it.

And then really, one has to look at the cost of being an expat itself. We make all sorts of spending choices that we wouldn't have to make if we lived back in the States. Right now, I think it's worth it for several big reasons, but I'm tempted to sit down and try and do a full accounting of what it's costing us to be here.

When looking at the cash flow parasites, it doesn't mean there's no value within them. Seeing our families is worth spending money. The phones do have major safety benefits and they allow easy access to a lot of free content. Living in Europe has major upsides. But I'm going to try and look at my choices much more holistically and see if there's some overarching concept that's causing me to spend a certain way.