Stealthy Neighborhoods

I have been thinking during the past week a lot about the topic of being stealthy while growing and maintaining one’s wealth.  Although we’re not rich (yet), I can see a time in the not-too-far future where Mrs. Mase and I will have to intentionally make strategic decisions with how we live our lives so that not too much of our private financial business is revealed to others.  We have it easier than a lot of people – neither of us are doctors, lawyers, financial planners, etc. so there are few social pressures or expectations around dressing a certain way all the time, driving a luxury (or at least newer) car, or living in a fancy home in a very fancy neighborhood.

That’s the good part.  The trick comes in when you want to enjoy a certain level of lifestyle – I know there is a point in my life when I do want to charter a private jet.  I do want to set up scholarship funds that help thousands.  I do want to own very nice things.  I’d be lying if I said material wealth was not a motivating factor in wanting to be rich.  Although it is not the only factor, of course, it is something we aspire to.

Maybe I’m getting ahead of myself, because we are definitely not rich yet.  I’d say we’re solidly stable and growing, which is a great feeling, since just a few years ago we were in a very different place.  I think one of the reasons this is starting to come into my mind is because there are already certain topics that I know would feel awkward or uncomfortable discussing with people – paying off our mortgage for example.  With the exception of one or two very close family members, nobody will ever know (at least, that’s the intention).  Knowing the personalities of people I know and associate with, there are just too many potentially negative consequences of even casually mentioning it in a conversation.

I think the best way to go about it is to keep your wealth to yourself.  There are many bloggers and gurus out there who gladly share all of their financial info on the internet for the sake of complete transparency, and I respect that.  People benefit from real-world numbers.  But putting my net worth and income out there for everyone to see is just something I don’t know if I or Mrs. Mase will ever feel comfortable doing!

This brings us to the subject of the opposite of stealth wealth – those who are completely open with their spendy lifestyles.  From the late Dr. Tom Stanley’s research, we know that the majority of people who live in very nice houses in the fancy parts of town are in fact, not millionaires, but simply high income earners who have enough cash flow in the here and now to leverage their lifestyle.  It’s one thing to read this in a book, but another to see it in real life.  Just the other day Mrs. Mase shared some interesting data with me about a few of the neighborhoods in our area that are well known as “good” places to live.  Neighborhood A is considered the Ritz Carlton of the city, where the perceived “rich people” are said to live.  Neighborhood B is considered to be another very nice neighborhood, but not as glitzy as Neighborhood A.  Here are the average home values and household incomes of each that my wife found:

Neighborhood A

  • Median Home Value: $695,435
  • Median Household Income: $177,507
  • Median Home Value to Income Ratio: 3.91

Neighborhood B

  • Median Home Value: $323,003
  • Median Household Income: $96,564
  • Median Home Value to Income Ratio: 3.34

Overall St. Louis Area

  • Median Home Value: $108,100
  • Median Household Income: $34,488
  • Median Home Value to Income Ratio: 3.13

Neighborhoods A and B are certainly well above average on the income scale, especially compared to the local St. Louis region as a whole.  Both probably are full of dual income households made up of professionals and small business owners.  The thing that gets me is people in both neighborhoods are generally less conservative with their housing than your average St. Louis household is.  Even though the folks in Neighborhood A make twice as much as those in Neighborhood B, there are homes are more than twice as valuable.

This higher than expected home value to income ratio suggests that the high income earners in Neighborhood A are mostly “income statement affluent” types, who feel they should be able to leverage more money than the average person because they make so much more.

In talking with Mrs. Mase about where our next place to live would be (we will inevitably leave our current neighborhood b/c of space constraints and the availability of certain types of properties), we’ve thought about living in a place like Neighborhood B.  It is solidly more affluent, and has a high but not shockingly high average household income.  I say that last part in particular to highlight how important we feel it is to own a home in a neighborhood where our personal household income is higher than the median, at least to some degree.  This is important to us because, as Stanley’s research points out, where you live have a heavy influence on your spending patterns.

If we moved to Neighborhoods A or B our spending patterns would likely increase without us knowing it.  This is the classic “keep up with the Jones’ syndrome”.  Sure, we all have ultimate control over what we spend and what we do not.  The thing is though, it’s a lot harder to avoid splurging if you constantly see new cars in your neighbors’ driveway.

We’ve also had our eye on houses in Neighborhood C.  This neighborhood is a solid, working class neighborhood that isn’t flashy, but boasts some beautiful homes with a wide range of values.  There a businesses constantly moving in and setting up shop, it’s walkable, etc.  Here are the housing/income stats:

Neighborhood C

  • Median Home Value: $121,912
  • Median Household Income: $35,175
  • Median Home Value to Income Ratio: 3.46

Ahh, now this is a neighborhood that is more indicative of the St. Louis region as a whole.  The average home value to income ratio is a little higher than I’d like to see, but the median household income and median home values are low enough in an absolute sense that I’d feel more comfortable moving into this neighborhood (in some ways) than into Neighborhood B.  It’s not flashy, would still provide great housing options, and has some other perks.

Needless to say, the point of this discussion is simply to recognize that every neighborhood has it’s own characteristics, and that those who hide their wealth are much less likely to live in flashy neighborhoods.  I think I read that the vast majority of millionaires live in homes values at less than $350,000.  That seems about right.  It’s big enough to get a nice amount of space, very solid features, and a good location (at least in the St. Louis area!)  However, it’s not so big and glamorous that people look at it as they walk through your doorway and immediately start asking for handouts.

Richard H., Real Estate Investor

During the recent Chick-Fil-A grand opening event that I went to, I met a handful of interesting people.  There was one in particular who I found fascinating and was able to talk to for a great length of time.  It was a gentleman named Richard, who eventually revealed to me that he was financially independent and had done so at a relatively young age (mid-40s).  After hearing what he had to say and asking him lots of questions about him and his story, I couldn’t help but think that he would make a great case study.

Although I have yet to do any biographical case studies, it is something I think I am going to make a greater effort towards.  You never know the kind of interesting people that you will meet as you walk through life, or the amazing stories you will encounter of people through books or other means.  Allow me to introduce Richard as the introductory case study toward a hopefully ongoing series.

Richard H. Net Worth and Biographical Overview

Full Name: Richard H. (real name redacted for privacy)

Born: c. 1970

Gender: Male

Nationality: United States

Family: Married, with children

Education: College

Estimated Net Worth: 1,000,000 – 2,000,000 USD

Source: residential real estate – single family homes, multi-unit homes

Richard H. Business Model

  • Work hard to achieve academic excellence, if you know it is going to take you to a well-paying career eventually.  Richard started out poor, graduated in top 5 of his high school.  Most students didn’t go to college because gang violence caught up with them.
  • Keep trying until something sticks.  Richard went to local college on a scholarship and then eventually transferred to another university.  He didn’t know what to pursue professionally – tried engineering, then accounting, then computer science/IT.
  • Continually seek to earn more, especially early in life.  OK grades in college but nothing spectacular; needed time to work.  He worked five jobs at one point during college (computer lab, furniture store, etc.).
  • Eliminate debt as quickly as possible.  The reason for working so much was to graduate with little debt as possible; graduated with $10,000 in debt, but paid it off the first year out of school
  • Go into a field that pays well and has room for growth.  He started working in IT (really loves technical challenges) with a decent salary.  As far as career goes, he stated that it is important to work in a field/environment where there is a high ceiling on income.  otherwise it is hard to progress quickly toward financial goals (i.e. you cannot save as much quickly).
  • Constantly expand your circle of competence.  Richard is always expanding his circle of competence in his field.  He figured out which type of developer positions paid the best, and set out to learn all necessary skills and certifications, always making himself more marketable.
  • Seek higher paying positions when the increase in pay and lifestyle change justifies it.  He switched jobs a few times but did not do so unless it was for a justifiably higher salary ($20k – $30k increases).
    • Advice on salary negotiation: figure out your desired salary, and then tell them you are making a reasonable amount less.  Ex. “I am making $80k looking to make $90k”.  Of course, be sure that the position you are applying for has value at the level of the desired salary.
  • Be well-liked and high achieving so people naturally help you reach higher positions of responsibility.  He eventually worked his way up to lead developer (technical role), then was good enough with people that he was encouraged to accept a manager role, making $100k+.
  • Take advantage of special situations.  The most recent company he worked for got bought out; he knew he was very valuable to the new company in order to help transition their old systems over to the new company.  He was thinking of leaving because he knew the role they would transition him to made less than he did at the time.  Instead the new company made him an offer to double his salary ($200k+)
  • When the time is right, buy back your most precious resource – time.  Once the transition was complete, he decided he was prepared enough to be self-employed/do something different.
  • Savings lots of money consistently provides greater flexibility as life progresses.  Throughout IT career he saved close to 15% of earnings in 401(k) plans, as well as money in regular savings.  He left IT job and created two companies: one for [redacted] and one for real estate investment.
  • Use the structural nature of the tax-code to your advantage to build wealth.  He consulted necessary professionals and rolled 401(k) into Solo 401(k); used Solo 401(k) money plus other cash to do first real estate deal.
  • When venturing into a new field, find a mentor to accelerate the process.  Richard had a friend that had been doing real estate investing for a decade that mentored him through the first deal as well as several more.
  • Build passive income by buying cash-generating assets.  Over the past 2.5 years, he has focused almost exclusively on real estate; now up to 9 rental units.
  • Building the right team is critical for real estate investment success.  Some homes are locally owned, while some are out of state; he stated that property management company was worth the cost for the out of state rentals.
  • Understand your niche and stick to your strategy.  He only buys distressed properties, usually at auction, and fixes them up (he has construction skills and his brother has equipment).  Richard’s  target rents for each property is $800-$1200/month.
    • if value of property is too low, you risk tenants messing up the property, more hassle
    • if value of property is too high, you risk higher tenant turnover because people can/will buy houses
    • targets 10-12% cash-on-cash rate of return
    • uses rents received only for maintenance and re-investment in more properties
  • State clear goals from the outset so that you know when you have achieved them.  The initial goal was to replace old manager’s salary of $100,000 with passive income; now almost there at around $90,000.  Ever since college he wanted to be financially independent by 45 years old; recently turned 45 and feels he has finally achieved that goal.
  • Avoid debt for investing – it requires more patience but reduces risk.  He never uses debt to buy rental properties – an rarity in the real estate investing world.  He only has a mortgage on his personal residence; all nine rental units he owns are paid for.
  • Allow your lifestyle goals to change as you age.  He will continue to invest in single family homes but will shift more time to help with his and his brother’s family business.
  • Think like a business owner when it comes to investment.  He thinks that many real estate investors simply “play games” with weird and shady deals – not true property owners.
  • Never stop giving back and enjoying life with people you love.  Richard enjoys playing golf, so he volunteers at a local golf course and gets to play for free; brought down his golf game from a 95 to a 75 handicap.  Also, he is now able to spend more time with his daughter and play tennis.  He ran his first half marathon this year and is going to run in a full marathon this fall.
  • Commit to a plan and follow it consistently – over time it will not feel like much of a sacrifice.  He said that he and his wife, over the years have not really had to sacrifice much to have what they have (nice home, cars).

Practical Lessons from Richard’s Core Economic Engines

Career in Information Technology

Richard’s career in IT proved successful, even right out of college.  The constant learning of new information and what was valuable to the organizations he worked for enabled Richard to command higher salaries for his services.  He knew that most of his peers would not take the time to get extra certifications and take extra technical classes that were particularly challenging.  By setting himself up to be a learning machine, he paved the way for quick and steady career growth throughout his 20s and 30s.

His high income and avoidance of debt allowed him to maintain a solid savings rate over the period of a few decades.  For most, this simply would not be possible because of either a moderate/low income, or simply not enough time to let money stack up and compound.

Transition to Real Estate

One of the things that inspired me most about Richard’s story was that he found a way to invest in real estate without going into debt, a true rarity in today’s world of low interest rates, especially.  The wisdom is that yes, a higher cash-on-cash return could be made through leverage, but the quality of an investment is not measured by rate of return alone.  The quality of the cash flows an asset provides, as well as the risks inherently associated with an asset, need to be considered.

Note the gradual progression of Richard’s finances.  Him and his wife saved tens of thousands of dollars each year for a decade, consistently living on less than they made.  It was only with a big pile of cash in his various accounts that Richard felt comfortable enough diving into a completely new field.  With the help of his mentor he was able to purchase nine rental units in less than a three year time period.  That would not have been possible without a combination of factors occurring at the same time:

  1. Lots of liquidity available to make deals happen quickly.
  2. The advice of a mentor to avoid major pitfalls and provide specialized education.
  3. The power of paying for properties completely in cash, thereby lowering the overall cost of investment (buying distressed properties at auction).

Once the first deal was done, it was simply wash, rinse, and repeat.  Upon reaching the 9th rental unit, enough passive income was coming in that he declared himself financially independent.  The transition to working on his family’s business and spending more time with family and volunteering became possible once the primary economic engine of the real estate portfolio was firmly in place.  This portfolio, in turn, would not have been possible  to build so quickly if not for the years of savings that had been consistently set aside.

Geographic Location As An Accelerant to Wealth Building

Wow, I keep finding more interesting Bloomberg articles that catch my eye.  I recently came across a Bloomberg article where the main discussion point is how hard it is for Millenials to afford new homes, especially in cities on the West and East coasts.  This intuitively always rang true with me but I had never seen much data to support my intuition other than those cost-of-living calculators online (and you never really know the data that’s driving those).

Although the article went on about how Millenials, as a generation, are having a hard time finding homes to buy in places they really want to live – such as the trendy California coast or the bustling cities in New England, I think the main take away for young people who want to reach financial independence is really look at the costs of housing in the place where you are thinking of setting up your life.  Even if you choose to move in a few years you’ll still want to save on housing costs, because an excessive rent/mortgage payment can be the greatest hinderance to your ability to save and invest money.

Take a look at the chart below.  It shows top cities where there is the largest gap between average Millenial earnings and what they would need to earn in order to afford the median home in that area.  The data assumes a 20% down payment and that 1/3 of take-home pay is going toward the house payment.

San Jose may be incredibly beautiful, but say goodbye to owning a home there unless you're willing to bury yourself in debt.

San Jose may be incredibly beautiful, but say goodbye to owning a home there unless you’re willing to bury yourself in debt.

Look at the disparities on the West coast especially.  In San Jose, it would take the average Millenial to earn over $80,000 more than the average wage in the region ($53,000) in order to afford a home.  We’re not talking mini-mansion here either.  The median home value in the region is over $900,000.  $900,000!  It’s difficult to get ahead, even for a high income earning couple who commits to frugal living, to afford a $720,000 mortgage.

Take a look at the full list of cities that were analyzed.  It compares average millenial earnings and average home prices of different cities as the key metrics:




I’m proud to say my home town of St. Louis is near the top of the list as far as home affordability.  There are also some good cities nearing the top like Kansas City and Indianapolis.  Although it wouldn’t be my first choice, real estate in Detroit is really cheap right now, so if you were so inclined, you could move there and have quite an affordable lifestyle.

One thing this article fails to discuss is that many Millenials simply aren’t focused on buying a home.  Many of my friends definitely see home ownership in their future, but not until they hit their early 30’s at least.  I get this.  Renting provides a lot of flexibility, so one can just pick up on relatively short notice and go to another city, or even country.

The thing is though, there is a correlation between rent prices and home prices anyway.  The ratio certainly varies depending on the city, but when all is said and done, living in Brooklyn will only be somewhat cheaper than living in Manhattan, whereas moving to Indianapolis would provide significant savings on housing costs over both cities.

Although I cannot guarantee it, I am pretty sure my wife and I will spend our lives living in the midwest or southern regions of the country.  We may even stay here in St. Louis long term.  It is simply so much easier to get ahead when you have lower costs to live but don’t sacrifice much in terms of quality housing.

If you add this to the fact that there are many jobs in the midwest and southern regions of the country that still pay relatively well, it is easy to see how a couple with solid jobs can easily afford quality housing (and thus build wealth faster) if they live in the midwest of the south.

I was thinking of this because I just finished reading the late Dr. Stanley’s Stop Acting Rich.  There’s a section near the end of the book where he discusses housing and the relative amount of millionaires that live in different areas of the country.  From p. 265:

I also pointed out that as a proportion of their respective populations the Midwest had a higher concentration of these high-net-worth people…the concentration of millionaires next door in the Midwest is 1.65 times greater than what is expected, given the size of its overall population.  The South is also above the norm with a multiple of 1.2, while California and especially Northeast areas of the United States have less than half the expected number, given their overall household population.

So, statistically there are two to three times more millionaires, adjusted for population size, in the Midwest and the South than there are on the east and west coasts.  Reading this blew my mind because, although I had the intuitive feeling that this was true, it was great to see actual data to confirm this hypothesis.

Sure, a small business owner might be able to charge a little bit more for his or her services in a high cost of living area, but relative to housing costs, the same small business owner gets to keep more of their earnings in the Midwest of South, because all of that profit is not immediately going out the door to pay higher property taxes, rents, and principal payments.

I’ll talk more about this topic in the future, because I feel like I’ve only scratched the surface here.  Housing costs have a profound impact on one’s expenses, and thus a profound impact on one’s ability to build wealth, since housing is one of, if not the largest expense for most people.  For those in the early stages of building wealth like my wife and I, living in the Midwest and southern regions of the country, while making an average or above-average income, is a solid formula for increasing capital for investments.  People underestimate living in these cities because they are not as glamorous, but the relative ease of living is something that I can say, for personal experience, that I am incredibly thankful for and cherish a lot.