Tag: real estate

the dead end of home ownership

the American dream

I’ve known more than one guy with the following life story: working at a corporate job as a middle manager, married with young-ish kids and settled in normal sized house in an acceptable neighborhood. Maybe the kids are really young, even though he’s in his forties; like me, a lot of men (and women) are waiting until later in life to have kids. The house is comfortable but small. The job is OK but if the guy’s honest with himself he knows he’s not likely to soar to the CEO floor in the 15 or so years of working life he has left to him.

So here’s the question: if you make X dollars at age 40, say, and 40% of your income goes to your mortgage that you took out at age 38 - a 30 year fixed mortgage - and you’re expecting a 5% raise every year (if you’re lucky) - when will you reach the finish line?

I know the common perception is that if you own instead of renting there will come a blissful moment when you burn the mortgage documents and skip off into sunset worry-free. In my mind, two things will be happening in 30 years when my mortgage is paid off that will throw a big monkey wrench in those plans.

Property taxes

Perhaps you live in Cheyenne, Wyoming. If so, your property taxes are the lowest (on average) in America, probably around $1000 per year. That’s $83 per month, a doable figure. However, if you live in places like Garden City, New York, your taxes run closer to $9000 per year, or $750 per month. One thing I can guarantee about both Cheyenne and Garden City that holds equally true for both is that 30 years from now, those taxes will be higher. Will they have grown at a rate faster or slower than your annual raises at work? With the strains looming on the US economy - an enormous national debt, rapidly ageing population, and so on, I’d be willing to bet those taxes will eat up a big chunk of your post-retirement income after you’ve paid off the mortgage.

Shoddy construction

On this point I only have my own limited experience to go on, but I remember laughing out loud every time someone asked me in New Jersey if I expected to pay off my mortgage on my townhouse in 30 years. I laughed because I really didn’t expect my townhouse to last 30 years. We moved in while construction was going on in the community, and I saw how these homes were built: pressboard and 2 by 4s. Not stone, not metal. K. Hovnanian put them up fast, using what (ahem) APPEARED to be workers who might not have been entirely legal citizens. These were not structures built to last. These were not cheap places, either; it was a very expensive gated neighborhood with fancy homes (think elevators installed in the homes, riverfront views, etc.) Most American homes will need substantial and continuous maintenance and repair work in 30 years. So think about that mid-70s guy dealing with a crumbling home. Again, no mortgage, maybe, but those bills can mount up quickly.

…the dead end

I still think you ought to own if you want to own, and you ought to work for a corporation if that’s what twirls your pigtails, but this scenario just looks like a dead end to me. This house I’m in now needs to be my last one, or else I’m going to need to move into a place where I can pay off the mortgage substantially sooner than 30 years or I’ll be working to pay the mortgage (and other costs) into my 80s. If you don’t think that’s a dead end, I don’t know what is. I for one don’t want to be struggling away at age 75 to finally pay off my mortgage just to get stuck in a crumbling house paying exorbitant property taxes. Figuring out how to stay out of this dead end ought to be a high priority for anyone who looks to buy a home in their late 30s or later.

The Real Meaning of Risk

By Curmudgeon - Curmudgeon’s a long-time friend of brip blap and I always appreciate his contributions; here’s his latest:

free


I’m afraid that I mentally hit the ceiling earlier when I read a comment on one of Steve’s posts. The comment was:

In real estate, the quicker you can go into massive debt, the quicker you can become massively wealthy. (Link)

It’s true, but in a very misleading way. The operative word here is “can.” It is easy to miss, and many people will automatically interpret this as “will” or even worse, “probably will.” That is precisely incorrect.

If you go massively into debt, what you do is you take on a massive amount of risk. Risk isn’t necessarily a bad thing; we take risks many times every day – getting on the highway, crossing the street, eating that Big Mac (well, a bunch of Big Macs, over time).

But in general, the odds of us succeeding in getting on the highway without an accident are pretty good. Most of the day-to-day decisions we make regarding risk turn out just fine, because our chances of being successful are pretty good.

Going massively into debt, with the expectation of making a massive amount of money? Well, the odds there are not so good. It’s not strictly a crapshoot, because it depends on your timing. If you get in early, it has a better chance of paying off. If you get in later, your chances decrease significantly. Guess what? The timing part is the crapshoot. There is no timing the bubble.

If you take on more risk, you have a chance of making more money. But that chance is smaller. In fact, sometimes it’s downright nonexistent. How can you tell when it’s tiny or nonexistent? Well, you can’t. You have to assess it with incomplete information and no clear vision of the future, and that’s not the easiest thing in the world. But if you are taking a lot of risk, you need to understand that a big return, or even any return, is by no means a sure thing.

That doesn’t mean that you shouldn’t consider leverage in your investments. Risk isn’t a bad thing. But you have to understand your tolerance for risk, and to understand how much risk you are taking. These are inexact concepts, and people assess them imperfectly. We make mistakes. If you bet the house, you may lose thehouse.

So yes, you can do real estate, or even any variety of other investments, and go massively into debt. But you might prefer to buy a lottery ticket instead. You’ll lose less, but you may be able to sleep at night.

photo credit: jonrawlinson

linklings, too old for the factory edition


Another week goes by and another spate of bad job news. I’m beginning to suspect that I may be in the “old enough to be difficult to hire” category - many of the manager positions I’ve looked at quickly turn me down. I doubt it can be my qualifications or me personally - since many of my applications don’t even make it to the phone interview stage - but perhaps they think “senior manager guy’s gonna want big money.” Or maybe my last five years consulting on Wall Street don’t look as nifty as they did a year ago - hah. I’m casting about for direction, and still hoping that one of the consulting contracts I’ve got very strong leads on will work out, so I can avoid reentering job world. I don’t feel that I want to do it, and of course that mindset doesn’t help, either.

When you are moving, life drifts into a bit of stasis. A lot of ideas about starting this or doing that get paused and filed away with “I’ll get that done after we move.” I’ve been meaning to start an LLC - but now I think I’ll wait until I’m closer to moving to Florida. I’m going to pursue some sort of certificate education (teaching? financial planning?) at one of the local colleges… down there. I’m going to start a small business, hopefully, doing some kid’s party entertainment - but now I’m just researching and won’t get started.

Of course this is just procrastination. I could start all of these things today if I felt pressure to do so. But with so many things to organize for the move these ideas seem destined for the shelf for the time being. I doubt it’s a characteristic of a successful person, but then again maybe I’m just being organized and prudent. Time will tell.

Some links for weekend reading:

My Tenant: “I’ve Lost My Job and I Can’t Pay You…”: Words that would give any landlord a sinking feeling.

Can One Choose Not To Participate In A Recession?: This is an interesting idea from the always-interesting (if not, in my opinion, always correct) Dave Ramsey.

Your Home Office: Ideas To Set Up Your Place of Work: Oh, to have a home office. I know, I am wishing for more space and a bigger home, and I know that’s verboten in the personal finance blogosphere. I sincerely hope that sometime in the future I’ll have a place with a room that can be devoted solely to work (and by work I mean blogging, writing and consulting). With a door. The door is key. Having a computer in a corner of the open-floor-plan living area is in no way conducive to getting work done during the day or putting yourself in a work mindset. My office, however, would not need to look like Gore’s. Yikes.

How Long Does It Take Your Broker to Answer Your Call?: I only have experience with three brokerage firms in the last 5-6 years. TD Ameritrade (where I keep my retirement and brokerage accounts) is terrific. They answer the phone almost immediately, and I have yet to have any trouble with my account (I say that while furiously knocking on wood).

Did You Miss the Stock Market Rally?: I don’t think March was a real rally, to be honest. I think we’ll see another dip, and I need to see one more strong runup before I’ll believe the market troubles are over. And I have to vent on a pet peeve: the market and the economy are NOT the same thing. The economy’s going to be in the dumper for a while. The market may come back long before the economy does - and by the economy I mean jobs, productivity, real estate and so on.

The 80/20 Rule and How it Applies to You: The Pareto Principle is a great way of looking at almost everything in life - if you don’t know what it is (but if you read this blog, I am sure you do), check it out.

Taking Control of Your Life By Finding Balance: I probably worry far more about balance than I should.

Poll: Generation X Feels Unprepared for Long-Term Care Costs. Are You Prepared?: I’m not. I’m one of those people who’s buried his head in the sand a bit on long-term care.

How to Save on Digital Services: We drop a LOT on digital services, although much less than we did. Probably the biggest waste? A landline, which we need because of (a) a security system and (b) we use DSL, so it’s cheaper when bundled. I’d love to have nothing but high speed internet and a Roku Digital Video Player.

How To Become An Expert: It’s true that 10,000 hours of practice will make you an expert, I suppose, although I’d argue that you may not need to be an expert to be successful - these are two different things. Practice does work, though. I’ve been learning to juggle and after spending one hour mastering the basics, I’ve been doing it every day when I have a few free minutes. 10,000 hours will be a long time in the future, but the 5-10 hours I’ve put into practice have already made me a decent three-ball juggler.

And so it begins …: Jacob is doing what a lot of us aspire to and “retiring” early. Extremely early, hence the name of his blog. Jacob’s blog is thoughtful and doesn’t focus solely on any one aspect of his life. Although he takes a different approach than I would in many areas, I’ve found his blog thought-provoking, which is the best reason to read any blog.

Why Achieving an MBA is No Longer My Goal: What? Don’t let too many people hear this - someone else decided that going into debt for a degree he didn’t really want or need wasn’t worth it because his real-life experience in building a company was - gasp - more interesting and more profitable. My master’s degree in accounting is nothing more than a resume padder at this point - think that corporate income tax course I took in 1994 is worth anything now? The code’s changed so many times since then it’s ridiculous. I didn’t mind getting my master’s since I got a free ride (graduate scholarship and a teaching assistant stipend), but would I go $40,000+ into debt to get one now? No way. MBA’s aren’t worth what they were 20 years ago.

I Am Just A Blogger, Damn It!: Amen.

4 FREE Videos for INO TV!: If you have any interest in trading actively - which I wouldn’t for retirement savings or the bulk of my investment accounts, but do engage in with smaller amounts - here are some free technical videos.

photo credit: TheeErin (great photo! — Steve)

how to get rich by choosing the right house


In The Millionaire Next Door - one of my favorite personal finance books - the authors point out that most millionaires live in nice homes in modest neighborhoods.

“It’s easier to accumulate wealth if you don’t live in a high-status neighborhood. … Perhaps you aren’t as wealthy as you should be because you traded much of your current and future income just for the privilege of living in a home in a high-status neighborhood.”

They also point out that many millionaires choose to send their children to private schools. My assumption is that they chose neighborhoods that were in less-than-desirable school districts, so the money they saved on a place to live was then pumped into the children’s education instead. You should choose a moderate place to live, amongst people who are not as rich as you are (or as rich as you aspire to become). Living below your means starts with a place to live.

Yet there’s another school of thought that says “you should dress to the job you aspire to obtain.” If you want to be rich, you should spend time with rich people (or people who have similar intentions to become rich). By rich, I don’t mean high-income, low net worth; I mean truly rich people who have high net worth and multiple sources of income besides a job (investments, businesses, etc.). You have to live amongst people who will inspire you, provide contacts and guide you.

Which way to live makes more sense?

Big fish, little pond

In this scenario, you choose a moderate home in a modest neighborhood. The money you save on a place to live is partially offset, perhaps, by a longer commute or an expensive private education for your children. You make sure that the place you live never becomes a burden on your ability to create wealth; you do not upgrade your home every four years or attempt to live in the best neighborhood in town. You know that spending money on a home in the best neighborhood in town is about status, not wealth - you will use the money you save on your home to build wealth. You want to be the richest man in your neighborhood in your late middle age.

Little fish, big pond

Looking at the opposite scenario, you find a place to live in the best neighborhood in town. You realize that having a good home and all that entails will be far more important in the long run than trying to skimp on what may be your biggest purchase ever. You feel that paying extra to live in the best part of town isn’t truly “extra” - it means good public schools, low crime, a healthy environment to live in. You want to live around rich people, to understand how they think and to move in the same circles. You want to be the richest woman in your neighborhood in your old age.

I think you can make strong arguments for both scenarios. It’s like the argument for buying used cars or new cars, or clipping coupons to buy name brands versus buying the store brand and skipping coupons. A lot of it may depend on personal preference. The direction you choose says a lot about your world view. I’d argue that the big fish, little pond people are almost by definition “classically frugal.” The little fish, big pond people seem more likely to be believers in Napoleon Hill.

Where you live shapes your worldview. When you buy a home as a young person or a young couple, you make your choices - and they aren’t always good. Sometimes they are just your best guess, and life throws you a curve (you bought a one-bedroom condo and right after the close you find out your wife is pregnant). Sometimes you close your eyes against facts you should consider (you buy an expensive home counting on next year’s raises to make the monthly payments affordable).

The answer is not black or white. But if you choose to live in a moderate neighborhood - according to The Millionaire Next Door - you’re following the path of most millionaires. The little fish, big pond people are - according to the stats - less likely to be millionaires. Yet they may be living more like millionaires. Only time will tell in your life if the choices you’ve made about homes to buy (or rent) will pay off.

photo credit: wili_hybrid

produce the note

If you need to be amazed and bewildered by the complexity (and stupidity) of the lending business, look no further than the “produce the note” phenomenon. This post may seem different from my usual focus, but I thought it was worth mentioning:

from Action News 6 in Philadelphia (italics and bold fonts are mine - Steve):

“I filed the produce the note and I haven’t heard a word from anybody.”

Kathy learned of the delay tactic from a website called the Consumer Warning Network. On it, attorney Chris Hoyer explains the strategy.

“There was an original iou, an original promissory note that you signed make them produce the original. We’re hearing now that they’re having difficulty doing it,” Hoyer said.

And that goes to the heart of the foreclosure crisis. During the real estate boom, the original note signed by the homeowner may have been lost, trashed, or stored elsewhere, in part because it exchanged hands so many times.

“They would take your debt, package it up with other debt, sell it, resell it, resell it again, put it in a bundle and sell it to investors telling them it was really good stuff. Now the really good stuff is exploding,” Hoyer said.

A lender’s inability to produce the note may force it to modify a mortgage so it’s more affordable. It may also give homeowners time to find a job so they can make payments again. This out of work real estate agent hopes either way the “produce the note” strategy will be her saving grace, too.

“I am requesting the mortgage company give me a copy or provide me proof of the original note that I signed. If they can’t prove I owe them, why should I pay them?”

Talk about an ethical conundrum. I agree, first of all, that if you have a legal system that requires that the mortgage company be able to produce a copy of the note, and they can’t, then the homeowner doesn’t have any legal reason or obligation to pay. We throw any concept of honor (i.e. paying one’s debts) out the window due to legalese, of course. I sympathize, because if the situations were reversed I am sure the mortgage company would dot the i’s and cross the t’s without mercy.

This situation may in fact be an interesting fallout from the insanity of the “bundling” of mortgages into investment packages. As someone who’s spent a professional life focused on controls - signatures and countersignatures, authorizations and approvals - I chuckle a bit when I see this story. I’ve been lectured again and again by business persons about how all of these durn controls were getting in the way of “Bidness” and how they could make a lot more money for the company if only the accountants and controllers and auditors would get out of the way. Those controls are there for a reason. Humans are fallible, and controls created by humans are fallible - but controls created by crowds are LESS fallible. The accumulated wisdom of years and years of business knowledge (two signatures are better than one, making sure that paperwork is filed in duplicate) are there for a reason. The reason? People fail.

I doubt this woman will be able to withstand foreclosure for long with this tactic, unless positive media attention helps her. Even so, it should serve as a harsh warning for all of us: make sure that you keep good documentation related to real estate dealings and business deals. The tiniest omissions can destroy everything. This time, it helped the little guy, but the truth is that most of the time, paperwork favors the corporate behemoths.