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Realtors Should Rent

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Stephen PopickDid that get some attention? I hope so. The conclusion that realtors should rent comes directly out of urban economics, an understudied and ignored branch of modern economics. But while it is a cute fact you’d expect to see in Freakonomics– it wasn’t there. I wanted to take some time to explain this counterintuitive fact, and then use this to maybe reshape the question of renting or buying.

One of the reasons why we hear that we should hold a balanced portfolio is that, for whatever reason, it reduces our exposure to risk. If our eggs are in one basket and that basket drops, we have a mess. So by diversification, we’re not so S.O.L. if one of the baskets drops. But that isn’t necessarily true. If, for instance, basket 1 and basket 2 tend to drop together, then we haven’t really diversified as much as we might suspect. Consider an asset portfolio of a typical family(Cash-Like, Stocks, Bonds, Income, House). In the classic portfolio of stocks and bonds, those two tend to trend in opposite directions, so that’s one way of diversifying away risk.

If we consider the house to be a part of our asset portfolio, then we have to consider how it co-varies with our other assets. So if our income moves together with house prices, buying a really big house doesn’t mitigate any risk on our portfolio…it makes it riskier. It would behoove such a person to either rent, or own smaller and put the difference in an asset that doesn’t vary much with income.

The underlying non-economic logic is the same reason why you wouldn’t just buy stock in the company you work for. Your income is very much related to the value of the company. If the company goes belly up, your stock is worthless and so is your job. Change company to house and the situation is the same.

Real Estate is a part of our overall investment portfolio. In fact, it is typically the biggest chunk for most households. If I look at my Net Worth estimate, about 40% is our estimated house equity. So we should consider our house part of our investment portfolio.

Now, let’s go back to our realtor. When house values rise, realtors tend to make a lot of sales and thus money (this is a fairly well established relationship in urban economics). When house values decline, realtors tend to make few sales. There’s a lot of economics behind these simple statements but I’m going gloss over them.

Since portfolio theory tells us to diversify, and since a realtor’s income and home values are very much related, diversification indicates that the realtor should RENT (or own smaller) to mitigate risk. Now how about that for some counterintuitive fun! The person selling your house should be renting theirs, if they’re properly diversifying. HA!

How does this tie in to DiNK readers? For one, the buying vs. renting decision is often thought about in terms of interest rates, time frames, and available down payment. But in addition, whether or not your income is related to house prices should ALSO be a consideration, and this is NEVER mentioned in buy vs. rent guides. Of course, this would imply that a foreclosure specialist should own their home, since their business goes up when house values go down.

Anyways, I hope that adds a wrinkle to the buy vs. rent debate. Can you determine whether your income varies alongside house prices? Sort of. Government employees tend to have income that is little related to house prices. Some banking, investment, and local business owners income may be quite related to house prices. It is worth considering.

And if you do buy, ask for a realtor who rents. They get it.

Top 3 Things You Need To Know About Life Insurance

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cemetery sky
For most people, thinking about the possibility of an untimely death can be an uncomfortable experience. However, as we travel down life’s unpredictable path, we will acquire responsibilities and debts along the way that can seriously impact our closest loved ones if we were to suddenly die. Although it may be an unpleasant thought to consider, it is our responsibility to protect our loved ones. This involves making sure they are not left with an overwhelming debt load that impacts their quality of life. One way to protect your family is to purchase life insurance.

Buying life insurance will ensure that your loved ones are able to settle outstanding debts such as a home mortgage, and set aside money for future plans such as the children’s education. When searching for a suitable life insurance policy, it is important to be aware of the following top 3 things people should know about life insurance:

1. The two general life insurance categories are Permanent Life Insurance and Term Life Insurance.

Permanent life insurance is insurance that covers an insuree for life. Term Life Insurance is insurance for a specific time period. The benefit is paid out if the insuree dies during the term of the policy. As well, it is important to note that insurance policies with an investment component will cost much more than term policies.

2. The life insurance industry is a business.

Agents earn more money if they sell an expensive policy. It is important to shop around for an affordable and quality policy. A helpful tool is an insurance online comparison quote service that allows users to submit a bit of personal information and then receive several different insurance quotes from different insurance companies. This allows users to find cheap life insurance quotes. Experts recommend purchasing an insurance policy that pays out no less than 5 to 10 times their yearly salary. It is important to acquire insurance that meets your needs and financial responsibilities.

3. Honesty and good healthy is important when purchasing a life insurance policy.

The best time to buy life insurance is when you are in good health. When you are healthy, including being a non-smoker, you will receive a lower insurance quote. As well, you need to be honest about your health because if the worst happens, and the insurance company finds out that you lied, your beneficiaries will likely be denied compensation.

When people marry and begin to start a family, they should consider what would happen to their family if they were to suddenly die. Unfortunately, life is very unpredictable so it is important that people have life insurance. It will ensure that their loved ones are protected in case an unexpected event occurs.

———–
Guest post by Joanne Kwan – an insurance industry writer.

(photo by kevindooley)

Interest Rates Soar

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John ToomeyAs our country seeks financial progression, higher interest rates are inevitable. In case you weren’t aware, we’re already experiencing some drastic increases. According to mortgage company, Freddie Mac, the fixed average mortgage rate is now 5.21 percent… after being 5.08 percent last week! So if you’re looking into buying a place, it might make sense to do so sooner rather than later, unless you can wait a whole lot later.

Also, this is the last month for the first time home buyers’ government tax credit. While the increased mortgage rates will likely have an impact on home purchasing, we won’t start seeing differences until after this month. Those statistics are going to look extreme as well, and I’m sure lots of different political writers are going to use them in order to support their claims against government policies. But keep in mind there have recently (last few months) been substantial increases in home buying, so just because there might be a massive difference between home sales this month and next, don’t fall into a state of panic.

This is mostly true for the Washington DC metro area; I know places like Florida have not experienced this same surge of home buying. So keep that in mind if you’re looking down there. Sure, you’re going to hurt a little on the mortgage rate hikes, but so is everyone else in the country. At least in places like Florida you’re truly in a buyer’s market and are thus capable of playing with different options.

A good buddy of mine has been looking into purchasing his first home in Orlando these last few months. The house is for him and his fiancée. Apparently he’s seen multiple places, all around the city, most of which have been on the market for many months. Two months ago he made an offer on a five bedroom, 3.5 bath home that’s in one of the top school districts in the state, in a gated community, on a golf course, and with a screened in swimming pool and hot tub. The home was listed for $200,000! He made an offer of $175,000. The appalled seller explained that the price was non-negotiable, after having been forced to drop the price three times already. My friend knew the market, and most importantly knew that nobody else was even looking at this guy’s house, so decided to allow the seller to sweat for a few weeks. After calling his bluff and waiting a month, the seller called my friend with a counter-offer of $189,000. My friend considered the offer, and just countered it a couple days ago with $182,000. Regardless of which he ends up paying, he’s getting a hell of a deal (assuming when he decides to sell he won’t have to go through the same hoops as this seller).

But back to my point… these rises in interest rates will undoubtedly cause a financial burden on our country, and the hikes are necessary in order to get the nation’s economy closer to recovery. So instead of moping about the rates, plan for them and see if you can’t get out there and find something close to an arbitrage opportunity.

Some other hiked interest rates:
Credit card interest rates: up to 14.26%
Car loan interest rates: 4.72% (was 3.26% in December)

Should You Live On a Cash Budget?

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wallet - you have no money
When I was the manager of a small business, I was always shocked to learn when a new hire didn’t have a bank account. He or she would opt out of getting an electronic direct deposit in favor of a paper check that they’d cash every payday. I guess it surprised me because bank and credit accounts lay the foundation for my entire money management system and make my life so much easier.

You might argue that a cash budget has benefits because there’s no chance you can spend more than you have. Or that spending cash gives you a psychological advantage because it’s more painful to peel off a Benjamin than to swipe a debit or credit card for a purchase. Yeah, that’s true. But on the other hand, you can’t buy online or make a reservation for something like a concert, hotel room, or a rental car with cash. Trying to keep the right amount of cash in your wallet at all times is terribly inconvenient and could be dangerous if you were caught short of funds at the wrong time.

Let’s take a look at four reasons to use bank and credit accounts, instead of cash, and how to find the best ones:

1. You need to track every penny of your money.

Spending with a debit or credit card allows you to automatically track your expenses. It’s simple to import transactions from your bank and credit card accounts into a financial program at the click of a button. Quicken is one of the best-known brands in accounting software. But there’s also free software like GnuCash and Outright to keep you organized. Mint.com is a fantastic online application that automatically aggregates your financial data in one place for easy budgeting and reporting. On the other hand, purchases made with cash can’t be easily tracked. You have to manually enter them into your software or paper register which means they’re easily forgotten.

2. You need to earn interest on your idle money.

Money that you set aside for emergencies, short-term savings goals, and everyday bills and spending, should be working for you in a high-yield FDIC-insured bank account. Funds up to $25,000 in my checking account at Bank of the Sierra earn over 4% APY. To get that currently-awesome rate, the bank requires that I do the following each billing cycle:

  • Make a minimum of 12 debit card purchases
  • Have at least one direct deposit or automatic payment
  • Pay at least one bill using online banking
  • Receive an account e-statement

Am I happy to comply with those requirements in exchange for earning over 4% with absolutely no fees? You betcha! You can find more high-interest checking accounts at CheckingFinder.com.

3. You can use credit card rewards to your advantage.

I really enjoy getting 5% cash back when I buy everyday items like groceries and gas with my American Express Blue Cash card. I buy everything I can on it (except for the 12 debit card purchases that I mentioned above) and deduct each charge from my checking account balance each week. Then I pay down the card balance in full twice a month—so I actually use it like a debit card. The cash reward is credited to my account every 12 months.

4. You need to pay bills on time.

Without a checking account, it would take me so much longer to pay my bills. I remember the old days of writing paper checks, addressing envelopes, and stamping them. Whew! I’m so thankful for online bill pay; now it literally takes me all of a few seconds. Paying bills with cash or a money order seems downright archaic.

To me, living on cash has too many limitations and too few advantages. However, if you’re still convinced that using a cash budget is the only way you can tame your spending—don’t change a thing.

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Laura Adams is the author of Money Girl’s 10 Steps to a Debt Free Life. It’s available as an audiobook at Audible.com or as a short e-book in the Amazon Kindle Store, the Sony Reader Store, and the Fictionwise E-bookstore. Learn how easy it is to get out of debt and stay out of debt for good. Take control of your finances today and create a more secure future.

(Photo by Jeff Keen)

Throwing Away Money

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landfill tractor
What do Bill Gates and Warren Buffet have in common? Other than being the two richest men in America; they love trash.

That’s right, hefty bags full of cereal boxes, half-eaten chicken bones, used coffee grounds, and that junk mail that you should have recycled is big business. How big? Waste management is a $50 billion per-year operation. Americans compile 200 million tons of garbage per day, or approximately 4 pounds per person per day.

We throw out more trash today than any other time in history, and we will only continue to throw out more. Think about it, the garbage industry is not going anywhere. You want a business with consistency-look no further than your own waste basket. Does your trash need to go out?

There is little competition in waste management. It is extremely difficult to open a landfill. As the saying goes, “not in my backyard.” No one wants a landfill stinking up their community, and your neighbors and local representatives are going to throw everything but the garbage disposal at you to keep it from happening. Competition? Good luck.

And guess what, neither Microsoft nor Apple is going to make technological advances in garbage retrieval. Until garbage eating robots roam the planet, count on waste management to pay out consistent, sustainable dividends. Just ask the two richest men in America. They’re not throwing away money.

“I’m in the waste management business. Everybody immediately assumes you’re mobbed up. It’s a stereotype. And it’s offensive.” Tony Soprano

(Photo by D’Arcy Norman)

Moby DINK

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JeremyCall me Jeremy. Some time ago, never mind the particular date, having no money in my bank account despite the forty hour week that I had just worked, I thought I would start blogging in the financial sector of the world. It is a means of keeping motivation and direction. It is a means of humanizing, or rather, dehumanizing my current state. It is a means of stepping outside of the forty hour week and delving into a blog where assurance and financial security are only a few paragraphs away. I am a DINK. This is my counsel. Please, call me Jeremy.

As you may have gathered, I am by no means a financial expert-quite the contrary. Yet, I see myself as a sailor about to set sail, delayed only by a little patch work on a leaky ship. I will gather the necessary tools, seek the appropriate expertise, and apply the necessary adhesive to finally set sail. I am confident that my research and efforts will not only patch the existing leaks, but will construct a ship as worthy as the Pequod (FYI: that’s Ahab’s ship in Moby Dick).

Please come back soon, and come back often. My first blog will be up shortly and it is bound to be groundbreaking. I will be exploring the world of garbage. That’s right, garbage-waste management’s ugly name. But believe me, Tony Soprano is not the only one making a hefty profit in garbage. You can too! I am a DINK. This is my counsel. Please, call me Jeremy.

“There is nothing surprising in this. If they but knew it, almost all men in their degree, some time or other, cherish very nearly the same feelings towards the ocean with me.”
– Moby Dick by Herman Melville

You don’t have to be ready – just go.

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So, a few days ago, I ended up donating a ton of my old books to the public library. The great thing about cleaning out your bookshelf is you are forced to make decisions about what’s important and what isn’t. Once book I kept was Loral Langemeier’s The Millionaire Maker.

Langemeier’s work is great because she provides a rough draft on how to start a business. But it’s framed more in the language of easy to read personal finance literature and less from the standpoint of a dry business text. So, I kept it around because it serves a good review and occasional source of inspiration.

One thing she says, which makes a lot of sense is: you don’t have to be ready to start a business, just do it. This resonates for me because a lot of people don’t take action to improve their finances.

I see this a lot in my peers. For example, when I talk to my friends about starting a small business or buying a house or investing in stocks, most of them immediately start to find a bunch of reasons for why they aren’t ready. Usually its something like “well I need to research it more” or “ I need more savings” or “stocks and real estate are risky”, etc. etc. This is a shame because most of the people I know who are aren’t willing to take action to improve their fiscal bottom line also tend to be poorer. Thus, by waiting until they are 100% ready, then tend to deny themselves important opportunities for wealth creation.

Bottom line: whether it’s starting a business, paying off debt or investing in stocks. You don’t have to 100% ready, just go do it.

Best,

James

13 Ways to Save Money

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Folks,

It spring time in DC. The weather is beautiful here, it partly cloudy and nearly 80 degrees. Spring is typically a time to do some cleaning but its also a good opportunity to start saving some money. Why? People tend to get out and about more, so you might have some extra spring travel planned. Also, saving money tends to help your budget and accelerate your investing. So, here are 13 ways to shave a little off your budget:

1. Switch from name brand groceries to store brand.
2. Pack all lunches for school / work.
3. Join a carpool. This saves both money and the environment.
4. Turn off the lights when leaving the house.
5. Water the lawn at night, as evaporation from the sun will waste water.
6. Set your lawnmower to cut the grass as short as possible.
7. Keep your showers short.
8. Consider hand-washing your dishes if you don’t have a full load.
9. Save your leftovers for a second meal.
10. Eat everything in your pantry before you make a new trip to the grocery store.
11. For shorter trips, use a bicycle or walk instead of driving your car.
12. Wash your car at home, rather than a commercial car wash.
13. Leave your credit cards at home.

While some of the above tips will only save you pennies at a time, but if you try to work several of these into your daily routine, the overall effect could help shave your household expenses by a significant amount. The money you save can be used for investing, paying down debt or for going on vacation if that’s your inclination.

Best,

James

You Are What You Read

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Folks,

Main point of today’s posting is: you are what you read.

There is a ton of finance and investing information out there. Don’t pollute your mind with bad investing strategies and philosophies. The quality of what you read and listen to is far more important than the quantity. So it makes sense to learn to evaluate the quality of what you read and hear.

Regarding this, here are some thoughts:

1) Tune out network programming in favor of classic books. MSNBC is fine, but MSNBC and most broadcast cable news programs don’t really provide a whole lot of insight or education – they produce a combination of commentary and entertainment. Instead, what makes more sense would be to invest some time in reading classic works which facilitate building wealth. The Intelligent Investor by Jim Graham or The Millionaire Next Door are good starting places.

2) Take pessimistic gurus with a grain of salt. A couple of examples of pessimistic gurus are guys like Swiss economist Nouriel Roubini and American investor Jim Rogers. Both of these persons have publicly made pessimistic comments about the economy, arguing that hyperinflation is sure to impact the dollar or that farmland is the best asset to hold in the future.

While its true that the economy has been challenged over the past couple of years, some people make a mistake by putting too much stock in a pessimistic perspective. For example, had you listened to Roubini and Rogers, you might have sold dollar denominated assets or bought gold or silver in 2009 and thus missed very profitable opportunities in stocks over the past year. Basically, take pessimists with a grain of salt. If you buy into their perspective too much, it can blind you to important investing opportunities.

3) Ignore most personal finance blogs. Being a personal finance blogger, I know this sound like a criticism of the blogging community. However, unless the blogger you are reading is willing to make their networth public and they have above average wealth, don’t bother with their blog.

The reason for this is you have no way of judging the quality of bloggers writing for your own wealth building. A great way to judge the quality of someones reasoning regarding wealth is if they are able to implement correct strategies to significantly build their own net worth. Bottom line, if they don’t disclose and aren’t richer than you, ignore them. Most bloggers don’t disclose and aren’t richer than you, therefore you can safely ignore their writing.

Bottom line: you are what you read. Carefully evaluate the quality of the information you take in.

Best,

James

Taking Care of Business

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Hello Folks,

If you’ve been following this blog you’ll know that we’ve been working on closing on another property in the district.
Well last night we sold our stock to raise the down payment funds. The closing date is April 13th, but we wanted to have the funds in cash so there won’t be worries about how the market does between now and the 13th.
We signed the loan paperwork last night as well. We are paying 5.75% with 25% down on an investment property worth approximately $185,000. So, the balance of our loan will be about $139,000 dollars and we’re looking at payments of just under $950 dollars a month.
The loan is with Branch Banking and Trust, who I am less than enthusiastic about working with. The company has a habit of helping themselves to their customers bank balances via fee harvesting. BB&T also tends to charge for things customers should get for free – such as conversations with customer service and starter checks.
Honestly, this will be our third property in the District and maybe the 5th piece of real estate that my wife and I have owned together. For what its worth, the next time we buy a place I think I’m going to try to go all cash. Having been through a couple of different markets and having worked with various lenders in different states, it seems like the real estate borrowing process is geared more towards lining the pockets of the banks and less towards consumer choice and empowerment. Basically after 7 years of being in real estate I’ve concluded it makes more sense to save the money, rather than hassle with banks and their fees.
Best,
James
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