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Author Archives: Team Dinks
Real Estate, the DC Market and Why You Need An Inspector
Hello Folks,
Its a soggy Monday here in the district. For today’s posting I wanted to update you all on our progress in buying our second investment property. Over the past couple of weeks we submitted an offer and got the financing nailed down and we are now moving into the final stages of closing the deal.
Well, this weekend we had an inspector in to have a look at the place. The results of the inspection were not too bad – there were just a couple of electrical outlet boxes that might be bad and a minor issue with a heating duct. That said, the inspection process was revealing in two respects:
1) Current conditions in the DC market allow buyers to demand repairs. For those new to the DC area, the past 5 years have been marked by a boom and sustained higher prices relative to before 2003. But things appear to have cooled off a great deal relative to then. For example, back in 2006 it was a real estate feeding frenzy – for a lot of properties there would be 5 or 6 buyers. As you can imagine, its hard to ask for repairs when there is a bidding war. So, in the past a buyer often had zero negotiating leverage to ask that maintenance be conducted. This is definitely NOT the situation now. For example, for this property we are the only buyers and the place was on the market for 6 weeks before we made an offer. Thus, DC market conditions currently appear to favor buyers allowing them to make demands regarding repairs.
2) Assumptions about upkeep. I used to believe that most people are essentially hardworking types who would take good care of their property. After having been through the inspection processes 5 or 6 times now, this no longer seems like a safe assumption. Instead you should probably assume there is something wrong with the property you are buying. Thus, you need an inspector to find out what is wrong with it.
In every property that I’ve looked at, there has ALWAYS been something that requires attending to. These can range from needing full renovations, to extreme insect infestation, to bad electrical work, faulty workmanship, or even to the effects of neglect and age. People just don’t keep up their property as well as you might think. More importantly, some repairs can be quite expensive. For example, water problems or roof work can run into the thousands of dollars. You definitely don’t want to get stuck with those kinds of issues.
Again, in every case there has always been something wrong with the properties I’ve looked at. Its not a safe assumption to buy a place with the belief that everything is okay. There will be something wrong with it – and you probably need an inspector to tell you what exactly is wrong with it and how much it will cost.
Best,
James
How Lehman Hid Its Woes
I wanted to share a bit about the recent release of the “coroner’s report” on the demise of Lehman Brothers. A friend of mine actually helped with the 2,200 page summary of the downfall, and I thought you might be interested in the highlights from the New York Times article, “Report Details How Lehman Hid Its Woes“
According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case.
“Unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,” Mr. Valukas wrote.
Its pretty crazy that behemoths like Lehman can get away with such behalf and walk away from it without criminal prosecution. You’d think that striping millions of their livelihoods would constitute criminal behavior.
Your thoughts?
Miel
Is Bank of America Developing A Pattern of Wrongful Evictions?
Good Morning Folks,
I was surfing through Yahoo this morning when this video jumped out at me. Evidently, Bank of America has been developing a nasty habit of foreclosing on people accidentally. For example, a few weeks ago in Florida, the bank accidentally seized the home of Charlie and Maria Cardozo. BofA went into the Cardozo’s home, took the furniture, changed the locks and kicked the couples tenant out. The kicker is, the couple owned the home outright – they didn’t have a mortgage with BofA. The whole thing was due to a mix up on the legal paperwork.
The only thing is, BofA’s actions against the Cardozos is not an isolated incident. Other bloggers have noted what appears to be a troubling pattern of behavior by BofA. The major culprit seems to be the fact that the bank is large and bureaucratic so its internal communications don’t appear to be working well. Consumer affairs has the story here and American Consumer News has covered it also. Finally, the timesnews.net has covered BofA’s efforts to reduce the amount of damages they are required to pay in another wrongful eviction lawsuit. So this has happening periodically over the past couple of years.
Now, while its sometimes premature to draw patterns from a couple of news stories. The only explanation that would make sense to explain BofA’s behavior is incompetence. In this day and age, with adequate regulatory controls, it seems far fetched that a bank would make a formal policy of wrongful eviction. Instead, the source of the problem is likely what these new stories have alluded to – which is that the banks foreclosure processes is flawed.
Now, as a final thought I’ll just say this: for investors this is a red flag. To the extent that the problems with the foreclosure processes are reflected in other aspects of the bank’s internal management, a pattern of improper foreclosures will, in some form or another, ultimately be reflected in BofA’s financial bottom line.
Best,
James
Update on DINKs Real Estate
Hey Folks,
So, last week we mentioned that we were buying another investment apartment in DC. Well, after some going back and forth between the agents involved, ourselves and the seller, we eventually settled on a price of $182,000.
The deal isn’t closed yet. In fact there are several things that still need to be wrapped up. For example, we are still waiting for the bank – we are going with BB&T – to approve lending for that particular building. We also need to arrange an inspection and a few other last minute items.
The building doesn’t look like much from this shot, but the neighborhood is really very good and the apartment is close to transportation, food and nightlife. 
Now, a key question you might be wondering is: does buying this place make sense? After taxes we should be making about as much as our stocks are paying us. It will also heavily weigh our portfolio towards investment real estate in Washington DC. as doing the deal will draw most of our stocks and available cash. These factors are hard to quantify, but my sense is the property would be neutral in terms of our cash flow and overall net worth growth.
So, if it won’t substantially juice the bottom line, why do it?
First, for my part, the decision is essentially emotional. When you get married and you choose to integrate your finances as much as we have, you find that sometimes your partner has de facto veto power. Its harder to move forward on complex projects if your partner isn’t interested or doesn’t “buy in” – they can just sabotage the processes via inaction. So I’ve been wanting to get more real estate for a while, and this is the first time my wife has been really committed to the idea.
Second, I love owning property and having people pay me a rent check. For some reason, this is tremendously gratifying to me. I also like the satisfaction from knowing that I am providing someone value. So, from my standpoint the reasons to get the place are emotionally driven: I find getting paid and running a business to be ego reaffirming.
Best,
James
Bonds and Interest Rates
Hello Folks,
Personal finance is like many other parts of life: the more you know, the more effectively you can make decisions. So, this posting addresses one rather important topic – the impact of interest rates on bonds.
This topic is important because if you’re serious about money you will probably get involved with buying bonds at some stage in your career. Since interest rates are a hugely important part of the economy, you probably should know how bonds and interest rates relate.
Here are the main points:
• The prices of existing bonds rise when interest rates fall, and fall when interest rates rise.
• Bonds generate “fixed income” payments, so when interest rates change, a bond with a fixed payment will be worth more or less by comparison.
• When interest rates change, the price of long-term bonds changes faster than those of shorter-term bonds.
Interest rates present both risks and opportunities—particularly in today’s low rate environment. This is important whether you invest in fixed income and want to do risk management, or if you are into bonds for income.
Interest rates today are less than in many years past – this has dropped yields to all time lows for money market funds and shorter-term bonds and CDs. Despite all the talk about inflation and potentially rising rates, interest rates have stayed relatively flat so far this year — but rates can’t stay low forever. So you’ll have to face this issue eventually if you are investing in bonds.
1) Bond prices rise and fall with interest rate changes.
Here’s one way to think about it: When you buy a bond, you’re typically guaranteed a “fixed income” stream, in the form of regular payment every 6 months. If you purchase one investment with a fixed payment, and then in a month from now buy a different investment promising a higher rate, the first investment you bought wouldn’t be worth as much in comparison. Right, if you buy a bond at 4% and rates go to 6%, then nobody will want an investment paying 4% and thus your bond values drop.
It also works in the other direction. If rates fall and you can’t buy another investment with a payment as high as what you’re already receiving, your older investment would be worth more than any you buy with lower coupon payments. In other words, its value would rise, compared to what you’ve got available.
Here is a handy graphic:
2) Prices change faster for long-term bonds.
Prices fall a lot faster for longer-term bonds if rates rise, and vice versa, because you’ll live with the fixed coupon payment for a longer period of time for a bond with a longer maturity. Right, if you have a 30 year bond that pays 4%, and interest rates jump to 6%, then people won’t want your bonds because they they’ll be stuck with a long term underperforming investment. The opposite holds true also – if you have bonds paying 6%, and rates go to 4%, then people will want your bonds.
3) Do interest rates matter if I hold bonds to maturity?
If you own individual bonds and don’t need to sell before maturity, you need not be as concerned about their market values fluctuating based on changing interest rates. You’ll still receive your promised coupon payments and repayment of the principal at maturity (assuming the issuer doesn’t default). But, regardless rates will impact the value of your bonds on your bank statements. so, in the event you do need to sell your assets – or borrow against them – then this could be an issue.
4) Risk and Inflation.
For Treasury bonds, the risk of default is considered by some to be effectively zero. The risk of default rises with the credit quality of the issuer of a bond, from Treasuries to government-issued municipal bonds, all the way up to high-yield (“junk”) bonds. Generally speaking, higher yields are associated with higher risk.
Even if you do plan to hold to maturity, however, you might want to consider the importance of inflation. You want your fixed income payments to keep pace with the declining value of money. If inflation rises, bonds generally won’t hold their value. This is one of the main risks for bond investors to balance when making an investment decision. If you are stuck in a situation like the 1970s where the value of your money declines at annual rates between 10% and 15%, then you could potentially loose some of your principle.
Relative to assets like credit default swaps, bonds are a very old and well understood investment class. As such, they make a lot of sense for people who are interested in lower risk investments or income producing assets.
Best,
James
Dealing With Higher Taxes in 2010
Hi All,
Its a bright Monday morning in Americas capital city. While going about your business, you may be wondering about what 2010 has in store for your money. Well, here are some thoughts:
Local governments are going to raise taxes and fees. Governments at all levels are running large deficits. Typical efforts to close deficit gaps involve some combination of increased taxes or user fees. In particular, the massive size of the Federal deficit indicates your income taxes are likely to increase.
So what does all this mean for you?
A) Pick the right account. If you are at all able to, sock away your money using ROTH 401ks, 401ks or ROTH IRAs. The rules vary, but in tax deferred accounts earnings on your investments tend to grow assessment free. This is especially the case for stocks and bonds, but you can hold gold and real estate in these types of accounts also.
B) Consider municipal bonds. Investors don’t have to pay federal taxes on dividends from muni bond funds because these funds invest only in relevant government paper which is exempt from taxation. While the rates these funds pay are typically pretty modest, the after tax returns can look good compared with taxable funds.
As a quick note here – some beginning investors buy muni bonds in their retirement accounts. You don’t need to do this because municipal bond interest is tax free already. A broker I know made this mistake. Her client dropped her for it.
C) Keep taxes in perspective. People go to great lengths to avoid taxes. Rich people found philanthropic organizations and ship their money abroad, common people work under the table or under report their income. You are probably pretty honest when it comes your income taxes, but the point here is that you should keep things in perspective. If you are too obsessed with taxes, it can distort how you make decisions.
For example, a lot of people didn’t want to sell their tech stocks at the height of the 2001 boom. They didn’t want to sell because they didn’t want to cough up the 20% tax on their capital gains. When the tech bubble burst, a lot of these folks were left with nothing. The bottom line here is that you shouldn’t let taxes distort your investment decision making.
Thanks,
James
Is the IRS Getting More Aggressive?
Hello Folks,
This is NOT the year to mess around on your taxes. The word on the street is that the Internal Revenue Service is becoming more aggressive in its collection efforts.
Three things:
1) The IRS is hiring up. I talked to my accountant yesterday morning about some real estate related issues. It came up in the conversation that what she is hearing in the CPA community is the IRS is hiring up to 25,000 thousand additional staff to examine individual tax returns. While the 25,000 figure seems a bit high, a quick scan of the Federal Jobs website USAJOB.gov shows 105 IRS listings for a variety of positions including clerical staff, auditors, and IT personnel. Many of these 105 listings have multiple vacancies. So, early indications are the Feds are probably going to hire a lot more staff for tax collection.
2) The IRS is flexing its regulatory muscles. Earlier this year the IRS announced that it would require the licensing and regulation of tax preparers. (see the LA Times article here). While the Internal Revenue Services’ stated rule for the regulatory change is to protect individuals against unscrupulous tax preparers, the outcome of this regulation will probably be to standardize and facilitate revenue collection.
3) Current political support for taxation is high. In an interview with C-SPAN, IRS commissioner Doug Shulman made allusions to this effect. Essentially with the Democrats controlling Congress and the Obama administration in the White House there is a strong amount of political support for increasing tax revenue to make up for the Federal budget deficit. You can listen to the interview with Commissioner Shulman here.
What does this mean for your personal finances? Well, if you are tempted to fudge your income numbers a bit or you desire to take a questionable deduction – don’t do it. Second, if you haven’t filed, you need to file. This year – and probably the next year as well – would be especially bad timing to try anything even remotely questionable on your returns.
Thanks,
James
DC Real Estate: Not 2005 For Sure
Hello Folks,
Its a brilliant Thursday morning here in Washington DC. As you may know if you read our blog, we’re in the processes of making an offer on an investment apartment. So for the past few days we’ve been emailing and calling lenders to get the right financing lined up.
The process has made one thing clear: its not 2005 anymore.
There have been drastic changes in how lending is handled in real estate since the boom a few years ago. For example:
1) No documentation loans are now illegal. You can’t just say you have a job and money. Now you have to prove it.
2) Lenders are far more stringent in doing due diligence. We’ve been asked for our full tax returns, evidence of employment and copies of all bank account statements for the past two months. This doesn’t sound like a lot, but its actually some work to get it all together in an electronic format suitable for emailing.
3) Fannie Mae and Freddie Mac have tightened lending standards. Specifically my wife and I are looking at getting an investment property, which means there tougher requirements mandated by Fannie and Freddie in terms of the owner/investor ratio for condo lending. Specifically, Fannie and Freddie won’t purchase loans for resale unless the loans are secured against properties in buildings with less than 51% owners.
4) All lenders want a big down payment. Zero down for investment properties in DC is officially dead.
Folks, if you are in DC condo market, feel free to leave a comment. We’d love to hear from you.
Best,
James
For t
DINKs Buying More Real Estate
Hi Folks,
So we don’t normally write so much about our own finances these days, but it looks like we’ll be buying another investment property. My wife Miel has been keeping an eye on the real estate market here in Washington DC for the past few months. On Sunday she found a great investment prospect. To make a long story short, we decided to put in an offer on the place.
So, the past two days have been a bit of a whirlwind of applications, digging through our tax information, applying for loans, adding up accounts and signing lots and lots of paperwork.
The tricky thing about this deal, is the agent representing the seller reads our blog! So, unfortunately we can’t discuss our negotiation strategy or how much we are offering right now. However we can tell you that we’re looking at a basement apartment in the 17th street neighborhood in Northwest DC.
Here is a picture of me with our agent, Marcie Sandalow.
In order to raise the downpayment money we’ll have to dip into our emergency fund and the bulk of our liquid stocks and bonds. So most of our dividend paying stocks, our bond funds and our index funds – all that will get sold. Basically we’ll be converting that money into real estate equity. As I can see it this has at least two disadvantages:
1) It limits our future options. If we put most of our liquid wealth into relatively illiquid real estate equity, we will be less able to react to the next opportunity that comes our way. Cash is still king.
2) It reduces our diversification. Our net worth is somewhere south of $400,000. If the deal goes through, about half of our wealth will be in equity in DC based properties. This means our wealth would be vulnerable to any protracted downturn in the DC condo or rental markets.
These advantages are mitigated somewhat by the income and tax benefits the investment would generate. Right now, we are still specifying the exact tax benefits, but our back of the envelope estimate is the acquisition should slightly improve our cash flow over and above what our stocks and bonds are giving us.
We’ll keep you posted.
Best,
James