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Author Archives: Team Dinks

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Can You Score Some Cheap Real Estate?

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Hi All,

So, if you’re interested in making money, you’re probably keeping a eye on the real estate market. Between the recession and the housing bubble, housing is starting to look like an attractive investment.

Of course, real estate prices probably aren’t going to take off anytime soon. However, its still possible to make money the old fashioned way – by collecting rent.

The question is: where is it profitable to own rental property?

Well, according to the latest in Forbes magazine, capitalization rates – or profitability is higher in some cities. Generally speaking, higher capitalization rates are better because it means real estate produces more cash. In 2009 capitalization rates were above 8.5% in:

Baltimore, MD
Las Vegas, NV
North Las Vegas, NV
St. Louis, MO
Phoenix, AZ
Indianapolis, IN
Atlanta, GA
Hollywood, FL
West Palm Beach, FL
St. Petersburg, FL.

Note that a lot of these are in states where the housing boom was the most frothy. Now that prices have declined in these cities, its possible once again for rentals to be profitable.

A few things to keep in mind with capitalization rates and investing in real estate more generally.

1) Rates tend to be short term. Capitalization rates are expressed as the amount of operating income from a property (annual rent less upkeep, insurance and management costs) over the purchase price of the property. When prices for rental property go up, which they tend to do when rentals are profitable, then capitalization rates go down. So, don’t expect these places to be cheap forever.

2) When managing a real estate, the owner or someone who cares needs to be in close geographic proximity to the property. Unlike stock in your brokerage account or physical gold and silver, real estate needs someone local to manage affairs. This includes cleaning and showing the property, making repairs, collecting rents and problem solving if necessary. Many investors assume these problems can be addressed by a management company. Sometimes they can, sometimes they can’t. All in all this means there are practical difficulties if you are investing in a distant geographic area.

3) Real estate is capital intensive. This is a fancy way of saying that you need a lot of money for a down payment, for reserve funds and repairs. All things being equal, the more money you put down on a property, the more you profit. Lenders are now requiring at least 20% down payment for a personal residence or even more for an investment property. For an inexpensive piece of property- say less than $100,000 H you’re often talking about $20,000 to $30,000. For many people this requires a long period of saving or borrowing. Bottom line: even for real estate that’s relatively cheap, you still need a lot of cash.

Best,

James

Volatility Vs. Risk

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Hi All,

Here is todays topic du jour.

Often one hears the term volatility in the financial news, another word commonly discussed is risk. These terms are sometimes used interchangeably, but are in fact very different.

Volatility is the characteristic of a security, commodity, or market to rise or fall sharply in price in a short term period. For those of you more quantitatively minded, that what the term beta means. The good thing about volatility is that is measurable so you know what you’re getting into if you buy an asset with a high beta.

Risk is the possibility of losing or not gaining in value. There are a LOT of different kinds of risk; hazards related to market performance, exchange rate risk, inflation risk, political challenges, inflation hazard, etc. etc. Risk has a greater degree of subjectivity. Each individual has their own risk tolerance, or degree of volatility that person is willing to observe in hope of realizing a profit.

Bottom line: its important to keep in mind that just because the market is volatile, it doesn’t necessary mean that conditions are risky.

Best,

James

Dinks At Work

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Hey All,

Its Sunday at the DINKs household. We are busy working on our various personal and work tasks for the upcoming week, so here is a quick picture from our living room so you can see what downtime is like around here.

Payday Loans Vs. Credit Cards, Which is Worse?

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A couple of weeks back, Miel and I met with J, a fellow personal finance blogger who runs a very good website called Budget Are Sexy. We were having coffee and ended up getting into a debate about the relative merits of credit cards vs. payday loans. That is, in a bind which would be worse to borrow from?

We ended up wrangling about it for a good 20 minutes, and in retrospect it looks to me like the bottom line is that if you really need to borrow and can only chose between credit cards or payday loans, the credit card is a far better way to go. Why?

Payday loans are a major rip off.

What? A rip off? Yep. Payday loans can charge effective interest rates (interest & fees) that are hugely expensive. For example, in Missouri, its legally permissible to charge annual interest rates of up to 1,955%. In Montana, you can get hit with rates up to 652% and in Virgina you’ll be charged an effective rate of 610%. In most other states the maximum allowed interest rate is higher than 300%. In fact, the rates are so over the top that payday lending isn’t legal in some states. Congress has capped the amount of fees and interest that payday lenders can charge military personnel and consumer advocacy groups like the Consumer Federation of America hate them with a passion (1).

Credit cards aren’t great, but tend to be cheaper than payday loans.

Credit Cards are obviously not an optimal way to borrow money either. Don’t believe me? Congress recently had to crack down on the credit card banksters (1). Even the normally lethargic FDIC is constantly penalizing some local banks for abusive credit card lending. The tricky business practices of the credit card industry are well known by now; arbitrary rate hikes, fee harvesting, etc. etc. In addition, some people actually think widespread use of cards has a detrimental impact on public health (1).

Even though some people are credit card addicts, their effect doesn’t seem as bad as payday loans. The percentage rates on credit cards are usually less than 30%. With fees the effective rates can often be higher, up to 120% if your balance is small. However, even at 120%, the cost of carrying cards is usually nowhere near the 300% you’ll see with payday loans. When you think about in terms of your cost to borrow, credit cards win hands down.

Bottom line: look for alternatives to both. If you do need to borrow money, its probably best that you look for a low cost alternative. Consider a person to person loan either in an on-line outfit like Prosper.com or LendingClub.com. If that doesn’t work it might be possible to borrow directly from a friend or family member. There are ways to formally do this so the relationship doesn’t get akward (here).

Here is another article on this topic.

Payday Loans vs. Credit Cards

Best,

James

P.S. In the interests of disclosure, you’ll note we do have two payday links on our website. This because we DINKs gotta eat and pay the mortgage, just like the rest of you. We would of course recommend that you live frugal, save money on everday expenses, and do what you can to spot money making opportunities so that you don’t end up in the bind we described above.

Support Street Carts

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Depending on where you live/work, vendors selling food from street carts can be a great alternative on those days when you don’t manage to pack a lunch.

DC is still kind of getting the hang of street vendors. Hot dog stands have been an institution for many years, but the nation’s capitol is just starting to spread its wings and expand to other cuisines.

Today my colleagues and I enjoyed a lovely burrito in the park after picking up the huge wraps for $5 at a nearby stand. It was simply wonderful.

In fact, it was cute because when we showed up right at noon, with five of us, someone had noted that there must be something wrong if there isn’t a line. By the time we left there were at least a dozen people in line behind us!

Close to our hearts, Portland, Oregon is one of the street cart capitals of the US. It has just about ever type of cuisine you could imagine within the downtown portion of the city.

Help support the little guy, get a fabulous lunch at a good price, and enjoy some time outdoors. Even if you don’t save money on your lunch, the experience is worth the extra cost.

Readers: If you have any tips on your favorite vendors – anywhere in the world – we’d love to hear your thoughts.

Cheers,

Miel

Peer to Peer Lending Recommendations

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Hi All,

If you want to get into peer to peer lending, an interesting bloomberg article just came out today on the subject.

To add come context, here are our recommendations regarding peer to peer lenders.

1) Prosper.com

AVOID. Prosper doesn’t do as good a job managing their borrowers as other alternatives in the industry. We’ve lost a LOT of money on that website, mostly our fault, but prosper’s screening and debt collection policies didn’t help. Prosper has also recently made it harder to withdraw free cash from their accounts, which for us has a feeling of adding insult to injury. Bottom line: lots of deadbeats, management not customer centric.

2) LendingClub.com

INVESTIGATE. LendingClub has an interface thats not as user friendly as prosper.com. So, its harder to navigate around their webpage. This is a problem because you have to work at lending money relative to prosper. That said, LendingClub does a MUCH better job screening applicants for loans, so there are fewer deadbeats on their site. Since the ultimate goal is to make money via loans, this is of paramount importance. You can build your wealth through this service, and you should keep that in mind as your ultimate goal.

Also, LendingClub is much better about relationship management than prosper. LendingClub actually has people you can call and talk with, this doesn’t hurt when you work with an online business. In contrast, Prosper has a nasty habit of censoring criticism on their company managed user forums. Bottom line: better borrowers, better customer service.

3) Kiva.org

INVESTIGATE. Kiva is an on-line microlending/development outfit. They basically make small loans to people in developing countries who don’t have access to capital. We haven’t done a lot of lending via Kiva, but the thing is, they do not pay interest, you only get your capital returned. Since the point of lending is to make money from charging other people to use your money, Kiva is disadvantaged. However, if you do believe that the best way to help others is by empowering them economically, then you will love Kiva. Kiva also interviews and trains their borrowers so one can be relative confident the borrowers will repay their funds. Bottom line: look into Kiva, but only for charity.

Here is the link to the Bloomberg article.

Best,

James

Fifty Ways to Love Your Money

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Hi All,

AARP has a great listing of 50 things to do to improve your financial situation. Most of them are nuts and bolts kinda stuff, but are still worth reviewing even if you aren’t over 50. They include saving money on things, living frugal, and many other great topics.

Click here for the link.

Best,

James

Asset Allocation Basics

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Hi All,

We picked up a primer on asset allocation in Portland last weekend, so you should be hearing a lot more about this topic over the next few weeks. However, if you aren’t familiar with buying stocks, asset allocation is an important topic. Persons interested in maximizing their wealth should have an adequate command of the basics.

Essentially, asset allocation is the process of deciding how to divvy up your investment dollars among various types of resources. More generally asset allocation is also an approach to investing which emphasizes diversification.

Asset allocation has four basic concepts:

1) A fundamental relationship between investment risk and return.
– The main idea here is you need to incur greater risk to yield a greater gain. Of course, the relationship between risk and return is far from perfect – that is – you won’t automatically get more money if you incur higher risk. Also, each individual has what’s called their own “efficiency frontier”, which means in economic terms, that individuals each have their own optimal mix of risk and return.

2) Asset class selection – determining which investments are right for you.
– Asset classes are different types of investments. The main idea is that the different types of investments have different characteristics. Right, some are more tax efficient than others, some have higher creditworthiness, others provide protection from inflation, etc. etc.

3) Determining what mix of investments is right for you.
– In addition to finding out what assets you want, you need to find out what the best mix of them is. The statistical metric that is used to measure how well asset classes go together is called “correlation”. It’s an important concept because you want a mix of assets that are negatively correlated. This means that if one of your assets declines in value, then others may go up. For example, if you own stocks and gold; when stocks decline, gold may go up. The idea about mixing your resources is to reduce your risk by being sure you have some negative correlation in your portfolio. The only reason you should want to take on more risk is in order to get higher gains, or build your wealth more rapidly.

4) Rebalancing your portfolio to keep it optimized.
– The real world is constantly fluctuating. Economic change causes some business to do better than others. You can’t just set up your asset mix and call it good. The major issue is your assets will grow at different rates, thus causing your portfolio to drift away from its optimal configuration. In order to address this, you have to periodically buy and sell assets. This is known as “rebalancing” your wealth. Rebalancing can help your portfolio by causing you to buy low and sell high as well as by exploiting natural fluctuations in the stock market to get extra return.

So, those are the basics. Stay tuned for more or feel free to pick up a copy of Asset Allocation For Dummies. The book is available at the World’s greatest bookstore. Powells, for $22.00. My advice, check out the google preview or get the e version, they’re cheaper.

Best,

James

Tip Of The Day: Turn Off The News

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Hi All,

I realized after coming back from vacation last week, that when I read the financial news, my blood pressure starts to increase. So, here is today’s tip: turn off the news.

Unless you are a portfolio manager or an active trader, keeping your eyes glued to the financial news will just stress you out. It might also distract you from your long term goals via information overload. Buying whenever the news tells you the market is on an uptick and selling everything when it is in a dip will not help you build your wealth long-term. More likely than not you will end up selling when you should be buying and buying when you should be selling.

At most you might consider monitoring your stock investments once per month or once per quarter.

Thanks,

James

Cost of Travel Delays

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James & I are happily back in DC, if only a bit challenges by the fact that it is 5am West Coast time. Of course, as we left Oregon, we happened to run into a bit of a SNAFU. We ended up missing our flight due to delays, weather, and subsequent traffic backups.

In the end this cost us around $800 to buy ourselves out of the problem. A relatively expensive reminder of why you build even more time into potential delays. With all of my travel this is only the second time I’ve missed a flight due to issues on my side, but it is still quite a wake up call.

Last year a flight simply never took off out of Kabul – no real reason was given – and I believe this cost me around $1500 to deal with. At the time I wasn’t in as good of a place in terms of cash flow, so it was pretty tight in terms of adjusting various budget items to make sure that I could pay off my credit card on time. As a result we ended up doing more to establish an emergency fund for such times.

This time around I’m happy to say that I was in even a better place. Despite the difficulty of sucking up a large chunk of change out of my bank account, I feel very thankful that the money is there. I didn’t even have to dip into our emergency fund. In fact, I had to see how ironic it was that the last time I checked my account I did a quick calculation seeing that I had about $900 that I could think about where I wanted to invest this.

While obviously I’d much rather be investing this, at least I’m in a position to be able to deal with the hiccups of life. I believe this is the first step towards financial security. If you are careful about your finances you will find the extra cash (even if it is cash savings on travel delays) and be able to invest it and build your wealth faster.

Best,

Miel

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