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Pessimism and You July 25, 2008

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Not to sound like a refugee from “The Secret,” but pessimism is an emotion that needs to be eliminated from an investor’s psychology.  Why?  Isn’t it a reaction to reality?  Well, no.  Currently, the pessimists are having a field day with the real estate market.  Indeed, the numbers look bad.  But remember the numbers are backward looking, so what they are telling us is that the real estate market in some areas was really bad.  Well, duh.  But, what those numbers don’t tell us is that real estate has always come back.  Let’s be honest, they aren’t making anymore dirt, people still need a place to live, and the emotion of home ownership is as strong as it ever was.  Bought your home in 2006, upside down?  So what?  Where you planning on moving?  Probably not. How many people buy a house with a 2-3 year time horizon?  The only thing that matters is that you take care of business so you can make those payments.  Real estate pricing will come back. 

Depending on building up home equity as your retirement plan?  Yes, I know that is the plan for the majority, but it is just dumb.  Now we see why, as you watch it disappear.

Less than a year ago I made a real estate investment.  It is about to pay off handsomely ahead of schedule.  How can this be, the real estate market is for fools?  Nope, many people are making huge profits in real estate, just not the pessimist.  My REIT went up 11% last year, plus paid out 6% in dividends.

Money is made is any market, just not by the herd!  Call me or e-mail me dave@shaferwealthacademy.com if you want to learn about building wealth the way the wealthy folks do!

Betting against Warren Buffett? May 1, 2008

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I am always surprised at the amount of people who bet against Warren Buffett.  If you don’t know who he is, let me tell you.  He is the worlds richest man, made his money by managing a company called Berkshire Hathaway, which is a holding company for his investments.  He owns large amounts of stock in companies as well as outright owns over 60 companies.  Over the last 43 years the company he manages has returned over 21% annually for a total return of 400,863%.  That’s right a total return of 400,863%.  But people have always taken pot shots at Warren.  In 1998-1999, the voices got very loud because he wasn’t taken in by the technology stock bubble.  People said he was old school, didn’t understand the new rules of investing, etc.  Then the tech bubble burst.  Now, it is he is to old, he has lost his touch etc.  For the last 10 years he has averaged over 18% return!  Here is the last 10 years return:

1998 ……………………………………………. 48.3%

1999 ……………………………………………. .5%

2000 ……………………………………………. 6.5%

2001 ……………………………………………. (6.2)%

2002 ……………………………………………. 10.0%

2003 ……………………………………………. 21.0%

2004 ……………………………………………. 10.5%

2005 ……………………………………………. 6.4%

2006 ……………………………………………. 18.4%

2007 ……………………………………………. 11.0%

 His company is publicly traded so you can buy his stock.  He doesn’t pay dividends so there is no tax consequences of owning his stock, no dividends nor capital gains until you sell, so it really doesn’t matter if you own it inside or outside a tax deferred vehicle.  Look at the return you are getting for the last 10 years on your mutual fund.  How does it compare versus Warren?  So why are you betting against Mr. Buffett?

****As usual this is only the ranting of a clearly deranged man who doesn’t have a license to issue stock advice.  Clearly, don’t take anything he says seriously as this blog is only for amusement purposes.  Talk to a “professional” for any tax and investment advice.*******

Retirement Strategies REdux: Old School v. My Way April 21, 2008

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Mary and Joe are typical folks, they have about twenty years to retirement with two kids fast approaching needing money to attend college.  Joe has been fortunate and has had the same job for over 15 years, while Mary works part-time for a local business and still does the majority of taking care of the kids.  They have accumulated around $100,000 in a 401K and owe $100,000 on a home that is worth $300,000 by aggressively paying off the mortgage and owning the home for 15 years.  Their emergency fund is meager at $8,000.  They know they need to figure out a way to get more money for retirement, but frankly, are at a loss how.  They make an appointment with John, the financial planner.  Mary pulls up in a 7 year old Honda minivan and waits for her husband.  Joe running a few minutes late pulls up in a 4 year old Chrysler 300.  Joe parks next to a new Lexus and admires it as they go into the office.  John meets them at the door and acknowledges Joe looking at the Lexus and mentions he has just leased it a few weeks ago.  Joe is impressed.

John, takes all their information and runs the numbers.  He looks them in the eye and delivers the bad news.  At their present rate they will not have enough to retire on.  They need to do something now!  Mary and Joe are a little embarassed about their situation, but they thought they were doing the right thing, paying off their mortgage and putting 8% of Joe’s salary in to the 401K.  Frankly, Mary knows because the wives talk about this, that they are better off than most of their friends.  So she is a little peeved at John’s rather cavalier attitude toward their retirement savings.  Then John throws in the kicker.  He can help them achieve success.  He starts to talk about asset allocation mentioning that they have all their money in one mutual fund.  He pulls out a prospectus that is for an international mutual fund that returned 28% last year.  Joe is impresses as he knows his fund returned a meager 3% last year.  Then Joe pulls out another prospectus for a Precious Metals Mutual Fund that returned 85% last year.  Joe is fully impressed now.  John suggests he take control of the $100,000 in the 401K to manage it.  He tells the couple to keep up the good work paying off the mortgage, but they need to put away more, much more if they want to retire comfortably.  John also suggests they need some life insurance so he suggests a $250,000 10 year term insurance which he says is dirt cheap now.  Joe and Mary look at each other with the same thought.  They are already pretty thrifty, but there goes the one night a week they eat out together and maybe Mary could work more hours after all the kids are old enough that they don’t need Mary to be there when they get home from school.  But, if that is what they need to do, then they will figure it out.

On the way home Joe is sold but Mary has some doubt about John.  She remembers reading “The Millionaire Next Door” in her book club a few years back, so she is not impressed with John’s car.  Her intuition also tells her that the returns that he showed them for those two funds were a little high, they must be risky she thought.  She thinks  they should talk to someone else.

Can you spot the mistakes?

1.  The assumption that leasing a nice car means that you know what you are doing financially is incorrect and probably the exact opposite.

2.  Mutual funds as a class underperform the market and specialized mutual funds have even more variability which means that those two mutual funds will probably underperform for many years to come to make up for their amazing performance last year.

3.  They use little leverage on their finances and are decreasing it by paying off their mortgage.

4. The majority of their net worth is home equity which gets a 0% rate of return.

5.  Suggesting to a frugal couple that they need to be more frugal is like throwing gasoline onto a fire.  They drive older cars, eat out only once a week and work 1 1/2 jobs between them while caring for two kids.  Life shouldn’t be this onerous for this couple.

My Way:

Move their 401K money to a discount brokerage account and buy $100,000 of Berkshire Hathaway B’s.  Warren Buffett’s returns 21% over 43 years and 18% over  the last 10 years.

Re-finance their home with a $250,000 mortgage now available at 5.75%.  This gives them $150,000 cash.

Take $25,000 and purchase a $200,000 duplex in Dallas, Texas that is cash  flow positive (See my Friend Jeff www.bawldguy.com for details)

Purchase a $450,000 equity index life insurance contract.  Fund it with $25,000 year for five payments.

Reduce the 401K amount to the 3% company match to cover the extra expense of the larger mortgage.

Place the $100,000 left over into a money market fund or high paying savings account to act as an emergency fund and reserve fund for the real estate.

As each year goes by make the $25,000 life insurance premium payment. 

Taxable income goes down as the mortgage interest goes up substantially and the real estate investment throws off tax advantages.

Let’s look down the road five years.  The real estate investment has a cash flow of +$3,000, +$3,000, +$4,000, +$5,000, +$6,000 as rent could be increased.  This $21,000 is held as reserves for deferred maintenance and is not counted for assets.  College aid was applied for the kids and this amount was not counted!

The insurance contract has a cash surrender value of $110,000 since the front loaded fee’s have been paid.  But this works as the couple’s emergency fund available to them with no tax consequences.  The big positive is that this is not counted toward income or assets for college aid.  So they have moved over $100,000 off the college aid books allowing the kids to qualify for more aid.

The Brokerage 401K is worth $228,776 with Warren Buffett continuing the 18% he got the last decade.

The duplex is worth $250,000 getting slightly less than 5% return. They have around $80,000 in equity.

Their home is worth $380,000 getting the same 5% return.  They have over $150,000 is equity.

Their taxes have gone down due to the mortgage interest deduction and the investment real estate.

Their passive income from the real estate is 500/month.

Their kids received large amounts of student aid for college.

They have a emergency fund/reserves over $130,000 so they sleep well at night.

The costs to do this was $5,000 for the refinance, $5,000 to buy the duplex, $12 to buy the stock, and the commission and fee’s for the insurance contract.

There are no ongoing fee’s (other than the insurance contract) payable to a financial planner.

No reduction in life style needed.  In fact as the couples net worth rose, they started to take a nice vacation once a year and Mary will stop working  as soon as the kids are out of college.

Old School V. My Way:  You make the choice!

PS  I used conservative numbers all the way through my way!

PSS  As usual this should not be construed as financial advice with respect to any particular stock or any general investment advice that might come under the auspice of the SEC.  It is only the ramblings of a derelect and a individual that does not have a license to issue stock or mutual fund or real estate advice.  Please see an “expert” for all tax issues.  

Follow the Money? December 17, 2007

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Crime fighters learned along time ago that when it comes to crime, you need to follow the money to locate the criminals.  In the finance world it is less clear that following the money is a good thing (think the stock market bubble of 2001).  However, taking the market as a whole, watching the money flow is instructive.  Here in Florida, the real estate market has been decreasing for about 18 months.  The latest numbers indicate year to year drops from 8%-18% depending on specific areas.  The media covered this the same as they have all news about real estate lately by using headlines screaming the “fall of the empire” so to speak.  However, what is starting to happen is that bargain hunters have come into the market in big numbers.  In fact, some large money funds have been trolling around Florida offering to take excess inventory off of builders’ hands, at a serious discount of course, but non-the-less looking to be buyers.  Other smaller concerns have started to amass inventory buying at discount.

What this means is that we are probably toward the end of the down real estate cycle.  I refuse to join the bandwagon in predicting the date of the end of this down cycle, but I think it is clear that we going to see the cycle end relatively soon. 

If you are comtemplating buying an investment property, now is the time to start looking.  Remember to keep in mind “cash flow” from any investment.  This is particularly important in real estate.

If you have been good boy’s and girl’s and have kept a good credit score (above 700) financing is readily available for you.

What is the real deal on REVERSE Mortgages November 6, 2007

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Here in Florida, reverse mortgages are becoming popular.  The lenders have discovered a new market, seniors with lots of home equity but little income.  Of course the lenders here in Florida have put advertising for reverse mortgages into heavy rotation.  But what is the real deal on reverse mortgages?

First of all, reverse mortgages are expensive.  They have heavy fees and work on a compound interest method that is sure to eat through retiree’s home equity rapidly.  The new reverse mortgages are government backed; therefore they have some protection for the home owner.  For example, you can no longer lose your home.  And your heirs have 1 year to sell the home and pay back the mortgage.  If you move out of your home, you have to pay back the mortgage within one year.

The lenders will usually loan to up to 60% of the value of the home.  It can be paid out in a lump sum or on a monthly basis.

So much for the good news.  The bottom line is that these loans should only be considered at the very last resort.  What has taken you years to build up can be spent in short order.

The truth is that the financially savvy thing to do, when the seniors find themselves in a predicament of little income, but a paid for home is to sell the home.  Take the proceeds from the sale of the home and buy an immediate annuity or a annuity with a lifetime income benefit.  This will give the senior much more yearly income, which they can use to rent.

In this area, seniors are taking out a reverse mortgage in order to keep up with insurance payments.  Taxes and insurance payments almost always go up over time and can seriously affect folks on a fixed retirement income.  On the other hand, there are many rental units available where the owner would love to have senior citizens rent from them.  No loud parties, no irresponsible behavior, payments on time all characterize the rental behavior of seniors.  Many landlords will not ask for annual rent increases for seniors because they are such good tenants.

Part of the job for folks who have parents or love ones that are in this predicament is to guide them to the emotional decision of selling the family home.  Tough, but the alternative is to see all that work of paying off a mortgage go to waste. 

Professionalism in Mortgage Originating October 29, 2007

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Those who know me, understand I am on the bandwagon for the professionalism of mortgage originating.  I think it is obvious to those of us in the industry that as long as loan officers are hired on the basis of having a pulse that the consumer will have little respect for loan officers.  Less obvious is the damage done by these amateur loan officers.

Take the sub-prime crisis for example.  Anyone with a little perspective, understands that a variable rate loan that recasts at year 2 or 3, is a dangerous loan for folks who have demonstrated little financial responsibility.  Let me make it a little clearer.  The  sub-prime market services those who have in the recent past failed to pay bills.  No matter what the reason was behind the failure to pay debts, these people are not financially stable enough to take the risk of rising mortgage payments.  Yet, few were even offered the fixed rate option, let alone had loan officers who encouraged it.

My first sub-prime loan was to a friend who was coming out of bankruptcy.  When I went over the options with him, he insisted on taking a fixed rate loan even though the rate was .5% higher and his credit scores were rapidly improving.  During the discussion a light bulb went off for me.  He was right, he could not afford something else to happen to him raising his mortgage payment.  Even though it turned out that he could qualify for a conforming loan in a couple of years, that was not a guarantee.  He took the fixed rate option and still has the same mortgage and his home intact.

Since that “light bulb” moment, I have insisted on my sub-prime clients taking the fixed rate option.  It has cost me many deals.  But, I have never had a client lose a home to foreclosure either.

Had all loan officers encouraged a fixed rate sub-prime mortgage would we not be better off?  Of course we would.  There would be less foreclosures, the investors would have less losses on their mortgage backed securities, and the loan officers would have happy clients that might be able to refinance into a conforming loan soon.

So when I get on my bandwagon about the hiring practices of lenders, it is not just self interest, but what is best for the industry and the consumer.  Unfortunately, it is clear that lenders have no intention of changing their “hire anyone with a pulse” mentality anytime soon.

Therefore it is up to the consumer to find a professional and trust him/her enough to take their advice. 

Next Seminar October 24, 2007

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NOVEMBER 15th 6-8 PM  Tampa Palms

Become Your Own Banker

Learn how to significantly improve your wealth/ future retirement income

by using already existing assets.

Tampa Palms, Compton Meeting Room

RSVP 813.910.8020

This educational seminar teaches you how to put all your assets to work for you, in a safe, reliable way.  Reduce you risk.  Improve your wealth. Create more future retirement income.  Learn how the strategies that banks employ can be put to use in your own personal finance situation.

If you think you need to do something about your future retirement income.

If you want to reduce your risk.

If you are tired of doing exactly what the banks and Wall Street want you to do.

If you want retirement strategies that work for you, not Wall Street or the Banks.

Then don’t miss this seminar.