Should You Add Real Estate to your Portfolio?


Many individuals invest in real estate, even if just buying a home.  As
the old saying goes, your home is “the biggest investment you’ll
ever make.”  Hopefully this will not be the case, but for many
people their home is the only asset they have as they near
retirement.  In the past the standard practice when retiring was to
sell the big family house and move into an inexpensive condo, using
the proceeds from the house to pay for expenses.  Unfortunately, in
the current culture of no-money-down loans and home equity lines of
credit, more and more people are never building up equity in their
homes.

Real estate investing is a bit different from simply buying a home.
Income from real estate investing typically takes the form of either
rental income or capital appreciation.  In either case a great deal
of knowledge is needed about the real estate markets and home values
in the area.  To quote another old saying, “All real estate is
local.”

Looking at the risks and returns of real estate investing, investing in
paid-for real estate, where there is no mortgage, is less risky than
individual stock investing and more risky than buying income
securities.  The return will also lag behind individual stock
investing and the hassle factor is much larger.  Real estate markets,
however, tend to be less transparent than stock markets.  This means
that it is possible to find people selling real estate at well below
what others are willing to pay, so an individual who is able to
correctly price real estate and thereby know the difference between a
great deal and a fair deal, can do very well.

As many have discovered recently buying real estate with a mortgage can
be very risky.  For years it was generally accepted that the price of
houses always went up.  Taking out a mortgage was therefore seen as
safe as long as nothing happened to one’s income stream such that she
could no longer afford the mortgage.

Buying real estate with a mortgage, however, involves a substantial amount
of what is known as “leverage.”  This is the use of a little bit
of money to control something much more valuable.  When the value of
the thing increases, one is able to make huge profits due to the
large value of the thing being controlled.  For example, if one buys
a $500,000 house for cash and the value of the property increases by
$5000, or 1%, one only makes 1%.  If one puts $500 down on a $500,000
house, however, and the value of the home increases by $5,000, one
will have made a 1000% profit.

During boom times, this meant that an individual could make huge profits by
buying and selling houses, and there were many individuals who used
the available no-money-down loans to speculate, buying several homes
at a time with interest only loans.  The trouble is that leverage
cuts both ways.  If that $500,000 home goes down just 10% in price,
suddenly one has lost $50,000 on what seemed to be a $500 investment.
Couple this with a loan that one could barely afford in the first
place for which the payments increase after an initial introductory
period, and you have the housing crisis in which we currently reside.

For the small investor, buying real estate with mortgages, other than
one’s home, is far too risky.  Adding some real estate to a portfolio
once it is large enough to pay cash for properties (say a $500,000 portfolio) can be very useful.
The advantages are that they provide a steady source of income
through rents, and the appreciation should at least keep pace with
inflation.  Again, if one buys in the right markets or finds
properties that are selling at a bargain, one can even beat
inflation.

The second advantage is that real estate does not tend to be correlated
with the movements of other investments (2008 excepted).  This means
that the price and rental income received from the properties usually
moves independently of the prices and returns of other assets.  This
adds protection to a portfolio since when your stocks are down your
real estate may be up or vice-versa.

As with buying individual stocks, one will tend to do better buying
individual properties, particularly if one has the knowledge to
select the good properties.  This requires a substantial amount of
time and energy, however, since the properties must be found and all
of the activities required when buying or selling a house must be
performed (including paying all of those various people who have
their hands out when a house changes hands).  In addition, if renting
one must deal with tenants who may decide to not pay the rent, trash
the place, or simply call at 3 AM about the hot water heater.

For those not wanting to deal with individual properties, Real Estate
Investment Trusts, or (REITs), may be the solution.  These are
similar to mutual funds, in that the funds of individuals are pooled
together to purchase a set of properties.  The holders of the REITs
then receive a share of the rent and appreciation income.  Like a
mutual fund, the price of the REIT will increase or decrease
depending on the return, value of the properties held, and other
factors.  The main disadvantage is that the fees paid to the
administrators of the REIT will eat into profits.

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Calling All Millionaires – How Did You Do It?


Let’s face it, it’s hard to become a millionaire.  Everyone around you is spending tomorrow’s money like there is no tomorrow.  It is a lot easier to put that new TV on the credit card, go get that new car with the new car payments, or get that fancy new smart phone with all the great apps on a payment plan than it is to save up and buy things, let alone actually put money away.  That is why millionaires aren’t normal people.  They are strange by all norms of our credit-loving society.

If you have a net worth of more than $1 Million and are willing to share how you got there, I’d like to post your story.  Hearing about how others have succeeded can serve as a guide and inspiration for others who are trying to work their way up.  Please send your story to me via a comment or an email.  No full names are needed and none will be posted.  Thanks in advance.

SmallIvy

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.comor leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Tax You Should Support – The Fair Tax


There is a tax system that everyone should support except for tax preparers and accountants, and that is the Fair Tax.  The Fair Tax is a consumption tax that would replace all of the other taxes that are currently levied by the Federal Government, including the Income Tax, Payroll Taxes (Social Security and Medicare), and corporate income taxes.  By a “consumption tax,” it is meant that the tax is paid when money is spent, like a sales tax, rather than when it is earned.  Some of the basics of the tax are as follows:

  • The tax would be levied on all goods and services and paid by the consumer.  It is expected that the tax rate would be about 23% if current revenue levels are to be maintained.  While this may seem like a lot, consider that income taxes for the middle class are currently about 15%, Social Security Taxes are 12.5%, and Medicare taxes are a few percent.  Add these together and the Fair Tax sounds great.
  • Each citizen would receive a prebate at the beginning of the year to offset the amount of taxes paid.  Because everyone would receive the same prebate, those who make less money would end up paying less in taxes each year.  Some would pay no taxes, as is currently the case for about 50% of Americans.
  • Because all other taxes would be abolished, one would receive ones entire paycheck – no deductions – and would not need to file income taxes at the end of the year or keep track of cost bases and income sources.

There are many advantages to this system over the current system.  A few of them are:

1) There is no need to file income taxes.  This means that there is no reason to keep all of that paperwork (or generate that paperwork), there is no need to spend hours teach year trying to figure out tax forms, and there is no need to pay a tax preparer each year just to comply with the law.  The tax would be figured out automatically when you buy things and collected by the retailer just like sales tax.

2) Those who save would pay less in taxes, motivating people to save.  Conversely, those who spend would pay more in taxes, motivating people not to spend.  Note that the prebate would prevent those with little income from paying a bigger portion of their income in taxes.  For example, if the tax rate is 20% and the prebate is $10,000 per year, no one making less than $50,000 per year would pay anything in taxes even if they spent their entire income.

3)  The expenses borne by businesses for tax preparation and tax avoidance would be eliminated since there would be no need to keep money oversees, depreciate equipment, or play other games to reduce taxes.  Also note that all of those funds that are currently sitting overseas to avoid taxes would come back and be invested in our economy.

4)  All money spent would be subject to taxes, making it more difficult to cheat.  Money earned by drug sales and prostitution would be taxed when it was spent just like money earned from working at a restaurant.  Everyone would be taxed rather than just those who follow the rules.  This means that the tax rates for everyone who is currently paying their fair share would be less.

5)  Because business costs for compliance would be less, prices of things would decrease.  It is expected that this decrease would largely offset the 23% tax.

6)  There would be no need for college savings accounts, medical savings accounts, and the like.  There would be no income taxes, so there would be no reason to shelter money from taxation.  Likewise, there would be no need for IRAs.  Think of all the time that could be saved.

If this sounds good, please check out the Fair Tax Website for more information.  Then tell a friend or three.  Finally write to your members of COngress or call them and tell them that you would like to enact the Fair Tax.  If enough people speak up, we could never need to file taxes again.

 

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.comor leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.