Our Family Finances by Dave Thyfault

Your Amazing Hidden Debt

2009-11-20T12:01:00.000-08:00

The National Debt has just surpassed twelve-trillion dollars.

That means every man, woman and child in America owes approximately $40,000.

If you are under the impression that we can just make the lucky rich people pay all of this debt, then think again. The richest man in America is Bill Gates. His net worth is estimated to be around forty-five-billion dollars. We would have to steal all of his money from him plus 20 others just like him to pay off one of those trillions, but we don’t have that many rich people. In fact, you have to throw in all of the money from Warren Buffet, and the Walmart Klan and the rest of the top-ten billionaires (see this list) just to round up one-quarter of a trillion.

After that group, we would have to seize all of Oprah’s money and Ted Turner’s and Martha Stuart’s resources, and the majority of the richest 400 people in America before you finally pay off the first trillion.

Now consider this point: According to The Tax Foundation, in a recent year, there were approximately 134 million tax filers and of those over forty-million were exempt from paying income taxes, (many of them actually get refunds) so somebody else has got to pick up their share.

So, if the richest people can barely make a splash in the bucket of debt, and tens of millions of citizens pay no taxes, who do you suppose is going to be expected to pay it?

Do you have a mirror?

In my next entry I will tell you who you owe the money to and how all of this is affecting you and your family.

Your input is invited!

Home Values Headed Up

2009-11-08T10:52:00.000-08:00

This information should be helpful to you whenever you want to discuss the long-term financial benefits of owning property.

When it comes to real estate values, they are essentially guaranteed to steadily rise with time. Oh sure, there are certain areas in the country that have held their same value for decades and will probably stay about the same for years to come. And then there have been communities in which real estate values seem to be on a perpetual roller coaster ride, but those situations are the exception. So, what about the rest of us who live in more traditional communiites? What can we expect?

For starters, let me suggest that a home should not ordinarily be considered an “investment” per se because the primary objective of investments is to make a profit; but the primary purpose of the family home is to provide an acceptable place to live. Still, some people simply cannot resist refinancing their homes every time they rise in value. This is not usually a good idea if the borrower is taking out money to buy a car, pay off credit cards, remodel the home, go on a vacation etc. This equity is simply to precious to CONSUME like that.

However, if the borrower is using the proceeds of the refinance to buy a rental property, then that is a different matter, because rental properties should pay for themselves over time and that is only one of four ways to make profit off of the investment. The other three ways include cash flow, tax savings and appreciation, which is related to inflation.

Regarding Appreciation: There are quite a few ways a person can force the value of a home to go up. A few of them include remodeling, adding on to the property and rezoning. But the steady appreciation of real estate that can be gained over time by simple inflation can be every bit as dynamic as some of those more industrious undertakings.

Now, to prove that inflation is here to stay I offer you these points:
1) The United States government has more debt than anybody else. They currently owe over 11 Trillion dollars. Each person in your family owes a staggering $37,000 and it is growing like a weed.
2) By manipulating the inflation rate, they can pay back their (our) debt with cheaper money. For example, if they borrow a dollar from the Chinese Government today and then maintain a 1.5% inflation rate for 10 years, the future dollar that they use to pay back the debt only has 85% as much buying power and therefore inflation has helped them (us).
3) Other government agencies also like property inflation because rising values mean increased property taxes. Furthermore, when values go up, citizens tend to refinance their homes and spend the money on the type of things mentioned earlier and that stimulates the society and creates jobs and that results in even more people paying taxes.

Once we accept the fact that the various governments have a built-in incentive to maintain and manipulate inflation, there are two follow-up questions we should ask ourselves: 1) How would they actually do that? 2) and, How do their policies all tie into the housing market in particular?

To explain how the Federal Government manipulates inflation, imagine a machine-shop operator who acquires a pound of brass for one dollar and then makes it into a hinge that is worth two dollars. Our operator-friend has just created a brand-new dollar in goods. The same thing happens when somebody else turns a tree into 2X4's and then again when somebody elses turns the 2X4's into a home, or when somebody makes a new TV or anything else. New products make up the Gross Domestic Product; The government studies these figures and then releases new money into society based on all of that added value. If they did not do that, the money that is in circulation would have to be stretched farther and farther over all of the new goods. Eventually, very few people would have money and those wishing to sell goods or services would have to lower their prices dramatically to attract some of the money. When prices go down, that is deflation, and as we just discussed that is contrary to the governments’ basic objective.

So, all the government has to do in order to create the desired inflation rate is determine the total value of all the new goods that were created and then release a modest amount more money than that amount into society and basic supply and demand principles kick in.

Generally, the Feds do not like an inflation rate higher than 1-2% because many of our citizens are on fixed incomes (especially seniors) so limits and stability are in order.

All of this spills into the housing market and affects new home prices. If goods like 2x4's and carpeting go up in value then builders have to raise their prices to recoup their costs. In addition, premium land values go up and so do wages.

When new homes get expensive or they are found to be too far from employment centers then used homes become more appealing to many consumers. All of that attention to the used homes causes them to rise in value too.

The bottom line is that most areas are not immune from these forces so most of us can expect our property values to rise steadily over time, generally between 1-2% per year.

So, if you can graciously take advantage of inflation and structure your finances so that your assets grow faster than your expenses, you are on a path to wealth. An important part of that equation is to avoid refinancing your home and using the proceeds to support an unnecessarily frivolous lifestyle.

Comments invited

Creative Way to sell homes

2009-11-04T16:59:00.000-08:00

Creative Way to sell homes

If you know anybody who is having trouble selling their home you might recommend one of these creative solutions.

1. Trade White Elephants.

This writer has completed many real estate trades both as a real estate agent (see uncledaves site example and as an investor. Sometimes trading will complete transactions that cannot otherwise be accomplished. For example if you won a small home and want to an area of higher priced homes the sellers of those homes might take property just to make a sale.

You don’t always have to trade up either. According to Goswap.org a lot of people are exchanging high-end properties as a means to get their equity out of properties that have watched the values in their neighborhood fall through the floor

2. Offer owner-carry financing

Car dealers and home builders have realized that people are more concerned about down payments and monthly payments than the purchase price. By offering creative front-end benefits, buyers will usually just pay full price.

If you are having trouble selling a home, you might get top-dollar by becoming the buyer’s lender. That way you can lower the down payment or the monthly payment enough to make the difference whether your home sells or not. Simon Volkov also likes this idea.

3. Auctions

human psychology can be strange. This writer has purchased several properties at auction. One of them off of eBay. The odd thing is I have seen many examples of people paying more for a property at auction than they would have to pay on the open market. This usually happens at government auctions such as FHA. As far as the private sector is concerned one of the bigger auction houses is REDC A good site to get information is www.willliamsauction.com

4 Bury a statue

If all else fails the owner can adopt a creative idea that involves religion. There are those who think that burying a statue of St. Joseph on the property assures the seller will have good luck. This idea was very popular a couple of years ago and there were several success stories. You might enjoy this article about the concept.

Selling a home can be difficult even in more prosperous times, but with all of the economic problems we have been experiencing lately some creativity might be in order. Don’t forget to tell your friends about trading, owner-carry financing, auctions and burying statues of Saints.

comments welcomed

Real Estate vs Stocks Part 2

2009-10-31T16:44:00.000-07:00

More stock vs. RE

In my previous post I explored a few of the many reasons why real estate makes for a better investment than stocks. Now we can explore a few more. Here are some additional points to ponder:

• In theory, mutual fund managers are experts at picking good stocks. After all, that is their primary job. However only a small percentage of them beat the indexes (groups of stocks within various categories i.e. Industrials). That means the average guy could buy an equal distribution of the stocks within that index and do just as well as the experts who try to hand-pick the best ones. Furthermore, whenever a fund manager has a particularly good year, word gets out and then there is so much new money thrown at him that he cannot usually maintain his success rates.

• Stocks come with plenty of taxes but very few tax breaks. On the other hand you can trade real estate and defer taxes forever.

• You cannot get tenants, partners or anybody else to buy stocks for you. However, you can buy rental real estate and get tenants or partners to pay it off over time,

• You have to pay cash for most stocks. It is true that financially strong investors can finance up to half of a stock portfolio, but that debt carries with it interest that the investor himself must pay. Unless there is some compelling reason to do this the interest on the debt and the taxes on any profits will offset the average profit made on stocks.However, real estate investors can finance 80% of their purchase (or more) and get somebody else to pay the debt (see previous paragraph). The point is real estate offers much better leverage.

• You cannot force the value of stocks to go up. However there are many ways to create value in your real estate investments. Currently, Fix and Flips are the rage. But real estate investors also use Rezoning, Subdividing, Remodeling, Assemblage, and other techniques.

• When people in the stock market have an inside tip to good deals, it is called “insider trading.” It is illegal and carries severe consequences.Just ask Martha Stewart But when a real estate broker goes to a sales meeting and learns that a client of another broker listed a property for $12,000 below market because they want a quick deal there is no ethical or legal issue with buying the property.

• Only a select few people make big money because of their stock portfolio but more people become millionaires as a result of investing in real estate than any other asset.

• Whenever you invest in the stock market you relinquish control of your money to people and companies you do not know? Have you heard of Bernie Madoff or Enron? On the other hand real estate investments offer many investors much more control of their investments.

Finally, did you know that you can buy a property, keep it for many years and make a profit if its value drops in half? Here’s why. Other people pay off debt for you. If you buy a townhome for $100,000 and pay 20% down you will have $80,000 in debt. Over time the rents will pay off your debt. So even if the property drops in value to $50,000 (half its original price) the investor still has a $30,000 profit. Stocks offer no similar opportunity to control risk, except the wacky and expensive world of options (see previous article).

Naturally, people have tried to persuade me that stocks offer solid investment possibilities, but considering the points in my previous article and the ones mentioned here, I think real estate is a much better investment than stocks.

Your counterpoints are invited

The Truth About Real Estate vs stock

2009-10-29T18:38:00.000-07:00

Real Estate vs. Stocks

Whenever Certified Financial Planners discuss investing, they rarely focus on anything other than stocks and bonds. I contend that their investment philosophy is so biased it is either naïve or dishonest. If they are not familiar with the points below, they are simply naive, but if they do know about these ideas and fail to share them with their clients their motives are dubious at best and dishonest at worst.
These “experts” tell us things like diversify, stay in it for the long run and use options to control risk, but all of those are merely tools that flatten out your returns. Consider these points:

• Diversify – As far as I am concerned, “diversify is a lie”. Did diversify help investors in 2008? Lon Jefferies does not think so. Whenever I diversify it diminishes my successes and exposes me to more opportunities to lose. If I have 30 stocks in a mutual fund and one of them goes up, the benefit is diluted; frequently to the point that it be.”comes insignificant. Obviously, I would have been better off with all my money in that one good company (if by some miracle I could have identified it; but, how do I do that without inside information?) vs. spreading it around so much.

When we discuss “risk”, I have plenty more of it when I diversify. In the above example I have 30 different chances that somebody in that group is going to screw up and cost me money. When I am exposed to so many opportunities to lose my money, the laws of probability work against me. If just one of those stocks drops in value, and it probably will, that one bad actor can easily wipe out the small benefit I enjoy on my already diluted successes. Theoretical “expert” Michael Miller of Dallas Morning News says, “I would never recommend that you have all of your eggs in one basket,”

• Stay in it for the Long Run - Once again, I have my own rebuttal: “Any plan to stay in it for the long run, is the wrong one.” The Long Run philosophy is used to discourage investors from selling when the market goes against them. As you would expect, a blog called “The Long Run” takes the traditional position. The theory is that there is no actual loss until you “recognize” it…by selling; but, that assumption is also flawed. The truth is you already lost the money, whether you recognize it or not. Unless you have some compelling reason to believe that the company who just lost your money is somehow poised for a remarkable recovery, it could easily be wiser to take the loss now, enjoy a tax deduction and put your money somewhere that offers some genuine promise.

It would be foolish to ignore the true beneficiary of the “Stay in it for the Long Run” philosophy. If investors were cashing in their investments whenever things went against them, financial advisers would soon be out of investors. As long as the expert has control of my dollars he or she is the one who has the greatest benefit for keeping me in it for the long run: namely they remain employed.

Clinging to past problems in hopes they miraculously improve is like watering weeds and hoping they produce fruit. Although radio personality and Certified Financial Planner, Bob Rall would not agree,

• Use Options Puts and Calls…Yeah, right! And, find out how quickly your portfolio stalls. In theory, these tools are used to generate income and control losses, but once again the devil is in the details. If you already own a specific stock, you may be able to SELL covered calls against the stock which is a means to generate some income off your investment. Essentially, you get a fee for granting some other investor the right to buy your stock in the future at a predetermined price, regardless of what the actual market price for that stock might be at that time. The problem with this concept is you still lose if the stock goes down and the investor who bought the option from you gets all the profits above the option price when your stock goes up. So, the best you can hope for is that your stock holds steady or only increases slightly so nobody will call your winners away from you. That puts you in the ridiculous position of cheering against yourself.

You can also BUY calls, which enables you to pay the fee for the option to acquire a stock in the future at a predetermined price; but, if the stock goes down or holds steady you lose your money. If the stock goes up enough, you can make a profit, but either way you lose the option money which you paid. One report I read said 85% of the time the person who buys the call option loses his money.

“Puts” are similar to calls, except that the parties are betting on whether the stock price is going to go down rather than up. Once again there is a small fee. You can buy the right to put a stock to somebody or sell the right to somebody who would want to put the stock to you.

As far as I am concerned the investor who “plays” with these investment tools is really just gambling. It is true there are a few experts who do well with it, but who among us is a real expert? When the fund managers and stock brokers use these puts and calls to reduce your risk, it comes at a price: the premiums and commissions you pay.

“Puts and Calls Blog” actually says that these instruments are “fun” and for “enjoying”. That sounds to me like a desperate attempt to salvage a reason to gamble.

The bottom line is options are somewhat complicated, they lend extra opportunities to lose money, they usually don’t work out and they require a lot of time to stay informed on all the choices. Nobody has ever been able to convince me the random profits of the stock market are worth all that aggravation.

In my next post, I will give you another handful of reasons why real estate is a better investment than stocks.

For example, did you know you can buy real estate and watch the value drop in half and still make a profit? I will explain this next. Come back soon.

wanna argue? Click on "comments" or

email me at Dave@Uncledavesrealestate.com

EZ INTRO

2009-10-29T12:03:00.000-07:00

I have been considering starting this blog for several years, but I have been fairly busy writing a book, subdividing land, clearing a forest, traveling and attending a challenging real estate portfolio. But it seems like there is more time now, so here we go.

Feel free to contact me about real estate or family finances.

Dave@UncleDavesRealEstate.com