Friday, December 25, 2015

Top Ten Tips for Buying a House

In my previous post, Top Ten Tips to Building Wealth, I wrote that one should buy a house, preferably paying cash, i.e. without incurring debt. This suggestion generated much discussion.

Yesterday I was having dinner with a friend and we had a brief discussion about purchasing cash vs. taking out a low-interest 30-year mortgage, and briefly the merits (or otherwise) of doing so.

As a follow-up, I thought to post my Top Ten Tips for Buying a House:
  1. DO NOT buy a residential home in the absence of Triple D. If you are patient AND plan to purchase a home based on needs rather than wants, you may be able to scoop a cash bargain!
  2. If you do your homework, you might even be able to purchase a home for an amount equal to what you have already saved and/or have available as a down payment on a residential property. Meaning, you may be able to buy it outright in a cash deal.
  3. Looking to purchase a rental property for investment? You can still buy a house today using a credit card, because there are still thousands of ‘underwater’ properties available after the financial meltdown that was caused by the housing bubble of 2008/9.
  4. Accountants will tell you that your home is a (fixed) asset. Albeit correct in accounting terms, it is however, incorrect in investment terms:
    • Assets generate active or passive income. If you earn money on a regular basis from residential property (e.g. by renting out a home that you own), that property is an asset.
    • Liabilities cost money on a regular basis. If you own a home (whether paid for entirely or not) and you live in it, that home is likely to be a recurring liability, i.e. costing you money e.g. every month.
  5. A realtor’s Competitive Market Analysis (CMA) might be interesting, but it has little value beyond “being interesting.” Any house is worth only what a willing buyer is prepared to pay a willing seller... nothing more, nothing less.
  6. A realtor is not a financial advisor. In fact, most realtors care very little about your financial health. Realtors are salespeople who care mostly about sales commission (often their only source of income), earned by representing you in a realty deal that closes at the highest price they are able to achieve, period.
  7. Any amount of cash required as a down payment represents consideration of ‘opportunity cost’ in relation to other investment/uses that you may have been able to consider for that same amount of cash (awaiting investment)... often better invested elsewhere for a higher return.
  8. According to CBS News, for the period 1890-2005, inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year. Comparatively, the historical average performance of the Dow for the period 1899-2012 (a similar period) was approximately 9.4% per year (including reinvested dividends).
  9. Many people will disregard costs when discussing their return on investment realized when selling a house. If you purchased a home e.g. 30 years ago for $10,000 and sold it today for e.g. $200,000 your profit does not equal $190,000.
    • On the positive side, you can factor tax savings (e.g. mortgage interest deductions), and the fact that you sold the house for more than what you may have paid for it.
    • On the negative side, you have to factor in 30 years of costs; like property tax; ongoing repairs and maintenance; realtor’s commission at the time of a sale, opportunity cost of not investing the down payment in 'the market;' adjusting the sales price for inflation over the period of ownership; money spent on unique and/or custom fittings like window coverings; etc.
  10. You have to live somewhere, so the cost of a home will always be a liability. This is true in terms of property tax, utilities, maintenance, etc. If unexpected costs (repairs, tax increases, etc.) cause discomfort, then you should rather rent for an amount similar to what it may cost you to make regular payments, for a residential home.

One of the most significant drawbacks to home ownership - especially with debt - is a potential loss of personal mobility. As an entrepreneur, I want to be able to ‘lock up and go’ to wherever business opportunities and/or adventure may present, without worrying too much about the ongoing running costs of owning a residential home.

The suggestions above may help readers to think a little beyond the propaganda that politicians, educators and your parents may have shared in the past: work hard at school, borrow to go to college, get a job, borrow to buy a car, borrow to buy a house… and live happily ever after with a lifetime of debt. This is also affectionately referred to as "The American Dream."

Or... you could simply decide to build personal wealth instead.

Wednesday, December 23, 2015

Top 10 Tips To Building Wealth

Although people sometimes get lucky (e.g. winning a lottery), most people don’t. That is just a fact of life. So, if we ignore luck, how can anyone ever have an opportunity to get rich?

‘Rich’ is of course relative. Relative to where you live, your consumption habits, basic requirements, how you manage your time (especially free time), and more. I prefer ‘building personal wealth’ to ‘getting rich.’

Setting a goal for building personal wealth is a necessary first step:

- An investment goal should be an amount of money that will allow you to maintain existing standards of living when paychecks stop, offering a return commensurate with spending requirements.
- Retirement is not a goal in itself. Retirement is a more likely a figurative concept of not wanting to work for a boss, rather than a desired end state. Ask anyone what he or she plans to do once they retire. A common response may be, “I plan to travel.” If someone says that, ask what he or she plans to do when they return from their travels… and you will notice how quickly their well thought-out retirement dreams dissipate.

Here are my Top 10 Tips To Building Wealth:

1. Never carry debt on a credit card. If possible, never carry debt at all, unless debt generates an income. Wealthy people use borrowed money to create new stuff, expand their businesses, buy machinery, etc. Poor people borrow money to buy stuff (made by rich people) that they don’t need, can’t afford, to impress their imaginary friends… stuff like big-screen TVs, fancy cars, etc.
(a) Rich people call their business debt ‘leverage.’ Because leverage is what they acquire by borrowing, and usually to achieve a projected future return on investment.
(b) Poor people use words like ‘mortgage, credit card balances, car loans, student loans,’ etc. to describe debt.

2. Earn as much money as possible, while you have the ability to work.

3. Never rely on a single paycheck; rather create 3 or more sources of income.

4. Start your own business.
(a) If you cannot figure out how to make yourself rich, others will hire you at the lowest rate possible to work for them, to make them rich.
(b) You cannot get rich by earning a salary from a single source of income (see 3 above).
(c) A business earns money, spends to pay employees, purchase goods, etc. and then pays tax on what’s ‘left over.’ Employed people earn money, pay taxes, and keep whatever is ‘left over’ after deductions. Spot the difference… it’s easy!

5. When you earn money you can buy a house to live in, preferably paying cash. Yes, this is possible. I have personally done it, more than once.
(a) A house needs to fit your requirements, not your emotions.
(b) As soon as you say, “I love this house” while shopping for a home, consider leaving that ‘open house’ immediately. Emotion disrupts logic, common sense and good investment decisions.
(c) Your house may be an asset in accounting terms, but it is actually an ongoing liability. If someone says, ‘My house is my biggest asset,’ ask him or her how much income they generate from their house on a monthly basis. If they look confused, it’s because they misunderstand the relationship between assets (that make you money) and liabilities (that cost you money). Help them!

6. As soon as you are able to do so - e.g. when your kids leave home - sell your house and downsize to something that fits with your needs (see 5a above).

7. Get rid of stuff. And then… stop buying stuff. If you need a new shirt, buy one. When you get home, throw out an old shirt, or preferably two. Stop hoarding trash; it prevents you from breathing clean air. If you buy stuff that you don’t need, with money that you don’t have… soon you will have to sell stuff that you would like to keep, to pay for the things you bought!

8. Open an investment account as soon as possible and invest in diverse (ideally dividend-paying) stocks across multiple industry sectors. Financial, biotech, energy, etc.
(a) Buy ‘cheap stocks’ and keep them. You will ONLY lose money if you sell underperforming stocks at a loss. Don’t do that!
(b) Right now, most energy stocks are ‘on sale.’ Rich people are buying, while poor people are selling energy stocks.
(c) For example, consider Exxon or Chevron: both offer a dividend yield of around 4%. You will therefore earn a 4% return on investment… regardless of the stock price day to day. Try earning 4% interest in a bank savings account!

9. When you have a stock that is performing very well, consider plugging in a trailing stop. For example:
(a) A trailing stop will allow you to sell out of a position if a stock price were to decline, say by 3%.
(b) If an equity that you own has gained e.g. 40% over a few years, you can use this modern technology to instruct your ‘online broker’ to automatically sell that stock, if it drops by e.g. 3%.
(c) Protect hard-earned gains by only selling stocks that offer a positive return on investment (see 8a above). Understand the difference between realized and unrealized gains/losses.
(d) If your online brokerage platform does not support trailing stops, open a new account with one that does, e.g. TD Ameritrade.

10. Reinvest all dividends while you are able to do so. For example, while you are earning a salary.
(a) Create an automatic DRIP (dividend reinvestment plan).
(b) This means, that e.g. when Chevron pays out a quarterly dividend, the cash is automatically used to buy more Chevron stock.
(c) A DRIP allows you to adjust your cost basis (your average stock price), ongoing. It offers some protection against market volatility.

11. Don’t be greedy, and invest for the longer term. The market will go up and down. Over the medium to longer term, the market will go up. There are many reasons why the market will always go up, longer term.

The Dow has averaged almost 7% annually, for more than 100 years, despite the Great Depression of the 30’s, dotcom bubble of the 2000’s, 9/11, the 2008/9 financial crisis, and more.

If you don’t know which stocks to invest in, buy any of the 30 stocks that make up the Dow Jones Industrial Index. These great companies are ‘solid’ corporations that offer good dividend yields, have a strong track record of ongoing success, and offer products portfolios and management teams that are reasonably bulletproof in managing adversity, and more.

If you invest in Dow stocks, be sure to diversify. $10,000 invested in equal weighting across 5 or even 10 stocks, is better than $10,000 invested in any one stock. Think Enron, in case you were wondering.

Here’s the math: At 15% compounded growth, an investment will double every 5 years. So, start investing early, as soon as possible. At the rate above, $10,000 invested at age 25 would be worth over $1 million, at age 60.

Rudi presents investment workshops to groups of investors for a nominal fee. He does not sell any investment products, and he will not offer to invest or manage your personal savings. He teaches self-empowerment and financial sustainability to foundations, families, corporations, and individual investors.

If you are interested in learning about ‘the market,’ your best investment choices, and building personal wealth, contact Rudi for a customized workshop in your area.