Some people will disagree with me.  [...]]]> Everyone is down on real estate as an investment right now.  But, this dismal real estate market is exactly what investors have been waiting for.  And, it’s exactly what home buyers should be hoping for.  Here is an affordable chance to purchase what could be the best investment you will ever make.

Some people will disagree with me.  They may have woeful tales of broken dreams and lost properties.  Others may declare that houses are a money-pit and recount every painful expense.  They may suggest you don’t have to pay these expenses as a renter, but that simply isn’t true.  All costs are factored into rent and passed on.  If your landlord pays a large maintenance expense, count on the rent going up.

Basic Premise

This Top 10 list is based on the purchase of a house to live in versus renting.  I won’t get into rental properties or commercial real estate, which have their own risks and benefits.  It also compares an investment in a house with other common investments.

Recommendations

I believe in getting one good mortgage and paying it off.  I don’t believe in refinancing, unless interest rates drop two percent or you shorten the loan by five years.  I recommend against lease-options, flipping, wrap-arounds,  property auctions or any other risky ventures, unless you are an experienced investor.  You can get hurt in creative transactions of any kind and real estate is no exception.

So, without further delay, here is the list:

1.  Leverage: Leverage is a double-edged sword.  You can control a large financial asset for a small down payment.  When the real estate market goes up by a few percentage points you can quickly double your equity.  When the market goes down a few points, you can be completely upside-down.  Since the long-term trend of real estate is positive, leverage is your friend.

2. Stability: Historically, real estate is a very stable long-term investment.  There are low-demand areas that won’t appreciate much and high-demand areas that rise and fall dramatically.  But over all, the real estate market is a steady long-term gainer.  If you don’t think so, compare it to the stock market for the past 100 years.  There are decades when stocks gained very little.  I’m not just talking about the Great Depression.  If you had bought stocks during the ’70s, you would have wished you kept your money in the bank.

3. Practical Use: You get to live in your investment.  You can’t do that with precious metals, collectibles or financial assets.  You may assume this just offsets the cost of rent.  But when you own a home, you can do things renters only dream about.  You can get a satellite dish, add a bedroom, remodel the kitchen or landscape the yard.  Basically, you are the king of your castle, as long as you obey the laws and regulations.  Here is another thought, no one can terminate your lease, keep your deposit or charge you for having a pet.

4. Fixed Costs: If you get a fixed loan and you don’t refinance, you can count on paying the same mortgage until your house is paid off.  Your taxes and insurance may go up, but that won’t even dent your budget.  Twenty years from now, your mortgage will be really cheap compared to everyone else’s.

5. Inflation Hedge: Inflation causes the cost of most items to go up every year.  It also causes housing costs and property values to rise.  So, you can rent and watch your housing costs go up.  Or, you can buy and watch your property values go up, while your housing costs stay the same.  Although, this was a bad year for property values, they will go back up in the next few years.

6. Real Assets: This is often overlooked, but very important.  Real estate has real value, based on the land and the usefulness of the dwelling.  Take it from someone who owns 2,000 shares of worthless stock.  The prices of houses will rise and fall, but they will always have value as long as people need places to live.  Paper assets, including our currency, have dubious future value.

7. Tax Advantages: Writing off your mortgage interest is huge.  For most homeowners, you can pay more on your mortgage than you would for rent and still come out ahead, after taxes.  And, you can usually write off your property taxes.  Finally, you can do equity swaps or sell a property and keep some proceeds tax-free.  No other investment offers you all of these tax advantages.  You may have to pay an accountant to figure it out, but the tax benefits are worth the effort.

8. Collateral Value: Say you need a lot of money quickly for any reason.  Let’s say you have the business opportunity of a lifetime.  Maybe you are less fortunate and get sick or injured.  The reason doesn’t really matter.  If you have equity in real estate, you can borrow against it.  And you can do it without cashing in your investment, moving out of your house or taking a hit on taxes.  You can even borrow from one property to invest in another.  You still have to pay the loan back.  But, it’s nice to have options.

9. Forced Savings: Modern Americans are terrible savers and our personal savings rate is -1%.  I’m not saying that a house is the best way to save money, but it definitely forces you to save.  You have to pay the mortgage, if you want to stay in the house.  And, when you make the payment, some portion goes right into your equity.

10. Live Frugally: This is my favorite point and that’s why I saved it for last.  Once your mortgage is paid off, you only have to pay taxes, maintenance and insurance.  I’m still about 10 years away from paying off my house, but I am literally counting down the months.  Once my house is paid off, I could live comfortably on a fraction of my current income.  Then, I can think about travel, mini-retirements and everything else I want but can’t afford.

The Bottom Line

If you are still renting, you may finally have an opportunity to buy a house for a cost that is close to rent.  That just wasn’t possible in California or any other hot market a couple of years ago.  Don’t let anyone discourage you from living “The American Dream” because you deserve it.  Clean up your credit, save that down payment and take advantage of the market collapse.  This opportunity is going to disappear in a couple of years.  Then, you will have to pay a lot more to buy your dream home.

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“It’s better to rent instead of buying a house and then you can invest the difference in the stock market.”

Logic Behind the Advice

Often, this advice comes from someone who has “Run the Numbers” and determined mathematically that you will be ahead if you invest [...]]]> Here is the worst financial advice I have ever heard:

“It’s better to rent instead of buying a house and then you can invest the difference in the stock market.”

Logic Behind the Advice

Often, this advice comes from someone who has “Run the Numbers” and determined mathematically that you will be ahead if you invest the difference between renting and owning in the stock market, instead of investing in real estate.  This advice is even more popular in a dropping real estate market, like we have right now.  On the surface, this argument may sound convincing.  If the historic returns of the stock market exceed the historic return of real estate in your area, then why wouldn’t you be ahead?

Errors & Omissions

Invariably, this bad advice is based on a number of important factors, which have been naively or conveniently omitted.  Factors such as leverage, taxation, inflation, appreciation and local market conditions all play a huge factor in long-term investments and they usually benefit the investment in real assets over financial assets. 

Special Circumstances

It’s easy to point out housing markets like Detroit or Philadelphia and argue that real estate is a bad long-term investment.   The same could be said for the people who recently bought in market bubble areas, such as Florida, California and Nevada.  But, if you look beyond these special circumstances and consider the overall market from a long-term perspective, real estate has consistently outpaced inflation and will likely continue to do so well into the future.  Barring some spectacular catastrophe in the economy or the population, there will definitely be a future demand for prime American property.

Death by Taxes

Everyone’s tax situation is different and the interest deduction from a house will vary greatly, based on your income and deductions.  One thing is fairly certain; your tax benefit from purchasing a property will greatly exceed your renter’s credits.  And, since you pay for housing in post-tax dollars, you will have to earn $1.30-$1.50 of income for every dollar of housing costs.  So, why pay extra taxes to the Government, when you can invest it in your house or some other worthy goal.

Interest & Inflation

Interest and inflation may seem like a small percentage, which doesn’t add up to much.  But, over the course of an adult lifetime, they can compound into a significant factor.  It’s been my experience that rent and housing costs seem to double every 10-15 years. 

Soon after you buy a house, a couple of magical things start to happen.  First, your mortgage payment stays roughly the same, while everybody else’s rent keeps going up.  Second, your interest expense keeps going down, and more of your mortgage payment goes back into the principal.  This assumes that you get a good fixed mortgage and you don’t keep refinancing your house.  As time goes by, inflation and interest start to work in your favor, because your house is gaining value at the same time your loan is shrinking.

Retiring in Style

Nothing in the financial realm terrifies me as much as paying rent or a mortgage from a fixed income, when I retire.  The real goal of buying a house should be to pay it off completely before you reach retirement age.  Then, you can retire in style and spend your housing money for recreation.  You may still have to worry about your property taxes and insurance going up, but that’s nothing compared to the future price of rent.

I can almost guarantee you that anyone who has supposedly “Run the Numbers” hasn’t calculated how big of a nest egg it will take to pay rent fifty years from now after getting taxed on the proceeds from their IRA account or 401K plan.  And if they have, I would be very curious how they calculated the future cost of rent.

I’ll make it easy and “Run the Numbers” for you.  I’m 43 years old and live in California.  My retirement age is 67, which happens in the year 2032.  Estimating that rents will almost double twice in the next 24 years, rent will cost around $6000 per month for a small apartment.  That means rent will cost $72,000 per year after taxes, so it will take $100K in income, just to pay the rent.  And then, the cost will almost quadruple again, during my life expectancy.  If you are younger than me, then it will cost you even more.

The Bottom Line

The bottom line is that bad financial advice is everywhere.  Many people weren’t taught sound financial principles nor do they have the discipline to stick with a financial plan that makes sense.  People working in the mortgage, real estate or financial services industries, may have an incentive to recommend products or investments that benefit themselves and their employers, instead of you. 

Any financial advice that is based on convenience, risk or gratification probably isn’t going to work out too well.  Stick to the proven methods of building wealth and you will be rewarded in the future.

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It is estimated by the Center for Responsible Lending, that 2.2 million homes with subprime loans may be lost to foreclosure in the next few years.  That’s 1 in 5 subprime mortgages that are projected to end in foreclosure.  And, if the economy falters, it could get worse.  

If you are one of those in trouble [...]]]> Are you Struggling to Pay your Mortgage ?

It is estimated by the Center for Responsible Lending, that 2.2 million homes with subprime loans may be lost to foreclosure in the next few years.  That’s 1 in 5 subprime mortgages that are projected to end in foreclosure.  And, if the economy falters, it could get worse.  

If you are one of those in trouble with your mortgage, it may seem overwhelming.  But, don’t give up hope just yet.  Unbelievably, banks, mortgage servicers and the Government are all working together to help keep people in their homes. 

New Sources of Help

Banks are quickly figuring out that it’s cheaper and easier to relax their hostile standards, then to take on a bunch of foreclosures in a dropping housing market.  So, if you are willing and able to keep making your payments, your bank may suddenly seem very eager to work with you.  Give them a call and explain your situation.

After a dismal failure in effective regulation, the Government is stepping up it’s game.  Senator Christopher Dodd has introduced S.2452, the Home Ownership Preservation and Protection Act of 2007.  This may be of little help to current borrowers, but it may help a lot in the future.  Effective consumer protection in mortgage lending is way overdue.

Many of the States are way ahead of the Federal Government in providing relief.  There are hot-lines, websites, task forces and new legislation designed to curb foreclosures.  The States are starting to understand that they are going to be big losers in this housing crisis.  As foreclosures rise and property values drop, the States are projected to lose billions in property taxes.  And, raising other taxes on strapped constituents, won’t be very popular.

Foreclosure Help Resources

• Federal Housing Administration (FHA)
• State of California
• State of Michigan
• State of Nevada
• State of Ohio – County of Lucas
• State of Pennsylvania

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Every blogger, pundit and reporter has already been waiving their arms around for weeks now, trying to get their 15 minutes of fame from the subprime fiasco. Never mind that most of these hacks never saw it coming. It’s big news right now and everyone is chiming in, with thoughtful [...]]]> Ok, so I’m late to the party.

Every blogger, pundit and reporter has already been waiving their arms around for weeks now, trying to get their 15 minutes of fame from the subprime fiasco. Never mind that most of these hacks never saw it coming. It’s big news right now and everyone is chiming in, with thoughtful analysis.

So what could I possibly have to add?

The biggest issue if there ever was one, is the Opportunity. Yes, that’s right. This is a golden opportunity, carefully disguised as a total disaster. For two or three years now, I have been telling everyone who would listen to save money and they would have a great opportunity to buy property. Unfortunately, sound financial advice isn’t always popular. Especially, if it requires cutting back on spending in order to save money. But, here it is. The opportunity to pick up a house for prices not seen in years. And, it’s getting better daily.

The Dynamics of the Meltdown

So, how did I predict three years ago that real estate would crash?

• Personal consumer debt had tripled since the ‘90s
• Housing prices rose by double-digits, while real income was flat
• Interest rates were historically very low and bound to go up
• An unusually high number of houses were non-owner occupied
• Mortgage regulation and underwriting standards were abandoned

Look, anyone paying attention could have seen this coming. When flippers are on TV with their own infomercials and your neighbor takes out a second to buy an H2, its last call at the party. It’s only a matter of time before the pros cash out and the amateurs get hurt. Doesn’t anyone remember the ‘80s?

The Victims

Unfortunately, in the cold hard world of finance, one person’s misfortune is often another person’s opportunity. Now, don’t get me wrong, I feel absolutely terrible for anyone who is losing a home. This has to be devastating to the affected people and their families. But, there is an immutable law of borrowing; that you have to pay money back. I truly feel sorry for anyone who got stuck with a rotten loan. But, keep your chin up. It’s not the end of the world. You may be able to rebound in a few years, with an affordable house and a stress-reduced mortgage.

The Scoundrels

Public enemy number one has to be the Mortgage Brokers. These smooth talking, bait and switching, commission-mongers are currently the poster child for all that is evil in the world. Are all mortgage brokers bad? No, of course not. But there are certainly enough bad brokers to give the industry a black eye.

Public enemy number two has to be our Government. You may have noticed that Congress and the President are suddenly “concerned” that people are losing their homes. And, regulators are pointing fingers faster than a downtown traffic cop. It’s amazing how poorly our Government serves the public interest.

Rounding out the top-four are Investment Banks and Hedge Funds. They seem to have invented a new way to profit, called a CDO, or a Collateralized Debt Obligation. This is just a nifty new way of packaging up non-conforming loans and selling them to Hedge Funds who speculate with your money. If you didn’t get stuck with an exploding mortgage, you may have seen your savings disappear.

The Bottom Line

No matter what anyone tells you, the cost of housing is based on the consumer’s ability to pay the loan. A young couple just starting out most likely can’t afford the mortgage on a $600K house. So, even if they qualify with a “liar loan” or a teaser rate, they probably won’t be in the house for long. That’s why houses aren’t selling and they won’t start selling until the prices come way down.

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