Buying vs. Renting

Owning a home used to be a virtual requirement in attaining the so-called American dream. But that was when people drove 2-ton cars, smoked on airplanes and watched live television. Buying is a smart choice for many people, but it isn’t always the best deal, depending on the market where you live and factors such as how long you plan to stay in your home and the size of the home you want to purchase compared to where you’re renting.

Before you commit to buying, factor in the following points:

  • There’s a big initial investment involved. You have to pony up a lot of money when you purchase your house, from the closing costs (roughly 3% of the home’s purchase price) to the down payment itself. Not everyone has that kind of cash to spare.
  • Can you handle the debt? Lenders often look at your debt-to-income ratio: how your mortgage payments and other debts would stack up against your pay. Conventional lenders often use the so-called 28/36 rule when determining whether to offer you a loan. Your house-related payments (mortgages, taxes, insurance) shouldn’t exceed 28% of your pretax income, and all other combined debts shouldn’t exceed 36% of your monthly pretax income. (Much more on this later.)
  • Buying is more expensive than you think. You can’t simply compare your monthly mortgage payment to your monthly rent — these are apples and oranges, particularly when you consider that the place you purchase won’t necessarily be the same size as the place you’re renting. Though you can deduct some of your home-ownership expenses, you’ll have to pay property taxes, homeowner’s insurance, HOA fees and probably mortgage insurance, as well as renovations, maintenance, utilities, and other fees typically covered by a landlord. (You can directly plug numbers into a handy rent-buy calculator from the New York Times.)
  • Buying decreases ease of mobility. In today’s ever-changing job market, very few people can say with certainty that they’ll have the same employer in five years. It’s much easier, and less expensive, to leave a yearlong lease than to sell a home.
  • How hot is your market? Real estate is local and cyclical, so consider whether your area is better suited to renting or buying. If you live in a larger metropolitan area, the Case-Shiller Index is a useful at-a-glance look at how current real estate values where you live compare to historic highs and lows.

Is a home an investment?

Some people would rather put their money toward equity in their property instead of giving it to a landlord. While that math makes sense for many — especially those who plan to stay long enough to pay off their mortgage entirely — nobody can predict whether home prices will rise or fall in a given time frame, so don’t count on your home to be a cash cow.

What to do before you act

If you’re thinking about buying, follow these steps before making your move.

  1. Calculate your current debts, including car loans, credit card payments, and student loans. Remember the 28/36 rule mentioned above.
  2. Consider how much available cash you have. You’ll want enough to at least cover your down payment and closing costs, and don’t forget to leave enough in your bank account to cover any emergencies that might arise.
  3. Make sure you can put enough money down. Traditionally, lenders have required down payments equal to 20% of the home’s purchase price, but special programs allowing down payments as low as 3% are available. (Putting 20% down on a $300,000 home would require $60,000 in the bank — plus an additional $9,000 or so for closing costs.)
  4. Get pre-approved for a loan. Contact a lender to get pre-approved for a mortgage. This doesn’t require you to accept the loan; it’s just a way of showing real estate agents and sellers that you’re serious. One of the first things a prospective agent will ask is whether you’ve been pre-approved, so check off this box early in the process.

Are you better off renting?

Deciding whether to rent or buy is a big decision that requires serious “Where am I now?” and “Where am I going?” sorts of questions. It might be best to keep renting if you want to maintain maximum flexibility for personal or professional reasons, or if jumping into more debt right now takes you out of your comfort zone. Maybe you’re just not ready to face the responsibilities of home-ownership: repairs, upgrades, maintenance, yard-work and all the rest. Even thinking about the difference between cleaning an 800-square-foot apartment and a 2,400-square-foot house can make you want to take a seat and a deep breath.

Your local housing market could be working against you, as well. If you live in a hot market with eager house hunters chasing too few properties, it might be best to bide your time until a better buying opportunity presents itself.

Buying vs. Renting

Buying vs. Renting

Owning a home used to be a virtual requirement in attaining the so-called American dream. But that was when people drove 2-ton cars, smoked on airplanes and watched live television. Buying is a smart choice for many people, but it isn’t always the best deal, depending on the market where you live and factors such as how long you plan to stay in your home and the size of the home you want to purchase compared to where you’re renting.

Before you commit to buying, factor in the following points:

  • There’s a big initial investment involved. You have to pony up a lot of money when you purchase your house, from the closing costs (roughly 3% of the home’s purchase price) to the down payment itself. Not everyone has that kind of cash to spare.
  • Can you handle the debt? Lenders often look at your debt-to-income ratio: how your mortgage payments and other debts would stack up against your pay. Conventional lenders often use the so-called 28/36 rule when determining whether to offer you a loan. Your house-related payments (mortgages, taxes, insurance) shouldn’t exceed 28% of your pretax income, and all other combined debts shouldn’t exceed 36% of your monthly pretax income. (Much more on this later.)
  • Buying is more expensive than you think. You can’t simply compare your monthly mortgage payment to your monthly rent — these are apples and oranges, particularly when you consider that the place you purchase won’t necessarily be the same size as the place you’re renting. Though you can deduct some of your home-ownership expenses, you’ll have to pay property taxes, homeowner’s insurance, HOA fees and probably mortgage insurance, as well as renovations, maintenance, utilities, and other fees typically covered by a landlord. (You can directly plug numbers into a handy rent-buy calculator from the New York Times.)
  • Buying decreases ease of mobility. In today’s ever-changing job market, very few people can say with certainty that they’ll have the same employer in five years. It’s much easier, and less expensive, to leave a yearlong lease than to sell a home.
  • How hot is your market? Real estate is local and cyclical, so consider whether your area is better suited to renting or buying. If you live in a larger metropolitan area, the Case-Shiller Index is a useful at-a-glance look at how current real estate values where you live compare to historic highs and lows.

Is a home an investment?

Some people would rather put their money toward equity in their property instead of giving it to a landlord. While that math makes sense for many — especially those who plan to stay long enough to pay off their mortgage entirely — nobody can predict whether home prices will rise or fall in a given time frame, so don’t count on your home to be a cash cow.

What to do before you act

If you’re thinking about buying, follow these steps before making your move.

  1. Calculate your current debts, including car loans, credit card payments, and student loans. Remember the 28/36 rule mentioned above.
  2. Consider how much available cash you have. You’ll want enough to at least cover your down payment and closing costs, and don’t forget to leave enough in your bank account to cover any emergencies that might arise.
  3. Make sure you can put enough money down. Traditionally, lenders have required down payments equal to 20% of the home’s purchase price, but special programs allowing down payments as low as 3% are available. (Putting 20% down on a $300,000 home would require $60,000 in the bank — plus an additional $9,000 or so for closing costs.)
  4. Get pre-approved for a loan. Contact a lender to get pre-approved for a mortgage. This doesn’t require you to accept the loan; it’s just a way of showing real estate agents and sellers that you’re serious. One of the first things a prospective agent will ask is whether you’ve been pre-approved, so check off this box early in the process.

Are you better off renting?

Deciding whether to rent or buy is a big decision that requires serious “Where am I now?” and “Where am I going?” sorts of questions. It might be best to keep renting if you want to maintain maximum flexibility for personal or professional reasons, or if jumping into more debt right now takes you out of your comfort zone. Maybe you’re just not ready to face the responsibilities of home-ownership: repairs, upgrades, maintenance, yard-work and all the rest. Even thinking about the difference between cleaning an 800-square-foot apartment and a 2,400-square-foot house can make you want to take a seat and a deep breath.

Your local housing market could be working against you, as well. If you live in a hot market with eager house hunters chasing too few properties, it might be best to bide your time until a better buying opportunity presents itself.

Don’t Put The Cart Before The Horse

Don’t Put The Cart Before The Horse

Today I thought I’d touch on a funky subject – FEES. As an Advisor, I often get asked about fees. So let’s discuss all the different types of fees that are likely built into your typical investment account – and yes, you should be concerned and ask about all of them, always. 1. Expense Ratio or Internal Expenses It costs money to put together a mutual fund. To pay these costs, mutual funds charge operating expenses. The total cost of the fund is expressed as an expense ratio.

  • A fund with an expense ratio of .90% means that for every $1,000 invested, approximately $9 per year will go toward operating expenses.
  • A fund with an expense ratio of 1.60% means that for every $1,000 invested, approximately $16 per year will go toward operating expenses.

The expense ratio is not deducted from your account, rather the investment return you receive is already net of the fees. Example: Think about a mutual fund like a big batch of cookie dough; operating expenses get pinched out of the dough each year. The remaining dough is divided into cookies or shares. The value of each share is slightly less because the fees were already taken out. 2. Investment Management Fees or Investment Advisory Fees Investment management fees are charged as a percentage of the total assets managed. These types of fees can often be at least partially paid with pre-tax or tax-deductible dollars. Example: An investment advisor who charges 1% means that for every $100,000 invested, you will pay $1,000 per year in advisory fees. This fee is most commonly debited from your account each quarter; in this example, it would be $250 per quarter. Many advisors or brokerage firms charge fees much higher than 1% per year. In some cases, they are also using high-fee mutual funds in which case you could be paying total fees of 2% or more. It is typical for smaller accounts to pay higher fees (as much as 1.75%) but if you have a larger portfolio size ($1 Million or more) and are paying advisory fees in excess of 1% then you better be getting additional services including, aside from investment management. These might include comprehensive financial planning, tax planning, estate planning, budgeting assistance, etc. 3. Transaction Fee Many brokerage accounts charge a transaction fee each time an order to buy or sell a mutual fund or stock is placed. These fees can range from $7.95 per trade to over $50 per trade. If you are investing small amounts of money, or your advisor is “churning” over your portfolio, these fees add up quickly. Example: A $50 transaction fee on a $5,000 investment is 1%. A $50 transaction fee on $50,000 is only .10%, which is minimal. 4. Front-End Load In addition to the ongoing operating expenses,  an “A share” mutual fund charges a front-end load, or commission. Example: If you were to buy a fund that has a front-end load of 5%, it works like this: You buy shares at $10 per share, but the very next day your shares are only worth $9.50 because 50 cents per share was charged as a front-end load. 5. Back-End Load or Surrender Charge In addition to the ongoing operating expenses, “B Share” mutual funds charge a back-end load or surrender charge. A back-end load is charged at the time you sell your fund. This fee usually decreases for each successive year you own the fund. Example: The fund may charge you a 5% back-end load if you sell it in year one, a 4% fee if sold in year two, a 3% fee if sold in year three, and so on. Variable annuities and index annuities often have hefty surrender charges. This is because these products often pay large commissions up front to the people selling them. If you cash out of the product early the insurance company has to have a way to get back the commissions they already paid. If you own the product long enough, the insurance company recoups its marketing costs over time. This the surrender fee decreases over time. 6.  Annual Account Fee or Custodian Fee Brokerage accounts and mutual fund accounts may charge an annual account fee, which can range from $25 – $90 per year. In the case of retirement accounts such as IRA’s, there is usually an annual custodian fee, which covers the IRS reporting that is required on these types of accounts. This fee typically ranges from $10- $50 per year. Many firms will also charge an account closing fee if you terminate the account. Closing fees may range from $25 – $150 per account. Most of the time if you are working with a financial advisor that charges a percentage of assets these annual account fees are waived.   A few notes on fees (and my personal opinion): People should worry more about value received rather than amount paid in fees. For instance, if your target portfolio return is 10% and you invest in a private equity fund which returns 90%, of which the manager keeps 80% – you get 10%. Who cares what the manager made? Are there cheaper investment options on there? Sure! But you chose this one and this one got you to your goal. Additionally, if you still have a financial advisor who ONLY advises you on investments – what are you actually doing? Go out and find someone who can offer you comprehensive financial planning. Many times, they will actually be saving you money on fees and in many other ways as well. I often say that I save my clients more money than I make them which is what keeps them wealthy!

Revocable Trusts

Revocable Trusts

I am way too tired from this weekend to come up with a really fancy title for this post.. so here goes.. straight and to the point.

 

The greatest benefit of a revocable trust is that it simplifies the estate-planning process. When a person without a trust passes away, their property is disposed of by a probate court. Not only is this a time-consuming and often costly process, it also generates a public record of the property being passed to heirs. To elaborate on this, there are certain states where it is particularly crucial to avoid the probate process because it becomes TOO costly and TOO cumbersome to be reasonable. Those people living in Florida, for instance, should do everything possible to ensure they avoid probate. Make sure to do some research to find out how “bad” the probate process is in your state.

Any property transferred to a revocable trust is no longer considered a part of your probate estate. It will pass to your heirs in the manner laid out in the governing trust documents without the need of a court’s intervention. This avoids the creation of a publicly available document outlining your assets and their disposition.

Making revocable trusts even more attractive is the ease with which they can be set up. Almost all attorneys that write Wills also write Revocable Trusts. The most important thing to keep in mind is that you need to formally transfer the assets to the trust and designate who the trustee and beneficiaries are — in the case of revocable trusts, these are all generally the grantor until he or she passes away, at which point a successor trustee distributes the trust’s assets to the residual beneficiaries.

Essentially, while you’re alive, the Revocable Trust functions as a personal account with a fancy title. Once you pass, the document directs how your assets are distributed. No one needs to approve and the trust doesn’t get filed anywhere until your death – which also means you can amend your revocable trust as many times as you’d like, as long as you’re alive and in good mental health.

That being said, there are two downsides to using a revocable trust as opposed to an irrevocable one. First, unlike an irrevocable trust, a revocable trust doesn’t protect the assets therein from the grantor’s creditors or legal liability. Because a transfer to an irrevocable trust is, well, irrevocable, its assets are no longer owned by the grantor. Thus, if the grantor incurs a legal liability or owes money to a creditor, those assets can’t be used to satisfy the debt any more than, say, the assets of the grantor’s neighbor.

And second, while a revocable trust allows the assets therein to avoid probate, they are still formally a part of your estate and thus incur estate taxes. Again, just for the sake of comparison, because the assets in an irrevocable trust are no longer yours, they neither go through the probate process nor are they subject to estate taxes.

The net result is this: If you’re simply looking for a legal device that will assist your estate-planning process without affording any immediate benefits or protection, then a revocable trust may be the way to go. This is particularly true if you want the flexibility offered by the power to revoke the legal entity. But if you also want to protect your assets while you’re still alive, and you don’t mind relinquishing the right to later change your mind and undo the transfer, then the best course may be an irrevocable trust instead.

I Own a Business…. Now What?

I Own a Business…. Now What?

Financial planning for entrepreneurs/business owners is a bit different than planning for all of us who get paid by an employer. When you own your own business there is no retirement plan already set up for you that you just get to stash money away into. So if you’re an entrepreneur – this one is for you!

Savings options for the self-employed:

  • Self-directed 401(k)
    • You can open one with almost any investment bank and it works the same way as a regular one except you choose all your investment options and you’re the trustee for your own account. It’s important to create a good, well-diversified investment portfolio for yourself. This is a solid choice for business owners and their spouses who are able to set aside a significant portion of their earnings. With a solo 401(k), as an employee, you can stash away as much as $18,500 (for 2018). As the employer, you can contribute another 25% of compensation, up to a ceiling of $55,000 for 2018, including your employee contribution. If you’re 50 or older, you can toss in another $6,000 extra. Total savings: a whopping $61,000.

 

  • SEP IRA (Simplified Employee Pension Individual Retirement Account)
    • Simplified employee pension. You set this up for yourself and it’s great if you have a few employees too, as you can help them out a bit. You set up the plan with your investment bank and then you have your own account, which you can manage exactly like any other IRA account. The maximum contribution cannot exceed the lessor of 25% of total compensation or $55,000 for 2018. Compensation up to $270,000 in 2017 of an employee’s compensation may be considered. Contributions are pre-tax so this is a really easy way to save for retirement if you’re a one man show.
    • Bonus: you don’t have to fund the account until you file your tax return.

 

  • Defined Benefit Plan
    • These cost a couple grand to set up usually but are SO worth it to reduce income especially as you get older. A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. Of course, if you’re setting this up for your self and you’re the only employee, it works wonders to reduce your income and help you save money for retirement, since you can set up all the rules. This is great for retirement planning and for tax planning.

 

  • SIMPLE IRA
    • A.K.A. a savings incentive match plan for employees. A SIMPLE IRA is designed specifically for small businesses and self-employed individuals. If you have a few employees, say, less than 10, who make more than $5,000, but far from six figures, and want to offer a plan for them as a perk, this is probably the one for you. It was designed for firms with no more than 100 employees.
    • This one isn’t for moonlighters–you can’t contribute if you’ve already maxed out employee contributions to a 401(k) at your day job. Also, if you need to make a withdrawal from a SIMPLE IRA plan within two years of its inception, the 25% penalty is significantly higher than the 10% fee you’d be charged for early withdrawal from a SEP IRA.

Those are the basic ways you can save for retirement. I would generally advise seeking the council of a financial planner to help set all of these up. How you actually retire and leave the business is much trickier than saving for retirement.