Tax avoidance strategies?
now...@noplace.com
accounts. At the same time our deductions are getting smaller due to lower
mortgage interest, although increases in property and state income tax are
compensating somewhat. I'm not sure what my options are at this point.
Annuities have some advantages with taxes but I know they can carry heavy
expenses. I suppose the Roth 401k holds some promise, but I don't know if
either of our employers will offer it. Nothing has been mentioned for 2006.
Aside from tax efficient and tax exempt funds, is there anything else I
should be considering?
Thanks.
Elizabeth Richardson
<now...@noplace.com> wrote in message news:107kf.1168$xg1.12@trnddc03...
> My wife and I are maxing out on the tax advantages of our 401k and Roth
IRA
> accounts. At the same time our deductions are getting smaller due to
lower
> mortgage interest, although increases in property and state income tax are
> compensating somewhat. I'm not sure what my options are at this point.
Re: mortgage interest. Interest is 100% going to the bank against 30% going
for taxes. I would pay off the mortgage to save money. Don't let the tax
tail wag the dog.
Elizabeth Richardson
BreadW...@fractious.net
> Re: mortgage interest. Interest is 100% going to the bank against 30% going
> for taxes. I would pay off the mortgage to save money. Don't let the tax
> tail wag the dog.
That's not much of an argument against mortgage interest -
you have to look not at the bank's cut but, rather, the
return on your capital. If you pay off your mortgage,
the money you use to do so is no longer invested in, say,
stocks. So the question isn't "is the bank making money?"
but, rather, will my return on the capital be higher
inasmuch as I'll avoid paying that interest? or will it by
higher because some other use of the money earned me more?
(and, of course, taking into account one's time horizon
and risk tolerance).
Given how much our earlier poster is already cranking
away into 401k, etc, it sounds clearly like he's looking
for long term higher returns on his assets. If he's got
a reasonably low interest rate on his mortgage (as do
most folks who bought or refinanced in the last couple
of years), he may do quite a bit better in the long run
by investing and diversifiying his investments in other
ways besides paying off the house.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
Matt
> mortgage interest, although increases in property and state income tax are
> compensating somewhat. I'm not sure what my options are at this point.
If your sole objective is to reduce taxes, you can achieve that by
contributing a large sum to charity.
You could also mail me a check for $10,000, and I will be glad to send
you a $3,000 "tax refund" in the mail.
Sorry, couldn't resist. It is rather amusing that you find increases in
property and state income taxes to be a good thing.
How above focusing on "net worth increase strategies" rather than "tax
avoidance strategies"?
jIM
would you rather have an income problem or a tax problem?
I applaud how much you are saving in 401k and Roth IRA. Some thoughts-
Roth 401k would increase your tax bill relative to traditional 401k.
T401k is pre-tax contributions, taxable withdraws at tax rate at time
of withdraw, R401k puts money in post tax (but qualified withdraws are
tax free).
If you want more risk, with more tax deductions, I might suggest
looking into seeing is owning a small business will give you any write
offs. If the risk rewards you, you have more income and a further tax
issue.
If you want less risk, more tax deductions, move into a bigger house,
higher mortage payment, more interest deduction.
I didn't say the two above things are GOOD ideas, but they are ideas.
other ideas might include selling investments at a loss. If you have
no investments in a taxable account, consider buying some equities each
year, and selling off the losers for a tax writeoff.
of course this implies you can choose securities with some confidence,
and the ones you fail at give you the writeoff.
slightly better idea (invest and sell if investment loses money), but
maybe not what you were looking for.
Elizabeth Richardson
<BreadW...@fractious.net> wrote in message
>
> That's not much of an argument against mortgage interest -
> you have to look not at the bank's cut but, rather, the
> return on your capital. If you pay off your mortgage,
> the money you use to do so is no longer invested in, say,
> stocks.
I don't think this fellow was going to use money already invested to pay off
the mortgage. But he was looking at mortgage interest as a tax deduction. I
think putting extra cash toward paying off the mortgage, and thus the
interest, then taking the standard deduction is better. As one who owns her
house free and clear, I can tell you the discretionary income derived from
NOT paying a mortgage is a good deal.
Elizabeth Richardson
HW "Skip" Weldon
<eric...@worldnet.att.net> wrote:
> As one who owns her
>house free and clear, I can tell you the discretionary income derived from
>NOT paying a mortgage is a good deal.
I agree. Further, the fact that the OP can save for retirement does
not mean he is saving enough. Also unsaid was whether he was
preparing for other necessary things - emergencies, his next car(s),
children's education, next vacation, future home repairs/improvements,
etc.
With rare exception I find that those saddled with mortgage payments
are being squeezed somewhere.
Another way to say this is that those who are not living within their
means (debt is evidence that they are not) will not realize consistent
progress until they begin to live within their means.
-HW "Skip" Weldon
Columbia, SC
now...@noplace.com
wasn't really the question. But in that line of thinking, if I maintain the
status quo with regular payments the mortgage will be paid off late next
year. The interest the "payoff money" is earning is about half the rate of
what I'm paying on the mortgage. I don't think the tax break will
compensate for that. The mortgage rate is relatively high (7.3%). I didn't
refinance because of the approaching payoff date. Not enough time to recoup
the closing costs. The potential payoff money is in a very conservative
vehicle because it was earmarked for a childs tuition, but fortunately won't
be needed for that. I could invest the money rather than paying off the
mortgage but I like the idea of using the amount previously used for monthly
payments, to invest via dollar-cost-averaging rather than at a single point
in time.
Increasing net worth is the overriding goal. Managing taxes is just one
aspect of the plan. Living well within our means is another. Although we
could upgrade, we drive basic transpiration vehicles, maintain them well and
drive them for 12-15 years on average. We have a very nice home but it's
not a McMansion. Why heat and cool more square footage (and pollute through
excessive energy consumption) than you need to live comfortably.
The basic purpose of the original post was to see if I'm overlooking
something obvious in the tax avoidance department. Thanks for the
thoughtful replies! This is a good group and I hope I can offer some useful
advice one of these days instead of just seeking it.
Matt....thanks for the offer but I think I'll pass on the contribution to
the "Matt Fund". ;-)
The OP
<now...@noplace.com> wrote in message news:107kf.1168$xg1.12@trnddc03...
Will Trice
HW \"Skip\" Weldon wrote:
> Another way to say this is that those who are not living within their
> means (debt is evidence that they are not) will not realize consistent
> progress until they begin to live within their means.
So you're saying that everyone should purchase a home (if they want to
purchase a home) with cash? Otherwise they are not living within their
means?
HW "Skip" Weldon
It depends. Keep in mind we're speaking generally here. When we deal
with a specific person where financials are known, solutions vary.
But generally, young people just starting out can't afford to pay cash
for a house, car, etc. Debt for them is necessary and acceptable with
one important caveat - I would want them to have a mortgage payment
(based on fixed rates) low enough so that they could do other
necessary things such as arranging an emergency fund, saving for
retirement, the next car, children's education, accelerating mortgage,
etc. In situations where the size of the size of the mortgage payment
interfered with doing other necessary things, I would be concerned.
Other debts popping up during this period (credit cards, etc.) would
be a signal that what they were doing was not working.
But after the onset of early mid-career (upper 30s but it varies) I am
less receptive to debt for any reason. Exceptions to this do occur
(divorce, death of a spouse/child, etc.), but in general I would want
them to be living (and saving) within their incomes.
$cott
deductability through the use of your home/mortgage, a suggestion in
this vain is as follows:
a. Seperate your equity from your home and take out a new 1st lien
mortgage (the amount is based upon your repayment ability and comfort
level). To increase mortgage deductability consider using a interest
only or deferred interest loan type.
b. Invest the money derived from seperating your equity from your home
into the investment vehicle of your choice.
Ultimately, any suggestion you might receive must be justified by doing
the math and I (nor anyone else responding to this thread) can
accurately advise you due to the lack of information provided.
Good luck.
Regards,
Scott Miller
Commercial and Real Estate Banker/Broker
"I've got money, want some?"
Paul Michael Brown
original poster is that the stage in life where most people increase the
fixed income holdings. The interest on munibonds is always exempt from
federal taxes and may be exempt from state taxes if the bond is issued in
his home state. (Yes, I'm aware that some munibond interest is subject to
the AMT. So if the OP is in AMT-Land, he should be aware of that.)
I would suggest that original poster educate himself regarding municipal
bonds. I like the site that Nuveen maintains, but there are dozens of
others. He needs to understand to the calculate the after-tax return on
munibonds, and basic concepts like maturity and duration.
If he's a high net worth guy, he could probably buy individual bonds. But
the average investor would probably be better off in a munibond fund.
Vanguard has several with low fees. If you wanna get exotic, there are
closed end munibond funds that are exchange-traded. But some of them use
leverage, which increases the volatility of their shares prices. If you
get comfortable with fixed income investing, these funds can have a place
in your portfolio. Otherwise, I'd stick to open end funds like Vanguard
(and many others) offer.
Don
news:1133861020....@g14g2000cwa.googlegroups.com...
> It sounds like you motivated to maintain or increase your tax
> deductability through the use of your home/mortgage, a suggestion in
> this vain is as follows:
>
> a. Seperate your equity from your home and take out a new 1st lien
> mortgage (the amount is based upon your repayment ability and comfort
> level). To increase mortgage deductability consider using a interest
> only or deferred interest loan type.
> b. Invest the money derived from seperating your equity from your home
> into the investment vehicle of your choice.
It seems to me that this strategy is extremely risky, especially for
seniors. It makes assumptions about what the future will bring. What happens
if the interest rate on the home mortgage shoots up in years to come? What
happens if the real estate bubble bursts and the equity in the home
declines? But the biggest risk of all, as I see it, is that the alternative
product into which the loan money is invested will not pan out. This problem
is especially serious for vulnerable seniors who might be mislead into
purchasing inappropriate financial products by sales people. I have seen it
happen in the area where I live. What if the hot mutual fund you buy with
the money from your home equity stops paying out but you still have to make
big payments on the home mortgage? Hint: You lose the house.
Ed
Just stopped by to see if you were still alive. Miss your one-liners.
Best to you and yours this Holiday Season.
$cott
comments that he was still in his earning years. If the gentlemen is a
senior, then I would agree that more risk averse actions would be
appropriate.
Growing one's net worth has a modicum of risk attached (unless he is
15, and he has the value of time and compound interest working on his
behalf), no different then what he appears to be willing to assume
currently. What happens if the interest rates rise? Answer: He
benefits from increased tax benefits associated with mortgage interest
deduction. There are interest only loan programs that span from 3-10
years in a fixed state, and I would argue that 7-10 years is sufficient
protection/time in order to endure a real estate cycle. WORST CASE:
Refinance. What happens if the real estate bubble bursts and the
equity declines? Answer: Offset losses at point of sale; capital
gains reduction. Historically speaking, real estate has only been
blemished by one crash (The Great Depression; corrections of the 20th
Century can be attributed to rampant inflation and if you follow the
Fed's sensitivity to inflation, the large correctional enviroment of
the past is not likely to repeat itself) and if one weighs the power of
leverage and tax advantages, real estate has consistently outperformed
the S&P500. Viewing real estate from a supply and demand economics
viewpoint, real estate will continue to be a investment with a positive
return because, 1) Limited supply; The Almighty doesn't make anymore
land. 2) Strong demand; this will be case for as long as our society
continues to procreate and reproduce and our country continues to allow
liberal immigration. Despite popular belief, home equity is a
"sleeping" asset that only has percieved value. Home equity is only
quantifiable when one either sells it out or cashes it out. Depending
on the investment choice, the gains in the seperated equity in a side
account could outweigh the losses associated with a market correction.
I orginally made no recommendations on how to invest the seperated
equity (because I didn't want to over "plug" real estate and my
services), but will do so now. I currently teach high net worth
individuals/high equity property owners how to safely get an annual
return of 8-11% by becoming a private lender (The investment is secured
by a first lien position on a real estate property) by offering
interest only loans (amortized on a 30 year schedule) that have a
balloon payment due/surrender time of 6-18 months. It's not sexy, but
it works and the returns are predictable, protected and consistent.
My advice to seniors that want to increase cash flow/net worth?
Predictably, I recommend reverse mortgages overseen by HUD (Housing
Urban Development; Government Entity) so that they can benefit from
their paper appreciation (home equity) will alive rather then becoming
rich after they pass on (and pass on sizeable inheritance liabilities
to their benefactors).
When properly executed, leveraged and managed, real estate is the only
investment that one can derive some sort of benefit during the purchase
process, ownership years and finally the point of sale.
That's my story, and I am sticking to it.
Regards,
Scott Miller
Commercial and Real Estate Banker/Broker
"I've got money, want some?"
Don
> My suggestion was not age specific, and I had assumed by the poster's
> comments that he was still in his earning years. If the gentlemen is a
> senior, then I would agree that more risk averse actions would be
> appropriate.
But not actions involving taking out a mortgage on the home and investing in
something risky , I assume you would agree. As for younger investors, you
could argue all day that there exists some special, unknown-to-most-people
product by which risk-free high yield can be achieved in a time of low
rates, but I wouldn't believe it. I take it as a law of nature, like the law
of gravity, that high yield means high risk, and I stubbornly refuse to
believe otherwise. The real problem comes to light in the last two
paragraphs of your post. Once the money is taken from home equity, how is it
to be invested? To make any sense, you have to get a return that is
substantially above the loan interest (and closing costs), and that is not
easy. Your alternate real estate "private lender" plan is a new one to me.
Where I live, the more familiar recommendation made by sales people is to
use the money from the home equity loan to invest in mutual funds or income
trusts, and the results are often disastrous. Your reverse mortage
recommendation for seniors, would not be popular among the heirs. If I used
that plan, my heirs would be so upset they probably wouldn't show up for
Christmas.
BreadW...@fractious.net
> trusts, and the results are often disastrous. Your reverse mortage
> recommendation for seniors, would not be popular among the heirs. If
> I used that plan, my heirs would be so upset they probably wouldn't
> show up for Christmas.
Presumably, you're kidding.
Would those future heirs be similarly put out if you
spent down your savings? If you use some (or all) of
your savings to buy immediate annuities so that you
could live off that capital for the rest of your life?
Just checking...
Don
<BreadW...@fractious.net> wrote in message
news:yob4q5e...@panix2.panix.com...
> Presumably, you're kidding.
>
> Would those future heirs be similarly put out if you
> spent down your savings? If you use some (or all) of
> your savings to buy immediate annuities so that you
> could live off that capital for the rest of your life?
No, not really kidding. I have always believed that it is possible to invest
sensibly and build up enough to be comfortable in retirement, and still pass
on something, the family home at the very least, to the next generation.
Whosoever disagrees should look inward at what their own reaction might be
after learning that their supposed inheritance had all been spent.
Tess Millay
> I have always believed that it is possible to invest
> sensibly and build up enough to be comfortable in
retirement, and still pass
> on something, the family home at the very least, to the
next generation.
> Whosoever disagrees should look inward at what their own
reaction might be
> after learning that their supposed inheritance had all
been spent.
I think the key is to avoid "supposing"; presume there will
be no inheritance; and raise kids to do the same. After all,
isn't there more joy--a greater sense of self-worth--to be
had by making one's own way?
Now, that's just myself and my family and maybe some others.
For families whose thriving (on several levels) depends in
large part on an income from a certain amount of "family
principal," maybe the "rules" are and should be different.
now...@noplace.com
my current home, unless I use a home equity loan to finance the purchase of
another property. I might be interested in an investment property,
especially one that could double as a vacation home and/or eventually be our
full-time home in retirement.
"$cott" <ezmortg...@aol.com> wrote in message
news:1133861020....@g14g2000cwa.googlegroups.com...
Don
news:8dnnf.3108$nm....@newsread2.news.atl.earthlink.net...
>
> I think the key is to avoid "supposing"; presume there will
> be no inheritance; and raise kids to do the same. After all,
> isn't there more joy--a greater sense of self-worth--to be
> had by making one's own way?
>
> Now, that's just myself and my family and maybe some others.
> For families whose thriving (on several levels) depends in
> large part on an income from a certain amount of "family
> principal," maybe the "rules" are and should be different.
To me a reasonable goal is to build enough capital so that the income from
it will allow a comfortable retirement. The problem is to make it generate
income as long as you live. Spending the capital or investing it in risky
schemes is not the way to go. You will run out too soon! If you "make your
own way," as you put it, in the first place, you should accumulate enough so
that risky ventures are not needed. What happens tothe money eventually? You
pass it on to the next generation, of course.
$cott
Don,
My opinions are still consistent with my last post, and I will expand
further based upon your comments. Although private lending might be
new to you, it has been in practice for centuries (how do you think we
got money before banks?) and as a mortgage lender, I am simply teaching
people to use their money as a bank would (I know how the bank makes
money and advise my clients on mirroring the same business practices so
that they can achieve the same results as a bank).
To further illustrate my opinion, I will cite the following simple
example (I am using 100K as an example so that you and others can use
this as a reference and round up or down as required to fit your
particular situation):
- You take a 2nd mortgage (not a heloc as it is pegged to the Prime,
which has been in an uptrend for the last 12 FED sessions, due to be
13) for 100K at a 30 year fixed rate of 6.5% (realistic and achievable
for someone with a good credit score, etc.) for a monthly principal and
interest payment of 632.07.
- You lend the 100K for 12 months at an interest rate of 8.5% on an
fixed rate basis amortized on a 30 year schedule with a balloon payment
due in 12 months.
- This is how it would shape up:
* Total monthly principal and interest payment for the term of the
loan due from the private funds borrower would be 768.91.
* Total interest paid in 12 months for borrowing private funds is
8470.99
* Total principal paid in 12 months is 755.93
* Balloon payment due in 12 months is 99,244.07
This simple example yielded an annual return in excess of 8.47% (after
paying the bank back for the 2nd mortgage, if you don't want to do it
again),which is in line with my original claims.
Again the investment is secured by the property in a 1st lien position,
and if the borrower defaults, you take possession of the home through
foreclosure proceedings (just like a bank would do to you if your were
the deliquent borrower). My private lending program further insures my
investors by requiring a max LTV (loan to value; the amount of the loan
vs. the appraised value of the property) of 70-75 which is a stricter
guideline then what the FED requires from its gov. entities (Ginnie
Mae, Freddie Mac, etc.). Having this buffer ensures that the losses
due to foreclosure are minimized if not eliminated.
Is private lending risk proof? No, nothing is.....It is in my opinion
though that this is the closest to Eden one can get with the least
amount of risk taken. Essentially, I offer to teach you how to think
like a bank, handle your money like a bank would, and administer the
transaction by the same or more stringent guidelines they would
prescribe to with the watchful eye of a financial professional (that's
me, I think). I am sure that you would agree with me that a majority
of the skyscrapers in our fine cities across this country are occupied
by either banks or insurance companies; why? Because they are in the
business of earning a great profit from our depository accounts/assets.
A bank simple pays you a percent or two to open a savings account and
lends your money out the "back door" at 6-8% in the form of a credit
card, car loan or mortgage. The spread (the difference between the
cost of money [what interest rate they pay us] and the cost of
servicing the loan is the profit realized)
We part company on our opinions on reverse mortgages and retirement
planning as well, but in the end, if whatever you do works for you,
then god bless and keep on keeping on. I tend to lean towards the
other poster and think that quality of life in our golden years takes
precendence over our heirs' future interest in your estate. I view
(and have taught my children the same) inheritance as a gift not to be
expected or relied on, and that self sufficiency/reliance should be our
optimum goal. That being said, it is a noble gesture on your part and
I applaud your sacrifice and willingness to do without (or do without
more) for the sake of your children. There are tax arguments that
support the use of reverse mortgages in estate planning, and if you
haven't already, I suggest you consult with a CPA or estate planner
before taking such a steadfast position. You might find after you
spend a few hundred bucks that your plan is either in line with your
expectations/retirement goals or there are opportunities for meaningful
gain/preservation of estate worth that can be accomplished by making
minor tweaks to your approach.
Tess Millay
> "Tess Millay" <elle_n...@earthlink.net> wrote
> > I think the key is to avoid "supposing"; presume there
will
> > be no inheritance; and raise kids to do the same. After
all,
> > isn't there more joy--a greater sense of self-worth--to
be
> > had by making one's own way?
> >
> > Now, that's just myself and my family and maybe some
others.
> > For families whose thriving (on several levels) depends
in
> > large part on an income from a certain amount of "family
> > principal," maybe the "rules" are and should be
different.
>
> To me a reasonable goal is to build enough capital so that
the income from
> it will allow a comfortable retirement.
Sure, for you. But others, less fortunate and as they hit
70, may very well have to draw down on principal.
> The problem is to make it generate
> income as long as you live. Spending the capital or
investing it in risky
> schemes is not the way to go. You will run out too soon!
If you "make your
> own way," as you put it, in the first place, you should
accumulate enough so
> that risky ventures are not needed.
I think we're not on the same page. I think people who make
their own way tend not to be gamblers. Those who bet on
receiving an inheritance are.
Also, even those who "make their own way" may have to draw
down on principal.
So I don't know exactly what you mean by "risky ventures,"
but someone making their own way should be smart enough to
allocate and diversify so that risk is low.
> What happens tothe money eventually? You
> pass it on to the next generation, of course.
Sure, barring obscene health care costs in very old age. But
that's a huge unknown. Hopefully you know or knew someone
well who was "well to do" but lived so long that s/he had to
start dipping /heavily/ into principal and, in fact, within
ten years would have been looking at welfare.
Then there's little factoids like stepmothers and
stepfathers who are much younger than their spouses. They
live longer. AFAIC, they're entitled to every last cent of
their deceased spouse. But that means the "kids" may see a
significantly reduced inheritance. A small price for one's
parent's happiness being remarried, AFAIC.
Don
> Sure, for you. But others, less fortunate and as they hit
> 70, may very well have to draw down on principal.
> I think we're not on the same page. I think people who make
> their own way tend not to be gamblers. Those who bet on
> receiving an inheritance are.
>
> Also, even those who "make their own way" may have to draw
> down on principal.
>
> So I don't know exactly what you mean by "risky ventures,"
> but someone making their own way should be smart enough to
> allocate and diversify so that risk is low.
I agree with most of what you are saying, and I do not believe anyone should
bet on receiving an inheritance. And indeed many families are not well off
enough to either give or receive inheritances. Nevertheless, I still reject
the notion that seniors should take out reverse mortgages, or buy annuities
or hot performing mutual funds with home equity, or invest money in
little-known-to-most products that appear to contradict the time-tested
principle that high risk accompanies high yield. These things are more
dangerous than counting on an inheritance. And, unfortunately, many people
who "make their own way" and are sensible during their earning years go
haywire after retirement and get taken by all sorts of scams (and sometimes
also get taken by those younger stepmothers and stepfathers to which you
refer).
Douglas Johnson
>Whosoever disagrees should look inward at what their own reaction might be
>after learning that their supposed inheritance had all been spent.
My parents are having a grand time spending my inheritance with applause from
my siblings and me. My parents owe me *nothing*. The debt goes the other way.
Let's see: 21 years of support, college tuition, plus 40 years of interest. I
hope they don't send a bill.
My children know of my intent to spend my last nickel with my last breath. (The
timing is tricky, I know).
Seriously, I know different families have different approaches to this. I
certainly respect those that wish to leave something to their children. But I
have real trouble understanding how children feel entitled to an inheritance.
Whosoever disagrees should look inward to make sure they have repaid their debt
to their parents.
-- Doug
Douglas Johnson
> What happens if the interest rates rise? Answer: He
>benefits from increased tax benefits associated with mortgage interest
>deduction.
Which isn't really a benefit, but a reduction in pain.
>There are interest only loan programs that span from 3-10
>years in a fixed state, and I would argue that 7-10 years is sufficient
>protection/time in order to endure a real estate cycle.
Not in Texas from the 80's crash. It was more like 15 years to even.
>WORST CASE:
>Refinance. What happens if the real estate bubble bursts and the
>equity declines? Answer: Offset losses at point of sale; capital
>gains reduction.
Again a reduction in pain, not a benefit.
> Historically speaking, real estate has only been
>blemished by one crash (The Great Depression; corrections of the 20th
>Century can be attributed to rampant inflation and if you follow the
>Fed's sensitivity to inflation, the large correctional enviroment of
>the past is not likely to repeat itself)
The Texas crash was only partially driven by inflation. Most of the run up was
fueled by sweet tax advantages, killed by the '83 and '84 tax reforms and loose
money, killed by the Savings and Loan crisis. It also looks like we are
warming up for a nasty bust on the coasts:
http://www.boston.com/business/articles/2005/12/09/sellers_chop_asking_prices_as_housing_market_slows/?p1=MEWell_Pos1
> and if one weighs the power of
>leverage and tax advantages, real estate has consistently outperformed
>the S&P500.
Do you have a citation for this?
>interest only loans (amortized on a 30 year schedule)
How does an interest only loan amortize?
-- Doug
Don
> Don,
>
> My opinions are still consistent with my last post, and I will expand
> further based upon your comments. Although private lending might be
> new to you, it has been in practice for centuries (how do you think we
> got money before banks?) and as a mortgage lender, I am simply teaching
> people to use their money as a bank would (I know how the bank makes
> money and advise my clients on mirroring the same business practices so
> that they can achieve the same results as a bank).
$cott, your detailed plan works out on paper but involves assumptions. These
assumptions perhaps seem reasonable when considered one by one, but it is
not certain that all of them would occur together at the same time and make
the plan work in practice. I can remember back in 1998 or so, when the stock
market was rising with no end in sight (but bank interest rates were low),
sales people around here were putting forth similar detailed plans of how
people needing income could get ahead. The arithmetic, like yours, looked
fine. The advice was to take out a home equity loan and then invest the
money in some of those ever-upward-rising mutual funds (which coincidentally
happened to have hefty front-end loads and management fees). It was expected
that the gain from the stocks would exceed the interest paid on the home
equity loan. Many unfortunate seniors studied the arithmetic and couldn't
find anything wrong and said "Why not?" Well, it so happened that the one
big assumption, which for some strange reason nobody talked about very much,
was that the stock market would continue its upward movement forever. As it
happened the market crashed a couple of years later and a lot of people
around here got burned. So much for assumptions. What's more, I believe
that, even if the market had not crashed, many of those hot mutual funds
sales people were pushing would have failed anyway.
Tess Millay
snip
> My parents are having a grand time spending my inheritance
with applause from
> my siblings and me. My parents owe me *nothing*. The
debt goes the other way.
> Let's see: 21 years of support, college tuition, plus 40
years of interest. I
> hope they don't send a bill.
As I am sure others are, I am reminded of the scene from
1967's "Guess Who's Coming to Dinner." Paraphrased by
someone on the internet:
---
A father is very angry with his adult son. The father says,
"Son, I carried that mailbag for 40 years so you could go to
college and to medical school. You /owe/ me for that... "
[Father goes on and on for awhile]
The son finally responds: "Now you listen to me. You say you
don't want to tell me how to live my life? What do you think
you've been doing? You teIl me what rights I've got or
haven't got... and what I owe to you for what you've done
for me. Let me tell you something. I owe you nothing, Dad.
If you carried that mailbag a million miles, then you did
what you were supposed to do. Because you brought me into
this world, and from that day you owed me everything you
couId ever do for me, like I will owe my son... "
---
This is not to say that I think parents should leave their
kids an inheritance. Rather, to me it's saying parents
should not expect their kids to be some kind of servant to
them, even in old age.
> My children know of my intent to spend my last nickel with
my last breath. (The
> timing is tricky, I know).
You're funny. :-)
snip for brevity
> Whosoever disagrees should look inward to make sure they
have repaid their debt
> to their parents.
I try to keep in mind the many children whose parents were
either alcoholics, spendthrifts, abusive, or negligent in
some other way. In these cases, I would say there is no debt
from child to parent. Indeed, if the kid turns out to be a
reasonably good citizen, the parent has come out far ahead
and got back way more than s/he invested.
Don
news:98ltp156mvbcfcvk2...@4ax.com...
> My parents are having a grand time spending my inheritance with applause
> from
> my siblings and me. My parents owe me *nothing*. The debt goes the other
> way.
> Let's see: 21 years of support, college tuition, plus 40 years of
> interest. I
> hope they don't send a bill.
I agree completely, and comfortable retirement should come first, before any
question of inheritance. But I would hate it if my parents threw away money
on harebrained schemes, as I would hate myself for doing the same. I think
many parents badly want their children to enjoy a life style equal to or
better than their own, and passing on a nest egg to give them a head start
is one way to make it happen.
Tess Millay
> But I would hate it if my parents threw away money
> on harebrained schemes,
Now I see where you're driving. "Family money" blown on poor
causes/investments. That happened with a certain relative of
mine not long ago, one who is mentally impaired, but not
enough for legal guardianship to be appointed. It was a
tough one to swallow. The rest of us realized there was
nothing we could do, other than watch and stay available to
give counsel, if asked. Though for my own peace of mind,
after this episode I did change my estate planning.
Douglas Johnson
>
>- You take a 2nd mortgage [...] 100K at a 30 year fixed rate of 6.5%
What are the fees associated with this? Appraisal? Loan origination? Title
search/insurance? What else?
>
>- You lend the 100K for 12 months at an interest rate of 8.5% on an
>fixed rate basis amortized on a 30 year schedule with a balloon payment
>due in 12 months.
I assume this is a sub-prime loan, right? Otherwise, they'd be at the same bank
I got my 6.5%.
>This simple example yielded an annual return in excess of 8.47%
It looks like an annual return of 2% (8.5% -6.5%) before fees to me. Could you
explain your arithmetic?
>Having this buffer ensures that the losses
>due to foreclosure are minimized if not eliminated.
How much does a foreclosure cost? How long does it take? How do you insure
against the house being used as a meth lab and turned into a toxic waste site?
> Essentially, I offer to teach you how to think
>like a bank, handle your money like a bank would,
Do you teach me how to diversify my risks over a large number of these loans
like the bank does? Do you get me the capital to do so?
What am I missing here? This example seems to put $100,000 and my home at risk
for $2,000 net.
Thanks,
Doug
$cott
The only assumption or area of speculation private lending must contend
with is the quality of the borrower (will they or will they not
default) which is buffered to a certain extent by, 1) The right to
foreclose; 2) Requiring a higher equity vs debt ratio then traditional
lending guidelines require so that the equity can buffer losses in the
event of foreclosure. The money borrowed and lent is done so in a
fixed enviroment and not effected by market changes once the contract
is enacted. Borrowing money at X and lending it out at X + Y isn't the
same as investing X and hoping for X + Y. Wouldn't you agree?
Regards,
Scott Miller
Commercial and Real Estate Lender/Broker
"I have money, want some?"
$cott
What are the fees associated with this? Appraisal? Loan origination?
Title
search/insurance? What else?
RESPONSE: Yes there are fees associated with this and can be offset in
a number of ways. Fees associated with seperating your equity are
highly dependent on the lender and the loan program selected.
>- You lend the 100K for 12 months at an interest rate of 8.5% on an
>fixed rate basis amortized on a 30 year schedule with a balloon payment
>due in 12 months.
I assume this is a sub-prime loan, right? Otherwise, they'd be at the
same bank
I got my 6.5%.
RESPONSE: Your statements are only partially correct. Yes, sub-prime
borrowers could be one target for lending at these rates, but there are
other reasons other then poor credit that would necessitate borrowing
at this level. One such exception is a borrower that is earning the
same money (and qualifies for a loan on income standards), but has
changed industries. Most lending institutions will only consider this
individual a prime (A credit) lender after he has been on the job for
at least 2 years. This is only one example, but suffice to say that
there are several circumstances in which "good" borrowers would not
qualify for prime (A credit) lending and would be required to consider
other means of financing.
>This simple example yielded an annual return in excess of 8.47%
It looks like an annual return of 2% (8.5% -6.5%) before fees to me.
Could you
explain your arithmetic?
RESPONSE: My math can be explained by using a financial calculator; my
simple example didn't include additional costs for borrowing; can you
explain how you derived at 6.5% of the transactional costs being
lending fees? If you are going to state that this is what you have
historically seen on a personal level, my only suggestion is to find
another lender. Lender fees are controlled in part by the lender
itself (with the exception of services rendered by third parties like
appraisers, attorneys, etc.) and the total cost of borrowing can be
reduced by working with the right lender who is not driven to increase
margins through the use of junk fees. My private lender arrangement
includes provisions that allow my clients to access their equity (using
me as the lender) with loans with near wholesale interest rates and no
junk fees. The end result? The cost of borrowing money is offset by
the discounted interest rate provided and the reduction of lender fees
associated with the borrowing from your equity.
>Having this buffer ensures that the losses
>due to foreclosure are minimized if not eliminated.
How much does a foreclosure cost? How long does it take? How do you
insure
against the house being used as a meth lab and turned into a toxic
waste site?
RESPONSE: Yes a foreclosure requires money and time, but in my example
(only lending up to 70-75% of the appraised value) you are alotted
25K-30K before you put it in the "loss" column. Meth labs and toxic
waste sites; possible sure, possible argument for not considering
private lending, not really.
> Essentially, I offer to teach you how to think
>like a bank, handle your money like a bank would,
Do you teach me how to diversify my risks over a large number of these
loans
like the bank does? Do you get me the capital to do so?
RESPONSE: I have already covered risk aversion, and don't think I need
to cover it again. Banks get their loan funds by offering depository
accounts, you get your loan funds from your equity. So to answer your
question, yes on both accounts.
What am I missing here? This example seems to put $100,000 and my home
at risk
for $2,000 net.
RESPONSE: Nothing is missing assuming that you borrow 100K from a
lender that wants to charge 6500 in lending fees, the borrower has a
chemistry set for bad boys, and foreclosure proceedings cost in excess
of the equity in reserve, only to find out the property in which you
lent money on is a toxic waste dump. Assuming that this doesn't happen
everyday or in every loan situation I present to my private lenders (do
you think the law of averages might favor my argument; do you think
that your argument is based in part on the extreme fringes of the "what
could be"?), your 100K is secured by equity and 1st lien position and
your home is only at risk if you can't pay your bills.
Douglas Johnson
>>- You take a 2nd mortgage [...] 100K at a 30 year fixed rate of 6.5%
>RESPONSE: Yes there are fees associated
>>- You lend the 100K for 12 months at an interest rate of 8.5%
>>This simple example yielded an annual return in excess of 8.47%
>
>
>It looks like an annual return of 2% (8.5% -6.5%) before fees to me.
>RESPONSE: My math can be explained by using a financial calculator; my
>simple example didn't include additional costs for borrowing; can you
>explain how you derived at 6.5% of the transactional costs being
>lending fees?
My math ignores fees as well. I borrow at 6.5%, lend at 8.5% and thus net a 2%
annual return, or $2,000 in this example. Fees will reduce this. Of course, if
I make another loan next year, I can amortize the fees over the later loan(s).
>RESPONSE: Assuming that this doesn't happen
>everyday or in every loan situation I present to my private lenders (do
>you think the law of averages might favor my argument; do you think
>that your argument is based in part on the extreme fringes of the "what
>could be"?), your 100K is secured by equity and 1st lien position and
>your home is only at risk if you can't pay your bills.
There are actually two underlying themes to my comments.
1) If I am going to rely on the law of averages, I need to get the law of
averages working for me. That means I need to make lots of loans.
2) If I am going to sleep at night, I need to know the worst case result is
acceptable to me. While the worst case result here is unlikely, it is really
nasty.
-- Doug
$cott
>>This simple example yielded an annual return in excess of 8.47%
>It looks like an annual return of 2% (8.5% -6.5%) before fees to me.
>RESPONSE: My math can be explained by using a financial calculator; my
>simple example didn't include additional costs for borrowing; can you
>explain how you derived at 6.5% of the transactional costs being
>lending fees?
My math ignores fees as well. I borrow at 6.5%, lend at 8.5% and thus
net a 2%
annual return, or $2,000 in this example. Fees will reduce this. Of
course, if
I make another loan next year, I can amortize the fees over the later
loan(s).
RESPONSE: I think you may be confusing margin vs yield. Although the
margin is only 2%, the yield after time and compound interest is in an
excess of 8%. I invite you to check my math personally or I can send
you further proof of my math directly if you would like (I assume I
can't post an attachment to a message on this newsgroup), but it is
accurate. Borrowing 100K at 6.5% and lending 100K at 8.5% will result
in a total of 8470.99 in interest, 755.93 in principal payments and a
balloon payment of 99,244.07 for a total reclaim value of 108470.99.
This results in a positive yield of 8470.99 or 8.47%.
>RESPONSE: Assuming that this doesn't happen
>everyday or in every loan situation I present to my private lenders (do
>you think the law of averages might favor my argument; do you think
>that your argument is based in part on the extreme fringes of the "what
>could be"?), your 100K is secured by equity and 1st lien position and
>your home is only at risk if you can't pay your bills.
There are actually two underlying themes to my comments.
1) If I am going to rely on the law of averages, I need to get the law
of
averages working for me. That means I need to make lots of loans.
RESPONSE: Yes or a low volume of loans to quality borrowers.
2) If I am going to sleep at night, I need to know the worst case
result is
acceptable to me. While the worst case result here is unlikely, it is
really
nasty.
RESPONSE: You have a point, but the worst case in real estate is alot
better then the worst case in some other investment options.
$cott
>benefits from increased tax benefits associated with mortgage interest
>deduction.
Which isn't really a benefit, but a reduction in pain.
RESPONSE: Benefit or reduction in pain is an argument of semantics.
It a means of insulating against total loss and in my book, that's a
benefit.
>There are interest only loan programs that span from 3-10
>years in a fixed state, and I would argue that 7-10 years is sufficient
>protection/time in order to endure a real estate cycle.
Not in Texas from the 80's crash. It was more like 15 years to even.
RESPONSE: Not knowing the specifics of your point, I can neither affirm
or deny.
>WORST CASE:
>Refinance. What happens if the real estate bubble bursts and the
>equity declines? Answer: Offset losses at point of sale; capital
>gains reduction.
Again a reduction in pain, not a benefit.
> Historically speaking, real estate has only been
>blemished by one crash (The Great Depression; corrections of the 20th
>Century can be attributed to rampant inflation and if you follow the
>Fed's sensitivity to inflation, the large correctional enviroment of
>the past is not likely to repeat itself)
The Texas crash was only partially driven by inflation. Most of the
run up was
fueled by sweet tax advantages, killed by the '83 and '84 tax reforms
and loose
money, killed by the Savings and Loan crisis. It also looks like we
are
warming up for a nasty bust on the coasts:
http://www.boston.com/business/articles/2005/12/09/sellers_chop_askin...
RESPONSE: For the sake of brevity, I chose to highlight inflation, but
agree that there were other forces at work that caused the depreciation
trend in the 80s. It is important to note that the government and the
real estate industry in a whole learned from the errors of those days
and various agencies and industry changes were enacted to prevent
repeating the mistakes of the past. Coincidentally, I live outside of
Boston and I am quite familar with the market conditions here. Real
estate appreciation in the last 5-6 years has been driven in great part
by the low interest rate enviroment (the lower the interest rate, the
greater one can borrow or qualify for). As interest rates rise, the
pool of qualified buyers shrinks, demand softens and the inventory of
houses on the market for sale expands. Couple this with seasonal
nature of the real estate industry and the negative sentiment towards
adjustable and interest only loans in a upward interest rate trend and
this leads to price retraction. What the article fails to mention is
that Boston (and other areas currently going through a price retraction
trend) also benefited from the greatest compounded appreciation rates
in the last 5-6 years (I guess the adage the bigger you are, the harder
you fall has some merit here). Boston real estate owners have
benefitted from double digit/multiyear appreciation rates and the
current price retraction is no where a break even when compared to the
lifetime appreciation rate (we are still way ahead of the game; case
and point me; I purchased a 2 BR condo for 168K in 2001 and it was just
appraised for 325K last month. Even with a 20% or more haircut, I am
still ahead of the game in my book (and the tax incentives makes it
even better).
> and if one weighs the power of
>leverage and tax advantages, real estate has consistently outperformed
>the S&P500.
Do you have a citation for this?
RESPONSE: No, and in fact, I can provide you references that oppose my
statements (claim that the stock market has created greater returns
then real estate). What the comparisons fail to give weight to is, 1)
The value of leverage, 2) The value of tax deductability and 3) The
value of using real estate as an inflation hedge. It would take some
time to lay out an complete argument, so I will just choose to
highlight the concept of leverage via a simple example to illustrate
part of my point. Starting with 10K in cash, what would be outcome if
invested at 6% vs. invested in real estate with an appreciation of 6%.
With real estate, one can leverage a large asset (the home) with a
smaller one (the down payment). The value of leverage can be explained
by the following chart:
RETURN ON INVESTMENT
Years 10K in Cash 100K
Property
3 1910
4102
5 3382
18823
10 7908
64085
15 13966
124656
20 22071
205714
30 47435
459349
The above chart assumes a 6% appreciation, 5K downpayment (purchase),
5K (closing costs) and 10K for selling costs, the annual rate of return
based upon owning a 100K property is 22.2%.
Adding tax incentives not afforded to investors in the stock market,
and the math makes a strong argument for real estate.
>interest only loans (amortized on a 30 year schedule)
How does an interest only loan amortize?
RESPONSE: My example was based upon a 18 month balloon loan with a
fixed rate for the term of the loan which is based upon the
amortization schedule of a 30 year fixed loan. Does this answer your
question?
$cott
I decided to research the bust and boom cycles and found something
interesting pertaining to your market (Texas):
- More the one area of Texas suffered from deappreciation cycles
starting from 1985 and lasting until 1992 (The start and end year is
variable based upon region; Fort Worth-Arlington TX was not effective
by a bust cycle).
- The average depreciation cycle time period was no more then 4-5
years.
- The max. depreciation amount was -31% (Midland TX); the min.
depreciaton amount was -17% (San Antonio, TX).
- Fort Worth-Arlington TX benefited from an appreciation cycle starting
in 2003 with a projected appreciation of 37%.
Study was conducted by the FDIC and can be seen at
http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf
Regards,
Scott Miller
Commercial and Residential Real Estate Lender/Broker
"I've got money, want some?"
www.RealEstate-IQ.com
www.EZMortgageLoanz.com
Douglas Johnson
>>
>> >There are interest only loan programs that span from 3-10
>> >years in a fixed state, and I would argue that 7-10 years is sufficient
>> >protection/time in order to endure a real estate cycle.
>>
>> Not in Texas from the 80's crash. It was more like 15 years to even.
>>
>- More the one area of Texas suffered from deappreciation cycles
>starting from 1985 and lasting until 1992
>- The average depreciation cycle time period was no more then 4-5
>years.
>Study was conducted by the FDIC and can be seen at
>http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi_table1.pdf
This study got hashed over in this group a few months ago. I think it is one
very useful input.
When I talked about "15 years to even", I was talking about from peak prices
(around 1987 in the Dallas area) until recovery back to that peak (around 2002).
The deappreciation cycle mentioned in the study seems to only the down part of
the cycle.
I've enjoyed this discussion, even though we seem to be talking past each other
on occasion.
-- Doug
Will Trice
$cott wrote:
> The value of leverage can be explained
> by the following chart:
>
> RETURN ON INVESTMENT
> Years 10K in Cash 100K
> Property
> 3 1910
> 4102
> 5 3382
> 18823
> 10 7908
> 64085
> 15 13966
> 124656
> 20 22071
> 205714
> 30 47435
> 459349
>
> The above chart assumes a 6% appreciation, 5K downpayment (purchase),
> 5K (closing costs) and 10K for selling costs, the annual rate of return
> based upon owning a 100K property is 22.2%.
>
> Adding tax incentives not afforded to investors in the stock market,
> and the math makes a strong argument for real estate.
I'm coming late to the party here, but the above example fails to take
into account very large expenses (as did your previous claim of 8.47%
return) such as mortgage interest, property tax, maintenance and
insurance.
$cott
You will need to read the message again as I think you missed the boat.
The private lender does not incur these costs, the borrower does.
Regards,
Scott Miller
Commercial and Residential Lender/Broker
www.RealEstate-IQ.com
www.EZMortgageLoanz.com
Elizabeth Richardson
> Will,
>
> You will need to read the message again as I think you missed the boat.
> The private lender does not incur these costs, the borrower does.
>
> Regards,
>
> Scott Miller
> Commercial and Residential Lender/Broker
Yes, and if you're borrowing against your equity to loan out to others,
you're the borrower, incurring these expenses. That's what was wrong with
your 8.47% yield.
Elizabeth Richardson