Knowing What’s Real in Real Estate

Someone once asked me what the best financial investment is. While this is a fairly subjective question, I answered real estate, and I think many others would as well. Countless fortunes have been derived from land ownership and real estate investing including my very favorite example: In 1626, Peter Minuit bought Manhattan Island from the Dutch West Indians for $24. That’s about $600 in today’s dollars!* It would be quite difficult to quantify what Manhattan is worth now, but let’s just say he didn’t overpay. Anyway, I would answer real estate regardless of statistics which may show that the total return of the stock market over the last 50 years is actually more impressive, on average, than that of the real estate market. The primary reason is that we can live in our real estate and often factor the payments into our budgets. A home cannot be instantly converted to cash and therefore has a greater chance of building up equity. Besides this illiquidity advantage, real estate can be leveraged. You don’t need to secure the full purchase price of a home to buy it. Often 25%, 10%, or 0% will be enough money down to take possession. We’ll go into exactly why this is such an important advantage to investing in real estate below. We’ll also touch on mortgages, even though the subject can be quite boring, because the method of financing you choose will ultimately have an impact on your investment.

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The Designation Discussion

Have you ever been confused by a designation printed on a business card? Perhaps it said “John Doe, XYZ.” Well, that’s excellent for Mr. Doe, and I don’t doubt he worked hard for those letters, but what exactly does that mean? What good is a designation which isn’t recognized by a majority of people? More importantly, how is a consumer to distinguish between prestigious designations and those which don’t necessarily represent better qualification for an area of study? For example, WMS and CFP are both financial planning designations. However, becoming a Wealth Management Specialist can be done through self-study and without continuing education requirements. Becoming a Certified Financial Planner has both experience and continuing education requirements, along with a 10-hour examination. Which one would you rather work with? As I continue investigating my own credentials as a financial advisor, I’m regularly learning new and interesting facts about how the designation business really works. The reason I say business, rather than process, is to clear up the misconception that all designations exist purely for the benefit of the consumer. Some of the ways issuing organizations make money is through study guides, classroom courses, and various examination and continuing education fees. That’s not to suggest that earning money for issuing an organization is never justified, but as we always say in finance, “disclosure, disclosure, disclosure.” The issuing organization should always be responsible for explaining their designation and where a profit motive may be lurking. At the same time, I want to make clear that having an artillery of letters doesn’t mean that an advisor is better suited for your needs. There is a definite correlation between the two, but ultimately, the decision is quite personal. I find this concept analogous to the education system we have in the United States. One might think that obtaining a bachelors degree from an Ivy League university necessarily indicates a better education, more career opportunities, and higher earnings potential. Statistically, this is still is probably true, however, none of these items is a given anymore. With billionaires lacking college diplomas, and graduates of Ivy League universities searching for jobs, we have to rethink some of our assumptions. Similarly, having designations may indicate that somebody is better qualified to advise, but not necessarily to advise you.

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Budgets: Does Anybody Really Stick to One?

Having a handle on your budget is a building block for other good financial practices. If you can grasp the concept that sacrificing a few items today will allow you to buy more items later, you’ll have a better chance at affording the important things: houses, cars, vacations, educations, etc. I had a difficult time conveying this concept to my brother, who believes that money is better enjoyed as a young wonderer in the world and becomes an item of necessity rather than pleasure as one gets older. I think he’s referring to life events such as marriage, children, housing, and education which are expensive and typically require a large percentage of your after-tax funds. I agree with him in one respect: that money has more of a shock affect when spent on items that pass quickly, such as vacations and meals. However, he (and many others) may be overlooking a crucial link: responsible spending on the not-so-fun things such as mortgages and retirement savings is directly related to one’s ability to spend more later on in life. Believe it or not, there are objective realities (the classic examples being death and taxes) which we need to plan around. If we are to lead fruitful lives, understanding the impact of spending will be very helpful down the road. Below I will discuss some budgeting basics that I consider to be important and integrate the financial journey of my hypothetical friend, Jay. He will be a single male from Chicago who is having some trouble with his budget. I’ll also point out some websites and blogs which give fascinating if not overly detailed discourse on the budgeting tactics that people use.

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September Newsletter from Premier Financial Advisors

We’re well into September now and it seems the market has carefully tiptoed around its current worst fears: inflation, recession, and expensive oil. The Federal Reserve apparently pleased investors when it stopped raising interest rates last month, giving the bond market a chance to breathe as well. It will be interesting to see how the Fed proceeds from this point forward. It’s my feeling that the retail season may be fairly strong this year, especially if a barrel of oil can stay in the $60 range. Remember, some people aren’t overly dependent on oil (such as city dwellers), but others spend a lot of money on gasoline both for heating their homes and powering their cars. If corporate earnings are strong in October and throughout the holiday season, the stock market may start hitting some fresh highs. Some of the major indexes have already closed in on multi-month highs this week, a good sign for September, which is traditionally not a great month for the stock market.

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What Is The Role of a Financial Advisor?

The question of whether or not to work with a financial advisor is very personal. For some people, dealing with financial issues is unpleasant and requires a great degree of undesired discipline. For these people, the real question will be how to choose the right advisor, rather than whether or not to work with one. Others choose to embrace the financial decisions which we cross in our lives, such as investing and purchasing real estate, and may be resourceful enough to work without an advisor. Interestingly, many of those who are most eager to seek help are actually very knowledgeable about financial issues. They confer with professionals to reinforce ideas and seek second opinions about what they may already know. Perhaps my cousin Laura has a good feel for investing but she doesn’t know much about how to determine insurance needs. Or, insurance may not present any problem for her, whereas issues surrounding her will and choice of beneficiaries does. I had a professor once tell me that anybody wise enough to handle all aspects of their personal finances on their own should probably be in the business of advising others. This wasn’t always the case, but financial issues have become so complex and convoluted that even experts must meet up to refresh themselves from time to time.

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The differences between 401k and 403b plans

I field a lot of questions regarding the various rules that govern 401k and 403b plans. Not only is it a confusing topic for the average investor, but the issue has been gaining in importance recently as these plans become more popular. The reason why they have similar names which often confuse people is that both reference the section of tax code which defines how they are organized. It may be easier to refer to them as “for-profit” and “not-for-profit” plans because therein lies the primary distinction.

If you work at a for-profit corporation, you probably have a 401k plan available to you at work. If you don’t, well, that’s an issue you may wish to raise with human resources. Most financial advisors would agree that funds accumulated through company retirement plans will be essential in light of future uncertainty regarding government benefits. A 403b is only available to tax-exempt organizations, the most common of which are schools, hospitals, and religious groups. Section 501(c)(3) of the tax code goes into considerable detail about the rules regarding organizing your business as tax-exempt. As for what the benefits are to contributing to either a 401k or 403b plan, here is the short list:

• Participants set aside money on a pre-tax basis through payroll. Let me explain what that means: If $100,000 is your taxable income in 2006, and you defer $10,000 through payroll into either plan, your taxable income is now $90,000. This is the primary benefit to contributing on a “pre-tax” basis.

• The deferral amount, $10,000 in our example, is directed to the authorized vendors working with your organization. I will discuss the vendor issue in the next paragraph as there are things to know about where you are sending your money. If you get paid monthly and you have twelve pay cycles per year, $833 would be taken out of each cycle and sent to the vendor managing your plan.

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