The Truth about Why to Invest in Real Estate

The trauma is officially over—I’m again seeing articles about real estate with outrageous claims.

“While prices fluctuate, over the long run real estate values have always gone up, always, and there is no reason to think that is going to change.” Says one blog. Yeah, right.

Also coming over the transom are claims about “passive income.” That is money you “earn while you’re sitting on the couch in your underwear, eating Cheetos.” I’m officially skeptical!


All the hype aside, there are great reasons to buy a real estate. Believing that values of real estate always go up just isn’t one of them. There are great reasons to buy rental property. Cheetos, underwear, and couches are not good reasons to buy investment property.

Inspired by a seminar I’ve been invited to contribute to (more details below), here is my list.

Four good reasons to buy real estate:


    Protects Against Inflation

    When you buy a principal residence, you lock in your biggest monthly expense. Now, instead of paying rent to a landlord, you’re paying mortgage interest. The big plus of owning, though, is at the same time, you’re locking in that payment for the life of your mortgage loan. It’s like locking in your rent for the next 30 years.
    That means that no matter what happens with inflation, your biggest expense won’t go up. You can be spending more money on everything else, but your biggest expense is fixed. Your biggest expense isn’t tied to inflation any more.

    An investment you can enjoy.
    You get to live in it.

    When we put money in a savings account or retirement account, we can’t actively enjoy the money. We can’t sleep in our mutual funds; we can sleep in a house. We can’t decorate our shares in Google; we decorate our house. We can’t throw a party in our savings account, we can throw a party in our house.

    Rental real estate is tangible. You can see it, feel it, and kick it. That’s unique in your net worth. It’s something that you can really enjoy.

    Can lead to meaningful community connections

    People find their lives more meaningful when they are connected to organizations larger than themselves. Being involved in local communities brings meaning to people’s lives. Getting involved in your local community can help bring more meaning to your life, and it also may increase the value of your investment.

    For instance, I’ve seen in community after community in Chicago, neighborhood groups get together and advocate for better schools in their neighborhood. Their efforts pay off. Pretty soon, other families are attracted to the neighborhood because of the good school. This increases the price of the original investment in houses and improves education of kids.

    Research backs up what are known as the social benefits of real estate. Here’s a recent industry article which is consistent with an earlier article that is not from an industry source.

    http://economistsoutlook.blogs.realtor.org/2017/10/24/highlights-from-social-benefits-of-homeownership-and-stable-housing/ This is consistent with an earlier paper that isn’t as recent that is from a more objective source: http://www.jchs.harvard.edu/sites/default/files/hbtl-04.pdf

    Solid Component of Net Worth

    Don’t buy real estate because you think the value is always going to go up. It doesn’t. That being said, if you understand the risks when you buy, you can protect yourself against them.

    With real estate, you get a mortgage, which means that you are taking advantage of leverage. Let’s go over a simplified example to illustrate the concept of leverage.

    Mary and Jem buy a $200,000 house. They put 20%, or $40,000, down and get a mortgage of $160,000. That means Mary and Jem have spent $40,000 for a $200,000 investment.

    In year one, the price goes up from $200,000, to $210,000. If they sold, theoretically, they would get that entire $10,000. That means they would get $10,000 on the $40,000 they put into the investment. Mary and Jem are happy. They’ve made 25% on their $40,000 cash outlay in one year.

    As a lot of people learned in the real estate bust, there’s a big downside to leverage, too.

    If the price of the house goes down to $190,000, they’ll get $30,000 back when they go to pay off the mortgage. So, they put in $40,000, and got back $30,000. They lost $10,000.

    What happened to a lot of people in the 2008 downturn was this: They bought a $200,000 house, but they put 5% down. So, they put in $10,000 and they had a $190,000 mortgage.

    When they wanted to sell, they could get $170,000 for the house. But they owed the bank $190,000. In other words, they’d have to pay $20,000 to sell their house. To keep things simple, this example doesn’t even include closing costs, which make the numbers significantly worse.

    That’s why you want to protect yourself. Put 20% down and don’t buy unless you intend to stay in your house for at least 5 years. The vast majority of the time, this protects you against the risks involved in leverage.

    What about buying a house outright? Without leverage, you miss out on the inflation protection. Also, real estate prices in general don’t go up enough to make it a great investment without leverage.

    Be aware of the potential downsides. To protect yourself against the downsides of real estate, repeat after me: 20% down, 5 years.

    Want to hear more?

    ******************************************

    Kyle Harvey is hosting a seminar where we’ll expound on these issues. Lauren Marks, Mortgage specialist, and I are joining her. Come check it out! Here’s the invite:

    Join us the evening of Wednesday February 13, 2019 and get the inside scoop on all things real estate

    Enjoy drinks and hors d’oeuvres and learn about:
    1. The current real estate market in Chicago for buyers, sellers, and investors, and where it’s going in 2019 and beyond
    2. How real estate can fit into your financial goals
    3. Financing options for homes and investment properties

    5:30pm at Blue Plate, 1362 W. Fulton Street, Chicago Please RSVP to
    Kyle Harvey. See you there!


    CONGRATS in order!

    Janet Newel, one of our associate financial planners, officially got her CFP® designation. Congratulations, Janet!
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    2,557 Reasons Why You Should have International Stocks in your Portfolio


    needle in haystayck
    Even before Brexit passed, I got questions if it still makes sense to include international stocks in our portfolios. So I asked one of my favorite bloggers if she would be a guest blogger on this topic.

    Welcome, Michelle Morris, CFP®,  EA from BRIO Financial Planning! I just love what she wrote about why we should include a healthy mix of international stocks in our portfolio:

    My father was a real "Buy American" guy. I came of age in the 70's and early 80's in the rural Midwest. Ethnic food did not arrive in my hometown until 1982 in the form of a Mexican fast food joint called "Aunt Chilottas". My father worked at an automotive parts store. The rare intrepid soul who walked in asking about parts for a Japanese car was promptly dismissed as foolish and often the subject of scorn at our dinner table.

    The world has changed a lot since then. Notably there are Japanese cars everywhere and many Americans partake of international food, products, culture and travel. These add richness and diversity to our lives. So it is for international stocks also.

    My Dad has passed away and while I doubt that he would have ever bought a foreign car, I'm pretty sure I could have talked him into some international stocks and maybe even some Mexican takeout!

     When I review prospects' portfolios I often see minimal or even no allocation to international stocks. But if you limit yourself to only US stocks you are missing a big piece of the global capital marketplace.

    This cartogram, from Dimensional Fund Advisors, shows the global market share for stocks of countries all over the world. The US is the biggest at 52%. This means that of the total value of the world stock market, the US accounts for 52%.

    In other words, the US accounts for just over ½ of the total value of the world stock market. By limiting yourself to US stocks you've lost exposure to 48% of the global stock market!

    Last year we heard a lot about Greece. Note Greece’s square on this chart – it’s tiny! In fact Apple stock alone is more than 20 times bigger than the entire Greek stock market.

    This year we are hearing about “Brexit” and its possible effect on markets. Certainly these issues may cause volatility, but the world has faced innumerable crises in the past and will undoubtedly continue to do so in the future. Don't let the news dissuade you from sticking with a broadly diversified long-term investment strategy.

    Some think buying US stocks provides exposure to international economies due to the large international presence that many US companies maintain. This is true to some extent, but limiting yourself to US companies means you have no stake in leading companies based in other countries such as Toyota, Samsung, or Nestle.

    Certainly US stocks have had a good run recently. The US had the highest annual return of the 19 developed market countries tracked by MSCI in both 2013 and 2014. In 2015 the US fell to 7th place. (The winner was Denmark!) In 2004 the US was dead last. What will the winning country be in 2016? 2017 and beyond? I have no idea, but guarantee you that I and my clients own it in our diverse portfolios.

    Remember, don't look for the needle in the haystack, just buy the haystack!

    One easy way to "buy the haystack" is through an index mutual fund: a basket of stocks that holds every stock listed on a particular index. One of the international stock funds I use from Vanguard (VFWAX) has 2,557 stocks. (Hence the title of this post).

    The expense ratio of this fund is a mere .13%. This means that for every $10,000 you hold in the fund, you pay just $13 to the mutual fund. Never before have ordinary people had such inexpensive access to huge swaths of the global capital marketplace. It is a marvelous age we live in.

    So take a look at your portfolio, are you missing out on a world of opportunity?
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    Deep Dive into Credit Cards


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    Recently a client emailed me to ask, “What is the best credit card?” Then, at a family holiday, four of my nieces and nephews asked the same thing.

    I have mixed feelings about credit cards.

    As with most financial planning decisions, picking a credit card is a good opportunity to check in with your values. Can you express your values while picking a credit card? The answer is a qualified yes.

    The best deals, however, are reserved for the people who express the value “I value the best deal.”

    Read More...
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    Draft Brett Farve to Start Your End-of-Life Plans

    Favre

    It's awkward to have "the talk" with your parents. Here's how to get started.

    We should all have an ongoing conversation with our loved ones, especially the older ones, about their end-of-life plans. Yeah right. We should, but we don’t.

    Because clients dread bringing up the topic so much, some financial planners refer to it as “the talk.”

    Thanksgiving gives us a great opportunity to start a simple, direct conversation.
    READ MORE



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    Give Money, Feel Happy

    givinghands
    “How should a client think about giving money to charity?” was the question my colleague posted on an adviser forum.

    I should know this, I thought.

    But since I couldn’t coherently answer my colleague’s question, it seemed like a good time to review the latest thinking on the subject and update what I tell clients.

    Turns out, there are four steps to giving money away. Even better, they’re pretty easy.

    1. Develop a donation strategy.

    That’s right, a donation strategy. That might sound like off-putting jargon, but we all have a donation strategy, whether or not it’s fully baked and conscious.

    For instance, a lot of people I’ve worked with seem to give money to anyone who asks. A lot of people give money to their college. For some people, the more desperate an emotional appeal, the more likely they’ll give. For most people it’s more hodgepodge than a strategy.

    A lot of charities are de-emphasizing outreach that seeks donations by evoking pity. The poverty-stricken face of a child who seems to be saying, “Just donate to this charity and my suffering will be alleviated,” may be on the way out. After seeing enough of these ads, empathy overload kicks and you start to wonder, are these kids being exploited?

    Celebrity causes are changing too.
    This parody is a plea for Africans to send radiators to freezing Norwegians. Hey, frostbite kills, too!

    Instead of pity and celebrity identification, charities are trying to appeal to people based on effectiveness.

    Develop your donation strategy by asking these two questions:

    What problem am I trying to solve?
    What do I value?

    To make it easier, you probably don’t even have to answer both questions. If one seems easy, just start there.

    Next, consider the balance between what’s near to you (your church, your alma mater) vs. what’s far (ending extreme poverty, disaster relief). You might have different ideas for each.

    Here’s what Bill and Melinda Gates did. First they thought, and I’m paraphrasing here, “What problems is capitalism crappy at solving?” The thing that bothered them the most was inequity. Globally, they asked, “What’s the biggest inequity?” And for them that it was children dying and/or not getting enough nutrition to develop.

    Locally they took a different approach and said, “Okay, our educations really helped us. We want to help alleviate the inequities in the US education system.”

    If you want help pinpointing global issues,
    Philanthropedia has thirty-six different causes. You can weigh the causes against each other and figure out which is most important to you.

    Close to home, if you’re looking for ideas beyond what initially comes to mind, it makes sense to check out your local community foundation. These are organizations that help budding philanthropists figure out their donation strategy. You can find them quickly through the
    Council on Foundations.

    2. Figure out which charities will fulfill your strategy.

    Next, explore charities that prove they are effective at having an impact in the areas you value.

    Figuring out your local charities might be easier than the global charities. When you give money close to home, you can pretty easily get a handle on how effective the organization is.

    When you give away globally, it helps to have third parties evaluate which charities are the best. They take out their measuring sticks and examine the numbers. They research: What charities fulfill their missions in the most efficient way?

    Three websites that summarize data and report on the effectiveness of specific charities are:

    charitynavigator.org
    givewell.org
    guidestar.org

    It’s a good idea at this stage to use your intuition as well. Melinda Gates said, “We come at things from different angles, and I actually think that’s really good. So Bill can look at the big data and say, ‘I want to act based on these global statistics.’ For me, I come at it from intuition. I meet with lots of people on the ground, and Bill’s taught me to take that and read up to the global data and see if they match.

    “And I think what I’ve taught him is to take that data and meet with people on the ground to understand, Can you actually deliver that vaccine? Can you get a woman to accept those polio drops in her child’s mouth? Because the delivery piece is every bit as important as the science. So I think it’s been more, a coming to, over time, towards each other’s point of view. And quite frankly, the work is better because of it.”

    3. Donate and feel good.

    Giving money away makes us feel better than spending money on ourselves.

    Elizabeth Dunn and Michael Norton report in their book
    Happy Money: The Science of Smarter Spending, “The amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The relationship between prosocial spending and happiness held up even after taking into account individuals’ income. Amazingly, the effect of this single spending category was as large as the effect of income in predicting happiness.”

    4. Pay attention to results.

    This doesn’t have to include spreadsheets or anything fancy.

    Notice the communication you get from the charities. Is it always a pitch for more money? Do they communicate their results?

    Do you see where your money is going? Are they fulfilling the mission that you were contributing to when you donated?

    Keep in mind that not every donation is going to succeed. For instance, Bill Gates says that his involvement in the attempt to develop a better condom didn’t get the results he was hoping for. He doesn’t detail exactly what was so ineffective about the project, except mentioning with a vague smile, “We got a lot of ideas.”

    By Bridget Sullivan Mermel
    Originally posted on Money.com
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