Peter Pays Paul

A goal without a plan is just a wish.
– Antoine de Saint-Exupery

The Coming Train

Many of us have the goal of retirement. For some it is a small cloud of smoke on the horizon and for others the roar of the approaching train is growing and the locomotive ominous. Will the train of retirement be cramped and unbearable or will you be able to ride it comfortably into your sunset years?

Wishful Thinking

All of us hope for the latter option. We desire to enjoy retirement and do many of the things we could not do before. Maybe it is a trip to Europe, a vacation home, more time to fish or golf, more time with family, and the list is endless.

For a lot of people retirement is just a wish. They never plan for retirement. Few people even know what retirement looks like. They never stop and think what do I want to do in retirement? What kind of lifestyle do I hope to live? How much retirement income will I need to accomplish those goals?

How much income is available for the duration of retirement? Many planners recommend a withdrawal rate of between 3% and 5% of principal per year of retirement. This means that if you have $100,000, financial advisers recommend that you could withdraw $3000-$5000 in your first year of retirement. Does $3,000 plus Social Security meet the needs of your retirement dreams?

Setting a Destination

If we use a 4% withdrawal rate, our calculations are easier. We can multiply your present salary by 25 to achieve the necessary amount of accumulated wealth to retire at the same income. So if you make $50,000 annually you would need $1.25 million in accumulated wealth to replace your present income. If you earn $100,000 annually, $2.5 million dollars is the recommended savings to replace your current income. In Contra Costa County the median household income was $82,641 according to the Bay Area Census website. At that income level it would require $2,066,025 of investments to sustain a 4% withdrawal rate.

(Side-note: These calculations do not take into effect inflation. For every year until retirement your annual income should be increased by a factor of 2%-4% annually to negate the effects of inflation.)

The destination (number) should be in your mind. Now that you have it, how do you get there? You need a financial plan that will assist you towards your goal.

Developing the Strategy

The first part of your strategy should be a budget. You need to plan how you are going to spend your money this month. Spend less today in order to enjoy a better tomorrow. This is the process of delayed gratification. Put off an immediate reward for a greater reward in the future, namely retirement.

The second part of your strategy is your accumulation and growth plan. This is the longer-term plan. Hopefully, it involves a strategy that takes place over multiple years to accumulate and grow your wealth. This part of the plan should take place with a coach or adviser that will help you prepare, show you the pitfalls, and provide encouragement along the way.

Choosing an Investment Vehicle

If you are a baby-boomer, the retirement train will soon overtake you. Do you have the wealth to ride it comfortably?

There is hope, wealth can be built with the help of a solid plan and creativity. You may be wealthier than you think, if you own your home. You must choose a vehicle that will help you to arrive at your retirement destination quickly and comfortably.

One of the benefits of real estate is leverage. The wise use of leverage can dramatically increase your return on investment if done with a professional.

Don’t leave your retirement up to wishes on a star. Make a plan, get some help, and achieve your goal. Too much is at stake to leave it to chance. Take an active role in making your dreams come true.

Strategy Links

Below is a list of links to various resources that discuss developing a retirement strategy.

• Jeff Brown has some wonderful articles on what a good plan involves.
• The Financial Planning Association has a retirement planning checklist available.
• The National Endowment for Financial Education also has links to various resources and planning articles.
• Yahoo! Personal Finance has a retirement calculator to estimate your retirement savings needs.

My post “Investing is a Luxury” is listed in the Festival of Frugality at Money, Matter, and More Musings!

Go check it out for a frugal way of life.

Today, in the United States investing is assumed for those earning a regular salary. We have 401(k)’s, IRAs, brokerage accounts and more. The options for investment abound: stocks, bonds, mutual funds, hedge funds, real estate, businesses, classic cars, etcetera.

Investing is a Luxury

We frequently miss the fact that investing is a luxury. Living in one of the richest nations in the world causes us to be jaded to the realization that the majority of the world lives day to day. They do not have the luxury of saving money. Nor does the majority of the world have the added luxury of choosing the vehicle in which they invest their money.

This is not to say investing is wrong or bad. Investing needs to be treated as a luxury in our thinking and practice. Luxuries come after we have taken care of the necessities of life.

A Plan to Invest

If you are going to begin investing, here is a recommended plan to get there.

1. Live within your means. – If investing is a luxury, it means that you should be making more money than you are spending. It also means that at the end of the month you should have some money left over to save. The best way to do this is to set a monthly budget and stick to it.
2. Reduce consumer debt. – Paying interest on things that depreciate like clothes, cars, televisions, and stereos is the best way to stay broke. It is a glittery road that leads to bankruptcy. Applying any leftover money at the end of the month towards debts is the quickest way to reduce them.
3. Save for a rainy day. – God forbid an unforeseen need arise, however it does occur. Bad things do happen and it is best to be prepared. Most financial experts recommend 3 to 6 months of income in reserve.
4. Assemble a team of professionals. – Having an accountant, an attorney, and a financial planner in your corner can make all the difference in the world. Choose professionals that are also investors. Your team members should have your financial health as their goal.
5. Invest wisely and often. – After paying off consumer debt and saving for a rainy day, invest the leftovers each month. There are many options for investment. Choose an investment vehicle that is understandable and that has a comfortable level of risk. Staying awake each night sweating your investment is not worth it.

What Are Your Dreams?

Where do you want to be in 5 years? 10 years? 20 years? What kind of life do you want for yourself and your family? What do you want to enjoy in retirement?

With those dreams in mind, how will you get there? “Failure to plan is planning to fail”, the saying goes. These steps above can serve as an outline for your plan. There are many nuances and intricacies in each step, far more than can be covered in this article. Dave Ramsey, an author and radio host, has written on these and other topics. His book The Total Money Makeover is a good resource for more information.

-Peter

With all the press generated about sub-prime mortgage failure and defaults, many more people are curious to know about buying a foreclosure home. Most people hope that by purchasing a foreclosure home they will be getting a better bargain and saving some cash. This may or may not be the case.

Unfortunately, when people begin to neglect their bills they also begin to neglect their home. Frequently a home that is in a state of foreclosure has deferred maintenance and is in need of repair. The amount of disrepair varies from home to home.

If a person is willing to put in some “sweat equity”, then this type of home can be a good buy. It will take either time devoted to the repairs, or additional funds to pay for the repairs. However, if a person has a history of failing to complete tasks and is short on cash, this is not good choice no matter how great a deal. It is very likely that the house will stay in a state of disrepair, and make home-life unbearable (Husbands read UNHAPPY WIFE).

Three Phases of Foreclosure

Pre-Foreclosure

When a homeowner fails to pay their mortgage, the bank or lender will send them a notice of default and file this with the appropriate government authority. The notice of default begins the foreclosure process and the homeowner is in a state of pre-foreclosure. The pre-foreclosure period varies from state to state. In California the borrower or homeowner has 90 days to bring the account current, called the reinstatement period.

If after 90 days the account has not been brought current, the lender will file a notice of trustee’s sale. This notifies the home owner and the public that the house will be sold at public auction. The homeowner has until 5 days prior to the trustee’s sale to redeem the house and pay off their loan. The trustee’s sale ends the period of pre-foreclosure.

Buying a Home in Pre-Foreclosure

There are varying views on buying a home in pre-foreclosure. When you buy a home in pre-foreclosure you are usually buying the home from the homeowner. Some people question whether or not this is ethical because you are profiting from another’s misfortune. Other’s will argue that assisting the borrower in their time of need can actually help them. It can prevent them from having a foreclosure or bankruptcy on their credit record.

Homeowners can be in foreclosure for a number of reasons many of them unpleasant: divorce, job loss, medical bills, death of a bread-winner, etc. Contacting a homeowner in any of these distressed states can be touchy. One must tread carefully and attempt to provide a win-win situation for the homeowner and buyer alike.

Trustee’s Sale

The trustee’s sale occurs after the notice of default and the notice of trustee’s sale has occurred. The auction often takes place on the steps of the county courthouse. The notifications of these sale dates and times are frequently obscure. The house is sold to the highest bidder. At many trustee’s sales the lender buys the home back to cover their losses.

Buying a Home at a Trustee’s Sale

A trustee’s sale does offer bargains, AT TIMES. However, most of the time a buyer is not able to inspect a home prior to purchase. What appears to be a good deal, may not be. The cost to repair the property combined with the purchase price may exceed the property’s value. This can make buying a house at a trustee’s sale a risky endeavor for the novice.

Bank Owned or REO (Real Estate Owned)

At many trustee’s sales the bank or lender will repurchase the house to minimize their losses. Most banks are not in the real estate business but in the lending and interest business. If they have money tied up in real estate, they have less money that they can lend to borrowers. This costs them money in interest earned each day they hold the property.

Banks will list the property for sale on the local MLS with an agent. Many of these are sold “as is”. Some lenders require that the purchaser be pre-qualified for a loan through them.

Buying a Bank Owned or REO Property

There are many good deals to be found at this stage of the process. The benefit for the average buyer is that because the homes are listed, they can be visited and viewed. Visiting the house with a carpenter or repair man, provides an estimate of the cost of repairs before the purchase, not after. An initial offer should be adjusted to account for repair costs.

The beauty of investing at this stage is their is no “emotional attachment” to the home by the current owner (bank or lender). For these owners it is a simple business decision. They want to minimize their loss. As time passes their loss grows and they are more likely to lower the asking price or accept a lower offer.

Summing Up

Buying a home in foreclosure can be rewarding. The homes are often below value. If you are willing to add value to the home through repairs and upgrades, you may be way ahead at the end of the game. However, it is not for everyone.

Always remember the real estate mantra “Location, location, location.” Don’t buy the best home in a bad neighborhood, rather buy the worst home in a great neighborhood.

- Peter

While watching television last night I came upon an interview with Ron Perelman on CNBC. Donny Deutsch was interviewing the CEO of MacAndrews & Forbes with the title “Blueprint to Billions” on the lower half of the screen and it caught my attention. “Ah, maybe I can glean some wisdom”, the eager student thought.

Perelman had two points that were salient. His first point was: Do not choose a career for the money, choose it because you love it. He said if you love what you do the money will follow.

This point is easily comprehensible, because passion will drive you to take initiative and motivate you to work hard.

His second point was the less obvious, but more poignant. He was talking about decisions and decision making. He said that in order to succeed a person must make decisions, because even though you may not have chosen, a decision is made. He continued to say that you might as well take part in the decision.

I may not have understood what he was saying if I had not read a book titled Manly Dominion. The book spoke about the passive tendency of many people, especially in men. The author argues that many men choose not to choose, and thus act passively towards life and life just “happens” to them.

The sad part of this is that life did not “happen” to them. The choices not made, shaped their life. They chose not to decide, and did not act to negate the forces at work in their life.

They chose to delay fixing the leak, and things were destroyed. They failed to submit their application to their dream job, and were not hired. They neglected to set aside time for their family and wonder why they spend their golden years alone. They couldn’t decide what to invest in, so they delayed investing.

What decisions are you delaying? What forces should you be combating that are acting against you? Is it your health? You do not stay healthy and strong by accident. Or is it your finances? Money does not magically appear in a savings or retirement account, it requires discipline and a budget. Are you taking care of your home? It will fall into disrepair if you leave it alone.

What are your goals and dreams? What steps are you taking to get you there?

How do you envision your retirement or future? What investment steps are necessary to have the future you imagine? What decisions did you make and actions did you take today that will shape the outcome?

Don’t allow your future to “happen” to you. Make choices, decide the course your life will take. Make a decision today that will help you achieve your future. Get a professional on your side that can assist you and direct your steps. Don’t not make decisions. Play an active role in your future.

Real estate investing and sports are alike in many ways. I mentioned earlier that longevity or perseverance can help you to succeed in both endeavors.

Real estate investing is similar to sports in another regard. Just like in sports, there are huge benefits to having a coach or mentor. I see three main benefits of having a coach in real estate investing.

Assembling the Team

One of the roles that a sports coach plays is that of personnel manager. The coach knows what is necessary to win the championship and does their best to assemble players in order to accomplish this goal. A coach evaluates his/her team’s weaker positions and finds players that will fill those weak positions.

A coach also makes sure that each player is fulfilling his or her individual role. If one player fails, the entire team is put in a position to fail.

And so it is with real estate investing. A coach/advisor should assemble the best team to help you succeed in the game of investing. A coach should have a top-notch team that includes a real estate attorney, an estate planning attorney, an accountant, and a property manager. A financial planner is another highly recommended team member.

These team members allow your advisor to specialize in finding the right investments that fit your plan and not to be distracted with other elements. A real estate advisor should also ensure that each team member is effectively fulfilling their role, helping you on the way to achieving your dreams.

Planning on Offense

Successful sports coaches also develop the strategy of the team. After evaluating the individual team members, a coach assesses their strengths and weaknesses and develops a plan to win. Not every team is the same. During different seasons, certain players may be stronger in areas than the preceding season’s team. A coach must adjust their strategy accordingly. For instance, a football coach with a weak quarterback may run the option rather than a West Coast Offense. A basketball coach with shorter, quick players is going to emphasize an outside game rather than force their team to play inside the paint.

A real estate investment advisor realizes the same is true of their clients. Not every investor is willing to take the same risk. Not every investor has the same assets and income. Individual investors also have distinct time frames to accomplish their personal goals and dreams. (In truth, any good investment professional should develop a customized plan for each client and not a blanket plan that is applied to all clients universally.)

A real estate investment advisor will develop a line of attack, in conjuncture with the client, that allows the client to accomplish their aspirations. This will take into account what the client wants or needs, currently has, and will possibly have in the future.

Planning on Defense

Another important role of coach is defensive strategy. No human can consistently predict the future. Coaches do not know what move the opposing team is going make at any time. Therefore, a good coach will prepare their players for any move that the other team might make.

A real estate advisor should also prepare you for the attacks of Murphy (of Murphy’s Law), natural disasters, and the economy. A real estate investment advisor will help you to know what steps are necessary should an unforeseen force affect your investment. You should be prepared to face challenges and overcome them with the help of your advisor.

Real estate investment coaches/advisors walk with you down the path to success. They instruct and teach you along the way and do not desert you after they are paid. Their ultimate goal is your attainment of your goals and your dreams.

“Success is peace of mind which is a direct result of self-satisfaction in knowing you made the effort to become the best that you are capable of becoming.”
–John R. Wooden, Head Basketball Coach, UCLA

Michael Cook over at the BloodhoundBlog wrote a great post about persistence in real estate investing. This is true in whatever realm of investing you venture.

Investing is a long-term game plan. If your only goal is to “get rich quick”, then the first sign of adversity will likely derail you and scare you away. Sports and investing have many similarities. In high-school I played football. We practiced for three to four weeks before we played our first game. Those first weeks were terrible. Included in that time was a week with two practices a day called hell week. Many times you questioned whether all the practice and pain was worth it.

But then… (more…)