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Boiled Down Money Goo

~ tips for propelling your financial future

Boiled Down Money Goo

Category Archives: House

Why Pay Cash for a House?

03 Saturday Feb 2018

Posted by moneygooguru in Debt, Growing Wealth, House

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home, House, investment, million dollars, mortgage, pay cash, rent or buy

Or “How Not to Lose a Million Dollars Buying a House”

How often have you heard someone say “I’m sick of throwing away money on rent so I’m buying a house.” Why do people think this? After all, you can rent from a landlord with little risk or “rent” from the banker with a lot of risk. Why do people think they’ll automatically be financially ahead if they buy a home?

Our house, as an investment, has been awful.  We bought it in a great location at a time when home prices were going up, up, up in our area. How could we go wrong with that? Yet we had no idea we were nDSC02025early at the height of a housing bubble, and it was about to burst. The short story is, after the bubble popped and even with an economic rebound that continued for ten years afterward, our “investment” gained us a whopping 1% average annual return minus mortgage interest, taxes, insurance and upkeep. A terrible investment. We lost big time.

But we love our home and don’t regret buying it at all.  Why? It has to do with the advice that we often give people about buying a house: Buy a house because of the location in a great neighborhood, or the view, or proximity to your favorite people or places, or to have a big yard or grand garden, or to raise a family, or to have a bunch of animals. These “wants” for owning a house, however, will cost you big time. If you’re not okay with that, then keep renting.

All About the Math

The main reason that buying a home is not really a good investment is simple. Simple math, that is, that the banks would rather you didn’t do. If you buy a house and get a mortgage, your home will have to appreciate by up to 7% or more a year just to break even (with inflation factored in this number could be 10% or more).  Do the math: Add up the annual cost of your mortgage interest, maintenance, property taxes, and insurance. Divide it by the value of your home. Don’t forget to add the annual inflation rate on top of that.  It all adds up to a pretty hefty annual percentage rate.  Are home prices going up by that rate in your area? Even if they are, for how long can you count on that before the market has to correct?

If you want to reduce the magnitude of this poor investment choice, then the best thing you can do is pay cash for a house. Seriously, you should.

venus and marsWhy Pay Cash For A House?

Answer: Because you may lose a million dollars otherwise.

Example: If you buy a house for $250,000, put a $50,000 down payment, and get a 30 year mortgage for the remaining $200,000, the lost investment opportunity could be worth well over ONE MILLION DOLLARS! Do the math. Assume monthly interest payments made to the bank on your loan balance given an annual interest rate of 5% over 30 years, and what that same amount of monthly mortgage interest if invested elsewhere could have become if it returned 8% annually.

Bottom line is this: Buy a house because you want a home, not fooling yourself into thinking you are making some great investment when you’re really losing a million (unless you pay cash or pay it off way early!).

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Tips for Buying A Rental Property

22 Monday Feb 2016

Posted by moneygooguru in Debt, Growing Wealth, House

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income source, landlord, leverage, mortgage, rent payment, rental property, retirement income, tips for buying rental

A few years ago, my wife and I came soooo close to buying a rental property. We actually signed some of the papers, then backed out. It was an older single family “grandma” house built in the 1950’s. We saw the potential in this excellently maintained house. The exterior wood, paint, and siding were in perfect condition, as was the roof. The interior was very neat and tidy (though dated). The curb appeal and location were decent enough too. But there were the “non-code” basement bedrooms, the lack of parking on that side of the street, and no driveway. The only parking was in the rickety single detached garage off the back alley, or in a small gravel parking area off the back alley.

xx76876dWe could probably have made it work. But in the end we chickened out, telling ourselves that our personalities weren’t suited to being landlords. After all, we would really come unglued with someone trashing our place and be very unsympathetic with them being late with rent. And we definitely would not want calls and complaints all the time, or have to give up our precious spare time to go fix things at the property. Further, having debt again scared the heck out of us. So we continued on with the formula we’d started years before – keeping out of debt, and putting as much as we could into various retirement funds through work and on the side.

The no-debt formula had worked well for us. We really thought that we’d “arrived” when we first got out of debt (all except the mortgage) several years earlier. And we thought we were surely on easy street when we paid off the mortgage four years later. We were on top of the world! Can you imagine? No debt, no more student loans, no credit card debt, a paid off house, paid off cars! We could do anything we wanted. All we had to do from then on was to coast along and dump whatever we could into retirement funds, right? Retirement, no problem. It was many years off. At varying times, my wife and I both had even temporarily cut back from full-time at our jobs, thinking we could just coast and enjoy life. And we did.

Fast forward several more years and given a stock market that has been anything but impressive, we were growing tired of watching all our hard work to save and invest in various retirement funds not really materialize into the thrilling gains we thought we might see. Given the historical average stock market returns going back seventy years, your money could theoretically double every seven years, right? Right, depending what decade you’re living in! Instead, we’d seen quite the roller coaster ride, losing nearly half the value of our investments in the stock market at one point. The stock market has made some notable gains since that time, yes, but our retirement funds’ overall growth still hasn’t impressed us.

We’d gotten serious about this money thing pretty late in life. Time was not in our favor anymore, whether it be its effect on compounding interest or for improved stock market averages. So in recent years we were beginning to foresee the harsh reality of not having a big enough pile going into retirement. Company pensions are nearly a thing in the past. Our “pension” is only what we save ourselves and we weren’t nearly far enough along. “If I have to, I’ll keep working ‘till I die,” I’d jokingly tell my wife. Sure, I really would if I had to. But the thought of really having to was starting to bug me.

A friend of ours recently started working at a financial firm which pushes, among other DSC02025things, annuities. While we really didn’t have enough extra cash lying around to even consider anything like that (and we’re not convinced we would do it even if we could afford it), we agreed to attend a free seminar and dinner. Both were excellent! And although the speaker was really talking about annuities, he made some memorable points that hit home with us. “You need income streams in retirement,” he said. “Peace of mind in retirement comes from having dependable steady monthly income, not a big pile that you are slowing whittling away.”

The light bulb came on. My wife and I again started talking about how rental property could achieve the “steady monthly income” thing. We had to get over our fear of debt, and of bad renters. So we did what anyone should do if they want to invest money in something. We sought council. We read books and magazine articles and blogs. We consulted experts. We asked friends and coworkers, and were quite surprised to find out how many of them were already doing this. There were many horror stories too, about bad renters. Seems like everyone we asked had had a bad experience.

Undeterred, we researched some more. We got materials from a local group that gives presentations on the laws regarding tenants and landlords, knowing that if we were really going to do this it wasn’t just about being an investor; there was the whole other side of being an active landlord and property manager. In general, the books and articles about buying rental property all said the same thing: Do the math, make sure that the rent you will receive will cover your mortgage and expenses, and have some cash reserves. Sounded like good advice. But there was something that kept eating at me.

The rental property investment method most touted seemed to always involve multiple long term mortgages and leveraging. It was a house of cards. My wife and I had done some math years before when we almost bought that grandma house rental property. It seemed that in order to make things profitable, we would have to compromise our wish list and somehow juggle buying an older fixer-upper or other property in distress with questionable location, and go with as long a term on the mortgage as possible in order to keep our payments down.

IMG_0871 - CopyWe knew some people who were doing the landlord thing in our town back then, so we checked out several of their properties. Our conclusion was that the only way they could be making any money was if they were being slum lords – buying lower end properties, not putting a lot of money into improvements, going with thirty year mortgages, and leveraging as many properties and loans as they could since they surely could only be making a few hundred dollars a month profit on each rental. This was not the game we wanted to play, then or now.

We wanted a game with lower risk. So we did some more math, this time some different math. And the results surprised us. It turns out that the lowest risk and highest return approach for us (and perhaps you, the “average Joe” landlord wannabe) is this:

  1. Buy a modestly sized three bedroom, two bathroom house, which is more desirable for the average family whether you are renting or selling. The trend is going towards smaller homes because they are more efficient (lower purchase price, lower taxes, lower utility bills, lower maintenance costs). Don’t buy a mansion.
  2. Buy a house in a neighborhood where you would want to live (location, location, location). A bargain in a seedy part of town will cost you in how much you can get for rent. So it’s not really a bargain.
  3. Buy a house that is newer or a recent total remodel so that constant surprises and repairs won’t be a concern. The last thing you want to have to deal with is lead paint, asbestos, or knob and tube wiring. If you are in the business of remodeling homes, then ignore this piece of advice.
  4. Plan to keep your properties long term. The longer the better. This is why you can afford to buy the nicer rental house you really want in the decent neighborhood and pay full price for it if need be, instead of a fixer in a bad neighborhood. In the long haul, you come out ahead.
  5. Do not overpay. Yet at the same time you really shouldn’t be apprehensive about paying fair market value if the above criteria are met (size, location, condition) since you will be keeping this property a long time. Foreclosures may be an option if they weren’t neglected or trashed, assuming they meet the above criteria as well.
  6. Buy only one rental property at a time.
  7. Have only one mortgage at a time (which means paying off your own home mortgage before you even do this rental property thing).
  8. Get a ten year mortgage (maximum) with aggressive plans to pay it off much sooner.
  9. Take a deep breath for this one: Have sufficient income and/or cash reserves to cover the delta between the rent you will receive and your monthly mortgage payment/expenses (which will likely be higher than the rent since you are getting a ten year mortgage). You will be subsidizing this first venture until your mortgage is paid off. Having this temporary negative cash flow flies in the face of what nearly every “rental property for dummies” book will tell you. Ignore any criticisms. You’ll likely only have to subsidize your first rental property anyway. And, there is minimal risk if you have only one mortgage yet two properties (your personal home, and the rental).
  10. Be diligent in developing tenant selection criteria and a legally protective rental/lease agreement. There are many available resources, often free, to help you.
  11. As soon as you pay off the mortgage, buy another property.

This is a “slow brew” approach, conservative in risk. By not stretching out the mortgage, you are saving a boatload in interest. This is money you will put into your own pocket! By not having a leveraged house of cards (that is, you will have just one mortgage at a time) you are minimizing your risks should something hit the fan.

If, on the other hand, you don’t want to rent out your first rental property for less than the mortgage payment (as well as paying off the mortgage in ten years or less), and you instead want to use the “rental property for dummies” house of cards method of long IMG_0232drawn out mortgages, then you should question why you would help the banks get richer faster than yourself. Don’t do it. Here’s why.

With a paid off mortgage, you will reap the most profit on your rental property with the lowest risk. Then when you buy your second rental property, you’ll have two renters helping to pay off just one mortgage. See the pattern? When you buy the third rental property you will have three renters kicking the one mortgage to the curb in no time. And your property snowball will grow larger and larger depending on how many years you have to work at this.

Contrary to popular belief: Start slow, and you will greatly increase your chances of winning.

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Buying A House As A Short Term Investment

28 Thursday Jan 2016

Posted by moneygooguru in Debt, Growing Wealth, House

≈ Leave a comment

Tags

buy house, home, investment, mortgage, short term

house frontRecently a co-worker asked me about buying a house if they didn’t plan to stay there but three years or so. I do have an opinion about buying a house if you’re not going to be living there a long time – don’t do it.

The math may seem to work but there are unknowns you can’t control, like the market.  If the market has dived when you want to sell the house, you’ll surely lose money. Yet get this: you may lose money even if the market remains steady because there are many costs in buying, owning, and selling that rob you of potential profit.

  1. There are buyer-pay closing costs. My wife and I just bought a house and forked over thousands in loan and other service fees.
  2. While you own your house there are insurance, taxes and maintenance costs.
  3. There is interest shoveled to the bank if you have a mortgage.
  4. The seller (which would be you in a few years) typically has to pay closing costs and realtor commissions. On the house my wife and I just bought, of the money we handed over, the seller paid $10,000 of it to the realtors.  Ouch.

So the problem is, when you add up all the above costs, your house would have to rise in value up to 7% or more per year just to break even (and that assumes today’s low interest rates). Yet historically, home values appreciate by about the same amount as the inflation rate (which has been 3%-4% annually on average).  How could you possibly come out ahead given this situation? This is exactly why buying a house short term is a good recipe for losing money.

But you say, “The market is hot in my area right now!” Beware. The market was hot when we bought our last house too. But when that housing bubble burst, home values dropped like a rock in a lot of places.  In our Pacific Northwest small town, home values held steady.  Our house value never dropped.  But because it was overvalued when we bought it, it has not increased in value much since the bubble burst. In fact, after owning it for ten years, even though we’ve done some great upgrades and have maintained it in perfect condition, it is now only worth about 10% more than what we paid for it. That is a very crappy growth rate (about 1% per year). As far as investments go, we’ve lost our shirts! If we would have had to sell our house within the past ten years, or even now, we would lose money.

The main reason to buy a home is for long term, non-tangible reasons. Like to raise a family. We love our house and have no regrets. And we plan to continue living there for many more years. We’ll probably come out okay financially in the long haul.

In my opinion, buying a house short term is not worth the gamble.  I would rent. All that said, as long as you know the risks going in and are willing to take them…go ahead, lose your shirt!

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Stay In It For The Long Haul

30 Sunday Nov 2014

Posted by moneygooguru in Debt, Growing Wealth, House

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beat the system, buying stocks, easy money, get rich quick, house flip, house flop, house investment, leasing a car, selling stocks, stock trading, vehicle trading

The longer you hold onto things the better off you are.  This should be a no-brainer.  But get-rich-quick impulses drive people to seek the so-called easy money goomoney.  Too many people think they can “beat the system” and win.  Probably because they started saving way too late in life and have too much time to try to make up for.  But better a few years of slow and steady saving, than a quick flash in the pan to see what little you have go up in flames.  Here are a few time-tested tips.

Tip #1

Statistically, if you keep doing the daily stock trading, trying to outguess the market, you will lose (unless you are genius and even then some of your success may just be luck).  You are better off buying some Index Funds and keeping them until after you retire.  Don’t sell them when the market dips or tanks.  Keep buying when the market dips and tanks.  The rebounds from these market corrections can be huge.  But you’ll miss them if you’ve sold everything out of panic and then are too much of a Nancy to get back into the market.

Tip #2

Doing constant vehicle hopping will rob you of your retirement faster than the angry grizzly bear mother whose cubs’ path you just crossed.  If you are one of these bozos who keeps buying (or worse yet, leasing) a new rig every few years, then I sure hope you are rich already and have plenty of money to blow – because if you aren’t rich you’ll never get there at this rate.  I can assure you that many of my friends, coworkers, and neighbors are giving their retirement away to the auto makers and their whore finance partners.  Don’t do it.

Tip #3

And if you are doing the house flip-flopping thing, thinking you are slowly climbing the property ladder on your way to easy street as you trade up houses, you may just be disappointed.  In very few markets is a house ever a good investment.  Beyond repairDo the math.  I have.  With mortgage interest, taxes, insurance, and maintenance, your house better be in a double-digit bubble or you are losing money big time.  You are much better off to buy a modestly sized house and stay it in forever, like our grandparents did.

Just Do It

Don’t panic and sell all your Index Funds when the stock market tanks.  Drive that old rig until she bites the dust completely.  Stay in that more modest, nearly paid-for house.  The road to riches is a slow simmer.  Quick speculation is always more risky.  The trick is to buy quality and keep it for the long haul.

Do you think you can do smart things with your money?  You can.  But if you say you can’t, you probably won’t.  If you say you will, then you’ll surely find a way.

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Money Prick 101 – The RV

07 Friday Nov 2014

Posted by moneygooguru in Debt, Fun, House

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camper, mobile home, motor home, rv, trailer, trailer house

A “rolling house on wheels” is an awful investment.  Really, investment is the wrong word since investments are supposed to go up in value.  Motor home and camper values drop like a rock the minute you drive or pull them off the lot.  A new RWV (Reverse Wealth Vehicle) is intended for people who can’t do math or are so rich they don’t care about the math.  Would you buy a house knowing it would drop half of its value in a few years?!  You gotta be rich or rash or both to do this.

Good old RV

Living the American Dream

The cost for maintenance, licensing, insurance, and fuel is jaw dropping too.  If the RWV is not motorized, it takes a beast of a truck to pull it.  Either way, going on a trip is like running hundred dollar bills through a paper shredder, then burning them just to be sure they are toast.  All this just because you don’t want to sleep in a motel bed?  Granted, motel beds are a little nasty, but a can of Lysol spray is a lot cheaper than a camper.  Get over it.

What is wrong with the good old-fashioned approach to travel, such as a seedy motel room, cramped pop-up camper, or simply a tent and a musty sleeping bag?  At least consider other means of family fun that don’t involve so much time and expense before you do take the RWV plunge.

If you can really afford an RV and enjoy using it, great!  We’re not against that.  But if you buy an RWV and can’t afford it, then you’re just hauling your financial problems around the country or have a very expensive lawn ornament covered by an ugly tarp like our pathetic neighbors do.  Don’t do it.

Excerpts from Money Prick by Taylor Young

Gotta love this video about RVs, though (warning: if crass language offends you, please don’t watch).

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Babylon’s Secret

27 Tuesday May 2014

Posted by moneygooguru in Debt, Growing Wealth, House, saving money

≈ 1 Comment

Tags

accumulating weath, babylon's secret, formula for riches, gaining wealth, how do I get rich, how to get rich, richest man in babylon

Beyond repairHave you ever read about the great ancient city of Babylon and its wealth?  It seems that the city’s great wealth was in part the result of the successful accumulation of wealth by many ordinary individuals, not just the ruling powers.  How did the average person go about creating wealth?  What was Babylon’s secret?  Perhaps that centuries-old wisdom can still apply today.

Although how they actually did it may remain much of a mystery, curious suggestions thrive to this day.  As George S. Clason wrote about in The Richest Man In Babylon, it would be plausible that it included some timeless yet very simple personal finance principles.  Perhaps it was common sense then, yet so uncommon today.  What’s at the core of this wisdom?  Let’s review some pivotal bits from The Richest Man In Babylon.

Keep ten percent of all you earn.  That means pay yourself right off the top, before you pay anyone else.  And this is not to be spending money, but saving and investing money.  So make yourself survive on ninety percent to pay for everything else.  Control and reduce your expenses if necessary.  You won’t miss the ten percent.

Before investing the savings from your ten percent accumulations, get advice from experts.  Don’t fall for advice from family or friends unless they are rich (and not just looking rich).  Don’t fall for get-rich-quick schemes – that only works for the schemer selling you out.  And don’t let other idiots lose your money (or then you join the crowd).

Invest to make your money work for you – make it your slave.  Your investments have to earn children and grandchildren.  The power of compounding interest is the key.  Keep in mind that “a small return and a safe one is far more desirable than risk” (quote from The Richest Man In Babylon).venus and mars

Own your home.  Plan to pay it off sooner rather than later.  Make your refuge a great investment as well.  Buy location, location, location.  Think it through before plunging into buying a home.  Get council from experts (not real estate agents, bankers, loan officers, or family and friends who aren’t rich).

Be quick to take opportunities to earn more.  But get council from experts (or you become the expert) in whatever the opportunity/investment field is before plugging in.  The more of wisdom we know, the more we earn.

Do not take on others’ burdens (for lack of them trying and working).  You won’t win by bailing out friends or family who don’t want to make it on their own.  If you want to give them money for an absolute necessity, as in charity, that’s no problem.  Just don’t loan them money, be partners in their grand schemes, or otherwise support their lack of motivation.  But loaning can be good to some, so be a wise gold lender.

Work hard.  If you’re not willing to sacrifice and work your ass off for it, then you don’t deserve it and you probably won’t achieve it anyway.  There is no such thing as lady luck or free handouts.  “Wealth grows whenever men exert energy” (quote from The Richest Man In Babylon).

All, so true.  Thanks master Clason.

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The Minefield of Tax Write Offs

08 Wednesday Jan 2014

Posted by moneygooguru in Growing Wealth, House, saving money

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mortgage, mortgage interest, tax write off, taxes

A lot of people brag about their “great tax write-off.” We snicker. Don’t get us wrong, if you are buying something because you need it and get a tax deduction on the side, that’s great. But when your decision to buy something is swayed because you’ll get the tax advantage, well, that’s laughable…and sad. Why? You’re spending a dollar to save a quarter.Beachy Peachy

One of the most common and largest tax write-offs for the average person or family is associated with the home mortgage. The interest is usually tax deductable. No one seems to do the math, though. We know of too many people who won’t pay off their house early because of the tax deduction, or just as bad, buy too much house because of the tax deduction. And because of not crunching the numbers, they will pay the bank a dollar just to save a quarter on taxes. They will lose seventy-five cents of every dollar they pay in interest! So why would anyone justify keeping a mortgage any longer than necessary or buying more house than they need just because they can write off the interest? The answer is, we’ve been duped.

As if paying a dollar to save a quarter isn’t bad enough, if you have a mortgage you’ll have to pay quite a bit in interest (and/or other deductions) before you even exceed the “standard” tax deduction to make it worth the bother. Did you get this? You have a choice every year to either take the standard tax deduction or itemize your deductions (basically just adding up mortgage interest, property tax, giving to dead presidentscharities, etc.). You can take the standard deduction even if you have no mortgage or any other deductions but if you itemize you’ll have to exceed this amount before it does any good. Unless your mortgage interest and other deductions exceed the standard deduction, you get nothing for all the pain. Why would anyone want to pay that much in interest when you already get a free standard deduction? The answer is, we’ve been duped again. Don’t even get us started on houses and the fact that they’re rarely a good investment when you have a mortgage… (we’re not against houses, just against buying them foolishly).

Tax write-offs are just an incentive to buy (and quite often using credit). They were not created with you in mind, but were created with “others getting your money” in mind. We don’t just fall for this in buying houses either. We may buy all kinds of stuff for our businesses too (vehicles, furniture, electronics, appliances, tools, etc.), thinking that the tax savings make it a good bargain. On the surface it does look like a bargain. But buying a bargain you don’t really need isn’t saving you anything.

Don’t let your tax write-offs be the reason you buy anything. Get stuff you need, charityyes, and take the tax deduction if it’s there. But if you can, avoid even being eligible for tax write offs. If you simply don’t want to take this advice and “have to” have a tax deduction, here’s the best one – give to charity! You’ll get the same tax deduction. You’ll still spend a dollar to save a quarter. But this time the dollar goes for something of a worthy cause, not to increase the bank’s profit. And you get paid back a quarter in tax savings for being so nice. Now there is a good incentive.

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Two Free Kindle eBooks

30 Monday Sep 2013

Posted by moneygooguru in Debt, Growing Wealth, Help is out there, House, saving money

≈ Leave a comment

Thanks for being part of the Boiled Down Money Goo experience.  We thought you might enjoy these humorous tales of money woes and triumphs by our friend Taylor Young.  These are free on Kindle, September 29 & 30, October 1!

Cover How I lost a Million Dollars Twice

Money Prick Cover (Vila 01)

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Too Big For His Breeches?

14 Saturday Sep 2013

Posted by moneygooguru in Debt, Help is out there, House, saving money

≈ Leave a comment

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bad investment advice, criticism, dave ramsey, money magazine, twitter

Dave Ramsey:  Does he sometimes shoot himself in the foot?  From a Crocodile Hunter comment, to an Oprah blunder to recent Tweets, if not shooting himself in the foot it’s a big ol’ foot in the mouth at times.

Money magazine published an article called, “Save Like Dave, Just Don’t Invest Like Him,” in its October 2013 issue.

The first part of the article pointed out some entertaining online comments from Ramsey, who was reacting to negative statements from critics.  I was a little surprised that Dave would stoop to Tweeting, “I help more people in 10 min. than all of you combined in your ENTIRE lives.”  And then there’s the, “Don’t want to get bit by the big dog, stay off the porch.”  Whoa, Dave.  Sounds a little more like “Dog the Bounty Hunter” type of comments to me.  And although Dave has helped a lot of people, including my wife and me, humility is always good.

But why the authors of the Money article brought these online comments up, I don’t really know other than for the entertainment factor.  Or was it to try to attack Dave’s character?  Granted, it is generally just good advice to not respond via the internet to internet attacks.  This should be “Author 101” or “Public Figure 101” kind of stuff.  Regardless, bringing all this up in the magazine article really reveals nothing about Dave’s true credibility as an effective personal finances councilor.  It seems that maybe the authors were fishing for something or someone to string up.

After discussing the online comments, the article attacks Dave’s investment advice.  Admittedly, the authors do point out that Dave’s advice is more geared towards getting people out of debt and not giving them specific investment advice, citing the fact that, “His bestselling book, The Total Money Makeover has about two pages describing which mutual fund to invest in.  There’s an entire chapter on how to save $1,000.”  So why, then, do the authors of this article move ahead to criticize his investment advice?

The first big criticism in the article has to do with Dave’s advice in investment recommendations, some vague and some now out of date.  “Ramsey’s investing advice is weak…,” they state.  Why the authors felt the need to go here is unclear.  More fishing?  After all, The Total Money Makeover, like many other of Dave’s books, was written in pre-2004.  Dave even recommends that you get real investment advice from a qualified professional.  These few paragraphs in the article really should have been left out, because they only muddy the water.  The main focus of Dave’s books is clearly to help people struggling with debt.  Beyond that he does touch on the type of investments to be thinking about once out of debt, but it’s not meant to be an end-all guide for the investments themselves.

The Money article made a big deal about Dave’s claim of 12% stock market returns.  According to the authors, most experts tend to agree that the actual average stock market return since 1926 has been closer to 10%.  Stock market returns can be calculated several different ways, showing the same average return, yet differing in actual returns.  For this reason the article says that, “Returns should be calculated as annualized, or compound, returns.”

Here’s an example of mine to help illustrate this point. What if you invested a bunch of money in the stock market and by the end of your first year your investments went down 50%.  Suppose the next year your investments double in value (100% increase by end of the second year).  The “average” return over this two year period is (-50% + 100%)/2 = 25%!  Sounds fabulous, right?  The actual net two year return is 0% (you’re only back where you started).  This is not to say that Dave made such a boneheaded math error.  I doubt he did.

But the authors spend a skewed amount of text talking about this 12% thing, perhaps making a mountain out of a molehill, considering that Dave’s main point in his investment advice is that you need to be invested in the stock market somehow to see the most appreciable gains in your investments over the long haul.  Most investors would agree with this.  Are the authors just looking to split hairs (which Dave is missing anyway)?  Nevertheless, it is curious that according to this article, Dave was still adamantly defending his 12% return number with a critic during one of his radio programs.  If the mainstream pencil geeks are saying 10%, why is Dave still holding onto 12%?

The next justified reaming is over Dave’s statement that you should draw off 8% of your money in retirement.  Many experts believe you greatly increase your chances of running out of money in your old age if you do this.  Instead, it is recommended that people only draw off 4% or less from their investments in retirement to guarantee that their money will last indefinitely.  Okay, Dave, maybe that one was coming.

Then the article made a surprise shot, not against Ramsey necessarily, but more towards those “religious Christians.”  Why any attempt to tie Dave’s nature, or bizarre comments of clients referred through Dave, to any religion?  It really makes no sense.  I got the feeling that the authors wanted to take a poke at that religion and reinforce a read-between-the-lines notion that, “See, just a bunch of radical, out of touch, lunatics so how could they be smart with money, too.“

Here’s what the article should have been mostly about, though the authors only spent the last third of the article discussing.  It has to do with the part of Ramsey’s business that recommends Endorsed Local Providers (ELPs) to people who may want professional investment advice.  Its sounds like a good service.  But those ELPs generally have to jump through some hoops with Ramsey and apparently, as hinted to in the article, provide a kickback to Dave for referrals.

If that’s true then here’s the main kicker.  The ELPs generally sell front-load mutual funds, meaning that these funds have to outperform non-managed funds (like the S&P 500) in order for you to come out ahead.  I’ve read so many articles over the years that discuss how non-managed mutual funds (like Index Funds) generally outperform many or most managed funds.  So, bottom line, you don’t want to take financial advice to buy a product from someone who stands to gain financially from that product.  Of course, Dave isn’t getting a commission on the front-load mutual funds.  But he steers you to the salesman of that product and perhaps receives a little reward for doing so.

Aside from the Money magazine article, we have a few bones to pick with Dave on other matters.

I am reminded about the Financial Peace University (FPU) course that Dave offers.  It’s a great course and worth every penny of the hundred dollars or so it costs per person for thirteen weeks of video (Dave is excellent in the videos) and class discussions.  We’ve taken it and facilitated it at our church several times.  It’s a lot of effort by church and community volunteers, setting it up, getting recruits (Ramsey does help with advertising flyers), collecting course money, ordering materials, securing a facility to show the videos and hold classes, prep time, presenting the videos, and time leading the class discussions.  Depending on the size of the class, several or many small discussion group “leaders” are needed too, all volunteers.  It’s a huge commitment for about three months. The only thing that has ever bugged me about this whole process is that no one makes any money from it, except Dave.  Granted, in the end, it does help a lot of people.

And then there was the “Oprah incident,” as my wife and I like to call it.  We were excited when, several years ago, we heard that our then hero, Dave Ramsey, was going to be on the Oprah Winfrey show.  We made a point to watch – and were disappointed.  At the critical moment of giving his wisdom-packed advice after hearing the plight of one struggling couple – Dave blew it.  I think he thought it would be a shocking surprise of an answer that would nail his reputation as a wise rebel personal finance counselor, but he spoke too soon.  He blamed the man for not knowing his wife had racked up a bunch of debt.  It was obvious to us, Oprah, and everyone else watching that clearly this man was not at fault.  Even Oprah said something like, “Oh, Dave, I don’t think so.”  Dave tried to pull his foot from his mouth after the commercial break, but unsuccessfully in our minds.

Speaking of foot in the mouth:  In one of his FPU videos, he made a comment about taking risk and getting burned and said something like, “If you play with crocodiles…”  He was referring to crocodile hunter Steve Irwin and that was long before Steve got killed.  I’ll never forget the time hosting an FPU class soon after Steve died.  That particular video had not been updated yet.  When it got to that part where Dave was putting his foot in his mouth talking about the Crocodile Hunter, there was a gasp from the audience.  I cringed in embarrassment.

Then, our personal beef with Dave.  Who knew there is a right way to get out of debt?!

We were always huge fans of Dave Ramsey, yet along the way we noticed that he could be as rigid as a square with his seemingly unbending, black and white approaches.  Sure, for people who are in debt up to their eye sockets he has to take a hard line, recommending they cut up credit cards to stop out-of-control behavior.  But like a drug counselor, Dave assumes that everyone in debt is a debt addict and must avoid it at all times.  Maybe it’s because he gets tired of giving good advice, only to watch people not follow it.  While that is often true, we have found that many people just need to start paying attention to why they are negatively charged!  Once smart folks start paying attention, they figure out the right things to do.  People change.  Hello hero, goodbye zero.

If you’ve read any of Dave’s books or taken his Financial Peace University course, you’ve learned that because of his personal experience with creditors (who insulted him and his wife, among other things) that he has a strong disdain for credit card companies or getting a car loan of any type.

So Dave has his reasons for being rigid on things.  But that hard ass black or white approach ended up knocking the wind from our victory sail when we wanted to call in to the Dave Ramsey show and brag about our being debt free.  Let me back up just a hair first, though.

We did something Dave would not like at all.  We got a loan for a three year old car.  At that time, we owed about as much on our house as we did for that car.  Not long after, we decided to pull money from savings to pay off the mortgage instead of the car.  Why did we do it in that order?  So my wife could reduce her work hours without fear of a looming mortgage.  A large mortgage payment scared her more than a small car payment.  It wasn’t really about the amount of money owed or the interest rate.  It was about a life choice.  You see, working full-time while someone else got to spend most waking hours with our daughter bugged my wife.  She just wanted to cut back on her work hours. Weird, huh?!  So for us it was a no brainer:  Get rid of the highest risk debt first.

Talk about the irony.  Getting that car loan kept us off the Dave Ramsey show.  We were scheduled to shout, with a big ol’ southern drawl, “we’re debt free” on Dave’s radio show.  Then the producer declined to have us on the air because “Dave wouldn’t like” how we had gotten a taboo car loan.  We wanted to say “Hey, but we’re debt free – does it really matter how we got there?”  Who knew that we were debt free losers?

Enough of the criticisms, though.  If you’ve ever heard Dave talk about giving, and how so much more good could be done on this earth if, being out of debt, we could easily give more to good causes, then you understand where his heart is.  I believe Dave’s heart is truly to help others “get it” with money, so that the world is a better place for them and for others they can help as a result.  And he’s living that dream.

So this is for Dave Ramsey:  Despite all the criticisms, we still love ya, Dave.  You’re doing the world much more good than not, and that’s about the best legacy any of us can really hope for.  Just don’t be too proud to tweak your stances on a few things, if needed, as this crazy world continues to change.

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Run From A Reverse Mortgage

10 Wednesday Oct 2012

Posted by moneygooguru in Debt, House

≈ 1 Comment

Tags

borrowed money, expensive mortgage, financial advice, financial tips, home equity, home loan, reverse mortgage, reverse mortgage issues, reverse mortgage pitfalls

Have I Got A Deal For You

Perhaps you’ve heard of the claimed benefits of reverse mortgages, which are touted to help you out in retirement if you’re short on monthly income.  And after all, these products are endorsed by more than one glib and graying famous actor so they must be good, right?

You know the drill:  Get a reverse mortgage and have no more mortgage payments!  All it takes is being at least sixty-two years old and an easy government-insured loan against your home equity.  You receive a lump sum or monthly payments for years to come and get to live in your house too!  What a concept!

I’m not here to say that reverse mortgages are some great evil.  But they do seem a bit devious.  I’ve always been leery.  For some reason, a red flag goes off every time I see one of those poker face ads.

For Sale: Borrowed Money

With a reverse mortgage you greatly increase the risk that you, your spouse or your family will get into financial hot water down the road.  Obviously, someone wouldn’t consider a reverse mortgage unless they were a little strapped for income in the first place.  First big red flag!  Who are they targeting?  Don’t those pesky payday loan stores target people who can least afford it too?  Hmmm…

So basically, because we need extra money to live on we are going to borrow it (with our house as security), right?  When does borrowing money to live on ever make sense?  At some point, especially if you did this at a relatively young age, you will run out of money.  Then what?  Eventually it ALL has to be paid back, with interest and fees.  Is your house really going to appreciate enough to keep up with all that?

You Mean It Will Cost Me?

You are still responsible for paying the insurance, taxes and maintenance on your home after getting a reverse mortgage.  So is it possible or even probable, being so short of cash in the first place, that you may not be able to make some of the insurance or tax payments along the way?  I recently read an interesting article (Kiplinger’s Personal Finance, 11/2012) that reported that 9% of reverse mortgage borrowers were at risk of foreclosure because they were behind on tax and insurance bills.  Another red flag.  Ouch!

Is it also possible that you may slack on doing all the necessary house maintenance since you’re on a tight budget?  If maintenance was neglected for many years (since to keep the house it will always be a priority to pay taxes and insurance first), then so much more money will be lost when your house is eventually sold.  Whose loss will this be?  The bank’s loss?  Your spouse’s or family’s loss?

And then the final red flag is the cost of the loan itself.  These are expensive loans.  You’re going to have to pay for an up front insurance premium (up to 2% of the value of the home, regardless of how much you borrow), loan origination fees (some up to $6000), traditional closing costs like appraisals and title searches, and other monthly service fees that will rob a huge amount of money from your home equity right off the top.  Any time you have a bank or lending institution “help” you with money you can guarantee that they will profit at your expense.  That’s just how they work.

Should I Or Shouldn’t I?

Given the costs of the reverse mortgage loan, your home insurance, property taxes, and required maintenance, how can you possibly come out ahead?  The answer is, you can’t – unless the housing market in your area is so hot (or is hot at the time the loan needs paid back).  Can you ever be sure of the housing market?  This is not something I would want to gamble my largest asset on at any age.  But if you do take the gamble, the lender will profit handsomely up front – and that’s really what’s driving this whole push on reverse mortgages.

So before being tempted by a reverse mortgage, please consider that you would likely be far better off financially, with more peace of mind and with much lower risk, to simply sell your house and rent a nice little downsized house or apartment.  You can take the profit from the sale of your home, bank it or invest it in something low risk and still draw off a nice steady income for much longer.  As we’ve said many times, there is no shame in renting.  And living without debt is so much more peaceful.  That’s what I want in my old age.

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