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Ben Bernanke Can’t Refinance His House

October 3rd, 2014 Living Off Dividends Posted in Uncategorized | No Comments »

You know it’s a weird situation when the person responsible for “saving” the US financial industry can’t refinance his own house!

From Bloomberg:

Ben S. Bernanke said the mortgage market is so tight that even he is having a hard time refinancing his own home loan.

The former Federal Reserve chairman, speaking at a conference in Chicago yesterday, told moderator Mark Zandi of Moody’s Analytics Inc. — “just between the two of us” — that “I recently tried to refinance my mortgage and I was unsuccessful in doing so.”

When the audience laughed, Bernanke said, “I’m not making that up.”

“I think it’s entirely possible” that lenders “may have gone a little bit too far on mortgage credit conditions,” he said.

Bernanke, addressing a conference of the National Investment Center for Seniors Housing and Care in Chicago yesterday, said that the first-time home buyer market is “not what it should be” as the economy in general strengthens.

“The housing area is one area where regulation has not yet got it right,” Bernanke said. “I think the tightness of mortgage credit, lending is still probably excessive.”

Luckily, I was able to refinance the house I recently bought in to a 7 year ARM at a ridiculous low rate of 2.875%. It was a no cost, no point loan – the only fee was the appraisal.

Considering that this is also tax-deductible, it works out to a post-tax rate of 1.84% – less than the rate of inflation!

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Rent Vs Buy? The Age-Old Question

May 23rd, 2014 Living Off Dividends Posted in Real Estate | 1 Comment »

Recently, my wife and I decided it’s time to buy a house. Our household income is set to more than double in a few months and we will be in a 33% marginal tax bracket. Time to start taking advantage of the tax benefits the government gives homehome sweet homeowners.

For the past year or so, we’ve been living in Los Angeles’s Westside neighborhood, about 2.5 miles inland from the Pacific Ocean.

Rent’s in LA have skyrocketed in the past year…along with real estate prices.

We currently pay $2,400 to live in a nice 2 bedroom, 2 bath, 1550 sq ft condo. I personally feel the neighborhood is run down, but apparently I’m alone in regards – it considered a very desirable part of town, owing to its close proximity to ocean, jobs, downtown, bars, and restaurants.

But this condo we live in would probably sell for $700,000.

It’s nice, but it’s not that nice!

Unfortunately, despite the somewhat stagnant incomes and employment figures over the past few years, property prices have soared in Los Angeles. Many places are up 25% in the past year or so and nearly 50-75% in the past three years.

It seems local residents are competing with foreign buyers from South East Asia, who are looking for a safe place to park their money. Being historically distrustful of governments, they shun liquid savings accounts, stock market investments and prefer hard assets like real estate and gold. But local real estate can be confiscated by their governments, so they prefer the US – where the judicial system makes it harder for the government to explicitly steal from it’s citizens.

In fact, about 50% of all home sales in the area were all-cash transactions. And in Irvine, the number seems to be closer to 80%.

Unfortunately, this has pushed up home prices on the coasts here, often times making it unaffordable for the local population.

Especially at the entry level.

On the Westside (Santa Monica, Brentwood, Westwood, Venice), it’s impossible to find a house for under $750,000. And even at that price, you’re looking at a tiny house – 1,300 sq ft, and its so old, it probably needs to be torn down and rebuilt.

Of course, if you’re willing to live in “the Valley”, you can find a very decent house for that price, but the trade off is a much longer commute.

So the question most people face, regardless of where they end up buying, is whether it makes sense to buy when prices are so high?

The probably with this calculation is that making an apples-to-apples comparison is hard. There are many variables to consider, and it can become excessively complicated for most people.

Luckily, the New York Times has an amazing interactive tool comparing the cost of owning vs. renting. It factors in home prices, rents, appreciation, opportunity cost for investments, property tax rates, your income tax rates, inflation, etc.

So for a $775,000 condo in my area, assuming a 2% annual increase in home prices and rents, it seems that you’re better off renting even if it’s only by $200 a month.

You need to break the $1 million mark before a home purchase even matches renting.

And $1 million gets you a nice home in SoCal, but nothing fancy like you’d get in any other major city like say Dallas or Atlanta.

Meanwhile, we’re in escrow on a nice 4 bedroom house in the valley. We decided to bite the bullet and a large home so we don’t have to ever move again – unless it’s to downsize in retirement.

I’m liquidating my entire portfolio of dividend paying stocks and municipal bonds to put towards a down payment.

So instead of dreaming of an early retirement, I’ll be starting from scratch to replenish my investments. It sounds like I’ll be pushing back retirement a few years, just for the pleasure of living in a big house.

I don’t believe one’s home is a good investment. Over the past several decades, ample research has shown that home prices have significantly underperformed stocks, even in places like California.

But this is a choice that I’ve decided to make. It’s not something that I’ve rushed into, only to be caught by surprise when I turn 60 and don’t have enough savings to last me another 30 years.

What sort of sacrifice would you make to buy a house?

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Vodafone Investment Finally Paying Off

September 2nd, 2013 Living Off Dividends Posted in Foreign Stocks, Investing, Stocks | 3 Comments »

In April 2010, I made an argument to invest in Vodafone (VOD).

That assumption was based on the fact that VOD owns 45% of Verizon Wireless (VZ) — that value wasn’t reflected in the share price, and eventually Verizon would have to buy back that stake.

After nearly 3.5 years, it seems like the bet will finally pay off. Verizon agreed to acquire Vodafone’s 45% stake for $130 billion.

While it’s taken 41 months for my thesis to play out, I’ve been richly rewarded in terms of share price and dividends. Considering Friday’s closing price of $32.35, that represents a total return of 83%, which is approximately 19.3% per year.

Once the deal actually goes through, there should be a special dividend worth several dollars, as well as some Verizon stock to existing Vodafone shareholders. The price of Vodafone’s stock will likely drop to reflect the loss of future revenues, part of which should be offset by the Verizon stock.

While the stock jumped 8% on news of the acquisition, it’ll be interesting to see how much more the stock jumps Monday morning. It’s rumored that AT&T is interested in acquiring the rest of Vodafone, which might cause a further run up in the stock price.

Sometimes, the best investments take several years to pan out. Patience, as always, should be the cornerstone to your investment philosophy.

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Inequality In The USA

March 16th, 2013 Living Off Dividends Posted in Economy | 3 Comments »

Here’s a really good video about the rise of inequality in America.

As depressing as it looks, we’re still much better off in the US compared to the rest of the world. Take a look at the site. According to nifty calculator, someone who makes a measly $20,000 a year is in the top 11% of the world richest people.

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Pay Congress like Businessmen

December 28th, 2012 Living Off Dividends Posted in politics | No Comments »

Today’s guest post was written by Greg Herlean, a financial expert and founder and partner in USelfDirect, a free resource website for savings and retirement planning and self-directed IRAs.

I am a small business owner and the whole fiscal cliff mess affects me and my children greatly. If you haven’t heard, the fiscal cliff is the description of when the terms of the Budget Control Act of 2011 kick in—at midnight on Dec. 31 of this year. Among the changes are both newer and higher taxes along with spending cuts. It’s widely expected among economists that this will all result in our economy falling into a new recession and unemployment shooting higher.

If the Bush tax cuts expire as scheduled, the lowest tax bracket—10 percent—will disappear, and only the IRS can tell employers what the new income ranges will be for the 15 percent and other brackets higher up the scale.

By sticking with the 2012 withholding tables, there likely would be little change in one’s take-home pay from this year, at least in terms of income tax rates. But overall, workers will see their take-home pay reduced because processors will follow current laws regarding the payroll tax, which funds Social Security.

For the past two years, the payroll tax rate, normally 6.2 percent, was reduced to 4.2 percent. In 2013, it’s set to go back up to 6.2 percent, and on a greater amount of gross income, with taxes applied to the first $113,700 versus the current $110,100.

Effectively, that means someone making $50,000 a year might get about $83 less a month in their paychecks. Someone making twice that would see their pay reduced by roughly $167 a month.

To fix what this current administration has done will take two things: increasing taxes and major decreases in spending. Both have to occur. There must be an agreement from both sides of the aisle that moderate tax increases for a small period of time are acceptable.

But, these tax increases cannot be only to business owners like me who are creating jobs. As a business owner, I take more risks than others. I work my tail off, and when I have them, put my savings and profits back into my company to hire more people and grow my business. But, there are times when I have no net income. Regardless of whether I have a net income, though, the one thing I am assured of getting each year is a big thank-you from the IRS in the form of a bill.

Meanwhile, there are those who take little to no risk as employees and who receive regular paychecks. It is absolutely insane for me to be penalized for making more money than someone else when the only reason for having a greater income is because of the greater risk I take on. As is often pointed out, we’re all in this economic crisis together and any tax increases should be shared among everyone who can afford it, including those with $50,000 to $75,000 incomes. Taxing just the big paychecks does not make sense.

But, that’s all on the revenue side of the equation. As I mentioned above, spending is really where the problem lies.

The government has taken on the role to aid everyone, even people outside of the United States. Congress must be paid like business owners. As a business owner, if I can’t keep to a budget and make my business profitable, pretty soon I’m not only not getting paid, I’m out of a job. Similarly, our representatives in the House and Senate should be in the same position. They should be paid in relation to how they cut expenses and increase not only consumer confidence but also spending and saving.

There should be a low base rate, just enough for rent, groceries and utilities. Then, just like in the private sector, if they do a good job, they will earn more, up to 10 times more based upon certain statistics and indicators, such as job growth, retirement and savings rates, etc. If our representatives were paid this way, I’m guessing they’d make better decisions and be much more motivated to help citizens.

Currently, it’s very easy for our politicians not to treat tax dollars like their own money because it isn’t theirs; it’s ours. And, once they leave office, they receive lifelong pensions—in the form of more of our tax dollars. In a sad irony, more and more citizens have to use up their own savings and retirement funds to pay for government workers’ salaries and retirement.

If we can get government spending under control with this approach in four to five years, then taxes can start to be slowly lowered to more reasonable levels. But simply increasing taxes on higher earners while leaving the rest of the system unchanged is not the solution.

Being that taxes will increase for all, with no clear sight of when it will end, it’s even more important than ever to have a retirement vehicle in which you can shelter your gains from taxes and also pull them out tax free. Shelling some funds now and using them to create and/or grow your business or other investments in the future makes a lot of sense. This is especially true if you’re considering jumping into the real estate business.

If you don’t have a Roth IRA yet, you must open one as soon as possible if you qualify. Open your Roth now, fund it, and then let it grow tax free. It’s truly the best way right now to avoid taxes on gains.

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Taking Investment Advice from the Federal Reserve

September 21st, 2012 Living Off Dividends Posted in Economy, Investing | 2 Comments »

Unless you’ve just woken up from a week-long coma, you already know that Ben Bernanke, Chairman of the Federal Reserve, announced the Fed is going to maintain its Zero-Interest Rate Policy for the next 2-3 years. It is also going to buy $500 billion worth of mortgages every year until the economy improves.

One opponent of this measure was president and CEO of the Dallas Federal Reserve, Richard Fisher. Fisher maintains that buying bonds probably won’t help stimulate the economy. Instead, it will however increase inflation, and expectations of inflation.

As one of the richest members of the Fed, we should probably listen to him. Worth an estimated $21 million, Fisher has worked as a Banker and a Hedge Fund Manager. And he’s been voicing inflation concerns since 2005.

While opposing the Fed’s stance on bond purchases, his personal portfolio is well positioned to benefit from any inflation that might occur due to it.

Fisher owns about $1 million worth of gold in the form of the gold ETF (GLD), $250,000 in uranium, and over 7,000 acres of land in the Mid-West.

In a prior post, I mentioned that everyone’s portfolio deserves an allocation to gold. As a percentage of his portfolio, Fisher’s allocation to gold is sitting at about 5%. In addition to gold, real estate is also inflation hedges. (While I wouldn’t necessarily recommend uranium as an inflation hedge, it is a commodity and thus being somewhat uncorrelated to either stocks or bonds, would provide some value in a portfolio).

So he’s definitely set up his investments to benefit from inflation.

What else does he own? Several million in Texas Municipal Bonds – earning him tax-free interest on his money. And a lot of blue-chip stocks like Eli Lily and Du Pont along with MLPs like Magellan Midstream Partners. You can check out the entire list here.

Nothing like a well-balanced portfolio to live out your retirement years in case your cushy government pension runs out!

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