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The Independent Investor: Should You Consider Renting What You Can't Sell?
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The first thing to remember is there is no such thing as "can't" when selling your home. It is just what price you are willing to take for it. Some homeowners have no choice. Underwater owners that are running out of money to pay their mortgage must sell or face foreclosure. Their woes have been well documented. But what about those of us who would like to sell, either a primary residence or a second home, but have the money to wait for a bottom in the real estate market?
The rental market is booming across America. More than 3 million Americans have entered the rental market over the last three years and as foreclosures mount, that number will only increase. It appears that demand for rental properties is outpacing supply.
Obviously, renting your home only makes sense if you have another place to live. If you are relocating because of employment, on sabbatical for a year or two, if you have a second home, or will be moving in with someone else (because of a marriage, death of a relative, etc.) then the economics of renting may be appealing.
On the plus side, renting allows the owner to keep the property until prices bottom out and, hopefully, begin to appreciate. In the meantime, rental income can cover mortgages, taxes and insurance payments if the rental price is right. Better yet, certain expenses such as mortgage payments, property taxes, repairs, maintenance, advertising, broker's fees, transportation and insurance can be deducted from rental income.
There's also a phantom tax deduction called depreciation (the wear and tear on your property) that you can deduct each year from your rental income. All you do is divide the fair market of your home (excluding cost of land) by its recovery period, which is 27.5 years for residential property. For example, assume your home is worth $350,000 divided by 27.5 years equals an annual deduction of $12,727.27 from rental income.
But there are some negatives as well. Landlords have plenty of headaches ranging from renters who fail to pay their rent, to vandalism of their properties. Housing maintenance issues don't go away simply because you no longer live in your home. Depending upon its age, everything from leaky faucets, non-flushable toilets to really big emergencies like roof leaks, and lack of electricity and heat must be addressed immediately or you may be hauled into court and sued.
Renters too have rights and in some cases, even obvious reasons for evictions, such as failing to pay the rent, may involve the courts and we all know how lengthy court cases can be.
As it now stands, the U.S. government provides a generous tax break for homeowners who have lived in their house for at least two of the last five years. Married couples who file jointly can keep up to $500,000 in capital gains from the sale of their home, tax-free. Singles can enjoy up to $250,000 in windfall profits. By renting your home that tax break disappears under certain circumstances.
If you are renting for just a year or two, there is no problem. Simply move back within the qualifying time period, sell, and enjoy your gains. However, if you want to rent over the long term (five years or more), you need to understand the tax consequences. Of course, you can always have your cake and eat it too. If you are willing to rent for a period of years, then move back into the house for two years and then sell it, you will qualify for the tax break.
Before you decide, find out your rights as a landlord by consulting with an eviction attorney. You should interview property managers. They will charge a percentage of the rental income for handling all of your landlord duties; but it could be worth it. Finally, create a budget that encompasses all the expenses, taxes and other items you might incur as a landlord.
All of this may take more time and effort then you are prepared for, but let's face it, renting is a business just like any other and requires preparation, planning and work.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
Independent Investor: Europe — A Train on the Right Tracks
It finally looks like the European Union is on the right track. After almost two years of vacillating, finger pointing and empty promises, the outlines of a deal were announced this week in Brussels that could provide a solution to Europe’s debt crisis.The EU gave itself a self-imposed deadline of this Wednesday to come up with at least an outline of a deal. It wasn't easy. There were so many moving parts to include that in the end it took a marathon, ten-hour series of negotiations to get everyone on board.
The respective finance ministers addressed the three areas that most threatened the financial well-being of the Union. Greek debt was the first order of business. Europe's leaders vowed to reduce that nation's debt to 120 percent of GDP versus its present rate of 180 percent. Much of this reduction will be accomplished by asking private creditors (mostly banks) to accept a 50 percent loss on the Greek bonds they hold. It remains to be seen whether these financial institutions will cooperate, but governments have historically managed to get what they have wanted from the private sector (or else).
This 50 percent "haircut" is equal to roughly $139 billion, which will be applied to a second rescue plan for Greece. The Euro leaders promised to guarantee the remaining half of Greece's existing debt and will spend as much as $42 billion to insure against further losses. It will take at least another two or three months to finalize this debt deal.
The next issue, of course, was how to mitigate the big hit Europe's banks are going to take in this haircut. The losses they will incur will drastically lower their reserves and the major concern was how to replenish these reserves quickly. The banks have been directed to go out into the open market and raise as much as $148 billion between now and next June.
Of course, the devil is in the details. There is no guarantee that there will be an appetite for new European debt or equity offerings. Still, depending on the terms, there may be demand from countries such as China, Brazil or in the worst case, European governments themselves that may be buyers of last resort if push comes to shove.
The EU recently agreed to establish a European Financial Stability Facility and fund it with $610 billion. Somewhat akin to the U.S. TARP, the ESFS is a bailout mechanism, only instead of baling out banks, the money was earmarked to save countries like Italy, Portugal and Greece.
The problem was the EFSF is just too small to insure the debt of bigger countries. There was a need to leverage the fund in order to insure at least part of the debt of borderline economies like Italy and Spain. The ministers agreed to allow the ESFS to act as a direct insurer of bond issues, which will bring the total firepower of the fund up to $1.39 trillion. This should make new bond offerings by Italy and Spain more attractive to investors, according to the EU.
There is also an effort to entice big institutional investors from both the private sector as well as government sovereign funds to contribute to a special fund, backed by the EFSF, which could be used to buy government bonds as well as to help in the recapitalization of Europe's banks.
I admit there are still a lot of details to work out but the Europeans should get an "A" for effort in finally addressing the core problems of their financial crisis. I do believe that implementing this program will take time. The process will be less than perfect and that could mean more disappointment ahead, but at least Europe is on the right track at last.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Can you blame them?
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It is not too difficult to understand why investors have abandoned stocks en masse. The declines and losses most investors experienced in 2008-2009 were traumatic. Many investors never returned to the equity markets, but preferred, instead, to keep their money in bonds or money markets. Those who did participate in the subsequent stock market rally from March, 2009 to the beginning of 2011 made quite a bit of their money back.
This year, however, the individual investor experienced a level of volatility that was beyond comprehension. It didn't matter whether you were invested in stocks, mutual funds or exchange traded funds, or in defensive areas such as dividend stocks or preferred shares. Nothing was immune and the volatility was insane.
Consider the movement in the S&P 500 Index for one 30-day period in September through October of this year: Up 8.31 percent, Down 7.34 percent, Up 5.34 percent, Down 5.68 percent, Up 7.38 percent, Down 8.70 percent, Up 7.34 percent, Down 10.14 percent, Up 6.65 percent.
By the end of the third quarter the Dow, S&P and NASDAQ all lost more than 12 percent, the worst decline since the fourth quarter of 2008. If you were invested in Europe, the results were even worse with Germany, Italy and France all down over 30 percent. Between the volatility and losses, no wonder the few hardy souls who had stuck with the market since 2009 have decided to abandon ship.
Their desertion has drained a great deal of liquidity from the markets over the past few years. Liquidity is a term used to describe the ease in which you can purchase or sell a security without moving the price higher or lower by an appreciable amount. In a recent story in the Wall Street Journal, "Traders Warn of Market Cracks," several Wall Street traders argue that it is increasingly difficult to trade large amounts of stock without moving the market (price level) substantially.
We have all heard of high-frequency trading (HFT) by now. These HFT firms represent about 2 percent of the 20,000 trading firms that operate in the markets today but account for over 73 percent or more of trading volume. Directed by computerized algorithms, hi-speed computers buy and sell in mini-seconds capturing tiny profits (less than one cent per share in many cases) over and over again 24 hours a day around the world.
In calmer market environments, HFT does provide additional liquidity in the markets and actually drives down costs. Where the system breaks down is in volatile markets like we have today. These traders are geared to make small amounts of money on large volumes. When good (or bad) news hits and markets begin react "in size" the HFT firms back away from trading, which instantly causes a 73 percent drop in liquidity at the very time it is needed most. It is what happened during the "Flash Crash" in May of last year.
In addition, some critics are blaming certain leveraged exchange-traded funds for contributing to the volatility in the markets. ETFs have experienced explosive growth in the last five years and now accounts for 40 percent of the daily trading volume. The use of ETFs that provide two and three times the amount of exposure to an underlying index, they say, causes excess buying and selling that would not occur otherwise. ETF defenders argue that leveraged ETFs only account for 4-5 percent of volume and are simply reflecting market sentiment not causing it. A subcommittee of the U.S. Senate has opened hearings on the issue this week.
The bottom line, in my opinion, is that today's stock market environment is no place for the retail investor unless you have help from a professional. Rampant insider information between government and Wall Street, both here and abroad, overnight trading by professionals that effectively prevents the individual investor from participating in the market's big moves, and the above volatility factors make the markets an unfair arena for most of us.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: The American Autumn
Occupy Wall Street, contrary to press reports, did not "come from nowhere." The American grassroots movement that has spread to more than 40 cities is a natural progression of protests that began in the Arab world this spring.But don't try to compare what is happening today on Wall Street or in D.C. to the ongoing struggle for basic human rights in the Middle East, nor to the riots in Greece over their debt crisis, or the seemingly senseless rampage of young people through the neighborhoods of London this summer. The one palpable thread that weaves its way throughout the masses in this global awakening of civil disobedience is that these protestors are convinced that their governments are no longer listening to them.
One recurring complaint that I have heard ever since Occupy Wall Street descended upon Zuccotti Park in lower Manhattan on Sept. 17 is that the protestors cannot articulate exactly what it is they are protesting against. To me, it is as clear as the sky above. It is the same reason our forefathers held the first Tea Party in Boston. Put in historic terms, these modern-day revolutionaries are protesting "taxation without representation." That no matter how bad the situation becomes for the majority of Americans, the status quo will remain the same
They argue that there is now an entrenched and extremely dangerous liason between Corporate America, Wall Street and our political system that threatens our economic and political freedom. If you have been reading my columns over the last few years, you may have picked up the same message.
I have often pointed to the excesses of Wall Street and railed against the practices of the financial sector. Occupy Wall Street and I share the same opinion of government bailouts that have done little but further enrich our nation's bankers and brokers. Instead of lending out the billions of dollars they received in taxpayer money, the banks pocketed that money, speculated with that money and paid their executives huge bonuses with that money. The country narrowly avoided a second depression because of them and yet, how many of these miscreants have paid for their crimes?
This week we were told that two years after the recession, inflation-adjusted median household income fell 6.7 percent to $49,909. During the recession itself, household income fell 3.2 percent and yet American corporations are making record profits with record amounts of cash in their coffers. Yet, they refuse to hire new workers or even raise the salaries of those they employ.
Whether we like it or not, the rich in this country have gotten richer and the rest of us have gotten poorer and it is a trend that appears to be accelerating.
The Occupy Wall Street movement calls us "the 99 percent." They claim that the top one percent of Americans owns 40 percent of the nation's wealth. They also argue that the gap between the 1 percent and the 99 percent is only going to grow wider. They are protesting (revolting may be a better word) in fear that the middle class in this country will be a thing of the past unless something is done.
The greed of Corporate America also figures prominently in their slogans and protest placards. But a corporation cannot feel greed since it is not human. It is an entity that is driven by only one principal–profit. It cannot, nor should it, be worried about things like humanity, kindness, fair play, a livable wage, etc. So, for example, when corporations are making historic record profits by demanding that their existing workers work longer hours for less money, fewer benefits and no raise or bonuses, it is simply following its stated objective, improving profits. Corporate executives will receive large bonuses to keep costs low and they know that with unemployment over 9 percent they can always replace workers who complain or protest.
There was a time in this country where the very same practices occurred. In an effort to protect themselves, workers organized and government regulated the worst of the excesses of corporation's unbridled devotion to profit. That was then but now unions are a shadow of their former selves.
As for government, if the regulator is beholden to these same corporations, then the system no longer works. Although we, the great silent middle class, continue to pay taxes, continue to dutifully vote to "throw the bums out" and replace them with new bums, our views as to what is fair is no longer represented by our leaders.
Our system no longer works when politicians, in order to get elected, finance their campaigns by taking huge sums of money from the corporate sector. How can they do what is fair and equitable for us and at the same time regulate the hand that feeds them?
How different is that from those days when American colonists were taxed but ignored by a monarch who administered to the favored few residing in England?
There is a growing frustration in this country. We work harder than ever, for less and yet we are told that everything that can be done is being done. Most of us are angry; some about the ecosystem, others about the two wars that are a decade old or our inability to get ahead or even find a job. There are plenty of us that are mad about all of the above and then some.
In my opinion, we are seeing the beginning of a revolt by the long suffering, long silent majority. We have a tradition of taking to the streets when our voices are not being heard, beginning with the American Revolution. Veterans of World War I marched for their pensions. The middle class marched during the Great Depression; farmers marched to forestall foreclosure and food prices. Workers marched for the right to unionize, and women to vote. Today brave and motivated Americans are marching again, and I say it's about time. As long as their protests remain peaceful, count me among them.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
Independent Investor: Pre-Owned Autos Selling at a Premium
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My wife, Barbara, and I have been shopping for either a used or new car. We own matching 2004 Subarus that we purchased used back in 2005-2006. We would much prefer a vehicle with even better gas mileage, but we live in the Northeast where snow and ice demand a four, or all-wheel, drive vehicle and that limits our choice of fuel-efficient transportation.
The good news for us is that although all used cars are priced higher these days, smaller, fuel-efficient models and hybrids are commanding especially good prices. As a rule of thumb, every $1 increase in the price per gallon of gas, the value of used compact cars rises 8 to 12 percent. So if the trade-in value of your car was worth $10,000 last year, it could bring $11,000 this year.
However, this shortfall in supply won't last long. Dealers estimate by late fall or winter the pipeline will begin to fill once again.
Much of this used-car price windfall is a by-product of the 2008 recession. The consumer was hit by the double blow - less income and, thanks to the financial crisis, increased difficulty in qualifying for either a lease or auto loan. As a result, today, three years later, there are a lot fewer used autos for sale. The average car on the highway today is 10.6 years old, according to Polk, the auto research firm. That's up from 9.8 years in 2007.
Another large source of used cars for dealerships has traditionally been the leased cars market. Companies sell leased cars as used when leases expire. But a lot fewer leases were written during the financial crisis, leaving a large hole in supply at the wholesale level.
"Wholesale prices are quite high," said Mike Coggins, general manager of Haddad Dealerships in Berkshire County. "We haven't passed those prices on to the consumer so our margins are smaller."
Still, Coggins isn't complaining since his used car sales are up 25 percent this year, leading all of his other divisions.
The effect of Japan's earthquake has also contributed to an overall shortage of new autos this year. The disaster in Japan disrupted the world's supply chain of auto parts as well as the export of many Japanese-made vehicles to the United States. This is a far cry from three years ago, when all three U.S. automakers were on the ropes and dealerships around the country were closing every day.
It may actually make more sense for us to look at replacing our autos with a new car this time around. I am going to do my research, something you should do as well, if you are planning to buy a car. Figure out the price differences between a used model and a brand-new vehicle before making a decision. I tend to drive my auto for many years (as opposed to trading it in every three years) so the new-car avenue may make economic sense for me. Find out a ballpark asking price for your vehicles from Kelly Blue Book on the Internet and find out what similar cars are selling for in your area.
I know that we would probably get a higher price for our vehicles by selling them to a private party. Something I suggest you try if you really want to get the best price for your car. We will probably take a 10 percent haircut on the price by trading it in to a dealer.
Yet, neither of us is willing to put the effort into listing it on the Internet and haggling with potential buyers. I would much rather devote that time to writing columns for you, my readers.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
