Join Paul Petillo and his co-hosts Dave Kittredge and Dave Ng as they interview some of the top names in the world of finance and discuss some of the most important topic facing you and your money on the radio show: Financial Impact Factor. Broadcasts every day at 6am on the west coast and 9am on the east coast! If you can't catch the show live, listen to it archived.
As Will Rogers once said: “Don’t wait to buy land, they aren’t making any more of it.” But we have developed it making the ground far more valuable and those who own what’s on it, in some instances richer because of it. Over the last couple of days we have focused on your immediate real estate. While your home is not an investment per se, it is often considered one. Owning a hundred homes, or a shopping center or an office tower is an investment. The roof over your head, not so much an investment as a stewardship. You pay for it, you fix it up, you might even spend your entire life in it but at some point, you pass it on to the next owners. And you care for it in that manner, improving it so it is saleable to those next in line.
Today on the Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Dave Ng, we have someone who has focused his career on real estate as an investment: Brad Thomas. Mr. Thomas researches and writes on a variety of real estate based fixed- income alternatives including both publicly-traded and non-traded REITs or real estate investment trusts. He has a broad background in capitalization and sustainable net lease investing. Mr. Thomas currently writes weekly articles for Seeking Alpha and Forbes where he maintains “real time” research on many of the equity REITs and retailers.
Among the topics Brad explained included the risk of owning these investments, how they are structured and the dividends they offer, how to analyze their worth and most importantly, how these investments react to various economic forces. REITs have been around for over five decades and are a widely suggested part of a diversified portfolio.
This is a must listen show for not only the curious investor but those looking to better understand the subject of REIT investments.
I thought that today on the Financial Impact Factor Radio we would switch gears a bit and talk about something that plays a significant role in what defines us as Americans: our homes. Ellen Thomas once suggested: “”Normal is getting dressed in clothes that you buy for work and driving through traffic in a car that you are still paying for – in order to get to the job you need to pay for the clothes and the car, and the house you leave vacant all day so you can afford to live in it.”
It is still a popular notion that the real arrival to adulthood isn’t obtaining credit, managing your personal finances, or even investing and saving for retirement: it is owning a home. And that emotional journey should be anything but emotional. It is without a doubt, the single biggest obligation we will commit ourselves to and in doing so, tighten the knot around the neck of our future plans.
We often think of money in a cold, calculated sort of way. But the money we spend on a house removes that cold calculation with the emotion we bring to the process. In almost every instance, buying a home depends on the visceral appeal of the place we are buying or looking to buy.
There are a couple of considerations we should entertain before we even begin the process, considerations that will play into the process after-the-fact. Housing is cheap, we’ve been told with home prices lower than they have been in almost a decade. That doesn’t make a home affordable. But because of the emotion we bring to the process, we will do everything we possibly can to make the transaction work.
Do many of us consider what a mortgage is? Under early English and U.S. law, the mortgage was treated as a complete transfer of title from the borrower to the lender. The lender was entitled not only to payments of interest on the debt but also to the rents and profits of the real estate. This meant that as far as the borrower was concerned, the real estate was of no value, that is, “dead,” until the debt was paid in full—hence the Norman-English name “mort” (dead), “gage” (pledge). Based on that, isn’t the term homeowner a bit of an oxymoron?
That said, how do we find the emotional middle ground between the reality of what we can afford and what is our concept of a home?
Most of us know exactly how much it costs us to live. We may not have written it down on paper or mapped it out in excel, but we know what our rent is, what our expenses are and how that fits in week over week with our paychecks. This exercise may show what money people like to call either a positive position or free cash flow or a negative one, where we service debt that might be in excess of our take-home pay. Adjusting that for many will be the first step to either dashing those dreams or offering some potential that you might actually be able to buy a house.
We often refer to the cost-of-living in inflationary terms. It costs x-amount of dollars to live in a particular city and you know it might be less expensive to live elsewhere – but this is where you work, where your friends and family live – and you don’t want to move just to buy something more affordable. In some cases, renting might be your best option.
When the two a put side-by-side, houses tend to cost more. Renting can put you closer to work, give you more mobility and perhaps allow you to do so without a car. If the neighbors are not to your liking, you can pack up your belongings and look for friendlier environments. Once you are in a house, and many people across the country can attest to this, you are stuck. That is an emotional weight we often dismiss when we first set that home-buying goal.
So we tell ourselves that a home is an investment. It’s not – at least in the clinical sense of the word investment. It can’t be liquidated with any ease. We even misconstrue the word equity suggesting it is profit. Even people who have homes – with positive market value – still think of their home in terms of the difference as profit on the purchase. And we do so without calculating, in cold hard numbers, the cost of getting it to the point that it is worth more than you owe.
Once in a home, the cost of living changes. Suppose you want to remodel the kitchen in that $250,000 home you just bought. Chances are you will look at the cost of the remodel in the following terms: If it costs $40,000 to redo a kitchen, you tend to suggest that the house is now worth $290,000. When in fact, this is the new cost of the house. Anything north of that figure is equity. And equity, for lack of a better term, is simply a dividend.
This is the first of a three part conversation on Financial Impact Factor Radio we are having on homeownership ending on Friday with a visit from Brad Thomas, Forbes and Seeking Alpha columnist to discuss REITs (Real Estate Investment Trust).
So take a moment and listen to this show as a primer to what will follow on the next couple of days.
Today on the Financial Impact Factor with Paul Petillo, Dave Kittredge and Dave Ng we have as our special guest Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, and President of Economic Security Planning, Inc., a company specializing in financial planning software. He is also the author of six books, the most recent “Jimmy Stewart is Dead – Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.”
Professor Kotlikoff is running for President of the United States in the 2012 election. He is seeking the nomination of the advocacy group Americans Elect.
