Should Millennials Rent or Buy a Home?

Usually I like to talk about things that I consider myself well qualified to speak on. This week I wanted to discuss a subject that is particularly relevant to millennials. When should someone look at buying instead of renting? I am currently dealing with this dilemma myself and trying to decide if it is worth it for me to make the plunge.

House

Credit: Danny VB 

From purely a dollar and cents point of view, it usually makes more sense for a person’s monthly payments to go towards equity in a home rather than pay someone else’s mortgage. However, buying and selling homes has a lot of short term closing costs including realtor commissions, loan origination fees, and appraisal fees. So essentially what a prospective homebuyer is looking at is a significant negative short-term return coupled with a steady long-term return. “Home ownership, like stock investing, works best as a long-term proposition,” Pollack and Olen explain. “It takes at least five years to have a reasonable chance of breaking even on a housing purchase. For the first few years, your mortgage payments mostly pay off the interest and not the principal.”

Looking at a house like an investible asset creates another risk to think about. When someone buys a stock or mutual fund, they generally purchase without any leverage. If a person buys a stock for $20 they have to pay $20. A house is one of the only assets that someone can purchase for 1/5 of what it actually costs. If we saw a market decline that was a fraction of what we saw in 2008, most new homeowners would have no equity in their home. Real estate is generally not extremely volatile, but that kind of leverage exacerbates the need to focus on purchasing a home for the long-term in-order to ride out short-term fluctuations in home prices.

Millennials are known for moving around quite a bit, so with this tendency does it make sense to rush into purchasing a home? I’m not sure it does make sense to rush into purchasing a home. If someone believes that they are going to be moving around in the next couple years, I think it makes sense to eat the rent payments and wait to purchase the right home at the right time.

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A Brave New World with the DoL ruling

In 2017 financial advisors are now considered fiduciaries regarding IRA accounts. A fiduciary is someone who puts the benefit of the owner/beneficiary of the assets over their own. Ideally, every financial advisor should always be putting their client’s benefit over their own. Unfortunately the financial industry has had a lot of people who take advantage of their clients. So my question is, what does the new Department of Labor ruling accomplish?

retirementEssentially what the ruling does is force financial advisors to manage money on a fee basis. This means that they can’t pitch individual stock, bonds, or mutual funds and charge a commission/load. Advisors now are forced to charge a predefined fee regardless of the asset managed. Charging a predefined fee takes away the conflict of interest advisors have when choosing products that pay the highest commission over what is best for the client.

If forcing financial advisors to be fiduciaries is the best thing for clients, then why not make them fiduciaries for all client accounts? Is it because the Department of Labor isn’t sure if it is the best thing? Are they worried about making such a dramatic change to the financial industry all at once?

In my opinion the ruling does not cover all accounts because they don’t want to make such a radical change all at once. Financial advisors should always be looked at as fiduciaries. That being said, the financial industry has done a good job evolving on its own when it comes to acting as a fiduciary even if it is not written into law. Even in my limited amount of time in the financial industry, I have rarely seen advisors pushing individual securities to clients on a commission basis, front-end loaded mutual funds have become much less popular, and fee based advisory services are becoming much more popular. I hope the Department of Labor ruling helps build additional trust between consumers and advisors and encourages advisors to do the best for their clients.

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Are Container Homes for Real?

Recently I have been doing a little research into shipping container homes. After a quick Google search it is clear that shipping container homes are feasible. A couple of questions that came to mind were the insulation, cost effectiveness, and legal issues. I decided to do a little digging.

On containerhomeplans.org they discuss 3 methods for insulation including foam insulation, insulation panels, and blanket insulation. Each method has its pros and cons, but the recommended (and most expensive) method is the foam insulation. To cover four walls and the ceiling of one unaltered 20-foot long container would require enough insulation for 476 sq feet. One bottle of Touch ‘n Foam insulation that covers 200 square feet would cost $333. Doing the math, it would cost $493 to insulate each container in the house. Of course, a large consideration is the athletics. Spray insulation has a distinct look compared blanket installation, which can be hidden in the wall.

Container homes

Credit: David Nunn

Part of the allure of making a shipping container home is having the ability customize it. For pricing purposes however, I was able to find Montainer located in Montana that will build and assemble the house for customers. The homes range from 200 sqft to 960 sqft and cost between $60,000 – $160,000. One idea looking through the floor plans of Montainer was that a family could start with one of their homes and expand on the home with additional containers as they want additional floor space. For the DIY homebuilder, according to hometuneup.com a 40 ft container itself can cost between$3,500 and $4,500. If a person knows what they are doing, they can save a lot of money by doing a lot of the work themselves.

Assuming the customization is appealing and the home is cost effective, the legal issues seem like they could pose problems. According to Noah Arroyo of San Francisco Public Press, “Owners of a controversial collection of shipping container homes removed them from their West Oakland lot after city building inspectors threatened fines.” Unfortunately there is no one way to go about getting a container home approved. Ryan Herr of containerauction.com explains, “First, communication. Speak with the local authorities about your plans, explain the designs and benefits, and have examples of other container homes built (ideally in your area or state, or worst case any good example you can find).”

Through my research, I feel comfortable with the idea that a container house is realistic in a lot of areas. I know my questions are not an exhaustive list of issues when it comes to container homes, but they are some of the main issues that I found online. I intend on continuing to follow the trend of container homes going forward.

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Bank of America 2016 Christmas Party

Kathy made dinner for us and then we had White Elephant.

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Assessing Asset Allocation

At some point, anybody with an investment portfolio such as an IRA or 401K has seen a pie chart showing how much equity, fixed income, cash, and maybe alternative investments they have in their portfolio. Depending on how much of each of these investments a person has in their portfolio they are considered aggressive, moderate, or conservative. What does that mean though? Lets break each part down.

Equity represents ownership of something. A person has equity in their house if the house is thought to be worth more than what they owe on it. If a person owns part or all of a business they are said to have an equity share. A share of stock is a small sliver of ownership in a large company. Generally speaking, equity investments have been the greatest creator of wealth for investors. Of course, greater upside means greater downside. If the rental market is sluggish, or GDP growth is not what is expected, the value of equity is going to drop. Because of the risks that investors take by investing in equity, the more equity in a portfolio the more aggressive it is.

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Credit: gold_globalintergold

The other large portion of the pie chart is usually fixed income. Fixed income is a little deceiving I believe. Debt is a more appropriate name for this portion of the portfolio, because fixed income portfolios primarily invest in bonds, which are a form of debt. Essentially what that means is that the investor is lending somebody money. When someone lends money to someone they have recourse if things go belly up. Having recourse and being guaranteed a stream of income makes bonds and other “Fixed Income” generally thought to be safer than equities. By safer, I mean that the returns are often less than equities in the long run, but they tend not to change in value as much in short-term.

Alternative investments. I have seen The Big Short where they talk about synthetic this and derivatives of that… It didn’t end to well… While those are considered alternative investments, alternative investments are anything that doesn’t fall into the bucket of equity or debt. The point of an alternative investment usually is to have exposure to something the will move in contrast to equities and debt, so when the rest of the portfolio drops (and it will at some point) at least something else moves up. The most popular alternative investment I have seen is gold. Gold, unlike equity or debt does not produce any cash flow. All gold does is sit there and look pretty, but that is kind of the point. If the housing market crashes, if the US is delinquent on its debt, gold will still be pretty.

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Game of Thrones Referencing a Movie?

 

Was Games of Thrones making a reference to Airplane!?

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How to Think About Annuities

A quick Google search of “Annuity Strategy” will yield almost 1 million results. It is not difficult to find someone to dole out annuity advice. The first thing anyone shopping for annuities should know is that an annuity is an insurance product. People don’t think that they will become extremely wealthy off of their home insurance or auto insurance. The same is true for annuities. Regardless of what type of annuity a person chooses and the riders on it, the concept is the same. An annuity is designed to PROTECT money.

 

Why would a company sell an annuity? A company sells an annuity, because they believe that they can earn more money on the money than they will pay out to the customer. Show me an annuity that doesn’t accomplish this and I will show you a company that won’t be around for long. This is not to say that annuities are all bad, in fact I believe annuities make a lot of sense in the right situation.

 

One thing I always tell my clients is that, “Annuities are great if you play by the rules.” Annuities can accomplish anything from guaranteed growth, guaranteed income, or a combination of the two. The problem is that many of the benefits that come with annuities also come with costs such as long lock-up periods or high internal expenses. If a person purchases an annuity for one reason such as guaranteed income and ends up cashing it out, it can cost the owner a great deal.

I believe an annuity should not be purchased without a strong financial plan, because they can be so complicated. Often times I use an annuity to cover fixed expenses in retirement much like a pension replacement. As I alluded to in 5 reasons for financial planning in your 50s, many annuity riders have a growth stage before the income stage that can be as long as 10 years. Planning ahead of time and executing on that plan will help the owner get the most out of their annuity.

I can’t count the number of times I have talked to a client that has been sitting on an annuity for years and has forgotten what kind of annuity they purchased or why they purchased it. I guarantee the person that sold them the annuity made it sound like the best thing since sliced bread, and it may have well been a great product. The problem is that if someone purchases a product without a plan often times they cannot take full advantage of it.

An annuity is an insurance product. Insurance can be a good thing to have, but it needs to be used with a purpose. Create a plan and follow through with it to get the most out of an annuity.

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