patrick.net

"Rich Renters"

Thanks Patrick! Put this down as one of the best-worded thread topics so far.

I get this question asked many times. "Hey, you don't have a mortgage to pay, so what do you do with all that money ?". No kidding. That says a lot about the "ownership premium", doesn't it ?

I think this is a simple question. The answer is - as you would have invested the money otherwise ! The fact that you are a renter doesn't matter. Invest money as per your knowledge, beliefs about the economy, risk appetite and saving goals.

Emergency funds and planned down payment should be in safest investments, CDs, money market funds, short term treasuries - whatever you want.

Rest should be invested in a diversified portfolio - just as you would invest your 401K. Have a goal (retirement, collage etc) and put a plan in place. And stick to it. Rebalance and tune periodically.

The actual choice of investments is too subjective. But the essence is simple.

How about a small percentage of money in a REIT or private equity fund that invests in commercial or overseas real estate? It could keep the diversity of real estate in your portfolio when you are chosing not to buy a place to live in.

Forgot to mention. If you do buy and sell individual stocks, keep good records. This has to be told to the IRS, and you’d better have all the math figured out. It’s not hard, just minor bookeeping, but very difficult to go and figure out after the fact. For instance, if you buy 10k shares of something, then you want to sell 10k shares when you sell. This makes it easy.

The Fidelity brokerage keeps pretty good records. And they allow you to choose particulat tax lots to sell.

The best thing is that the data can be automagically imported into TurboTax.

My focus on the next few years isn't to make a killing. I just want to preserve enough savings if a genuine buying opportunity presents itself in a couple years' time.

Looks like the bond market is not so sure about recession now.

http://finance.yahoo.com/indices?e=treasury

The 10-Year rates are just above 4.8 now. The are above 50 day MA and approaching the 200 day MA at around 4.85.

The yield curve is still inverted though and 10-year rates are way below the MSM newsworthy level of 5%.

The one thing holding the housing market from sliding too fast is the mortgage rates. If the economy remains strong (it is in a good shape IMO), job market is good (at least in the BA), and oil prices have hit the floor. Guess what it would do to the interest rates ? Yes, they would rise. What would it do the housing market ? You have 3 chances to get the right answer ;-)

Personally, I do not believe in retirement accounts. That is just my instinct.

The world will be drastically different in 30-40 years. It is not necessarily productive to plan that far ahead, using today's assumptions.

Not investment advice.

Mutual funds can be a very good investment if you avoid the high fee ones and do some research. I tend to stick to Vanguard and Fidelity though I have a few investments in smaller funds. The 1 and 3 year return numbers are useless. It's the 5 and 10 year numbers that give an indication whether the manager can outperform his index and earn his fees. Also looking how fund in 2001-2003 market meltdown gives you good idea how the fund and manager weather down turns.

If you can get a mix you are happy with index funds, the lower fees and better tax behavior are advantageous. The reason I don't invest in individual stocks is that it takes too much time to follow stocks. Really analyzing a quarterly earnings report and factoring back in the effect of all the footnotes takes 1-2hrs per report. If you don't understand the footnotes, you're going to get burnt. All the important information is in the footnotes. I just don't have that kind of time which is why I'm hiring the mutual fund manager.

I urge people here (the sensible Rich Renters :-) ) to take a look at the one stop target retirement funds offered by most mutual fund companies.

They offer you a simple way to do asset allocation based on your target date and will keep tuning it for you. The simplicity offered by them to do the basic things is worth investigating. Sure you might be able to do a lot better if you have the knowledge and time, or the ability to hire a good consultant. But for most people the "read easy button" (as in Staples ads) is the best option.

SP,

Still, if your friend's wife didn't spend all her money on purses and luxury car leases, she should have quite a bit of money salted away.

I have been reading (like most of you) in the blogsphere a lot about subprime meltdown. Refer to the mortgage-implode-o-meter (http://mortgageimplode.com).

What I have yet to see is this reflected in the real world. I have yet to hear about people having a tough time to get loan or refinance (due to unavailability). I also haven't heard of people needing to change lenders due to this problem.

I am pretty sure, bloggers are WAY ahead of the curve. But if you happen to know such stories, now or later, please share it with us.

What do you do when all the equity has been tapped in your house but you need those Jimmy Choos? Read this 'news' article to find out:

http://www.herkimertelegram.com/articles/2007/01/24/ara/money/821.txt

StuckInBA Says:

> I have been reading (like most of you) in the blogsphere
> a lot about subprime meltdown. Refer to the mortgage-
> implode-o-meter (mortgageimplode dot com).
> What I have yet to see is this reflected in the real world.
> I have yet to hear about people having a tough time to
> get loan or refinance (due to unavailability).

Do you know any illegal aliens buying $800K homes with no money down, or Best Buy Stereo sales guys buying $800K condos (they will have a lot tougher time getting a loan today than one year ago). For more links to subprime bad news see:
http://www.forsakencraft.com/mainframe.html
I’ve got info from insiders and the amount of mortgage fraud in this last bubble is pushing a Trillions (Trillion with a “T”). It looks like the guys working on the mortgage implode site are going to have a busy year…

@SFWoman,

That's not a 'news' article, that's a 'noose' article.

StuckInBA,

You might also try:
http://www.housingbubblecasualty.com/
http://realestatehaircuts.blogspot.com/

Maybe I shouldn't mention this, but most renters aren't rich, and a lot aren't even well-off, and some can barely pay their rent each month.

I don't know what the statistics are, but I suspect most renters who haven't found a way to buy so far, or couldn't do it even with a funny mortgage, are not saving much if any of the differential between their rents and the hypothetical mortgages they could have been paying monthly.

These average renters are unlike the savvy posters here, a moneyed bunch, who are all renters by choice rather than necessity. The patrick net regulars display a general trend of being very interested in discussing the financial potential of the various lucrative investment opportunities for the extra cash they keep accumulating.

I doubt the general non-FB, renting public fits into the mould of the Patrick net commentators posting on this thread.

Any responses?

;)

@tsusiat,

True, but couldn't the same thing be said of most loan-owners? As in, "most loan-owners aren’t rich, and a lot aren’t even well-off, and some can barely pay their loans each month".

I think Patrick used "rich renter" mainly as a rhetorical hook and sarcastic retort to the REIC "rich loanowner" meme.

tsusiat,

I do think this thread is very much geared toward the bubblesitter accumulating cash and not the person (renter or owner) spending every cent either trying to put food on the table or maximizing their lifestyle. Not a large percentage of Americans, either renters or owners, are savers today.

Well, PMI sees more risk in the housing market:
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/01-24-2007/0004512223&EDATE=

HARM,

you're right of course.

I just notice a general drift here at patrick net to all sorts of discussions about finances, inflation etc, which is great, but I seriously doubt whatever economic reality will unfold, is seriously going to benefit renters per se. On the other hand, for renters, there is no current downside risk, unless people believe rents can outstrip incomes (they can't).

What I mean is, I don't think renting and owning are two equivalent but different choices. One exposes you to leverage, one doesn't, one costs more now, one costs less now - but I doubt that people taking the less expensive option are always doing it out of economic smarts, and saving the differential.

Hence I wonder about the many discussions here about how everyone should invest their extra cash - are half the posters here financial planners or brokers?

Wouldn't all these posters talking about investments be making these investments, assuming they have disposable income, whether they are renters or not?

Person Says:

> First, vanguard.com is your friend.
> Then follow these rules (and posted some good rules).

The rule even more important than “Vanguard is your Friend” is “Debt is your Enemy”… I am amazed at the number of “Rich Renters” (and American’s as a whole) that are in debt (and not investing a penny).

Investing is as simple as losing weight, but most Americans never get around to actually investing (or losing weight). Only a small number of people are so stupid that they can’t grasp the concept of spending less than you make and investing rest every month to create and grow wealth. An even smaller number of Americans are so stupid that they don’t understand that consuming more calories than you burn will cause to look like a big fat slob (and have a laundry list of health related issues).

I wish that our public schools would at least try to teach kids the basics of money and investing (vs. just trying to give them “self esteem”) so we would not need places that give “paycheck advances” and loans secured by the equity in your car…

tsusiat,

Well, if we're going to look at it that way, everyone that got an I/O loan should be socking away major bucks too! MY guess is that most of "that crowd" couldn't get out of the county (if a trip around the world was quarter).

What I really admire and value about the "non-licensed"* financial planners here isn't just their incredible grasp of the fundamentals but also their respect for trad. fin. architecture and adherence to common sense. I don't think anyone here is deluded enough to believe that they'll be giving out free condos any time soon (although we've kidded about squatting).

*I know plenty of FP's that haven't learned anything truly new for at least 10 years. Folks here (licensed or not) make every effort to stay informed on all things financial!

I like closed end funds that are in corprate and soveriegn debt and trade at a discount to NAV. There is much less volatility (usually) than common stock and it's so nice to have that monthly dividend (some yield 8% or more). I use www.etfconnect.com to find these.

I loved this advice that Scott Adams of Dilbert fame came up with:

Scott Adams said all that? I thought he just did funny cartoons and books full of acerbic insights into the pathology and pointlessness of just about every workplace. He apparently also provides 'Desiderata'-style lifestyle advice between gags. Sounds apocryphal to me...

Person,

Smart college students who could get their parents to pay the rent might be interested in that.

On foreclosures; my husband just told me that he spoke with our pool man, and he had one of his houses foreclosed upon. I said 'You mean the pool man has more than one house???' and my husband said 'He had at least two that I knew of.'

NYbanker sez silver and gold....

You're kidding....aren't you?

The biggest financial mistake that most people make is to spend too much of their income on their cars. And most people actually do spend too much money on their cars. This sucks the financial health out of the average American - and it kills the potential for wealth accumulation.

Cars are frivolous consumption. Look around yourself on the roads at all the SUVs – expensive to buy and expensive to operate. If you want to accumulate wealth ditch the extravagant car.

Buy a low cost, fuel efficient used car.

Put the money you save into almost any reasonable investment option or strategy and you will be way ahead of the pack.

Paul,

I like etf as well, but etfconnect seems to be lagging in reporting NAV info. I particularly prefer closed-end ETFs with a discount, a good deal is mostly in the buying! I have done quite well getting into heavily discounted ETFs in certain overseas market in the last couple of years. Closed-end ETF is the way to go if you are like me, love discounts, trade frequently, and love to make some quick bucks taking advantage of premium/discount.

If Bush has his way of cutting oil consumption by 20%, corn is the way to go. If he doesn't have his way, oil/gold is the way to go. I am also trying to get into some REIT funds in Germany / Japan where some pockets of real estate is still being undervalued.

As for subprime disaster, all I have to say is, this hasn't hit the Bay Area market yet. Free money is still rampant, and job market is holding up. If we have a few more rounds of Pfizer layoffs, then things will start to roll in the direction that we are anticipating.

I was at Wholefoods today. A guy in front of me had a bursting wallet that held together about ~40 credit cards that stacked up to be around 2 inches thick. He made the payment with one card, it didn't take. Then he swapped to a different one, it still didn'[t take. Eventually he found a card that worked. Oh, did I mention that his wallet was LV?

Then as we walked out to the parking lot, I noticed that he was driving a Boxster.

Anybody you'd like to put in the crosshairs?

http://tinyurl.com/2vh8pt

I think the only retail shorts that I am aware of is Profund, not an ETF tho.

OO/Paul,

There are way too many ETF's to look for. Can you give more pointers, or sector name or whatever else to narrow down the list.

TIA.

Don't invest in Second Life, lol. I haven't been around because a recent article I wrote on my blog got picked up by slashdot, snowballed from there, and buried me.

I'm going to do an article here later on the "Virtual Real Estate Bubble". Yes, as if the real real estate bubble weren't bad enough, people are paying thousands, tens of thousands, or more real dollars to buy pixelated land in computer games. And, judging from some of the responses I received, they aren't any more happy about being educated about the fact they're participating in a bubble than are real-world FBs.

here's the article

StuckinBA,

use the discount ranking function at etfconnect, it will give you the most discounted ETF at present. Of course you won't get into any mortgage / US residential REITs regardless of discount at this point. What I have consistently found out is, for the ETFs selling under its NAV, the discount narrows when they rise, and widens as they fall. Also, foreign closed-end ETFs are closing down their discount gap as more and more people seek diversification into foreign assets.

You can also use etfconnect's filter. However, not all info there is correct. You need to go to the fund's own site to verify the details. The info is also not timely (2-3 days lag). However, it is a good start.

What are other good choices?

Diversify, whatever you choose to do. I can't stress that enough. That includes diversification of/from cash, just in case there ends up being some nasty inflation.

I don’t mind living in a not-so-great apartment if it saves on rent. Unfortunately, the majority of the people in any cheap aparment complex is there because they *can’t* afford anything else.

I live a really crappy complex that's full of people who I think are on H1B visas. Some have pretty senior titles at tech companies (judging by the junk mail that's let lying -around- the overflowing trash bin). I have a feeling that many of these people are "Get in, make money, go back to India and live like a king".

Adam,

I think it is a great idea.

There is a business in offering "smart" apartment products just like the retirement community. I visited a high-end retirement community in the Bay Area last year, and this is what they do. It is a co-op, you have to pass a test, they only admit healthy people but the healthy people can stay there indefinitely even if they slip into a long-term care situation. The rent is very reasonable compared to much lower end products. You need to pay an initiation fee (something like $250K-1.xxM depending on your choice of residence) which is just an equity membership that can be redeemed. You also need to prove that you have steady income from assets at least twice your monthly rent.

When I ran the numbers for my in-laws, the cost of living there is actually LOWER than other lower-end retirement places, especially if they require long-term care later. This place is very cleverly filtering
1) sick, less health-oriented people
2) deadbeats with no prior financial planning

So such a community is a self-feeding healthy cycle attracting the most lucrative and easy-to-maintain customers of the market. The best of all, the cost is actually lower because of such a customer base.

Apartments can be run in the same fashion. I would love to see some apartments that opt to throw people off the street right away if they miss a payment, require a much higher desposit (6 months rent at least) but offer a lower rent for the same product. I think such an apartment community will be naturally attractive to people who are financially savvy and filter out rif-rafs much better.

OO,

Yesterday morning I had the exact thing happen to the guy near me at Whole Foods. I didn't see his car, though.

I love the people in Ford F250s who try to park in the California Street Whole Foods garage. They are never contractors' trucks, no tool boxes or anything. They often have city parking permits (probably can't fit into tiny city garage.) Who are these people that think these are good city cars?

I had a friend who asked if she could park her car in my extra garage space for a few weeks while her garage had some work done on it. When I went to let her into the garage I discovered she had traded her Miata for an F150. She lives in Pacific Heights and is a writer. I ended up not letting her stay in the garage because I wouldn't have been able to get out if she parked in the only spot that fit her truck.

Adam and OO,

Aren't co-op boards like that? They often have intrusive income/cash requirements and unexplained blackballing. People who get through the hurtles end up in nicer digs than they could get if they bought a condo.

I can't see it in a multiple dwelling rental unit though. Seems like something that would violate the Fair Housing Act.