Monday, December 31, 2007

Loose Ends, Year Ends

Many weeks ago, I posed a couple of questions related to our potential move to London. One question was "in what currency we should want our compensation to be" and the other was "what should we do with our condo"?

Seeing as how we have decided, for the moment, not to cross the Atlantic (nor to take the longer route across the Pacific and through Eurasia), and because I enjoyed toying with you as I allowed the suspense to build, there was no urgency in answering them. But since I don't want to have to write a post that begins "Back in 2007...", I'll attempt to close them out now.

To answer the first question -- Would it make more sense to take jobs that paid in dollars or pounds? -- there were a couple things I took into consideration.

Can I predict which way the dollar is going to move against the pound in the next two years?

Of course if I could predict which way the currency markets would move in the next two years then it's a no brainer. In fact, it would be time for a complete reallocation of my investments. Of course, I can't, and anyone who says they can is probably one of the three quarters or so of Americans who considers themselves "above average". Predicting currency markets is notoriously difficult, and anyone who could do it with a lot of accuracy should be quite a bit wealthier than I am.

How much of our total salaries would we spend while we were over there? Would we be able to save a significant chunk of our income?

This is important, because what we earn will go to two purposes -- our living expenses, and our savings. By matching the portion of income that will go to living expenses while in London to the Pound, we'd reduce variability in our effective expenses. That's desirable...

Where do we plan to retire, and what type of currency would we need to finance it?

However, our retirement is much more likely to occur in the US than in London, so getting the portion of our income that will go to savings in dollars, we reduce variability in our retirement savings. That's desirable as well. Retiring in a third location (such as Mexico) would further complicate things, since having a diversified portfolio of currencies might actually reduce total variance the most. But we don't want to get too cute, and it makes sense to think that we'd want to keep our retirement savings consolidated in dollars.

If we assume that one of our salaries would cover our expenses there and the other would go into savings (a big assumption, but a worthy goal), then the optimal solution would be to receive the "spending" salary in Pounds and the "savings" salary in Dollars.

The second question -- what should we do with our condo -- is a little tougher to answer, because it requires math and stuff, but not that tough to set up. The mistake I've heard a lot of people make lately is this one: "It's a really bad time to sell... my property value is down 15% from a year ago, so I'm going to wait for it to come back up." Sound familiar? The problem with that is that it completely ignores the opportunity cost (and probably many other costs) of owning a house or condo.

The "opportunity" part of the opportunity cost is what you'd do with the money you could get if you sold the property. To make the math easy, let's assume my condo was worth $500,000 a year ago, and is worth $400,000 today (if you just spit on your screen, we'd like to welcome you to Southern California). And to further make the math easy, let's assume I have a $300,000 mortgage, so I have $100,000 in equity which I can turn into $76,000 in cash after real estate agent commissions (6% on $400k). These numbers are not real but should suffice for this illustration. Investing that $76k in an index fund or something, I should expect to make about $11k over the next two years (before tax) if I get a 7% return.

Alternatively, I can keep the condo and rent it out for the next two years. Let's set aside property value appreciation for a moment and treat it as a straight exercise of earnings net expenses. For a $400k condo in my area, I should be able to get about $2,000 per month in rent. As a landlord, you should expect a vacancy rate of between 5% and 10%, so let's say I get that rent for 11 of 12 months, for a topline revenue of $22k per year. From that, we must subtract the following expenses:
- association fees of $3,600
- only the interest portion of my mortgage (not principle since that's roughly the same as putting money in a savings account), which would be about $17,000 per year on a $300k mortgage at 6%.
- property taxes of about $5,000 (1.25%)
- other expenses of about $2,000 (plumbers, repairs, carpeting, paint,etc... a half of a percent of property value is very low but the association fees cover a lot of this)
- insurance... zero in my case, as the association fees cover this already
- property management: one month's rent plus 10% of rents. $4,300. Ouch. We would need this since we'd be abroad. You could avoid this fee, but then you'd have a brand new second job as a landlord, so it wouldn't really be fair to compare it to the passive investment of the equity you could get.

So that's a total of about 32,000 in expenses on revenues of $23,000 per year. I'd be underwater about $11,000 per year, or $22,000 for the two years I'd be gone. The alternative, you'll recall, is gaining about $11,000 over the same period.

So now the next question is... will the increase in property value (by itself, since we didn't count principle payments as a cost either) generate $33,000 (real cost plus opportunity cost) or more over the next two years? That's about 4% appreciation (on the initial $400k) per year. Normally, you could answer yes, but I wouldn't bet on it for the next two or even five years.

So for me, the answer is a big resounding "No, thanks. I'll just take whatever someone is willing to pay me for it now." Even if the value has dropped staggeringly in the last year, that has no bearing unless I think that that makes appreciation in the next couple years more or less likely.

"But what about the tax benefits?", you ask, as people so often do when talking about real estate. Simple - there are none. Once you go from living in your home to being a landlord, you lose this benefit. If you were net positive on the income net expense equation, then the tax benefit is that you'd get only get taxed on the net income instead of the total rents.

"But what if you consider a time horizon of more than two years?" You're welcome to do that. But be sure to factor in that once you've been out of your house for three years [corrected--thanks, commenter], you'll lose the best tax break in America - the ability to sell your home without paying capital gains taxes. If you're already underwater, or nearly so, this may not be a concern.

So there you have it - if we were moving to London we'd sell our condo and try to diversify our income into two different currencies. But we're not. So we won't. This entire post was for your benefit.

I hope you'll agree that I have successfully concluded my 2007 deliverables, and we can move on to new business in 2008.

Happy New Years.

Monday, November 26, 2007

Adsense Vs. May Mer Most

[Note: This post was originally uploaded on Oct 7, 2006.]

You'll notice I don't use Adsense on this blog... an odd omission considering my overwhelming appreciation for financial compensation. I've actually used Adsense before a couple times, once on a blog and once on a failed Amazon affiliate site focused on language products. In both cases, the income I made with Adsense was not really worth my time.

As good as Google is - and they are very good - it's just not that easy to make people want to click on ads. Google really tries to make the ads specifically relevant to the page they're on, but you only get paid if people click on the ads. Adsense is really geared towards benefiting elite bloggers who can generate thousands of visitors per day.

That's why the

Monday, Nov 26, 2007: Attention, we interrupt this post with a special announcement. The Google empire has decided, in their infinite wisdom, that certain methods of monetizing blog posts that compete with Adsense are bad news. Even naming the site, which rhymes with May Mer Most, could lead to good hard deGoogling of your site until the only evidence of your previous PageRank(tm) is a gaping hole and a light sheen of santorum.

Now I don't use Adsense, and I haven't posted anything on May Mer Most in a a good long time -- mostly because I just don't have time. But Google is by definition not evil, and if they don't like May Mer Most then neither do I. I mean, how could you side with evil against not evil? I'm sorry Google. Forgive me my trespasses, as I forgive those who have trespassed against me? Lead me not into temptation, and deliver me from evil. For thine is the kingdom, and the power, and the glory, forever and ever.

We now return you to your regularly scheduled blog post.

May Mer Most's paid blogging works better for me. The ad is, by definition, relevant to your content, because the ad is the content. Given that, and the fact that the links have value in and of themselves, May Mer Most can afford to pay the blogger whether people click the links or not. I've only been using the service a short while, but since I started I've found it's much easier to make money. At around $15 per day (for a few minutes work that I enjoy) it's not making me rich, but it's certainly helping with the car payment.

Saturday, November 17, 2007

How Much Does a Rolex Cost? How about a Mac?

I've got a few friends who own actual, honest to goodness Rolex watches. Now, cost aside, I'm about as likely to wear a Rolex as I am to drive a Corvette. A Rolex may be a great watch, but I tend to believe people wear them more for what it says about them than as a great timepiece. If I wanted my watch to say something about me, it would probably be the opposite of what a Rolex says. To me, a Rolex says I've got six thousand dollars with which I've nothing better to do. It probably goes without saying that I never expected to learn anything valuable about personal finance from a Rolex wearer. But I did.

J is a sales dude, and ostentatious displays of wealth are part of his schtick. Tormenting J is a favorite past-time of mine, so I'm sure I made some snarky remark about how I'd rather retire a few months earlier than own a nice watch. J pointed out that he had bought the watch used and, because a Rolex retains its value, he'd likely sell it for close to what he paid for it in a couple of years. Assuming, for simplicity's sake, that the transaction costs are not a factor then J's cost of owning the watch is his cost of capital (k). On a $5,000 watch, that works out to about $30 per month or so. That's not nothing, but it's probably a no-brainer for a guy who's livelihood depends in part on the appearance of success.

I'm sure I sat slack-jawed as he explained this, because I'm a bad multitasker and I was too busy having an epiphany to close my mouth. It should have already been obvious to me that you should consider resale value in the cost of an item, but I sure as hell wasn't doing it in most situations.

Since then, I've seen numerous examples of this principle in action. I've got a film-maker friend who's an ebay power-seller, and he financed an entire movie paying little more than ebay shipping costs. First he bought the high-end cameras he needed (he actually made money on the cameras by modifying them in a way that made them equivalent to more expensive cameras), then returned them to get the money to buy post production equipment, editing software, etc.

And today, I saw an article that used the same concept to explain that a Mac is actually cheaper than a PC. Since I'm in the market for a Mac but really put-off by the price, this was another great reminder that the price of an item is only the starting point for calculating cost.

Friday, November 09, 2007

Financial Koans, Anglo Style

So I haven't posted anything in 5 months. I've been busy. What? It's not like you've been checking back daily.

Anyway, The V-Train and I are contemplating a couple-year stint in London, home of the $20 Burrito (I'm sure it's delicious). So here are a couple of financial questions I've been noodling over. I'll give my thoughts on them later - but first I thought I'd throw them out there for my vast reader base to do their own unbiased noodling.

Question the first - Would it make more sense for us each to take a job that gets paid in pounds, or one of us to get paid in pounds and one in dollars (assuming the total comp will be the same either way at today's exchange rate, and that each of us gets paid roughly the same amount)? What should be the considerations?

Question the second - With the housing market down significantly since last year, would it make more sense to sell our condo in a down market, or rent it out and wait for prices to come back up? Does it matter how much equity we have? What if we were upside down? We live the greater metro Los Angeles area. Assume there's no expat package that helps us with either option.

I await what's certain to be a flood of responses.

[Go to part II of this post.]

Tuesday, June 19, 2007

A Contrarian on Interest Only ARMs

So let's assume you've got full use of your cognitive facilities, and actually get the best loan for which you qualify. But should it be a conventional, ARM, or what? Obviously not an interest-only ARM... as we've already assumed you're not stupid.

But wait... here's a contrarian view. Everyday Finance rightly points out that you don't pay down much principle in the first several years of a loan. And if you're not planning on living in your home more than the time period of the interest-only rate, then you haven't lost much. At 6% interest, in the first 10 years of a 30 year loan, you'd pay down less than 17% of your principle, or about $49,000 on $300,000. So from a risk perspective, it's not as bad as people make it out to be. And if you don't blow that extra money on hookers and coke, you can actually get better returns.

If you've got a low low interest rate (assuming taking interest only doesn't increase your rate), you're probably better off investing your extra cash elsewhere like, say, the stock market. Then instead of $49,000 in equity you could have $55,000 in stock. Hell, I do this with my 1.9% APR car loan right now. Lexus Financial Services is investing in Powershares Water Resources (PHO) on my behalf, and I'd never pay off that loan if I didn't have to.

Don't quite agree with everything in Everyday Finance's analysis (for example, paying down principle is not the same as giving the bank free money) but the key point remains - don't be a sheeple and blindly accept advice from Money Magazine without thinking it through on your own.

SubPrime by Choice

One of the key assumptions of neoclassical economics, one that colors theories and analysis put forth by its practitioners, is that people act in their own rational self interest. How, then, can they explain this report from Fannie Mae that half of the sub-prime loans they purchased in 2005 were held by borrowers that could have qualified for prime loans?

Let's pause for a second to digest that.

The difference between prime and sub-prime loans could be up to 3 percentage points. Even if it's just two points, you're looking at hundreds of dollars a month on your standard Los Angeles mortgage.

So who doesn't shop around when they are taking out a $300,000 loan? Rational people for whom the the several hundred dollars a month is worth less than the time it would take to find a better loan? I'm pretty sure that The V-Train's meddlesome cousin (a former sub-prime loan underwriter) has something to do with this.

Or perhaps people act in their own self interest only if they can recognize what their interests are. Rational, but retarded.

Thursday, May 31, 2007

Test drive of Yodlee

So I've been hearing a little about Yodlee, which offers an account aggregation service. That is to say, they will track all of your accounts - bank, mortgage, credit cards, stock, 401k, student loans, etc on one page, as well as offering billpay services and other benefits, all for the low low price of free.

My first thought is that it solves a real life pain point - and the plusses would be a godsend. That thought was immediately followed by another - if someone got ahold of your Yodlee account, and that account has full access to every other account you hold, you could be up a very deep creek without a paddle.

Still, after a little research, I found that Yodlee has a partnership with HSBC, with which I already have some accounts. HSBC in general has some good security methods, so I went ahead and took the plunge and signed up for their EasyView service.

I did take some efforts to protect myself for now. I chose a unique password that's more complex than the one I normally use. I also left my largest accounts - those holding my stocks and 401k - off for now. I did include all of my mortgage info because, while those accounts are large too, there isn't as much someone could do to screw me up by accessing my mortgages online.

So what did I think? I loved it as much as I thought I would. Accounts like my student loans, that I access rarely and have to look up my account information anytime I want to see them, come up as part of the dashboard, just as easily as my bank accounts and credit card info. Bonus - it computes your net worth for you based on the assets and liabilities in it.

There were a few accounts I couldn't get it to synch with - my car loan, for example - but it gives you a method for manually entering the information. I'll just have to update it periodically as I make payments. I've also heard they have partnered with Zillow, so soon it may go out and automatically get the value of my real estate assets and include that as part of my net worth. I've done it manually for now, because having the liabilities listed without the assets was making me cranky.

Overall, I'm very happy and plan to keep using it. I'll wait a while to decide whether to add any login information for my most sensitive accounts. Your risk tolerance may vary.

Wednesday, May 02, 2007

Back from hiatus

Well, I'm back from my honeymoon. The last month and change has been consumed with preparation and all kinds of things that are generally incompatible with the advice of personal finance professionals. Oh well, I figure as long as we did everything with our eyes wide open, and know exactly where everything fits in my master plan to retire very young, it's all right.

Anywho, now that that craziness is done, things should get back to normal, which means more regular posts here and elsewhere.

Saturday, April 28, 2007

Put back that airplane pillow

Maybe I'm naive, but somehow I assumed that airlines replaced the pillow cases on those little white pillows after every flight. Not so much, it turns out. Airlines mostly use the time at the gate to re-fold the blankets and pick up trash. Ugh.

On another note, I recently bought one of those inflatable neck pillows, and it's really nice. Folds up to about the size of my wallet, and it's really comfortable if I only inflate it halfway.

Friday, April 27, 2007

AMT Reform Finally Here?

I did not get hit with the AMT this year, though I was pretty concerned that I would. It's tough to know if you're going to get hit without doing your taxes, and what with other stuff going on, the taxes weren't finished until late. I had a couple of friends that got nailed with it this year. One owed around $10k more than they thought they'd owe, and the other got hit with a surprise, totally unexpected $30k shortfall. Wiped out his savings and had to put off plans to buy a house. Ouch. I breathed a sight of relief when my accountant finally told me I was due a refund.

I am reasonably certain I'm going to get hit in 2007 if there's no change. I got married this year, and apparently that's not doing me any favors tax-wise. One of the effects of my AMT limbo is that I've been completely paralyzed on certain financial decisions. My financial portfolio is very heavily weighted to a couple of investments, and I'd like to diversify by rebalancing. Unfortunately, with this AMT thing hanging over my head I was concerned that the capital gains from my rebalance would reduce my AMT exemption, thus effectivly getting taxed at 22% rather than the standard 15% long term rate.

The Dems have apparently taken up the AMT mantle this year (risky, since many people, like my friend, don't know they're about to get hit with it and will thus never know that the Dems saved them from it). AMT reform presents all kinds of problems (namely, how are they going to make up the shortfall), but it looks like the Dems have finally agreed on a strategy to protect folks who make less than $250k per year. I'm waiting with bated breath.

Sunday, March 18, 2007

Real Estate Prices Explained

This article from today's New York Times Magazine is one of the most straightforward explanations I've seen for the factors impacting real estate prices.

The long and the short of it - it's not entirely appropriate to think of real estate as a completely different type of asset class, immune to the vagaries of bubbles and speculation.

Shiller’s gloominess has been widely noted. He thinks we are under the spell of that familiar goblin, mass psychology. Lemming-like, people are buying homes merely because they expect that prices will rise. This certainly holds for speculators, like the manager of a rental-car agency at the Tampa airport who confessed to a customer (an economist) that he owned no fewer than 20 condominiums. And it explains some of the impulse to buy second homes, which are closer to being tradable assets than a primary residence is.

But neither is it appropriate to think of it as being the same. Real estate is much stickier. Quoth The Times:

This is the problem I have with the real-estate-equals-dot-com argument. Most homeowners buy to have a place to live. If prices fall, they react precisely unlike stock traders; rather than bail out, they stay put longer. Every share of Cisco may be for sale every day, but every house is not. Case, Shiller’s partner, tracked 628 home listings in the Boston area during 2006, as prices began to fall. After four months, the majority remained unsold, but the sellers lowered their asking prices by only 3 to 4 percent.

But what I liked most about this article was it's treatment about the value of leverage in real estate investing.

Suppose the stock market did rise 10 percent; after a year you would be up $5,000. Whereas the gain on your home would be 5 percent over the entire purchase price — or $11,000. Over 10 years the gap becomes huge — not to mention over 20 or 30 years. This is the little guy’s (and also Donald Trump’s) trick for accumulating equity: leverage.

It then goes on to talk about how leverage is theoretically practicable for investments in other asset classes, but the truth is that the lending rules for real estate are much more forgiving. If stock prices go down and you are leveraged, you're forced to cover immediately. If that held true with real estate, as the author points out, very few of us would be homeowners. Overall, one of the better articles I've read on this subject.

Saturday, March 10, 2007

The Bubbleversary

On March 9, 2000, the NASDAQ stock index hit 5048.62. On March 10, 2000, it began a downward slide from which it has never recovered. On Friday, the NASDAQ closed at 2,387.55, which is a great improvement over 1300 where it sat in September of 2002.

The NASDAQ increased over 500% in the five years leading up to 2000. It had pretty consistently returned 60-70% every five years for the several five year periods before that. There was a lot of talk at the time that things were "fundamentally different". Now it really only matters that large institutional investors thought that, because they move the market. Individual investors really don't have a lot of power to nudge it.

But even if they didn't have market moving power, individuals could still get themselves in a lot of trouble. I remember people who had no business investing in stocks, talking crazy. I remember hearing people say that a stock sounded cheap because it was priced at $10 per share, without any regard for the number of shares outstanding or what that implied about the value of the company. Much less did they try to evaluate the profit the company might return in the future, and what share of that profit their $10 got them.

I remember people buying stock because it was about to split, and they were sure people would buy more stock after it split, driving the price up. They didn't consider that a) a split doesn't change the value of the company and b) even if it did, we ALL knew the stock was splitting, and if it was really that simple a lot of people would have beaten them to the punch.

Anyway, happy anniversary. Did we learn anything? I don't think so. The way I've heard people talk about real estate over the last five years, I'm pretty sure we did the same damned thing just a couple of years later -- people who knew nothing about real estate talking about it "knowingly" like they were Conrad Hilton. Many people think the reckoning has come, but it certainly hasn't felt like a reckoning to me. NASDAQ 2000-2002: now that was a reckoning.

Saturday, February 10, 2007

How to hide stuff from burglars

Good post from Personal Finance Advice on how to hide stuff from burglars. They interviewed a burglar who pointed out that if you hide stuff too well, the burglar will tear your place apart looking for your valuables, causing damage that could be even costlier than the theft itself. Since they want to get out as quickly as possible with your valuables, it suggests helping them do that. By hiding a "stash" where it will be found quickly, you may convince the burglar that they've completed their search, and their desire to get out quickly may become the next highest priority. Interesting take.

Free Language Lessons!

The Foreign Service Institute collects language courses developed by the U.S. Government. Since you own part of the U.S. Government, you therefore own an equal share in anything they develop. You've already paid for these, so there's no need to pay again. Their options include Vietnamese, Chinese, French, Italian, and Spanish. Great stuff.

Friday, January 05, 2007

Stupid Ways to Lose Money

Some forum posters on have been discussing stupid ways they lost money. I'd have to think long and hard to figure out my worst, but suffice it to say that over the course of my life I've lost five figures easy through really stupid stuff. Here are some examples that leap to mind:

- Countless times have I failed to send in rebates, or failed to return non-fitting articles of clothing within the return period. Being absent minded is costly.

- Losing receipts for work expenses is another of my favorite ways to blow money. Being disorganized is costly.

- My favorite: I went shopping for a new wallet with V-Train, and thought it would be a good idea to test containment ability by stuffing TWO HUNDRED DOLLARS cash into the wallet I was considering purchasing, then seeing how it felt. Eventually I decided not to purchase the wallet, and put it back. Hilarity did not ensue. Being retarded is costly.

I thought reading other people's stories would make me feel better, but it made me feel worse because my examples are dumber.

Wednesday, January 03, 2007

Manhattan Real Estate Still Bubbling

Real estate prices aren't going down everywhere. According to the Associated Press, median prices for Manhattan apartments have risen 9% in 2006, and the mean price is up 5% over the fourth quarter of '05. The median Manhattan apartment went for an astounding $760,000 in Q4 of '06, 4.27 times the median home price in Boise, and making me wish my real estate holdings were on the other coast.

On the Upper West Side, large apartments are up 48% over a year ago. Condos stayed flat, and Co-Ops went up 3%: impressive when most of the country is experiencing, if not a burst, at least a deflation.

There are no signs of slowing in '07.

Monday, January 01, 2007

Points Don't Pay

A new study coauthored by Penn State and Freddie Mac shows that an overwhelming majority of the time, homebuyers buy more points than they should. A point, or 1% of the cost of the mortgage, lowers your interest rate a specified amount. The cost-benefit analysis simply entails figuring out how many months you'd have to have a the lower interest rate (and lower payment) to make up for the money you spent on the point. Once you buy the points, if you hold the mortgage for less than that breakeven period, you lost money by buying the points. If you hold it longer, your points were positive ROI.

The study showed that only 1.4% of borrowers who bought points ended up holding the mortgage long enough to make the points ROI positive. Of the people who didn't buy points, only 1.5% of people would have been better off purchasing them.

This study shows a couple of things, I think (even assuming the results are skewed by decreasing interest rates that caused a lot of unexpected refinancing). One: people may overestimate how long they're going to keep their mortgages. But a second likely explanation is that people probably don't bother to do the math. For whatever reason, they may just think that lowering your interest rate is worth more than it really is. Important stuff to keep in mind for the next time you look at a home purchase.

PMI Now Tax Deductible!

Wish this had been in place 10 years ago. For mortgages originating in 2007 or later, Private Mortgage Insurance is now tax deductible! Oh, happy day. This effectively cuts the cost of PMI by a third to a half, dramatically changing the balance between accepting PMI, or taking out a 10% piggyback loan at a high interest rate.

I took the piggyback on my last mortgage, and am paying 8.5% interest (effectively 5% or so after tax deduction) on that piece, and that could go even higher since it's a variable rate. If this had been in effect, I'd probably have gone with the PMI.

Of course, you could avoid all of this with a 20% downpayment, but then you'd lose some of the wonderful power of leverage.

Getting Started on the Right Foot

CNN Money gives some sage advice about the right way to ingratiate yourself with your new colleagues when you start a new job...

- keep your good ideas to yourself for a bit, until your coworkers' guard comes down a bit
- be respectful and subdued, not their best friend
- learn the culture, but don't come off as nosy
- find a way to work with, and impress, influential people

The article gives much more detail on the whys and hows, and makes some very solid points.