Green Investing for your IRA

We need to invest dramatically in green energy,
making solar panels so cheap that everybody wants them. Nobody wanted to buy a
computer in 1950, but once they got cheap, everyone bought them. 

 -Bjorn Lomborg

While there is no “green IRA”, you can pick a
mutual fund, such as the ones mentioned above, or select stocks yourself in
within your IRA or Roth IRA (see
To Roth or Not to Roth).  That is, when you contribute cash to
your IRA, it sits in a money market account, doing little until you invest it. 

 

For an increasing number of investors, “doing good” with their
investments is as important as doing well.

Tapping into this new environmentally
conscious market, more not-for-profit organizations are teaming up with money
managers to create a new line of impact investments.  Here are some examples: 

Green
Century Funds
;

Aquinas Funds; and

Calvert

Caution:  before you pick any, use a resource to
evaluate and compare, such as Kiplinger’s
Finance

Here are the steps to
invest in environmentally conscious companies:

 1.     Select type of IRA:  Before opening and IRA, decide whether a
Roth IRA or a traditional IRA suits your needs (see the Financial Literacy post). 

2.     Open
an IRA
:  Opening an IRA has never been easier.  You can contact a financial
institution, by phone or online, that offers IRAs, usually a bank, brokerage or
mutual fund company.  Do your research
and be sure the broker offers a self-directed IRA, so you can pick your
investment options.  Also, be mindful of
fees charged for trades, that is the buying and selling of stocks or funds.  You want a discount broker.  Finally, name beneficiaries in case something
happens to you. 

3.     Choose
your Investments: 
Your IRA can be made of stocks, mutual funds
or a mixture.  In choosing stocks,
experts such as Jennifer Schonberger of The Motley Fool, suggest that
you focus on particular countries as you make green stock or mutual fund
selections for your IRA.  She notes that China
is an innovator in green technology, though it is also known as one of the
world’s biggest polluters.

4.     Fund
your Account:
  Make a plan to fund your account and stick to
it!   Starting early and contributing
regularly can have an enormous impact your account’s value due to tax-free compounding
of returns (see “Save 10% of
Income
”).

As with any stock market investing, your Green IRA may show you a roller
coaster ride of value swings; however, if you have a long-term horizon, the
significant growth potential should out-weigh this volatility risk.  Also, if you pick a loser, you can always
sell your investment (tax-free) and invest in another.  Good luck!

 

Real Estate: A Money Making Illusion

Many novice real estate
investors soon quit the profession and invest in a well-diversified portfolio
of bonds. That’s because, when you invest in real estate, you often see a side
of humanity that stocks, bonds, mutual funds, and saving money shelter you
from.

-Robert Kiyosaki

Proper diversification of your investments may include real property. However, purchasing and managing rental property isn’t for everyone. Most people are better off diversifying by purchasing REITs (real estate investment trusts) using a mutual fund or an ETF (exchange-traded fund).

Unfortunately, most real estate success stories are either not true or fail to factor in all costs. 

Remember Florida like 15 years ago? Prices were climbing on a monthly, if not weekly basis. However, to achieve good returns, you had to buy well (not pay too much), sell well (not be left holding property after the frothy market collapsed), and cover your costs. Quick flips are taxed at ordinary rates, so having an after-tax profit means selling at a price that covers all you paid to purchase, hold until sale (mortgage interest, property taxes, maintenance), and the costs of sale (usually more than 5% of the gross), plus taxes on the profit – usually 25% or more.

 

But just investing in REITs is so boring ….

If you are serious about buying and managing rental properties, then you have made a decision to go to the business of being an owner/landlord. 

Steps you need to take

Before you can hang out with Kar Po Law, John Sobrato and Hawken Xiu Li, take these steps:

1.      This is a real business!

Almost everyone has heard a story about people becoming wealthy investing in real estate. However, the stories of true wealth accumulation involve people who dedicated substantial time to running a business investing in real estate.  Just to be clear, claiming you need a massive profit on the sale of your home is neither investing in real estate nor a true profit. Your residence is part of your cost of living.  So, before you claim that you profited on the property, you need to factor in all the costs of insuring, maintaining, repairing and improving that residence before sale, as well as the actual costs of sale. Rarely does the net return on a personal residence equal the stock market return over the same period.

2.      Do some research! 

For rental real estate, you will need to do your homework just like any other business to determine what is a good market. That is, find out where property values allow you to buy low enough that you can get a good return on your purchase.  Part of your return will come from property appreciation.  If the market changes and property values decline, you have lost capital.  You want to know what segment of the population is likely to rent from you for a given property and the likelihood of vacancies or late payments.  This is sometimes called a market study.  You should anticipate some level of vacancy (times when you don’t get collect 100% of the possible rent).  Furthermore, you will want to factor in, and anticipate, the cost for advertising, professional fees (legal and accounting), repairs, supplies, landscaping, snow removal, and so on.  Finally, at some point, there will be capital improvements, including anything from a new roof to upgrading electrical systems or changing some part of the internal or external structure.  If your anticipated rental income, less an allowance from vacancies, is sufficient to cover the debt service plus all projected expenses, then you should be in good shape.

3.      Avoid too much leverage (mortgage financing) 

When you have decided on the property, expect to use mortgage financing.  This allows you to buy more property. You are counting on rental income to pay the mortgage principal, interest, property taxes and insurance.  However, if you put very little down, your payments might be quite high, make it less likely that will cover all those expenses (you may need to put in more and use less mortgage financing).  A downturn in property values when you must sell will mean that you must bring money to the closing – a bad thing! A change in the local economy, so that you lose tenants, could result in negative cash flow, which means you are effectively adding capital to the property – also bad.

4.      Form the proper entity to own 

Before you buy, you may want to form an entity – an LLC, corporation or trust.  The entity protects your personal assets, because anyone who tries to sue you as the owner can only claim against the value of the property and other assets of the entity.

5.      Set up all the systems you will need:

Bookkeeping – be sure you know how to treat security deposits, both so the money is not income to and so you meet requirements of local laws.

Legal – form of entity, rental agreements, local law, zoning … you are going to want help!

Tax prep – be sure you know what you can deduct vs. depreciate and so on;

Maintenance – expect to spend time and money on this, or else tenants won’t pay rent on time and may leave; and

The rest– Fire, police, zoning and other contacts.  You may want some form of record keeping for all this, such as rent rolls.

As with our recommendations for starting your own business, setting up proper bookkeeping and getting legal advice at the outset is crucial. See 7 Things to do When Starting a Business.

6.      Put your agreement with partners in writing 

If you join with someone, you will want an agreement that makes clear who does what, in terms of funding and time spent. Otherwise, you could end up in an unpleasant disagreement or worse.

7.      Don’t stay too long at the party

 In the example of Florida mentioned above, many people jumped in too late, which helped push up prices for others until the market crashed.  Many people were left stuck with properties valued at less than their mortgages in the mortgages bust of 2008 and took many years to finally sell.

The flip side of buying well is to recognize when the property so overvalued and sell. If you gauge this well, and if the market later declines in value, you get to redeploy your capital and start over!

So much keep in mind!

True, but you are now more prepared to be a landlord of the future.  Good luck!

 

 

How to Compare Loan Options

“It’s not hard to make decisions when you know what your values are”          

– Roy E. Disney

Difficult Decisions

Which of these options would you choose?

  1. Paying $8,000 of interest over 10 years
  2. Paying $5,000 of interest over 5 years
  3. Paying $3,500 of interest over 2 years.

A little overwhelming isn’t it? This list could be your choices for student loan repayment options, with different payback periods and interest rates. How can you possibly figure out which is best? 

If you said, “Option 3, duh…”, you’d be paying less interest overall, but at what cost? What you can afford to pay, depends on your income. If your monthly payment is too high, you can’t afford to live. You can’t give up too much of your income for student loans or else you can’t pay rent.  

 

So, the smallest interest might not be the best? That also depends on what you think your money is worth over time. 

This comparison is a time value of money problem.  You remember what we said about investing:

        If you invest at 5%, you need just $7,102 today in order to have $50,000 in 40 years.

Okay, now turn this around.  The net present value of $50,000 in 40 years at a 5% rate of return is $7,102. How does that help?  It allows you to compare everything at one point in time, today. 

 

I know, it takes some really good technique with a calculator.  In future posts, we will try to tackle more of this.

Inflation: Money, Not Balloons

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”  

-Ernest Hemingway

College, Cars and Why College Costs Are a Scam

You got cheated on college. Badly. It’s been in the news and on your facebook feed. But how exactly? Well, you know that a dollar invested will grow.  However, at the same time, the prices for goods and services also grow.  When goods and services become more expensive over time we have inflation. How does this prove you got cheated?  Here’s an example, using cars and college: 

Your parents could’ve bought a new car in 1975 for an average price of $4,950. If you bought a car in 2015, the average new car price was $31,252. The price increased 600%. That is the impact of inflation.  

Now let’s compare the cost of just 1 year of college. The average cost of college tuition, room, and board in 1975 was $2,577. 40 years later, the average for college tuition, room, and board in 2015 was $43,921. College costs jumped 1700%!!!!!!!!!!  

 

It’s absurd and that is why so many people today are saddled with insane debt.  

Inflation affects all prices for goods and services, but it really hit college and health care costs the worst.  Anyone who graduated college in the last decade or so knows it!

The Time Value of Money

We must use time wisely and forever realize that the time is always ripe to do right.” 

– Nelson Mandela 

Investing and time

Your retirement is on sale. Right now. And at a big discount.

 

If you invest now, you will be in better shape than if you wait.  Much better. Every dollar can grow.  Sounds magical, doesn’t it?  But your money can grow, if you invest it.  Plant your dollar in a patch, tend to it and it will produce a crop of interest, dividends and growth called capital gains. Something else magical happens, the crop of one year is added to the crop that grows in the following year. So, you not only get interest, dividends and capital gains on the initial dollar, but you also gain interest, dividends and capital gains on the interest, dividends, and capital gains.  And this happens every year.  It is called compounding and it’s awesome. The investment growth in any single year usually isn’t a big deal.  Over time, like several decades until you hit retirement, the impact is huge. Some examples:

  1. To have $50,000 in 40 years, you’ll need to invest $7,102 today (assuming 5% growth market average is about 7%).  Yes, just $7,102 in your patch will grow to be $50,000 in 40 years at 5%. 
  2. 2. But if you wait, and want to have the same $50,000 in 30 years, you need to invest $11,569 at 5%. That’s a big difference. 

Waiting a decade means that you need to save over 60% more than if you just start now, and it doesn’t take a lot to get started. Fintech companies like Betterment have a balance minimum of $0, which means you can start saving just a little bit here and there. Your retirement really is on sale now.  So start saving! 

In future posts, we will describe more on investing.  Just as you have to water and weed your garden, you have to monitor and rebalance your investments.  Also, just as picking what will grow well, producing the best harvest in your garden, while getting rid of plants that no longer grow as well, your investments need to have the right mix.