The Investment Scientist

Archive for the ‘Real Estate’ Category

Last week, the Fed announced another round of quantitative easing (QE3).

This time around, they plan to buy $40 billion worth of mortgage-backed securities with created money until the employment picture improves.  Compared to QE1 and QE2, QE3 is open-ended.

How does this affect your personal finances?

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Commercial property investment

For investors who can’t stomach the volatility of real estate investment trusts (REITs), but also don’t want to get their hands dirty, there is the middle way in real estate investment, namely through a private partnership.

A real estate investment private partnership (REIPP) is a pool of investors’ money that is invested in commercial or residential properties. As an investor, you can contribute capital as a limited partner and let the general partner do all the dirty work. Sounds like the best of both worlds, doesn’t it?

It is emphatically not.

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house for sale

House for sale

My wife and I own a couple of rental properties, so I feel like I am qualified to give my 2 cents worth on another way of investing in real estate – owning rental properties directly.

Now let me be clear: owning rental properties is a business; it is no longer an arm’s-length investment. It is great for some people, people who are hands-on and disciplined, but it could be a disaster for others.

When we posted a notice to rent out our townhouse, the first person to answer was a single mother with three kids. My wife checked her credit – it was bad. When my wife said no to her, she could not hear the pleas of my bleeding heart: Rent it to her! She has three kids to take care of! We’ll waive her rent if she can’t pay!

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Judge’s gavel

Why do I need an expensive lawyer to do estate planning for me? Why can’t I just write my will on a piece of paper with two people as witnesses?

This is a question I got from a woman who owns 11 properties in 5 different states. Here is how I explained it to her.

It’s a bad idea to write your own will. Each state has its own descent and distribution law that governs the distribution of the estate of the deceased.

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Is Refinancing Right for You?

Do you see any evidence of superior investment strategy for the last five years? Seems all is correlated and all is going nowhere.

This is a question I got from a reader of my newsletter.

I hate to be impolite, but I think he is focusing on the wrong thing. Yes indeed, over the last five years, the market has given us one disappointment after another – first the financial crisis in the US and now Europe.

There is a silver lining in all of these crises, though. Mortgage rates are at an all-time low. Five years ago today, the 30-year mortgage rate was 6.75%; now it is 3.5%. If you have a $400k mortgage on your house, do you know how much you save if you refinance?

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Person holding house

I got my power bill yesterday for the first time after moving into my new house. I instantly felt half a million dollars richer.

When we purchased the new house, one of the biggest concerns we had was the utility bill. The previous owners showed us that they spent $1,000 on power and gas each month and that number was pretty constant year round. The house was in good shape, but the windows had not been replaced for 20 years and were leaky.

So the first thing we did after settlement was to replace all the windows.

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Lease agreement

I wrote about our rental property investment six months ago. We purchased the property for $180k, and we are earning a monthly rent of $1,750. That’s a great investment, with cash-on-cash return of 8% after taxes and HOA fees.

All was hunky dory until recently when we got a call from our tenant, who told us he lost his job and he was only able to scrape together $875 to pay for half of the rent.

We told him we appreciated his effort, and we hoped he would get another job soon. Deep down, we are really not sure how long our rental property will be nonperforming.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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