…does it wear out?

All things, such as cars, shoes, mowers, etc, wear out.  More cars, shoes, mowers, etc, are produced to replace them.  Yet, the aforementioned items lose value.  A house, on the other hand, wears out too.  More houses are built as well.  The difference is property generally increases over time.

Despite the recent housing bust, when looking at history, I’m betting it is a safe bet that home prices will eventually rise.   (I show in detail the stats and reasons why in Barking With The Big Dogs.) They have too – property is a huge tax base for local governments to the IRS.

My point is not to discourage home ownership, but rather to simply say a house is not a good investment for most people.  Most people do not rent or buy and sell property as a real estate investor does.

A house wears out, has major expenses, such as roofs, foundations, termites (as I’m seeing in the house we live in), as well as small continual expenses.  Small expenses may simply be the air conditioner repairman doing tests, to having a bathroom faucet drip being repaired.  Think about all of the little things that happen over the course of owning a house.  Furthermore, lawn maintenance, utilities for operating the house, etc. occurs.

As you can see, just by driving around old neighborhoods, houses wear out, need repairs, renovation or torn down.  Therefore, why is a house considered a good investment?

Probably because the realtors tell us so in order to sell houses as well as politicians so they can generate tax revenues.

In reality, a house for the most part does not produce income.  A business’ building wears out, but the business produces revenue.  (Gold doesn’t wear out.)  Isn’t it really an expense?  Also, a house is not a liquid asset, meaning it cannot be sold quickly for cash.  Liquidity is another criterion for a good investment.  Lastly, when property values change, what does a similar house across the street go for as well?  Do you really have a true gain when all values rise?

So the next time you hear a home is a good investment, consider thing things just discussed…it may simply be a really nice place to house a family.

Check out more truths, myths, hype, etc. regarding property, income, interest rates, taxes, banking, etc.  by ordering a copy of Barking With The Big Dogs.  Your lifestyle just might be affected.

I was reading an article on Yahoo Finance yesterday talking about how to get cash out of your home (basically talking about retirees).  Whether a retiree or not, I’ll show you a few additional details not commonly discussed, nor pointed out in the article.  Take a look.

#1.  Sell it…

Selling the house is a great way to get cash, but selling the house plays to the advantage of the realtor.  Actually the equity in the house may be more for realtor protection than the homeowners’.  Here’s what I mean.  First, some people don’t like to borrow money.  Fine.  Sell the house.  Second, and possibly more importantly, look at history.  Until the late 1990’s, Texas did not allow home equity lending.  The realtors lobbied against it.  Common myth says equity is for homeowner’s protection, but in reality, it protects the realtors market.  They need sales!

#2.  Rent it…

Renting property can take a house of brick and mortar with a ton of cash tied up into a business creating income.

#3.  Borrow it…

For homeowner’s who do not go with option #1 or #2, borrowing can be done.  However, home equity loans come in a couple of ways with vastly different approaches.  The first way is a HELOC (home equity line of credit).  A HELOC is simply an amount of money available against the house, but generally uses the house’s original value and does not need new appraisals, etc.  Simply put, homeowners are borrowing their own money.  The next way is a cash-out equity loan.  The cash-out is different than a HELOC, because it allows the current market value of the home to come into play.  Simply put, if the house has appreciated in value, owners can take the profits out of the house without selling the house.  (See why realtors don’t like the loans?)

4.  Reverse it…

Baby boomers are a big target market right now and a reverse mortgage is a hot topic.  One might be lured into the idea of getting money out without ever making a payment.  True, no payments required (with a couple of stipulations), but any money borrowed has to be repaid…by the heirs or estate for example.  If traditional thinking, meaning pay cash or get a loan and pay off the mortgage worked for past generations, why a reverse mortgage now?  Fact is it didn’t work for many people.  Therefore, if an owner needs money, or potentially will need money, why tie up an enormous amount of money into brick and mortar sitting idle for so many years?

The bottom line is how to get cash out of the home should by why put it there in the first place?

Owning a house may or may not be the American Dream we commonly hear and the answers can be broken down into areas.  Real estate decisions and financial decisions.  People spend quite a bit of time looking for a house, but what appears to be minutes in deciding about a loan or paying cash.  In reality, both are huge decision and they are separate, but equal and should be looked at independently of each other.

Read about it in Barking With The Big Dogs and see what is happening to your (and my) money every day.

The other day I was talking to an acquaintance of mine who decided to not use his money to start a business, but to buy a home. The home made more since to him since he couldn’t find sources for his materials and he (and his wife) are renting an apartment.

I told the client he owns his home no matter if he buys a house or rents because a home is the people and the house is brick and mortar.  (He was shocked when I stated I rent a house.)

With previous housing conversation started, I told my friend a house has no guarantees just as a business has no guarantees; which leads me to the following statement. ‘Which produces income? The house or the business?’ I went on to say a quote I heard several years back, ‘buy the company, rent the house.’

Income can buy the house, but a house doesn’t not produce income.

Don’t get me wrong, I am not against owning a house, rather I understand a house for what it is – shelter (basic to luxurious) and has income potential, but it must be rented or bought and sold. In the case of renting or “flipping”, a house is simply a product as any other in its basic concept.

More on this story later as it pertains to how he was getting some funding…check back, you’ll want to read it.

Okay, so I eat at Chili’s restaurant quite frequently. Been doing so for years and will continue to do so.

Chili’s has (from time to time at least) a $20 for two meal special. Is that a great deal, or value?

Maybe, but Barking With The Big Dogs is now available on Kindle for $15 – and the value here is the insight about banking and lending that affects a lifestyle, not just dinner for an evening.

Download today, or get a paperback copy!

Barking With The Big Dogs is now available.  Enter the Promo Code for a limited time only special.  Thanks.

Make Money In 2011:  Your Home is the caption from an article in Yahoo finance.

There are a few problems with the article as opposed to the title – when you read the Action Plan: Owner, you are encouraged to save money, decrease cash flow and increase equity.

If you want to see how to make money on your home read “Barking With The Big Dogs“.

Paperback is due out on Amazon.com February 1 and will be available on Kindle as well.

I was reading an e-mail regarding debt strategies for struggling businesses.  The question was part of a series.  Today’s topic describes the current situation for people wanting to stay in business, but cash flow is tough and the business is past due with creditors.

(The question is straight-forward and no other assumptions are implied.)  “What is your best option?”

Choices ranged from ignoring the creditor’s attempts to collect the money to telling them the truth about the situation and seeking cooperation.  Other possibilities included setting for a lump sum amount for pennies on the dollar to a payout over a couple of years time.  The final choice is to pay the full amount plus interest over a year, but ask for no payments for the first year.

As it turns out, the answer to the aforementioned question is the final option.  No payments for the first year and the rest paid out over the second year.  This option will be the most expensive, but makes financial since as described by the party producing the question.

My take from a struggling business would concur with the answer.  No payments protects immediate cash flow and limited resources while reducing some risk; and, the no payments choice allows the business the ability to continually try to make money over the course of time to stay in business and hopefully turn things around.

However, from a creditor’s viewpoint, I’m not going a full year without getting paid.  (Even though the question was around you or me as a struggling business and our options, look at the other side as if we are the ones dealing with struggling business as well.)  I want some type of monthly cash flow myself.  As a business, I’m not the bank.  Furthermore, working things out, but collecting some amount regularly might keep their doors open long enough to get my money back; or, at least I will settle for some monetary amount, but I won’t settle for a customer not being upfront.

If the business avoids my calls and doesn’t want to structure some type of agreement, one last thing I might do as a creditor if I do not get my money, I might just send them a 1099-Misc. and treat the amount they owe me as a GIFT!

Why would I send the business or person owing me money a 1099?  First, I’ve lost.  I’m out either the merchandise or my time for services and can’t recover the loss of profit or the cost.  Next, the 1099 is a revenue form filed with the IRS that shows income to the other party.  I might not get paid, but the party owing me the money will have to show the amount as income and pay the taxes (or adjusts their taxable income) to the IRS.  One or two of these 1099′s can earn the reputation that when doing business means honoring commitments by the customer, not just allowing people to walk away.  Go to the bank for financing.  Look at what happened to furniture stores, such as Lacks Furniture in Texas.  They got in trouble financing the furniture and are now out of business.

Getting back to the main answer though, the key is cash flow.

No payments increase cash flow, but what you do with the cash flow difference is very important too.  Speaking of the importance of cash flow, payments, etc. and although I’ve written Barking With The Big Dogs primarily around the house and a mortgage, the concepts apply to any business.  Many business examples will be demonstrated as well.  One such business is the bank itself and you can read the importance of payments and other business tactics and use them on a business or personal level.

We all know risky and greedy bankers were the culprit in the housing market crash over the past few years. We have been told they are the ones to blame. However, they are not the only ones.

Take a look at the following Letter To Bush, from back in 2004, from members of Congress.

What I find really interesting is the stance that Barney Frank, Nancy Pelosi, Maxine Waters, Charles Rangel and company (you can see the full, signed list) were concerned that the Bush Administration was more concerned about “safety and soundness…at the expense of affordable housing.”

In other words, the people in Congress did not like seeing easy home ownership practices scrutinized.

Take a look at the following letter and see who else is to blame for creating the housing bubble leading to the financial crisis for the last few years.

I always keep a cash flow statement close to me. So close, it’s not on a computer or piece of paper, rather I keep it in my head.

Cash flow statements in business are easy to understand. Money coming in versus going out. Cash flow on a personal level is easy to understand too. Paychecks coming in, bills taking money out. Either way, business or personal, if more money is in the checking account at the end of the month, the cash flow is positive. If more money is going out than coming in, cash flow is negative and can lead to deficit spending. (I wish Washington would look at their budgets this way. But I guess this is too simple.)

When looking at a house, figuring the math is very simple.

First, I’ll start with buying a house with a mortgage. Typically, a 30-year mortgage is common.

(I won’t use a 15-year mortgage, because I think the 15-year loan is the most risky loan on the market for the average person. Read Barking With The Big Dogs and you’ll see why.)

Let’s start with a $250,000 house and a 20% down payment.

Using a 30-year mortgage, a loan amount of $200,000 at 6% interest runs $1,200 per month. Taxes and insurance vary, but a good, high estimate is 3% for taxes and 1% for insurance on the value of the property.

3% = $7,500 or $625 per month
1% = $2,500 or $208 per month

When combined, taxes and insurance are $833 per month. Add $833 to $1,200 for a total payment of $2,083 per month.

$2,083 / $200,000 is approximately 1%; therefore, look at paying 1% of the loan amount to own a home. Pretty simple.

(Just as an FYI, the percentage will go up with a smaller loan amount, say 1.5% of the loan amount, but the payment will be less over all, which is what is important. With the maximum amount borrowed, say 100% financing, the percentage is just below 1%. So, for conservative estimates, use 1% of the value of the house. Pretty simple.)

You can see a calculator by clicking here for more precise scenarios.

Now, for those who do not want a mortgage, taxes and insurance are payments you will have every month, year after year, so don’t be fooled in thinking you own a home free and clear. Don’t pay the taxes and see who owns your home.

Also, don’t buy the hype that paying cash is the wisest financial decision either. Yes, paying cash has advantages, but not always financial advantages.

Next, did I mention repairs? Nope.

According to a realtor, expect to budget and pay 3% each year for repairs and maintenance. 3% budgets to $625 per month, just like taxes. More if a foundation or roof needs replacing.

Taxes, insurance and repairs won’t go away just because a loan does.

Read Barking With The Big Dogs for more – and easy to understand – information regarding home ownership, money, loans, investing, that is not commonly discussed – but very important financially.

While driving home, I heard a typical hyped up debt free commercial. The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices. First, live with relatives, who bought a home. However, did they have to get a loan to buy the house? Second, rent. Renting is not always a bad idea, just as homeownership is not always a good idea. Both scenarios have pros and cons. Third, buy a house. Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage. Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving 232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well. If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan. Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages. Mortgages have pitfalls as we all know, but provide benefits. The benefits are not just the ability to purchase property, but can increase wealth as well. Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.