Nationally, foreclosures are on the rise. According to RealtyTrac, 1.2 million homes were foreclosed in 2006—up 42% from 2005. The cities with the highest foreclosure rates were:
- Detroit
- Sacramento
- San Diego
- Las Vegas
- Dallas/Ft. Worth
- Cleveland
- Pittsburgh
- Houston
- San Antonio
- Minneapolis
The question remains, how many bad loans are out there in the marketplace? How many are going to fail? And how will that affect pricing in the coming year or two?
According to a subprime mortgage tracking site, 23 sub-prime mortgage lenders have gone bust (bankruptcy or closed their doors) since December. Twenty-three defunct subprime lenders in less than 3 months is NOT good news for the housing market. Other subprime lenders are no longer operating independently, after having been "rescued" (bought out at fire-sale prices).
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Planning to buy a home in the next 12 months? Well, if you live in one of the cities listed below, you may want to postpone buying a home.
According to CNN, these are the worst 10 cities to buy a home, over the next 12 months. The expected percentage decline is listed below.
- Stockton, CA —> expected 9.7% decline
- Merced, CA —> expected 8.9% decline
- Reno/Sparks, NV —> 8.9% decline
- Fresno, CA —> 7.9% decline
- Vallejo/Fairfield, CA —> 7.8% decline
- Las Vegas, NV —> 7.1% decline
- Bakersfield, CA —> 6.6% decline
- Sacramento, CA —> 6.4% decline
- Washington, D.C. —> 6.3% decline
- Tucson, AZ —> 6.2% decline
In some cities, such as Reno, I think we could see a higher decline than CNN expects. Interestingly, all the cities listed—with the exception of Tucson and D.C.—are in California (or just over the border, in the case of Reno/Sparks).
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More dollar dumping —
According to The Financial Times, The Bank of Korea plans to diversify its foreign currency reserves to gain higher returns. Apparently the bank is not happy with the U.S. dollar (and who can blame them?). The Bank of Korea plans to invest part of the nation's huge international reserves ($240 billion—the world's fifth largest) in overseas stocks (notably the blue chips of advanced countries) in an effort to gain higher returns. Korea's move follows a policy switch in China which also wants to diversify its $1 trillion+ of foreign reserves (70 percent or more of China's reserves are held in dollar-denominated assets).
Hot on the heels of Korea's announcement is Syria. Syria recently announced that it has replaced the dollar with the euro for half of its foreign currency reserves. According to the Syrian Prime Minister, this was done—in part—to counter possible U.S. sanctions.
I expect more countries to follow suit.
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West Coast residents lack confidence in the local real estate market, according to recently released survey data by The Experian-Gallup Personal Credit Survey. According to Experian, 52% of West Coast (U.S.) residents fear that house prices will severely decline.
Nearly half of all American consumers (47 percent) say a housing price crash is likely in their local real estate market within the next three years. This has increased from the 37 percent of Americans who felt this way in May 2005, and the 42 percent voicing the opinion in April 2006.
- 44 percent of Southern residents believe that a housing price collapse is likely within the next 3 years.
- East Coast residents were next in line, with 42 percent fearful of a housing price collapse.
- The Midwest clocked in at 41 percent, the least likely to be concerned about declines in home value.
The survey also showed that renters believe a drop in housing prices is more likely (57 percent), than do homeowners (43 percent).
Consumer confidence in local real estate markets (notably California) is dropping.
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In an earlier post, I wrote about how the euro is gaining popularity as countries begin to reduce their dependence on the U.S. dollar. Last Wednesday, Kuwait announced that it may abandon the dollar, in favor of a basket of currencies, to protect its economy. This decision is being studied by Kuwait's central bank.
Kuwait is currently the third-largest Arab oil producer, and it has pegged the local currency (the dinar) to the U.S. dollar. However, this dollar-peg has been harmful to Kuwait's economy. Without the peg, the dinar would have appreciated in value, due to the increase in oil prices.
According to Deutsche Bank, most of the currencies of the six Gulf Arab states, including Saudi Arabia and Kuwait, are undervalued against the dollar. Bloomberg has a very good article on Kuwait's decision to reduce its dependence on the U.S. dollar. The article notes:
The U.S. needs to attract about $2.5 billion a day from foreign investors to keep the dollar steady and fund a current account deficit that widened to a record $225.6 billion in the third quarter of last year.
I expect more countries to start moving away from the dollar. Kuwait is only the beginning.
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The U.S. dollar remains the world's reserve currency (for now), with central banks holding 2/3rds of their reserves in dollars. But, according to recent news, the dollar's status as the world's reserve currency is changing. The dollar is being challenged by the euro, which is now five years old.
For the first time ever, the value of all euro notes in circulation exceeded the value of all dollars in circulation. The total dollar value of all euros in circulation (at the end of 2006) was $828 billion, compared to $753 billion worth of dollars.
Even more ominous is the fact that many countries are diversifying away from dollars into euros (or threatening to do so).
- Russia has threatened to price its huge oil and gas exports in euros instead of dollars as part of a strategic shift to forge closer ties with the European Union, and to hedge against the falling dollar. Russia is the world's second largest oil exporter.
- Sweden has cut its dollar holdings, from 37 percent of central bank reserves to 20 percent, with the euro's share rising to 50 percent.
- UAE Converts Dollars to Euros – The declining U.S. dollar has caused the United Arab Emirates, a close U.S. ally, to convert eight percent of its $25 billion foreign exchange reserves into euros. Kuwait and Qatar have indicated that they plan to make similar moves.
- Other countries, including Russia, Venezuela, Indonesia and Iran also have decided to cut their dollar reserves or, in Iran's case, start pricing oil in euros. Iraq has priced its oil in euros since 2000.
Fred Bergsten, director of The Peterson Institute for International Economics, predicts that within 5 to 10 years, half of all global finance could be conducted in euros…
The euro is the first currency in 100 years that can really compete with the dollar on a global level. The U.S. dollar has been the dominant currency because it's had no competition. The creation of the euro changes all that.”
The U.S. is the world's largest net debtor, and the world's largest net borrower. What is not commonly known is that the main financiers of the U.S. deficits are not U.S. allies such as Japan and Europe, but rather competitors such as China, Russia, and Middle East nations. In fact, China holds 20 percent of all foreign reserves (roughly $1 trillion), which could create a sticky political situation, given China's growing economic power and its status as a massive exporter.
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Ben Yoskovitz has compiled a great collection of articles on entrepreneurship. This week's Entrepreneurship Carnival includes advice for entrepreneurs, characteristics of successful entrepreneurs, thoughts on success and failure, marketing insights, and much more.
If you're a entrepreneur (or an aspiring entrepreneur), go have a look. You'll love reading through these articles.
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Interestingly, research shows that immigrants are more likely to become successful entrepreneurs than native-born Americans.
- According to a new study released last week by Duke University and UC-Berkley, immigrant entrepreneurs founded 25.3 percent of all U.S. engineering and technology companies established in the past decade. This is very significant, since immigrants make up only 11.9 percent of the entire U.S. population.
- In every 10-year census from 1880 to 2000, the percentage of immigrants who are self-employed is higher than the percentage of natives who are self-employed.
- According to the 2000 U.S. Census, immigrant women were more likely to be business owners when compared to native-born women. Census data shows that 8.3 percent of employed immigrant women were business owners, compared to 6.2 percent of employed native-born women.
This leads me to wonder why immigrants are more likely to become successful entrepreneurs. What characteristics do foreign-born immigrants possess that most native Americans are lacking? Why is there such a high rate of entrepreneurship among immigrants?
Characteristics of Entrepreneurs
A research study, conducted in 1994, analyzed more than 50 studies conducted on the personality traits of successful entrepreneurs. This study found a consensus around six general characteristics of entrepreneurs:
- tolerance of risk, ambiguity and uncertainty
- commitment and determination
- creativity, self-reliance and ability to adapt
- leadership
- opportunity obsession
- motivation to excel
Other research on entrepreneurship has linked various demographic and cultural attributes to a higher likelihood of business success. These characteristics include:
- Being an offspring of self-employed parents.
- Being fired from more than one job.
- Being an immigrant or a child of immigrants.
- Previous employment in a firm with more than 100 people.
- Being the oldest child in the family.
- Being a college graduate.
In my opinion, immigrants have many of the same character traits as entrepreneurs. This may make them predisposed to succeed at a higher rate in the area of self-employment and entrepreneurship. I think the three biggest factors that link immigrants to entrepreneurship are: (1) risk-tolerance, (2) having the ability to adapt to changing and unfamiliar situations, and (3) motivation to excel combined with lots of hard work.
Tolerance of Risk, Ambiguity & Uncertainty
Immigrants are—by and large—a group of people who have shown (by the mere act of immigrating) that they are willing and capable of taking risks to improve their lives. Compared to the risks associated with immigration, the risks of entrepreneurship are small.
Although there are American-born people with this "can-do" attitude, they're a small percentage of the population, just like immigrants are a small percentage of the population of their county of origin.
Ability to Adapt
The ability to adapt to changing circumstances and a foreign environment creates confidence in your abilities and skills. This is a huge advantage when starting a business. Many immigrants have no family or friends in the country they are immigrating to. Thus, self-reliance becomes critical.
Immigrants must overcome numerous challenges during the adaptation phase (language barrier, culture shock, outsider status, no family ties, possible discrimination, etc.). The ability to adapt to a foreign environment can be easily transferred to the business world. All of the immigrants I have met (so far) are exceptionally hard-working people. They work long hours, and are not afraid to get their hands dirty. Is it any wonder that they succeed financially?
Motivations for Entrepreneurship—Desire or Necessity?
I wonder whether some immigrants are forced into entrepreneurship out of necessity, rather than desire. Many lower-class immigrants do not have a college degree, and therefore do not "qualify" for white-collar, office work. Maybe some immigrants experience discrimination during the hiring process (due to accent, foreign mannerisms, etc.) and so, working for themselves becomes a necessity. This is simply speculation, but it could play a role.
Motivation to Achieve
I find it fascinating that research on entrepreneurship shows a higher rate of entrepreneurship among children of immigrants, than children of native-born Americans. I think children of native-born Americans are handed things too easily, which kills motivation, initiative and desire to achieve.
Children who are handed expensive cars, college educations, vacations, and new houses—all funded by mommy and daddy—rarely become first-generation millionaires or successful entrepreneurs. Why is this? Because life is too easy. What motivation do these children have to achieve? Too much has already been handed to them. They are not accustomed to overcoming obstacles.
Children of immigrants are "hungry" in a way that children of native-born Americans are not. This hunger for success drives the creation of new businesses, and the cultivation of skills necessary for financial success.
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Your geographic location can affect your personal and business finances in a number of ways.
For one, your geographic location plays a role in career options. It can affect the type of jobs that are available to you (if you're an employee), or the type of talent you can hire (if you're an employer). Your geographic location can also affect your maximum salary, the cost of home ownership (can you comfortably afford to buy a home in your area?), and the amount of annual taxes you'll pay. To a smaller extent, your geographic location can affect your professional circle (local mentors, colleagues, competition).
Sometimes it pays to relocate to an area that meets your needs and allows you to lead a higher-quality of life. Of course, "a higher quality of life" is defined differently for different people. For some, a higher-quality life, means a smaller, more affordable city where they can raise children. For others, a higher-quality life means living in a large metro area with a lot of different career options.
If you work in technology, Wired Magazine has just published a list of the top 10 technology cities. These 10 cities were chosen for their technology talent, geeky culture, and tech amenities.
Top Technology Cities
According to Wired Magazine, the following 10 cities are tops for technology:
- Seattle
- San Francisco Bay Area
- Los Angeles
- Austin
- Orlando
- Raleigh-Durham
- Pittsburgh
- New York City
- Boston
- Washington, D.C.
It would be nice to see a list of smaller cities that are technology hotspots. Most of the cities on Wired's list are large metro areas (i.e. NYC, LA, SF, DC), with the exception of Pittsburgh, Austin, and Raleigh-Durham.
Seattle, San Francisco, and New York are well-known as technology hotspots. However, cities such as Orlando, Pittsburgh, Austin, and Raleigh-Durham are less well-known.
Austin and Seattle are good choices for technology startups, since both Washington and Texas have no state income tax. Zero state income tax (at the personal level) can help new business owners keep more of their hard-earned money, and make the transition to entrepreneurship less rocky. Texas also has a number of tax benefits at the business level. My vote would be for Austin, assuming you can handle the hot weather.
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Morningstar polled 600 advisers in August and found that 65 percent of them expect more than double-digit growth in alternative investments, which include hedge funds.
"We were surprised to find that the majority of advisers expect double-digit growth in alternative assets under management every year for the next five years," said Steve Deutsch, director of separate accounts and managed investments at Morningstar.
These expectations might be 'unrealistic,' says a Reuters report. And, the Daily Reckoning comments…
Unrealistic? They are hallucinating. This year hedge funds actually underperformed mutual funds; hedge funds made about 7% in the first nine months of the year, while mutual funds did about 8 percent. Compare both of those to the S&P, which is up 12 percent.
Double-digit gains? It is possible…but very unlikely. With 9,000 funds, odds are they are going to generally mirror the performance of the broad market. How could they not? They ARE the market. But investors are likely to do worse, because the hedge funds charge such high fees. And if the markets go down, hedge funds are likely to go down further and faster, because they tend to be leveraged.
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Pennies and nickels are now worth more melted down than at face value.
In an earlier post, I wrote about how the government is losing money by minting pennies and nickels. It now costs 1.73 cents to create a penny, and 8.34 cents to create a nickel (6.99 cents for the metal, plus the cost of production).
Instead of operating at a profit (or at least break-even), the U.S. Mint is now operating at a loss.
In an effort to prevent arbitrageurs and opportunists from profiting off the metals (contained within the coins), the U.S. Mint has placed a ban on melting pennies and nickels. According to Yahoo News, "U.S. Mint officials said Wednesday they were putting into place rules prohibiting the melting down of 1-cent and 5-cent coins. The rules also limit the number of coins that can be shipped out of the country." The new regulations prohibit the melting of 1-cent and 5-cent coins, with a penalty of up to five years in prison and a fine of up to $10,000 for people convicted of violating the rule.
Assuming that commodity prices continue rising, the "operating loss" for the U.S. Mint (Read: U.S. taxpayer) will continue climbing. The nickel is particularly vulnerable since there is a known shortage of nickel due to surging demand from China.
How long can the U.S. Mint continue operating at a loss—before they decide to make coins out of non-metals?
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Wal-Mart Expanding to India
Like many investors, Wal-Mart smells opportunity in India.
Yesterday Wal-Mart announced that it has formed an alliance with Bharti Enterprises Ltd. (India's leading telecommunications company) to open hundreds of stores in India over the next several years.
According to Investor.com, "Under the deal, Wal-Mart and Bharti Enterprises will set up a joint venture to manage procurement, inventories and logistics, while stores will be set up under a franchise agreement, said Sunil Bharti Mittal, the chief executive of the Indian company."
The Indian retail market is worth approximately $200 billion currently, and this figure is growing by about 30% a year. According to Technopak Advisors (a consulting firm)…
Organized, or branded, retail makes up only 3 percent of the market, compared to China's 20 percent and Thailand's 40 percent, but is forecast to rise to 15 to 18 percent by December 2011."
Until recently, large retailers such as Wal-Mart and Target have not been allowed to set up operations in India. As The Daily Reckoning notes: "When India opens its markets [to foreign competition], there will be a massive influx of investment spending. Stores will have to be built. Access roads will be carved into the countryside. Pipes will be laid. Wells will be built. And on top of that, salaries and benefits will be paid to thousands and thousands of workers."
No doubt Wal-Mart's effect on the Indian economy will be massive. Just look at Walmart's effect on the U.S. economy.
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Many of you may have already read this, but Milton Friedman, Nobel-Prize winning economist and advocate of personal choice and limited government, died last Thursday (11/16) at the age of 94. Friedman championed personal liberty and changed the way the world thought about macro-economics, free markets & enterprise.
Many of his ideas were controversial, including Friedman's push to decriminalize drug use, and his advocacy of school vouchers. Friedman viewed school vouchers as essential to give poor children a better chance to attend quality schools. Taxes, Friedman said, should be cut and simplified.
"America has lost a true visionary and advocate for human freedom," said Gordon St. Angelo, president and CEO of the Milton and Rose D. Friedman Foundation.
"Milton's passion for freedom and liberty has influenced more lives than he ever could possibly know. His writings and ideas have transformed the minds of U.S. presidents, world leaders, entrepreneurs and freshmen economic majors alike."
In the spirit of Thanksgiving, thank you Mr. Friedman for your contributions to the world of economics.
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The Washington-based Tax Foundation found that nationally most people in the top 1 percent of earners are business owners and entrepreneurs, and that in 2004, business owners paid 54.3 percent of all income taxes. Or, to put it differently, the top 1% are paying more than 54% of all income taxes.
Of the total amount of income taxes collected from business owners, 69 percent came from upper-income taxpayers. The study concluded that lowering top marginal tax rates benefited many highly-taxed business owners, as well as the U.S. economy.
Unfortunately, I don't have statistics yet for 2005, but the results are quite interesting. When you consider that in my state, 95 percent of all businesses employ 100 or fewer employees and 75 percent employ 10 or fewer, it is clear that small business is the backbone of our economy.
Supporting small businesses by lowering the top marginal tax rate will provide an opportunity for these businesses to expand and create more jobs.
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According to an article published by The New York Daily News, Chelsea Clinton will begin working for Avenue Capital Group, a New York City hedge fund that has donated significantly to her mother's re-election campaign fund.
It seems that Chelsea's life will never be 100% her own, as long as mom and dad are involved in the political arena. I'm sure that much of what Chelsea does (and is forbidden to do) is dependent on "grooming" and "cues" from her parents. Even down to the job she takes.
On another note, I wonder what Avenue Capital's position is on the increasing clamor for hedge fund regulation. I'm sure having close ties to a powerful political family certainly helps matters.
Former and perhaps, future First Daughter Chelsea Clinton is getting a new job – and probably a big raise. Clinton is taking a post at the Avenue Capital Group, a hedge fund run by supporters of her mother, according to a person familiar with the company's decision.
The 26-year-old Chelsea has been a consultant at McKinsey and Co., and the move to the hottest sector of finance would almost certainly mean a raise. Annual bonuses for junior hedge fund staffers can exceed the entire salaries of consultants of Clinton's vintage, which run in the $100,000 to $150,000 range.
Her move will also embed the Clintons' family fortunes even deeper in the booming, controversial and lightly regulated hedge fund industry. The funds, which pool the money of wealthy investors, are battling to maintain freedom from the government scrutiny attached to more pedestrian money managers. Bill Clinton reportedly stands to make tens of millions of dollars as an adviser to hedge funds managed by Ron Burkle's Yucaipa Cos.
Avenue Capital claims $12 billion under management. The firm specializes in buying the bonds and stock of troubled companies at a discount and selling them at a profit when the businesses recover. The fund's founders, Marc Lasry and Sonia Gardner, are major Democratic Party donors who have contributed the maximum to Hillary Clinton's reelection campaign.
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According to a study released by UBS/Warburg, the world's largest private employer — Wal-Mart — can boost a marginal family's spending power by 10% or more.
Very impressive.
But, that's just the beginning. According to the study…
- Wal-Mart is the world's largest private employer, with 1.8 million people working for it. Of the 1.8 million, more than 1.3 million employees are located within the United States. [To all those who claim that Wal-Mart is exploiting cheap labor from overseas, this is largely inaccurate, since the majority of Wal-Mart employees are U.S. based.]
- Wal-Mart can save the average family more than $2,300 per year. Dan Denning, of the Daily Reckoning notes, "If you're making $200,000 a year, maybe this doesn't mean much to you. But if you're making less than $27,000 a year, an extra $2,300 is equal to a month's pay or more." Very good point. Walmart's effect on lower-income families is quite significant.
- Wal-Mart is responsible for a 0.9% higher wage base, and a 1.3% higher total real disposable income.
- Wal-Mart is responsible for a 3.1% lower consumer price index (CPI).
- Wal-Mart is responsible for a 0.14% lower unemployment rate.
- Wal-Mart is a desired employer for thousands of applicants. When Wal-Mart opened in Chicago, it advertised for 325 jobs. It got 25,000 applicants. In Oakland, CA, 12,000 people showed up for 350 available jobs.
Dan Denning writes…
You'd think people would be grateful.
Instead, the well-to-do conspire to keep Wal-Mart stores away. Lobbying groups form to complain and harass the company. Congressmen fulminate against it. Legislatures try to put it out of business.
The logic now being employed to prevent imports from overseas is also directed at America's most successful company. 'Fair' this and 'fair' that they call for. Competitors want to force Wal-Mart to charge higher prices. Labor unions want to force it to pay higher wages—even though it already pays much more than McDonald's, H&R Block, 7-Eleven, and other low-wage employers.
Reminds me of Atlas Shrugged.
For all the negative press that Wal-Mart receives, it has positively affected the economic lives of millions of people around the globe. Wal-Mart offers inexpensive goods, improves the living standard for millions of families, employs millions of workers, and has made its investors millions of dollars. Does Wal-Mart have problems? Absolutely, all companies have problems. But, let's give credit where credit is due. Wal-Mart deserves to be applauded for the positive economic *good* it has created.
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Looking to keep more of your hard-earned money from the tax man? Well, you're going to love this tax exclusion.
How You Can Exclude up to $250,000 Tax-Free on the Sale of Your Primary Residence
Provided you meet the following requirements, you can receive up to $250,000 tax-free when you sell your primary residence. If you are married, filing jointly, you can exclude up to $500,000 tax-free. Here are the criteria that must be met to take this exclusion…
- You owned the residence for any two of the last five years.
- You occupied the residence for any two of the last five years.
- You haven't used the exclusion within the last two years.
The two years of ownership and the two years of usage don’t have to be the same two out of five years. Here’s an example that explains this point…
Example: Katie & Dan rent from a landlord for one full year. In Year 2, Katie & Dan decide to purchase the home from the landlord, and live in it for a full year. In Year 3, 4 and 5, Katie and Dan rent out the home to the Joneses. Upon the sale of the home, Katie and Dan would be allowed to use the exclusion, because they have owned the home for two out of five years (Years 2, 3, 4, & 5), and they have used the home as their primary residence for two out of the last five years (Years 1, and 2).
For those who own summer homes, or more than one residence, you can use the exclusion to avoid capital gains taxes (up to $500,000) on ALL your homes, provided you meet the requirements.
Example: Mary sells her home for a $210,000 gain and uses the tax exclusion. She then moves into her summer home in Florida and lives there for two years. After the two-year period has ended, she sells her second home. She may use the exclusion again—every two years. How’s that for a great tax strategy?
Depreciation Recaptured
Note: If you've taken any depreciation on your home after May 6, 1997, any gain up to that amount of depreciation will be taxable at your normal rates, up to a maximum of a special long-term capital gain rate of 25%, as long as you have owned the property for at least one year. If, however, you have owned the property for less than one year, the prior depreciation taken will be taxed at your ordinary income tax rates. Let’s look at an example.
Example: Jessica sells her home for a $230,000 gain. Over the past seven years, Jessica had used her home as a home office and claimed depreciation on the office portion. If the total depreciation taken after May 6, 1997 was $8,000, then Jessica must pay tax on $8,000 at the rate of 25% when she sells the home. If Jessica had owned the house for less than 12 months, then the tax rate on this depreciation would be at her ordinary income tax rates (which could be much higher than 25%).
How to Exclude Up to $250K on Investment & Rental Property
Let’s assume you own a house that you rent to tenants. You have been renting this house to tenants for the past four years, and the house has significantly appreciated in value. You would like to sell the house and pocket the gain. Unfortunately, you’re going to be stuck paying several thousand dollars in taxes when you sell the home. To make use of the exclusion, here's what you do…You will need to move into the rental home and live in it for a full two years. After the two-year period is over, you can sell the home and exclude up to $250,000 of the gain if single, or $500,000 if married and filing jointly. One caveat, however: You will be required to pay tax on any prior depreciation you took on the rental property. The following example explains this…
Example: Amy owns a townhome that she rents out which has appreciated by $120,000. Amy has taken a total of $10,000 in prior depreciation on the townhome. If Amy sells the townhome, she would have to pay tax on the entire $120,000 of the gain. If, however, she moves into the townhome and lives there for two years, she would only have to pay tax on the depreciation taken (25% of $10,000 which equals $2,500).
How to Gain $1 Million Dollars Tax-Free
A married couple that I recently met (at a local REIA), have developed the following financial plan to capitalize on this tax exclusion…
For each of our primary residences, we’re planning to live in them for two years then rent them out for three, then sell. We’ll take the capital gains tax free since we lived there two out of the last five years each time.
Not a bad strategy. 
You would only need *four* $250K exclusions, and you've got $1 million tax-free. But that's "easier said than done." It's pretty tough to get a home to appreciate $250K in only 5 years. If you buy below market value and purchase in areas that are experiencing strong growth, it's certainly possible to get $80K appreciation every five years. That would translate to an average price appreciation of $16K a year. That's a reasonable expectation, assuming you bought the home below market value. Also, in some areas, price appreciation could be significantly higher than $16K/year.
If you amass $80K in tax-free gains every 5 years, then you'd only need 13 properties to generate one million tax-free. Hmmmm.
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This post is written in response to a reader's question. The reader asked…
How Can I Get the Highest Return While Minimizing Risk?
This is the $64 million dollar question—the holy grail of investing. Every investor seeks to maximize his return while minimizing risk (mainly the risk of losing his original investment, but also the risk of looking dumb by making unwise and foolish investments). Generally speaking, the higher the return, the higher the risk. "He who bears the risk reaps the reward." This is true in mortgage banking, small business, the financial markets, personal relationships, and many other areas of life.
The corollary, of course, is that the risk-bearer must also suffer the consequences if there is no reward, but rather a penalty (loss of money, time, reputation, etc.). If you want to decrease your risk, realize that you will be limited (usually) to investments that generate lower returns.
There are, however, some exceptions to the "risk-return correlation." Risk can be lessened by skill, knowledge, or access to opportunities & resources that the majority of investors do not have access to.
The First Rule of Investing
The first rule of investing is that you should never invest money that you can't afford to lose. The money you invest should not significantly change your lifestyle, if it were lost. If you invest with "scared money"—money that you can't afford to lose—it may affect your judgment and cause you to make poor financial decisions. People who invest with money they can't afford to lose usually make emotional decisions (based on fear of loss) that negatively affect their investment returns.
How Do I Determine the Best Investments?
The best investments for your particular situation will depend on several factors: your age, your risk tolerance, and the amount of time you want to spend managing your investments.
Your Age
If you're young (20's, 30's), then you can afford to take more financial risks, because you have more time to recover from potential losses. If you're older (40's, 50's, 60's), then you will generally make more conservative investments, since you have less time to recover from large financial losses.
Your Risk Tolerance—Preservation of Capital vs. Growing Capital
If preserving capital is your number one goal, then I'd suggest investing in CD's, Treasury bonds, Treasury bills, money-market accounts, and other "safe" investments. To find the best CD rates (in the United States), be sure to visit Bank Deals website, which lists the best rates on CD's, and money market accounts nationwide. If you are looking for a relatively "good" return in a short period of time, you can usually find a bank CD that offers 1% a month for 6-7 months. One-percent a month is not a fantastic return (especially compared to other available options), but for a risk-free investment (FDIC insured), it's pretty good.
Given the continual decline of the U.S. dollar, I suggest moving some of your assets into non-dollar-denominated investments. This could be foreign currency CD's, foreign bonds, foreign stocks, or foreign real estate. For a relatively "safe" investment (FDIC insured), you may want to explore Everbank's Foreign Currency CD's. Investing in foreign currency CD's will allow you to diversify out of the U.S. dollar.
If your number one goal is maximizing your return, there are thousands of possible investment vehicles—all more risky than CD's, bonds, and money market accounts. Some possible options include…
- Investing in local real estate (provided you don't live in a "bubble" area).
- Exchange Traded Funds
- Publicly-traded stocks
- Stock options
- Mutual funds, including closed-end mutual funds (which trade like stocks)
- Investing in state tax leins (Note: Some states have tax deeds, instead of tax leins.)
- Investing in your own private business
- Investing in someone else's private business
- Lending money to a real estate investor for a guaranteed return (i.e. 3% or 5%) each month.
- Buying a business and growing sales & revenue
How Much Free Time Do You Have Available to Manage Investments?
The amount of free time you have available can affect what you invest in. Certain types of investments are more "hands-on" and require more day-to-day involvement. Other investments, however, are more passive and "hands-off." For example, investing in local real estate and renting properties to tenants is more "hands-on" and time consuming, than purchasing publicly traded stocks.
Likewise, buying a business and growing revenue is very time consuming when compared to buying an exchange-traded-fund—however the ROI from the business revenue can greatly exceed the ROI from the exchange-traded-fund.
Investing in Your Own Business vs. Investing in Someone Else's Business
If you own a business (self-employed or entrepreneur), then you already have an investment asset that can yield an extremely high ROI. In my personal opinion, it's better to invest the majority of your assets back into your own business, provided you know how to grow sales and revenue.
Investing in someone else's business (which is what you're doing when you buy publicly traded stocks or bonds) is far riskier, in my personal opinion. As a small business owner, you understand your business intimately. Trying to familiarize yourself with someone else's business—especially when the owners/CEO's have an incentive to "fudge the numbers" to satisfy Wall Street—is more difficult and carries increased risk.
The Single Best Investment
I believe the single best investment is investing in yourself. Developing knowledge about investing, finance, small business, and sales & marketing is one of the smartest investments you can make. Your knowledge and skills are very big assets. And yes, they will pay dividends over time, if you put them into action.
If you know nothing about investing, I recommend visiting your local bookstore and reading books in the Personal Finance & Investing section. Select a finance book that interests you, sit down and start reading. Keep reading books until you've gained a solid understanding of the types of investments available, and basic money management principles. I also suggest reading personal finance and investing websites.
One caveat: Realize that most information in books is "conventional," meaning it's what everyone knows (i.e. mainstream). To get better-than-average returns, you must invest unconventionally.
You must seek out knowledge that…
1.) other people don't have, or
2.) seek knowledge that other people have but don't apply (due to lack of self-discipline, greed, fear, time constraints, etc.). You must become good at application.
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According to CNN Money, the following cities are experiencing the highest number of foreclosures (Foreclosure data gathered from RealtyTrac)…
- Greeley, CO
- Detroit, MI
- Miami, FL
- Indianapolis, IN
- Ft Lauderdale, FL
- Denver, CO
- Dayton, OH
- Dallas, TX
- Fort Worth, TX
- Atlanta, GA
Problems within the auto industry (i.e. employee layoffs) may have contributed to higher-than-average foreclosure rates in Detroit and Indianapolis. Interestingly, Dallas and Fort Worth are some of the fastest growing (and hottest) real estate markets in the nation. Atlanta is also growing rapidly and experiencing higher-than-average appreciation.
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CNN Money recently published an interesting article on the best and worst cities for real estate investing. According to the article…
"The real estate slump could get worse before it gets better. But these 10 markets offer great opportunities for those who have the patience to buy and hold."
The Best Cities to Buy Real Estate
- Panama City, FL
- Vero Beach, FL
- Bridgeport, CT
- Lakeland, FL
- McAllen, TX
- San Luis Obispo, CA
- Wilmington, NC
- Manchester, NH
- Fort Collins, CO
- Atlanta, GA
The Florida cities (Vero Beach, Panama City, and Lakeland) seem a bit suspect. Florida is generally regarded as one of the "bubble" markets. I wonder what criteria CNN used to create this "top 10" list.
The Worst Cities–Avoid Buying Real Estate Here
According to CNN, the 10 cities listed below are overvalued, and home prices are expected to drop over the next year.
- Stockton, CA
- Merced, CA
- Reno/Sparks, NV
- Fresno, CA
- Vallejo/Fairfield, CA
- Las Vegas, NV
- Bakersfield, CA
- Sacramento, CA
- Washington, DC
- Tucson, AZ
Six locations in California made the list, including Reno/Sparks, which is just across the border from California. The remaining cities have reputations for high investor concentrations.
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