Mr Money – Unemployed

A Slice of Real Estate Pie

            Investors know that building a solid portfolio involves striking a balance between producing high returns and protecting the portfolio’s assets. The underlying factor in both of these is risk. However, our desire to manage risk does not mean we need to sacrifice high returns, and that is the beauty and strategy behind having a well-diversified portfolio.

            The idea backing proper asset allocation is to have investments divided among different asset classes, such as cash, stocks, bonds and real estate. Returns from different asset classes do not regularly move up and down together, which is the reason diversification is so important and valuable. One asset class that has started to be widely considered as a necessary slice for a balanced investment portfolio is that of alternative investments.          

            Alternative investments include any investments that are not considered traditional or of the “main stream.” While traditional investments include stocks, bonds, treasuries and certificates of deposit (CDs); alternative investments include private equity, hedge funds, commodities and real estate. Alternative investments are typically most productive when they are treated as long-term investments. On their own, alternative investments can carry high risks, but as part of a diversified portfolio, they tend to reduce risk. This is because alternative investments often times have lower correlation with publicly traded securities, causing them to add much-needed balance when traditional markets are volatile.

            The size of the returns produced by a portfolio is obviously based on the types of assets included. But, the size of the returns is also largely impacted by how much capital is invested in each asset class. There is no fool-proof formula for how much money to invest in each asset class. Experts recommend that investors consider the time horizon of the investment and their tolerance for risk.

            A well-diversified portfolio can by no means guarantee a specific rate of return; that is impossible. Anyone that claims they can do this for you is lying, and I advise you to take your money and run. However, by managing a well-diversified portfolio with adequate amounts of traditional and alternative investments, you can significantly improve your chances for obtaining high returns. Long-term objectives, such as saving for retirement, can more easily be accomplished by putting your money to work in a balanced portfolio with a slot dedicated to alternative investments.

The Retirement Minefield

            The federal entitlement programs that help provide retirement security were among the many somewhat-stable programs to unravel throughout the course of this recession. Projections released May 11th by the trustees of the Social Security and Medicare trust funds indicate that both funds will run dry sooner than estimated in last year’s report.

            The Social Security trust fund’s revenues still exceed benefits by an ample amount, making it the better off of the two funds. Unfortunately, the onslaught of baby boomer retirees will certainly change that. The new report predicts the supply will continue until 2015 but quickly move into deficit thereafter. Medicare is in critical condition compared to the Social Security trust fund. The Medicare Hospital Insurance fund is already running a deficit, and the trust fund is set to run dry in 2017. However, these Medicare estimates are harder to predict because they depend on forecasts of health-care costs.

            Shrinking federal-entitlement programs coupled with a growing elderly population result in a problem that demands our attention. Plus, throw in the skyrocketing number of bankruptcy claims among the elderly and you have a complete recipe for disaster. According to the Associated Press:

The world’s 65-and-older population will triple by mid-century to make up one in six people. Census estimates released (last) Tuesday show the number of senior citizens has already increased 23 percent since 2000 to 516 million, more than double the growth rate for the general population. The fastest-growing age group, seniors now comprise just under eight percent of the world’s 6.8 billion people. By 2050, the senior group will increase to 1.53 billion.[1]

Furthermore, elderly Americans have been seeking bankruptcy-court protection at drastically faster rates than any other age group. According to the AARP, the rate of personal bankruptcy filings among those ages 65 or older jumped by 150 percent from 1991 to 2007.[2] Rising debt and health-care costs are the two main factors contributing to the spike in claims.

            With all the obstacles to negotiate within the world of obtaining a comfortable retirement, now is the time to prepare for the worst. One of the most beneficial investment vehicles for retirement planning is the Roth IRA, in which nearly all income growth and withdrawals are tax-free. Plus, new tax rules are making it easier to convert traditional IRAs and employer-sponsored retirement plans into Roth IRAs. The majority of employers are no longer offering retirement plans that are sufficient for their employees. Plus, with major government programs becoming depleted at rapid rates, it is time to become proactive in your retirement planning. Putting your money to work now will help to create substantial income flow that will allow you to enjoy your retirement. It is up to you to create an opulent nest egg in spite of all the crumbling entitlement programs that are looking to crack it.

The Skinny Behind Short Sales

            While we have all become keenly familiar with foreclosures and their impact on the real estate market, their nearly-as-popular cousin, the short sale, is somewhat less understood. With an unprecedented number of property owners upside down with their mortgages, the Obama administration has implemented incentives in its housing-rescue plan to persuade lenders and sellers to choose short sales over foreclosures. 

            On the surface, short sales are easy to comprehend. Simply put, a short sale is when a lender agrees to accept a mortgage payoff that is less than the full amount from a borrower. When an owner of a property is financially distressed, the option of foreclosing becomes more and more realistic. But, the process of foreclosing is a lengthy and costly one. Although short sales can also be very time consuming, they are often times preferred by lenders, investors, buyers and sellers for a number of reasons.

            According to the National Association of Realtors, short sales have accounted for 15 to 20 percent of sales of existing homes in 2009.[3] Sellers prefer short sales because a short sale is likely to not damage their credit as badly as a foreclosure. Buyers are attracted to short sales because they have the opportunity to purchase property for less than its current market value. If any investments are backed by the property, investors prefer short sales because they will lose less than they would in the event of a foreclosure. A short sale is a better option for banks and lenders because, typically, short sales result in about a 20 percent loan loss, whereas homes sold after foreclosures result in about a 40 percent loan loss.[4]

            Although short sales are appealing to buyers and can prove to be an incredible investment opportunity, these are not do-it-yourself projects. In a short sale you will need help from an experienced real-estate agent or attorney. Not all agents know their way around a short sale, so make sure you consult with one who has a good track record with short sales. As a seller in a short sale, the difference between the actual loan amount and the acquired amount is sometimes considered income for which the selling homeowner can be taxed. Therefore, it is important to include a tax professional in the deal.

            The Obama administration’s short sale incentives allow homeowners who agree to short sale the opportunity to receive up to $1,500 in closing costs. In May, “the government also announced it would make it simpler for borrowers to voluntarily transfer ownership of properties to mortgage companies through a “deed in lieu” of foreclosure.”[5] Lenders can also receive $1,000 for accepting a deed-in-lieu transaction, making them even more responsive to sellers wishing to avoid going into foreclosure.

            Often times, short sales can be a better option than foreclosures, but there are still many risks and stipulations that come to the buyers, sellers and lenders involved. Understanding short sales and the incentives that come with them can help sellers get out of a financial rut by avoiding foreclosure. For buyers, hunting for short sales can be time consuming, but the investment potential can prove to be worth the extra effort. For all of the investors that are sitting on the fence and looking to put their money back to work, short sales should be a considerable option.