In my last post, I pointed out that real-estate is technically ‘on-sale’ in many areas of the country. However, I don’t want to mislead the reader into thinking that now is the time to recklessly go out and buy up anything that looks like a good deal with the expectation that you are guaranteed to make money. (There is never a time for reckless behavior when investing.) However, I am suggesting that the well-positioned investor who is willing to act has an opportunity today that will not likely be repeated, at least not in my lifetime.

Before plunking down your hard earned cash be sure you take the following factors into consideration.

1. What is your exit strategy? Never, never, never buy a property without knowing how you are going to make your return. Are you going to fix and flip? buy an hold for a rental property? lease/option to another buyer? combine with another parcel for an entirely new project? etc.

2. Is your strategy appropriate for the market? I obviously would not consider pre-construction projects in Florida or Las Vegas. However, other strategies might work well in those markets. For example, I know one investor who recently purchased a couple of very high-end luxury, foreclosure homes in the Las Vegas market and is renting them as vacation rentals. It is the perfect strategy for this market because the houses are selling for pennies on the dollar, they are strategically located, and this particular vacation spot is not seasonal. His houses were cash-flowing from the get-go. The point is, be sure your strategy is appropriate for the market you are in.

3. What are the market fundamentals for the area? Is there a demand for housing? How diversified is the employment for the area? Are the major employers cyclical or are do they need a stable workforce year round? What is the unemployment and how has it changed? In other words, just because you can buy a house or maybe in an entire apartment building for next to nothing doesn’t mean it is a good deal. You need some evidence there is demand for the strategy you are employing.

4. How will you finance your deal? While traditional loans are not obsolete, there is no doubt that the credit market has tightened and cash is king? Will you use your cash or OPM (other people’s money)? Is the owner of the property willing to finance part or all of the sale? Do you plan to tie the property up with an option meaning you’ll need little money up front, or do you need the full purchase price available? The bottom line is, you need to know how you can finance the deal.

5. Purchase only cash-flowing properties. While there is no doubt that the biggest windfall often comes as a result of appreciation. However, the wise investor would avoid purchasing any negative cash flowing properties with the promise of great appreciation in the future.

While I contend that America is indeed on sale, and it is possible for alert investors to be on the receiving end of the greatest transfer of wealth, success still requires some common sense. Know your market, match your strategy to the market and execute.

Unless you just crawled out from under a rock, you are undoubtedly aware of the credit crisis especially as it relates to the world of real-estate. In fact, a Federal Reserve Study confirmed that in 2007, owner equity in U.S. homes fell below 50 percent, meaning equity was exceeded by mortgage debt, for the first time since 1945. By March of 2008, according to the Mortgage Bankers Association over 900,000 households were in the foreclosure process which was up 71% from the previous year. Finally, during 2009, almost 3 million homeowners received at least one foreclosure filing sometime throughout the year.

You get the picture. The housing market has really taken a beating. As a result, not only have many previous homeowners lost their homes, many markets have seen the median house price drop in their area. In some markets, the drop has been significant.

While tragic for the homeowner, the glut of homes for sale coupled with discounted prices provides a great buying opportunity for the keen investor. In fact, it has been predicted that we are entering a period in which we will see the greatest wealth transfer since the great depression.

Are you ready?

IRA’s (Individual Retirement Accounts) have been through many iterations since their inception in 1974. Originally they were designed specifically for individuals who lacked other retirement pensions. However, as of 2010, not only are working persons (with our without other retirement plans) eligible to take advantage of IRA’s as a retirement tool, non-working spouses are eligible if you file a joint return.

To determine whether it is better for you to contribute to a Roth IRA or a Regular IRA, it is necessary to understand the differences. First of all, funds contributed to a Roth IRA are subject to regular income tax withholding, BUT all earnings are tax free as are distributions once the individual meets age eligibility guidelines. On the other hand, contributions made to a Regular IRA are tax-DEFERRED and all growth is also tax-DEFERRED. This of course, means that taxes will be withheld when the funds are distributed.

So is it better to pay taxes up front or taxes on the back-end? There is no single correct answer this question. Each person needs to take into account their individual situation. Factors that should be considered include: Your current tax bracket, estimated time-frame to begin withdrawing funds, anticipated tax bracket at the time of retirement, and overall retirement portfolio etc.

There is no doubt that a poor credit score and negative posts in your credit report can not only inhibit your ability to secure a line of credit, they also impact the rates you’ll pay. Therefore, it is important to understand how long your history will ‘hang’ over your head.

Generally speaking, adverse credit instances that are more than seven years old and bankruptcies that are more than 10 years old, will be automatically deleted. However, this does not apply in all instances. For example, if a credit transaction was more than $150,000 or if an individual has an annual salary of $75,000 or more, the information may remain beyond the time frames stated above.

If you have been denied credit based on your credit report, the lender is required to give you the name, address and telephone number of the credit bureau that provided the credit report used to make the determination. You have up to 60 days to request a free report. While most will provide a copy of the report, others may only make disclosure in person or by telephone. However, they are obligated to let you know the nature and substance of all information contained in your report. Additionally, they must identify the sources of their information.

Obviously, the best scenario is to avoid any negative reports to your credit history. However, sometimes unexpected life events such as a loss of job, serious illness, accident, or a devastating weather event etc. cause unforeseen financial circumstances that lead to some negative reports to your credit history. However, these may not ‘haunt’ you forever.

Without a doubt risk is inherent in all investments, so it is incumbent upon the investor to determine their risk tolerance before making any investment decisions. Often a financial advisers provide their clients with some type of a questionnaire designed to gather information and assist in determining one’s risk tolerance. I’m certainly in favor of gathering data to help determine appropriate risk levels, but I would suggest that despite these informal assessments, investors continue to unknowingly invest recklessly and they don’t even know they are doing it.

So what is the riskiest investment you should never make? Quite simply, it is one that you don’t understand. I’m sure you’re thinking, “DUH,” but hang with me for a minute, because I can assure you many of us are guilty at one time or another of making this potentially deadly mistake. Take a look at your own portfolio. Do you own, stocks, bonds, annuities, real-estate, mutual funds or T-bills? Is your primary vehicle for saving a savings account, money market account or CD’s. Are you sinking money into precious metals or investing in Exchange Traded Funds? Perhaps you are a more ’sophisticated’ investor and you are placing money with others through PPM’s (Private Placement Memorandums) Regardless of your investment choices, do you truly understand how each of these investments is structured and how they work?

Let’s use bonds as a case in point. Generally speaking, I think most see bonds as a ’safer’ investment. Essentially a bond is an IOU which can come from corporations, the United States Government, State and Local Governmental entities or municipalities. The holder of the bond is the person lending the money and the borrower is agreeing to pay back the amount loaned plus a preset interest amount. Sounds simple enough, right? What are the risks associated with this type of investment? Obviously, there is always the risk that you may not get your money back, especially if loaning to a private company or corporation. This risk is compounded if you are investing in ‘C’ rated bonds versus ‘AAA’ rated bonds.

However, investors in bonds are also subject to ‘interest rate risk.’ Understanding interest rate risk requires investors to understand the relationship between current interest rates, the coupon rate your bond is paying and the value of the bond if you were to try to sale it today. Essentially, there is an inverse relationship. In other words, as the interest rates go up, the value of a bond goes down and as interest rates go down, the value of a bond goes up.

I’m not suggesting that bonds make poor investment vehicles. Rather, I’m making the case that it is important to fully understand all aspects of any investment and make an informed decision about the appropriateness of any opportunity given your current needs for liquidity, investment goals, time-frame, and need for cash flow etc.

I’m embarrassed to even admit this, but 28 years ago when I first started my career in education, I didn’t have a clue about annuities, 403b accounts, defined pension plans or even IRA’s for that matter. On the one hand, as a 22 year old just out of college it’s no surprise that I wasn’t giving much thought to retirement matters. On the other hand, this was exactly the time I should have been thinking about retirement because time is either your best friend or your greatest enemy. Furthermore, as a new employee, I was making decisions about these matters.

I invite you to click the link at the end of this post and study the chart to see how profound the Impact of Time is on growing your retirement nest egg. Given the current state or our economy a 9% return may seem astronomical and completely out of whack, but I can remember the day, when we routinely expected overall returns of 10%. Obviously, this chart assumes a consistent 9% return which may not be realistic, but nonetheless, the chart still serves it’s purpose.

It never ceases to amaze me to see in black and white the impact of time on total account value. After studying the chart, I think you’ll agree that it begs to ask yourself, would you rather invest $2,000 a year at 9% interest for 9 years starting at age 22 and end up with an account valued at $579, 471 or invest $2,000 for 35 years starting at age 31 at 9% interest and end up with an account valued at $470,249?

Impact of Time

A few years back, I had a conversation with a fellow educator who had just received their annual statement from KPERS, (Kansas Public Employee Retirement System), and they expressed dismay about the paltry growth they saw compared to the growth her husband was seeing on his 401k annual statements.  Obviously this was prior to the real-estate and financial melt-down in 2008.  Nonetheless, it became clear to me that this person did not understand the difference between their defined benefit plan through the state and the 401k pension plan her husband’s employer sponsored.

First of all, let’s dig into 401k Plans.  These are employer-sponsored,  retirement investment plans that allow an employee to put a percentage of earned wages into a tax-deferred investment retirement account selected by the employer–sometimes—referred to as a salary reduction plan.  The employee has  control over the investment decisions of their funds within the scope of the plan, and they determine the monthly contribution amount subject of course to IRS maximum contributions.

Some companies provide matching funds,  on a portion of the funds saved by the employee in the 401k plan, although this is not a requirement.  Usually, the matching funds are subject to a vesting schedule which means if the employee leaves before they are fully vested (often up to 8 years), they forfeit part of the funds contributed by the employer.

In addition to making contributions before taxes are withheld,  401k earnings grow tax-deferred although there are penalties for making withdrawals prior to eligibility, based on age.  Once eligible, plan distributions may be non-periodic such as a lump sum distribution or periodic such as annuity or installment payments.  The lump sum distribution or installment payment amounts are a direct function of the size of the account.  Therefore, the retirement benefit for 401k plans is predicated upon the amount saved and the total growth realized over time.

Unlike 401k plans, public defined benefit plans such as KPERS do not have voluntary contributions.  Rather a set amount is withheld from each check and eligible employee are required to participate.   Unlike the 401k, benefits for defined benefit plans are based on a formula using factors such as salary history and duration of employment rather than the value of the account. For most retirees, their total contributions are often paid back to them within the first 3-5 years of retirement.  However, their retirement checks will continue for a specified time period.

Therefore, while a 401k account may depict a higher balance, it does not necessarily mean the payout will exceed a defined benefit payout despite the overall lower account balance.  In reality, the account balance of a defined benefit plan is really only significant if a person plans to withdraw the funds for whatever reason.

My son who is in his early twenties is looking to purchase his first home in a very rural part of Kansas.  He has several interesting elements to navigate during this chapter of his life.  I think he thought getting pre-approved for credit was going to be the most daunting part of the task, but it turns out that this was actually a piece of cake.

He explored several lender options–local small town bank, www.lendingtree.com, mortgage broker, and larger bank.  All have been impressed with his credit score as well as the size of down payment he has available.  They’ve assured him, he easily qualifies for the line of credit he is requesting.  However, this is where the easy part ends.

The house he is considering will be sold at auction and the terms are $10,000 down the day of the sale with the remainder due within 30 days.  Under normal conditions 30 days would not be much of a problem.  However, there are very few houses sold in this rural part of Kansas which of course makes it difficult to get an appraisal based on comparable sales.  As one loan officer explained to my son.  If they can’t get an appraisal, the bank won’t make the loan.  Furthermore, because it is difficult to quantify fair market value of the house due to a lack of similar homes being sold in the area, he needs to be careful not to pay more than a bank may determine is a fair market price, because obviously the amount they are willing to loan will be predicated upon this still unknown number.

Enter USDA loans.  These loans are designed for persons in rural America and they are guaranteed by HCFP (Housing and Communities Facilities Program).  On the plus side, these USDA loans  will lend up to 100% of the value of the home which reduces the risk of not having enough loan dollars when coupled with the down payment to cover the actual selling price in relation to the bank appraised price.  However, not all lending institutions offer USDA loans and of course there is some concern that any extra paperwork requirements might make it impossible to complete the loan process within the 30 day window.

While the local bank would offer more flexibility in loaning on the property, they don’t offer long-term, fixed-rate mortgages.  However, they could certainly serve as a stop-gap measure until a long-term long could be secured.

To answer the question in the title.  No. While good credit and a steady income is enough to qualify for a loan, it doesn’t ensure  loan will be secured.

I teach a basic financial literacy and money management class as a volunteer for an agency that serves clients who often have blemishes on their credit history.  More times than not, the adults in these classes know they have credit woes but they’ve never seen a copy of their credit report, despite the fact many of them plan to work toward purchasing their first home.

Each of the three credit agencies (Experian, TransUnion, Equifax) are required to provide you with one free copy per year.  Additionally, if you have an application for credit that is denied, you are entitled to receive a free copy of your report from the company that provided the report the lender used to render their decision.

However, you should know,  there are a lot of companies that advertise a free report which is really nothing more than a teaser to get you to sign up for some ongoing service, usually with a 30 day free trial period.  If you cancel within the 30 day period,  you will not be billed for anything and you will have received a copy of your credit report for no cost.  Although you will almost always receive you FICO score with free reports associated with an ongoing service, it isn’t really necessary to sign up for any subscription service  to access your free credit report.  You can simply go to http://www.annualcreditreport.com

You will not likely receive you FICO score using the annual credit report link above, but for monitoring purposes the most important things for your to review are the entries on your report anyway.  You want to review each one to ensure that they are accurate and that they should be associated with your name.

When requesting your free credit report, you can either request each of the 3 companies to send your report at the same time, or you can space them out and request them over the course of a 12 month period.  Personally, I prefer to request them on a staggered scheduled as it allows me to check entries multiple times throughout the year.  However, you should be aware that you should expect slight differences for the 3 reporting companies.  This happens for several reasons, such as having a different set of vendors who upload data to the  specific credit agency.

Gone are the days of feeling unarmed when haggling over the price of a new car.  In addition to the dealer invoice price which is pretty widely available to anybody who is willing to do a little legwork, I ran across a new website that provides local data.  Apparently, they gather data from finance companies, insurers and dealers to compile data about what people ACTUALLY paid for a vehicle.

You only need to identify the make and model of the vehicle for which you are shopping and your zip code.  The site generates a graphic that provides not only the dealer’s actual costs but also the average price people are paying in your area.

If this interests you, I encourage you to check them out at www.truecar.com