Real Estate Review 2018

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A starter home in Boulder is about $1 million => if you can find one.

How do I look at rent vs buy?

Because it is so expensive to sell real estate, I consider a minimum five-year block. I ignore inflation and future predictions.

For our starter home, I assume that five-year rent is $180,000

My alternative uses of the funds, with five-year income shown:

  • Five-year treasury bond $150,000
  • Yield on Investment Real Estate $100,000
  • Yield on Vanguard Portfolio (using my 40/20/40 mix) $100,000

If I buy then I don’t get the income (from the alternatives) and my cost of ownership is $75,000 across the period (maintenance, taxes, insurance).

To keep things simple, I haven’t assumed a mortgage. I didn’t buy my first house until I could pay cash. I earned a premium on my career by being able to easily change cities.

What does the above say to you?

Here’s what it says to me… if you think there is a good chance you will be able to buy during a market decline then rent.

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The last time I bought a house (winter 2012/2013), the rental map was bare. Here it is this week…

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Real estate and equity investments have the potential for capital appreciation/depreciation. Real-economic growth drives long-term asset values. I’m bullish for Boulder, Boulder County, Colorado and the US.

With real estate, my capital is locked in and it will cost me ~$55,000 to get out (exit costs are about 5.5% of sales price).

With real estate, you can get priced-out of a market. Relative to what I can afford in Boulder, I am priced out of London, Hong Kong and San Francisco (three cities where my skills are highly marketable). This “pricing out” happened within a five-year window.

Beware of FOMO (fear of missing out), after three years of rapidly rising prices, our minds will extrapolate never-ending appreciation into the future. It won’t happen. Your goal should be financial independence, not real estate ownership.

Inflation, future asset prices, vacancy risk, insurance hazards… can’t be known. Sometimes they can be hedged, insured or mitigated.

I don’t seek to predict an unknowable future. I ask myself, “Is this a good price, today?”

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I have a few friends that sell real estate. I watch their their high-end sales to understand the mood of the market.

Nobody needs a 5, 10 or 20-million dollar property. So…

When the ultra-luxury deals start closing with regularity we can assume that we are on the upswing. The last 18 months has been a great time to be selling high-end real estate in Colorado.

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I force myself to review: (a) annually, (b) prior to making any new investment decision and (c) prior to changing strategy.

For now, I’m not sure what to do.

My rule-of-thumb, when unsure, is rebalance, watch and wait.

A cash buyer in a credit crunch can count on a 10-20% discount from pre-crunch prices. Given the magnitude of the last downturn, deals were available at 25-40% discounts.

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What were we thinking?

IMG_0501Late-cycle is when we tend to make unforced errors in our financial life. My spidey-senses have been tingling due to a series of macro-events that I’ve noticed.

  • Wars of choice (trade, diplomatic and conventional) on multiple fronts
  • Tax cuts and borrowing increases into a strong economy
  • Rising interest rate environment — across all durations
  • Blockchain implosions
  • A study noting 76% of newly-minted IPO companies were loss-making at listing

I last felt like this in 2005. Then, and now, the party can continue for a long time.

What to do?

Rebalance – once a quarter, reset to my target weightings.

Consider leverage – don’t borrow to buy stuff you don’t need. Pay cash, or wait.

Stay invested – Stay the course. Each time you make a change, you introduce an opportunity for error to enter your life.

Do you remember 2009-2012? It probably seems like ancient history to many. There will be great times for new investments in all of our futures.

Supporting Public Education

In my community, many families opt out of the public school system. Public schools are better with all our kids attending. We’d love to have you opt back and join us.

Three kids imply $100,000 per annum, pre tax, in the private system. Three million dollars of future value when my wife reaches retirement age.

For a whole lot less, consider…

Volunteer in the district — I started by helping in the classroom but realized my skill set was most useful at the district level. Monica rotates between our kids’ classrooms on a weekly basis. If you want better treatment then give.

Hire public school teachers to tutor – the single best investment you can make for your kid – you will be amazed at the benefit one session per week brings to your child.

Join education.com // it’s a no-brainer and gives you access to worksheets you can do with your kids.

Smarter application of family finances:

  • childcare to support your marriage and the young adults that work for you
  • after school activities because fit kids have greater capacity to learn
  • swap money for time and use the time to make yourself a better person
  • live walking distance to a great public school, kill your kids’ commute and be a hub of goodness in your community

I often catch myself fixating on external problems that distract me from taking action on what I control.

Choose wisely where you invest time, money and emotion.

Geographic Reappraisal – Real Estate October 2017

This business insider article about an SF Bay Area house that sold $1 million over asking caught my eye.

Here in Boulder, we’re up 100% over the last seven years. Most of the increase has happened in the last 2.5 years.

Notwithstanding our big local increase, the “coasts” and luxury vacation markets look expensive from here.

The coasts look even more expensive when I factor in…

Schooling – Can I use the local schools? If not then my cost of living jumps by $25,000 per kid, per annum, after tax see the linked article – public, in-state education will save my family $1 million per kid.

Tax Base vs Legacy Liabilities – How heavily taxed is the location? How large are the legacy liabilities (health care and pension) from former city, county and state employees? The large cities of the oldest parts of the US look awful in this regard.

Other costs of living – Cali always surprises me when I run the numbers. I suspect it’s similar in places like New York and Seattle. Costs are 50% more expensive for the rest of my budget.

I am not recommending that you sell. I’ve made a decision to hold through the next recession.

However, the relative trade into “states with great lifestyles” strikes me as attractive — North Carolina, Montana, Idaho and Colorado.

If you are considering taking-the-leap…

Live where you don’t need to leave — can I create a long-term, year-round, local life here?

When I worked in international finance the “top guys” had homes in three or four countries. That kind of overhead has two negative impacts on your life: (1) your ethics are easier to purchase; and (2) you’ll need (at least) an extra decade of full-time office work.

Kill your commute — can I live within an easy walk, or a short ride, of where I spend my time?

When I was thinking about moving to Cali, I plotted my life in Google Maps. I did the same thing for my prospective life in Palo Alto. That gave me two geographic “triangles” and I calculated real estate and family costs inside the triangles.

Finally, surround yourself with people that live a life you’d like to follow. I do best with an active, outdoor life in a location with abundant sunshine.

This last point is important — know what you want — know where you do best.

What Makes Real Estate Assets Cheap – Tame Your FOMO

Because we are hard-wired to be poor investors, your family’s best bet is dollar-cost averaging in low-cost index funds. Consistent investing, over your working life, it’s as close to a sure thing as you can get.

Despite, and because of, the above truth, many people are going to dive into the real estate market.

When the masses get into trouble, you can do very well by applying this post.

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Wait for…

FINANCIAL DURESS — Once a decade, debt markets rapidly contract and everyone has a freak out.

DIVORCE — Corporate, professional or personal — vendors will hurt themselves to damage former partners

MOMENTUM — Collectively, our long-term memory is about three years long. The Great recession ran from December 2007 to June 2009. It took three years years for us to “forget” the asset price run up of 2005-2007.

If you don’t have two-out-of-three then wait. Discounts are coming!

Do work…

INFORMATION — I assume the vendor knows far more than me, and probably you

How can we improve our knowledge?

Wait & study — while waiting for the next crisis… live in the location where you’re thinking about buying. The cost of the rental will pay for itself through better information.

Fundamental Value — do this with every large investment (or purchase)…

A./ What is the net cash flow the asset can generate after current taxes, all operating costs and the investment required to keep it producing cash?

B./ What is the total capital required to purchase? Include every_single_dollar.

C./ How does the implied yield (A/B) compare to the yield on 30-year US Treasuries (currently ~3%)?

Example… across 2014 and 2015, I was unsure if I should sell, or hold. The common wisdom was long-term rates were going to rise and prices would stagnate. Tempting to switch asset classes…

I calculated my cash yield was roughly equal to the, then, 30-year rate.

I considered…

1./ My sites were exposed to the upside from Boulder County economic growth

2./ My alternative investments had lower yields than my existing investments

3./ I would crystalize significant deferred tax liabilities

4./ My existing position was good enough to meet my goals

I decided to sell a negative-yielding asset and hold the cash generators.

NOBODY predicted what happened next, long rates fell by a third, and local real estate values rose by 50%.

FWIW, long rates are back up but fear of missing out (FOMO) is driving the market upwards.

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When is our margin of safety highest?

  1. Let prices, and transaction volume, fall for two years
  2. Look for a distressed seller
  3. Look for a deal where the cost to own is less than the cost to rent
  4. Confirm your taxed, net cash yield is greater than the 30-year treasury rate

Your FOMO will tell you that the above will NEVER happen.

WRONG!

Since I graduated university (1990), very favorable conditions have happened FIVE different times where I was living.

It takes a long time to build capital and two great deals (in 50 years) will let you meet your goals.

Tame your FOMO and choose wisely!

Effective Real Estate Ownership

When you buy real estate, what’s your goal?

We want to live in a fabulous place, while getting rich on asset appreciation.

It sounds great but the choice of moving into an affluent community increases expectations, and cost of living.

“So what?”, you say.

The hidden cost can be time for our kids and marriage.

In the Great Recession, I changed course…

We aim to create a portfolio of assets enabling us to live for free in an effective public school system that’s close to nature.

In your teens, you will start to make investment decisions… how much to work, spend, save, donate and borrow. You have 50 years to create your portfolio!

Live for free:

  1. In high-school: with your parents
  2. As a young adult: a place where your roommates subsidize your cost of living
  3. Next: a house with many bedrooms — the first place I owned had the capacity to support me via roommates
  4. As soon as I “could afford it” — I made a mistake with a large, expensive to own, flash property!
  5. …but I found myself unexpectedly unemployed and we couldn’t afford it
  6. Eventually, we wised-up, downsized our home, and bought rental properties that covered our mortgage and healthcare.

When my wife is 65, the mortgage will be paid off, the kids will be educated and her retirement self-funded by the residual real estate portfolio.

How much of our cost of living can be permanently covered, or hedged, by this decision?

Most people aspire towards material goods, appearances and spending.

I urge you to patiently buy time, personal freedom and shared experiences.

Most of effective investing is learning, saving and waiting.

 

Regime Change

2016-11-24-19-02-19A friend asked for my thoughts about “what he should do” regarding the changes that are about to happen within the US Government.

My quick answer was “do nothing.”

2016-11-25-16-16-29..but there is a lot we can do.

I spent the days after the election teaching my kids to read, helping with math and working on the family’s open water skills.

My advice to “do nothing” is based on the following…

#1 – if you are adjusting strategy more than once a decade then you don’t have an effective strategy // if you truly feel the need to change then there is a structural problem within your family plan

#2 – you should consider tweaking strategy when your life changes (not the ruling party) – unemployment, impending retirement, new dependents, less dependents, major illness, wealth transfers // external surprises are going to happen all the time — spend your emotional energy preparing yourself to stay-the-course, not feeding your fears

#3 – the best time to sell high-quality assets is “never”

2016-11-25-16-31-59#4 – all the emotional energy and financial wealth spent on elections is better allocated to the next generation of your family

#5 – the richest people in America are about to feel a whole lot richer // stay invested and, if you sell to rich people then, raise your prices

#6 – with Elaine Chao’s appointment, the pieces are falling in place for a major domestic infrastructure initiative — this strikes me as a whole lot better (for everyone) than nation building via Asian land wars

#7 – don’t build capacity, or leverage, to the peak // the next recession is likely to be large

#8 – there will be excellent buying opportunities in all our futures // I’ve been researching my next major purchase since before the last recession

2016-11-26-10-29-40The hive-mind has been wrong all year. Glaringly wrong!

I ask myself, “Have they ever been right?!”

Spending time infecting our minds with media noise is the worst thing we can do for clear thinking. Turn off the media, learn persuasion psychology and study history.

Know that the largest gains in your family’s human capital come from self-improvement, ever stronger marriages and educating the next generation.

  • Financially – stay the course
  • Individually – incremental positive change

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