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Archive for February, 2008


"Assets" Versus "Investable Assets"

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I just spent some time this morning going over my balance sheet – taking stock of where our assets are placed and what our portfolio balance looks like these days.  We have a real variety of holdings – businesses, promissory notes, real estate, cash, retirement accounts, stocks – but we don’t have any BONDS… I am biased against them. 😉

One thing I did notice, though, which I thought would be worthwhile pointing out, is that while I enjoyed looking at the big number at the bottom of our balance sheet, it was not representative of our true pool of money to invest.  There is a difference between assets and investable assets.

For those of us who are emotionally “rewarded” by looking at our big juicy balance sheets, it’s important to remember to not over-indulge in figures that make us feel good.  When it comes time to making investment decisions, we need to make those decisions based on our pool of “investable assets,” and not our net worth figures.

I consider investable assets to be money or equity in things that you are pursuing as investments purely for their rate of return.   Assets held in the stock market, bonds, promissory notes or mortgages you own (where people are paying YOU payments), and real estate, for example.

Your “other assets” – things like your car, boat, and equity in your house – may have a cash value if you sold them and can rightly be considered assets, but if your purpose in acquiring them was not chiefly financial reward, I wouldn’t consider them to be investable assets.

Take some time to take stock of your investable asset base.  Tomorrow we’ll talk about Portfolio Balancing, and beginning to determine or re-evaluate whether the assets in your investment portfolio are allocated the way you want.

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Letter to a First Time Home Buyer

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For all the 20-something’s out (or older) who are looking at dismay at the current housing market and wondering "How can I afford to get into my first home?"  This article’s for you! 

My sister’s friend Leah recently came up to Seattle (from her home in sunny Los Angeles) to visit and the talk later turned to real estate – how to get in in these expensive markets…

Here’s a peek-behind-the-window: My letter to Leah as she considers buying her first home. 


Hi Leah,

Thanks for your email. I do have tons of books on real estate – unfortunately, most of them are geared toward "creative" real estate investing, which is probably not going to be helpful when you buy your first home.  However, our friend the Library would probably have a number of good books which could give you general advice.

I will share my tips for you to buy a home and figuring out the ‘real cost’ of home ownership, but a few caveats before we get started…

  1. Real estate that you live in is probably something you should look at as a "consumption" item rather than an investment… 
    Although your personal residence can help you build equity and contribute to your net worth, that doesn’t really "get" you anything unless you cash out of your home and move to a less expensive area, or tap into your home’s equity to pursue other investment options.  (Many people are not comfortable with the risk this creates and can find it challenging to find investments that offer a rate of return consistently higher than the cost of the financing… however this can be a good strategy for the bold investor.)

    Consider the possibility that buying a home is like buying a car – an "expense" rather than an investment… if you can keep your home price lower, you’ll keep your cost of living lower, which will give you more flexibility if you ever want to change jobs, save more money, etc.

  2. Owning real estate is a fairly "illiquid" investment. 

    When you’re ready to sell a home it can take 6 months or more from the time you put it on the market to the time you find a buyer who can close.  This varies in different market places, of course.  Also, up to 10% of the purchase price can be lost to "transaction fees" such as paying a realtor’s commission (6%), closing costs (the seller generally has fewer than the buyer, but there are still some), taxes, getting the home ready to show, having it empty for a few months if you’ve moved, etc. 

    Let’s look at an example.  Say that you buy a home for $360K… you’ll probably have to sell it for about $390K to break even… that means you probably should be very careful about buying something you don’t plan to stay in for at least 5 years.  That will give it time to appreciate up to $390K (hopefully), that assumes it goes up in value at about 2% per year. 

  3. Take a look at the real estate market where you live…

    In general I hear that California is soft/going sideways or down right now – this can mean some relatively "good buys" in the marketplace, but if you’re not seeing the break-neck appreciation that the area has experienced in the past, it may be that there’s no rush to enter the market, and a home you purchased wouldn’t necessarily go up in value very quickly. 

    In other words, don’t bank on appreciation making you a fortune in the next couple of years… do some demographics research on sales volume and price appreciation trends in the area where you’re shopping.

  4. Finally – Let’s consider the opportunity cost of buying a home versus renting. 

    In California you can rent a place for MUCH MUCH cheaper than you could own the same property.  With a $350K purchase, your monthly PITI payment would probably be in the vicinity of $2,000/month if you put 20% down on your loan.  Let’s say you could rent the same unit for $1,500/month.

    If you invested that $70,000 down payment and $500/month you’re saving by renting, in the stock market (or some similar vehicle) and earned a 10% rate of return… how would that compare to the gain in value in the house over the same period of time  (especially after you factor in your $30,000 disposition costs…)

    In 5 years, that "saved" money would be worth $154,329.

    If you put it into the house, and the house was going up 3% a year in value, the house would be worth about $405,000 in five years.  If we subtract $30,000 for sales costs – that gives you a net equity position in the home of $95,000 and a profit of $25,000.

    Clearly, that number would be higher if the home appreciated faster, and lower if the home was not appreciating.

    I think you’ll see that if the home is appreciating quickly, you’ll do much better with the investment in the home, but if the home is not going up in value, you can do better with the stock investment.  This is all a bit of a "what if" scenario, but I think it’s important to look at.

    Run your own numbers on this cool compound interest calculator.

    A lot of people tell you you’re "throwing your money away" if you rent, but there are actually many, many cases in which it makes more economic sense to rent than to buy…

Sooo… with all those warnings under our belt, let’s assume you want to buy a home.  Here’s a look at the costs you’ll need to plan for when you’re deciding what your budget can absorb.

  1. The realtor will charge a 6% commission to the SELLER of listed property, so this fee will not come out of your pocket.  You’ll pay the price you agree to pay for the property… the seller will get that money and use it to pay their mortgage, the realtor, their portion of closing costs, and then keep whatever’s left.

    If you want to buy below market value, consider looking for a "motivated seller" – foreclosure properties, bank owned properties (REO’s) people who have already transferred to a new job out of the area, estate sales, homes that need fix-up work, etc. can all be significant bargains if you’re willing to hunt down the owners and negotiate something that works for both of you… 

    That’s what I do in my real estate investing… it would probably relatively easy to find something at about 80-90% of fair market value right now… still not a huge deal, but perhaps walking into a nice equity position would make it easier to stomach such a large investment.

  2. When estimating your monthly costs, the interest rate and balance of your mortgage is only one thing to consider. 

    As Laura mentioned, if you finance more than 80% of the purchase price, the mortgage company will usually break up your loan into multiple mortgages:  A "standard" 80% mortgage, and then a 20%, 15%, 10% or 5% mortgage to pay for the difference (depending on if you put 0% down or 20% down)…  These 2nd mortgages are considered "higher risk" and will generally come with a higher interest rate. 

    You can also get one big loan for 90% of the purchase price – something Ben and I just did with an investment property we bought.

    I wouldn’t "rule out" these "low money down" possibilities – you won’t know for sure what the loans will cost until you talk to a mortgage broker.  We just got an investment loan at 90% of the purchase price for 5.875% interest rate, so good loans are out there if you have good credit.  :) can tell you the going interest rates for different types of loans.

    The thing that can "surprise" you though is PMI – Private Mortgage Insurance – because it doesn’t show up in the monthly payment calculations of so many mortgage calculators. 

    PMI is nasty, but necessary these days… If you borrow more than 80% of the purchase price of the home, the mortgagor (the bank) will get an insurance policy to protect itself from your default and they pass on the charge for the insurance policy’s premium to you.

    The amount this PMI policy costs varies, but it could add $100’s to your monthly payment, so be sure to ask the mortgage broker about that…

    Those are your monthly loan costs.

  3. In a condo, you’ll also have HOA dues – which the realtor should be able to disclose to you, but could always go up in the future. 

    Condos can raise the dues at any time and also make special assessments.  An assessment is a 1-time bill that often demands a significant amount of money.  For example, if the Home Owner’s Association didn’t save up enough to fix the roofs on the complex, and now they’re leaking, they will get them fixed and bill all the home owners an extra 1-time fee to pay for the cost.

    HOA dues will be higher in buildings that have a lot of amenities like a pool, tennis courts, a clubhouse, etc. so if you don’t plan to use those things, consider whether you want to pay for them. 

    Also beware of HOA’s that have dues that seem to low… the association might be under-budgeting and setting themselves up for an assessment down the road.

  4. Property Taxes – These are a matter of public record and the realtor should also be able to get this information for you.  These will probably go up a little bit every year, or a lot every few years, depending on whether tax rates change and if your property tax value is re-assessed by the town or county, thereby increasing the taxable basis for the property.
  5. Property Insurance – when you’re in a condo, often the HOA dues will cover the insurance on the exterior of the property… check into that.  In our condo, we pay for "the sheetrock in" and we carry a small ($10/month) policy on our personal contents.  Our little insurance policy would pay for things like interior cabinets, toilets, sinks, etc. in the event they were damaged by fire, theft, accident, etc.  Be sure to find out if you have insurance for earthquakes as sometimes that is covered separately.
  6. Utilities – Utility costs are often a "hidden" expense… you may have gas, electric, water, sewer, cable, phone, etc. to pay for in your new residence.  Talk with a few residents in the building you’re interested in to get a feel for what utilities may cost there.  This is often more of an ugly surprise if you’re moving from a small apartment to a big house, and didn’t consider the cost of heating or cooling all your new square footage.

    That’s all I can think of for monthly payments.

As far as closing costs, I’ve had several mortgage brokers tell me to estimate about 4 points (that’s 4% of the loan balance) for my closing costs.  That’s a little on the high side, but you’ll want to shop around for a mortgage broker or bank who’s not going to charge you a lot to get the loan done.  Often, though, you’ll have a trade off between a slightly higher interest rate and fewer points to the mortgage broker or a lower interest rate and more points.  Ask the broker or bank how they get paid!

The 4% you budget for closing costs, in addition to paying the mortgage broker, will also go toward things like inspections, appraisals, title policies, attorney’s fees and so forth… but most of it is for the mortgage broker – so beware!

Also… YES – the realtors and mortgage brokers are salesmen.  Shop with your guard up and don’t take their word for anything they say.  Some people will tell you what they think you want to hear when their commission is on the line.  Be a careful shopper and take your time, don’t be in a hurry to buy anything.  Educate yourself about the marketplace and see how the purchase works into your financial plan.

I love talking about this stuff, so please keep me in the conversation and I’d be happy to chime in on any future questions. ;)  Have a great week!



Real Estate Summit Meeting

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Today I spent some time preparing for Grassland Investments‘ quarterly summit meeting which is scheduled for next week.  My real estate company of five members, each living in a different state, gets together every 3-4 months to meet in person and discuss vision and direction for the company.

As I put together some notes of things I wanted to make sure we covered, such as:

  1. Income goals – how much money do we want to make and distribute this year?
  2. Acquisition goals – How many properties do we want to buy and what size. (For example, we’re moving away from working on buying property worth less than $5 Million because it takes just as long to find the deals and put them together, but it’s not as lucrative, and thus not a great use of our time.)
  3. Charity goals – We currently support a number of charities, but how can we do more and/or get more leverage with our giving.  For example, last year, we donated money to JDRF – and we made sure to give enough that we could get credited as a named sponsor in a golf tournament.  As a sponsor, we got an opportunity to speak, to have our logo on T-shirts, to have our literature distributed AND to invite 16 people to the golf tournament.  We gave some of the golf positions to key business partners and we auctioned off several of them to our investors, in exchange for a donation to the charity.
  4. Lifestyle goals – All our partners work from home and value the work-life balance that comes from being your own boss, but not being a slave to your business.  Since I am having a baby this year, and one of my partners is planning to adopt a foster child, we want to make sure that we have enough time to reach our business goals WHILE STAYING IN BALANCE with our personal goals.


While we clearly don’t re-set all our goals each quarter, we’ve learned over the past few years that it’s very valuable to re-assess our goals on a regular basis to see if we’re making progress toward them as anticipated AND to see if the goals still fit with what we want to be doing as a group.

We also review our mission and vision statements every time as a way to make these "living documents" (as discussed in the book Good to Great) which we feel is an important practice.

Even if you don’t have business partners to have fun with every few months, make sure that you keep your goals and mission out in front of you so that as you grow, and your business grows, you can make sure that things are happening in the way you want them to.

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About Emily Cressey

Emily Cressey is a real estate investor and licensed real estate agent living in Seattle, Washington. After graduating Phi Beta Kappa with an Economics degree from UNC-Chapel Hill (Go Tarheels!) her focus has been on building business for cash flow and investing in real estate for wealth. If you have questions about real estate investing, personal finance, or would like some flat-rate, affordable advice on one of these topics. Please fill in the Contact form.