House Flipping In The Real World-Part 7-Doing The Numbers

As they say at NPR, when we do the numbers we find that, well, it depends on how you do the numbers. Analysis is in the eye of the beholder. Just ask any finance guy told to justify the corporate jet. I prefer, with a few twists, to do the cash in, cash out method so here goes.

The HUD asking price was $39,900. I got it for $27,000 after some long negotiations. Dealing with HUD is tricky so a realtor that specializes in this is important. HUD picks the realtor and the realtor cannot opine on a bid but they will do so in code. "They may have an issue with this" means too low. "Perhaps in the ballpark" means you got it. Anyway, as I said before, you make money when you buy the house, not when you sell it.

Here are the cash flows (Sorry about the numbers going all over the place, programming ignorance):

Money out

Purchase Price $27,000

Maintenance/Repair 3,400

Property Taxes 3 Years 3,600

Insurance 600

Freddy and Celia Closing Costs 3,500

Foreclosure Legal Fees 750

Back Taxes and Penalties 3,000

Patricia Sale Closing Costs 500

Total Out 42,350

Money In

Rent $16,275

Freddy/Celia Mortgage Payments 7,920

Patricia Sale Proceeds 49,000

Total In 73,195

ROI = Cash In minus Cash Out divided by Cash Out=$73,195-$42,350=$30,845 divided by $42,350=72.8%. Not too shabby, at first glance. I held the property for 4.5 years so the annual return is 72.8% divided by 4.5 years equals 16.2%.

At this point, any analyst out there worth anything should be shouting "Wrong, wrong." And they would be right. You can't divide 72.8% by 4.5 years because it ignores the time value of money and a few other things but that's my story and I'm sticking to it.

There is a more glaring error. There is no expense in there for me but let's not quibble.

Let's do look at what is in there--The cost to renovate the house was only $3,400 because I did most of the work myself. It was a controllable variable. Uncontrollable variables are property taxes and penalties ($7,600), insurance ($600), closing costs ($4,000) and legal fees ($750). Actually, closing costs can be reduced significantly by avoiding real estate agents as I did with Patricia but it ain't a done deal yet so an agent still may be necessary.

What ate up a large amount of cash was FEES and you cannot avoid them but most people forget about them. If you invest in real estate, don't forget them.

BUT we still haven't come up with the most GLARING error in the analysis. The Donald and Co. would say "Don't do it this way. Use OTHER PEOPLE'S MONEY." Let's try that. You put 20% down and borrow the rest for repairs and everything else at 10%. So that is $5,400 for the downpayment and $15,350 for everything else and 4.5 years of interest payments=$31,899 plus the interest not paid you for the downpayment but let's not split hairs. Income of $73,195 minus expenses of $31,899 generates a return of $41,296 divided by $31,899 for a return of 129%, or an annual return of 29% doing it my way.

Not bad. In fact, great. The Donald is vindicated except for the fact that OPM is based on the assumption the OP are either idiots or charities because...

Who is going to lend you this money? Not HUD. Oh, there may be a government program out there that will lend you the money but I don't know about it and I wouldn't qualify. Maybe you would but I doubt it. Will a bank lend it? Lend $31,899 for a property worth currently, maybe $27,000? Remember OPM assumes you can borrow just about everything. I don't think so. Maybe Mom and Dad will lend it. Give it a try. Or private individuals may lend it but they will charge a lot more interest and take a lot more of the profits.

Please feel free to take a whack at the analysis or come up with a better one. I'm going to send this to a friend that is much better at finance than me so we will see what he has to say. For now my head is spinning and I probably made some major mistake BUT no matter how you do it you will come up with the same conclusion--yes, you can make money in real estate but it isn't as easy or painless as the guys on TV would have you believe.

Rebates to U.S. territories approved

American taxpayers outside the official 50 states and Washington, D.C., got good news today.

Secretary of the Treasury Henry Paulson approved the stimulus distribution plan and payment amounts for residents of American Samoa, and payments amounts to residents of Guam, the U.S. Virgin Islands and the Commonwealth of the Northern Mariana Islands.

The Economic Stimulus Act of 2008 required the Treasury Secretary to approve distribution plans for "non-mirror code" territories (Puerto Rico and American Samoa), and payment amounts to territories with "mirror codes" (Guam, U.S. Virgin Islands, and the Commonwealth of the Northern Mariana ; Islands). ;

For American Samoa and Puerto Rico, which had its funds approved on April 16, the islands' governments had to devise distribution plans that to be approved by the Treasury Secretary. In essence, the territories' had to enact language that the U.S. federal funds be advanced instead of having the local governments pick up the tab and get reimbursed by the federal government.

You can read Paulson's transmittal letter to American Samoa and see the A.S. distribution plan here.

Paulson's letter to Puerto Rico is available here and P.R.'s rebate plan is detailed here.

Click below to read Paulson's other letters:

• Guam



• U.S. Virgin Islands



• Commonwealth of Northern Mariana Islands

Gonna be on the tee-vee

So about two weeks ago, I was contacted by a journalist who was looking for someone to be interviewed on camera about the new ING checking account. Apparently, I was the first person to say yes. A camera guy came to my house and filmed me talking about the account, at my computer using it, and then about 15 minutes of footage of me feeding the guinea pigs (including a couple minutes of extreme closeup, where his camera was almost touching the cage and they were eating a piece of celery right in front of the lens.) No idea how this will turn out, but I hope that gets in. :) This story is essentially going to be sold to a bunch of smaller networks, who will have their local news anchor read the copy and dub it over, so hopefully it will start appearing on the Web in late March. I'll post one if I find it.

O where o where has my thousand dollars gone

So I upped my voluntary retirement contributions for February, and they were duly taken out of my paycheck. However, they didn't show up in my TIAA-CREF account. This is bad. They always arrive at the same time as my work's contribution and my involuntary contribution, but this time something seems to have gone amiss and I am missing $1000. I notified TIAA-CREF and they are looking into it, and I notified my HR department and did not get a response. Let's hope one of them finds something soon.. I'm a little disappointed that I missed the really low stock prices day - TIAA-CREF said that when they credit the money, it'll buy shares at whatever price is current that day, not the day it was supposed to credit. (Dangit.)

Taking the big plunge

Today I filled out the paperwork - effective as of my payday at the end of April (since I get paid once a month) I will have about 86% of my salary deducted pre-tax and put into my retirement accounts. I have plenty of money in liquid savings, and will have more by then, so I know logically it will be perfectly fine even if I don't bring in another dime from CashDuck for at least six months, but it's still a little scary to only draw $500 of salary a month! (That is, before my deductions for my insurance premium, gym membership, and FSA.. that's why it's not 100% of my salary.) So I might only bring home $200 a month. I went in to my TIAA-CREF account and put in some allocations for it - I am hoping that the gibberishly named account that doesn't have any money in it is the 457. (All the other gibberishly named accounts have deposits from which I can figure out whether it's my involuntary contributions, voluntary contributions, or the Roth.)

I also signed up with Citi to get the $50 signup bonus (read about it here) but I forgot to put in the code. I was supposed to take out the code that was there, and enter another. Oh well, I can always use more bank accounts. :) I wonder what the original code was supposed to get you.

Quick Political Fixes That Don't Work

Going to post another article that is pretty good but pretty boring but has a lot of meaning so read it. I'm too busy right now to do it all myself since I just added a possible lawsuit in Florida over my late uncle's estate. Just gets better and better.

But I realized when I saw this article at MarketMinder.com (full disclosure--I do business with these guys) that none of you have ever seen or been under price controls. Hope you never do because they don't work, ever. Read on.

The high cost of cheap food

Published: October 24 2007 20:37 | Last updated: October 24 2007 20:37

In 1973 Richard Nixon, US president, under political pressure be­cause of rising domestic food prices, banned the export of soyabeans. The policy had predictably dire results, but today, with the world in the grip of another bout of food price inf­lation, governments worldwide are rushing to distort the market with subsidies and quotas, price controls and export taxes. They should stop.

In the run-up to its presidential election, Russia has imposed price controls on basic foodstuffs, and plans an export tariff on wheat. China already controls prices; other importers, including Egypt, Jordan, Bangladesh and Morocco, are increasing subsidies or fiddling with their tariff regimes.

The simple problem with all these actions is that they distort the market. Price controls and export tariffs make production less profitable, which discourages increased supply and can make shortages worse. Subsidies stimulate demand so it does not fall into line with higher prices. All distort the terms of trade within a country. Farmers suffer at the expense of city dwellers – especially perverse in countries with high rural poverty, such as China.

None of this is too bad in the short term. If food prices fall back, price controls become meaningless, subsidies can be withdrawn and export tariffs no longer make sense. The more pernicious problems will appear if food prices stay high. With more demand for protein from fast-growing Asian middle classes, lunatic policies to subsidise corn-based ethanol and the legacy of under­investment during long years of low prices, that prospect seems likely.

For exporters, distorting the market in favour of domestic consumers harms the balance of payments, lowers investment and helps rivals. Nixon’s ban is often credited with creating Brazil’s soyabean industry.

For net food importers, who can keep prices down without shortages only by offering subsides, the risks are much more serious. Cheap food is an open-ended fiscal commitment – once in place it is politically impossible to withdraw – that can play havoc with a budget. Developing countries have improved their fiscal position in recent years. They should not throw that away.

Rich countries, where food is a small part of total consumption, have less to worry about, although they should beware the ratchet effect as food importers increase subsidies and food producers tax exports, driving up world market prices still further. But leaders in the developing world, no matter the political pressure to bring down the cost of grain, should resist. Cheap food comes at a high price.

Copyright The Financial Times Limited 2007

APRIL 22: A No Good Terrible Bad Day

Well, I’m sure y’all all know by now, the Washington Capitals lost in sudden death overtime to the Philadelphia Flyers, 2-3 on Tuesday. It kind of sucked to watch that, but it was an exciting game nonetheless.

But the real kicker was in the morning at work. First, you have to understand that I work for a consulting firm. Second you have to understand what ‘being on the bench’ means and how it’s basically death for consultants. Being on the bench is when you’re not working on a client’s project. You’re not being productive and your billable hours goal for the year will be missed, so you want as little bench time as possible during the year.

Tuesday morning, I get to work, run get a little breakfast with some of my teammates, and return to find out that my project has come to an untimely end, a bit like CleverDude in the link above. Next thing I know, I’m laughing mildly hysterically at the situation and at the slight edge of panic in the room.

I find it damned ironic that I need to find a new engagement at work in a hurry because the day before, I was at an internal corporate event trying to network so I can line up the next gig in a few weeks at the planned close of my project. A friend of mine who’s been at the firm for almost a decade introduced me to someone who needs staff in the next 2 weeks. but I won’t be released till midsummer so that isn’t going to work for me.

But how much do things change in 24 hours. You can bet your bippy the first person I called after being axed in the morning was the one staffing up soon. Although I probably won’t end up on that particular project, I was hugely relieved to have a place to turn right away for help.

The moral of the story is to seize your opportunities to network, internally and externally. I can’t say that enough. It’s the reason I guess why us DC PF bloggers like to meet for happy hour. We try to do what we can for our network. It’s a bit of a quid pro quo though. I mean, if I’m willing to take someone’s resume and pass it along, then hopefully they would do the same for me, right?

Small Investments, Big Pay Offs - The Best Investments You Can Make

Many people make the sad mistake thinking that they need to have a great deal of money in order to invest.? That’s far from the truth.? You do not need to have a lot of money to invest you just need to know where to invest it at.? You can make small investments that will have big pay offs in the end.

There are many options for first time investors to get started with $1000 or even as little as $50.? One of the easiest investments that you can get into is a 401(k) Plan.? You do not need any money at all to start with and you can add a minimum of 1% of your pay to the plan with each paycheck.? A great perk of these kinds of plans is that your employer will also put money in at the end of their fiscal year so that means you will get free money each year that is earning money for you.??

This means if you earn a yearly income of $30,000 with bi weekly paychecks, you can have as little as $11.50 taken out for your retirement fund from each paycheck.? This is taken out pretax so you will only see about $9 missing from your check.? Most people recommend that you contribute at least 10% of your pay to your retirement in order to save enough to live a comfortable life style when you retire.??

You can save for college with a 529 plan and you can start it up with as little as $25.? You would then need to have at least a $15 automatic deduction from another account like a savings or checking that will go directly into the 529 plan.? This is a great way to invest in your child’s future and there are great plans that you can get into such as Upromise where you save on things that you buy each day.??

These plans are tax exempt when they are used for qualified education costs of the beneficiary on the account.? With plans like Upromise, you can sign up with different credit cards from yourself as well as family and friends.? Each time they take certain purchases with those credit cards, a percent of the purchase is places into an account for your child for college.? You can then take those savings and use them in a 529 account.??

Another great investment choice would be U.S. Savings Bonds.? All you need to buy one is $25 dollars and you add to it in $25 increments.? Generally you can buy Savings Bonds right through your payroll as an automatic deduction.? The good thing about this is that the interest on the Savings Bonds are exempt from both state and local taxes and most often federal taxes as well.??

Investing doesn’t have to take a great deal of money.? Just do a bit of research before you invest your money so you can go with the best option for your goals.?

My latest Stock Watchlist

It’s good to be back, back to research. Honestly, I love researching stocks, even after a long day of work. I don’t consider studying charts work and sometimes believe they help relieve stress after a long day and/or week of ‘regular’ life.

I have not studied the market since late March but ran at least a dozen screens this weekend and viewed hundreds of charts and compiled a list of 10 that I will be watching for possible positions. I will most likely give myself another week or two to get back into the market rhythm but these ten look solid for mid-to-longer term buys (trend/ momentum buys). Remember, we are not day-trading here.

Some names will be familiar as I have owned and/or covered them over the past 6-12 months. Others will be new to the blog but they all have solid fundamental and technical characteristics. These stocks are currently presenting favorable odds for future gains based on the CANSLIM-like characteristics.

I must be clear that I am NOT declaring them buys at this point in time but they should be gearing-up for positive moves giving us potential positions (based on risk/reward setups). The stocks are listed in random order so I am not favoring one more than another until I get my market bearings back.

Let me know what you think of my ten and certainly leave comments for stocks on your watchlists that you think I may be overlooking.

10 Stocks to Watch:

• MA – 228.60, buys along the 200-d m.a. are ideal for this winner (I own shares)


• V – 66.11, any accumulation near $60 is ideal in my opinion (I own shares)


• FSLR – 268.30, extended with an ideal accumulation point above the 50-d m.a.


• GU – 14.12, the stock gained 60% while I was away; ideal entry near $12


• PPO – 23.19, good looking young stock with ideal accumulation near $20


• GTLS – 35.48, poor ending to the week but a buy near the 200-d m.a. is fine


• TITN – 22.39, solid young stock with an ideal entry point near $20 (looking good)


• SD – 44.28, made almost every screen I ran this week (buy near $40)


• CLR – 38.38, yes, this stock is extended but I like it near $30 or the next base


• RIMM – 115.85, I’ll jump on this one if it has anther run in it (classic superstar)

Free camera when you sign up for Key Checking

I got a Nano with their last promotion - now you can get what is actually a very nice camera. Click to check it out. You have to open a checking account and:

* Set up Direct Deposit and/or Automated Payments and complete two transactions each of $150 or more by June 1, 2007
* Or, use your new checking account to make 20 transactions - from ATM withdrawals to online banking to writing checks - and be approved for a new Key credit card by June 1, 2007

I'd personally go for the first one as it doesn't involve opening a credit card. I've always had great service from Key and they'd be my primary bank if there were a branch close by. Right now I use them as my bill paying account and things have always gone smoothly.

Name that tune!

So I've spent some time on hold with the IRS recently. (I do our taxes myself, so this is a common occurrence, especially when calling at this time of year.) Every year I wonder the same thing: What the heck IS the name of that song they play for the hold music? You know, the waltz?

I know it's something obvious, but this has been driving me nuts for years so humor me with this only-marginally-money-related post.

Is it:

A. Dance of the Sugar Plum Fairies

B. Waltz of the Flowers

C. Eine Kleine Nachtmusik

or something else?

Apparently, It Pays to Be Naughty - Vice Fund vs. Socially Responsible Fund

A comparison of Vice Fund vs. Socially Responsible Fund

I heard an anecdote contrasting these funds on Bloomberg on my nifty Sirius Satellite radio and thought I'd check out how the angel on the left shoulder fares against the devil on the right. Yes, there is actually a fund called the Vice Fund, ticker VICEX, that invests in none other than tobacco, casinos, military and alcohol companies. As you may have heard, "socially responsible" investments are all the rage now as well, with the most notable fund being the Neuberger Berman Socially Responsible Investment fund NBSRX.



Interestingly, in the year ago period, the Vice Fund beats both the Socially Responsible Fund AND the S&P500 at 3% up for Vice vs. a loss of 4-5% for the benchmarks.





Next, check out the 5 year view, as the Vice Fund completely trounces both benchmarks at 144% for Vice vs. less than 60% for the benchmarks:








Some notables:

• Vice Fund gets a 5 star Morningstar rating vs. 4 for Socially Responsible
• Vice Fund has a higher expense ratio at 1.75% vs. .9%

Vice Fund Top 10 Holdings:

Altria Group Inc. (MO)
9.07%

Carolina Group (CG)
7.15%

MGM Mirage, Inc. (MGM)
5.63%

International Game Tech. (IGT)
5.34%

Diageo PLC ADR (DEO)
5.26%

British American Tobacco PLC ADR (BTI)
4.95%

Boeing Company (BA)
4.81%

InBev (INB)
4.33%

Wynn Resorts, Ltd. (WYNN)
4.13%

Lockheed Martin Corporation (LMT)
3.97%





Socially Responsible Fund Top 10 Holdings:


Comcast Corporation (CMCSK)
4.39%

E.W. Scripps Company (SSP)
4.39%

Anixter International (AXE)
4.13%

Altera Corp. (ALTR)
3.98%

Danaher Corporation (DHR)
3.76%

Willis Group Holdings, Ltd. (WSH)
3.74%

UnitedHealth Group, Inc. (UNH)
3.60%

Bank of New York Mellon Corporation (BK)
3.54%

American Express Company (AXP)
3.32%

BG Grp (BG.)
3.25%


I found the top holding of Comcast in a Socially Responsible Fund to be somewhat ironic, given that they are evil, anti-customer service monopolists (can you tell I have trouble with my cable and internet service?). However, I'm sure they've vetted all their holdings to ensure there are no dealings with the Sudan, profiting from blood diamond trade, etc. In conclusion, let your conscience be your guide at your portfolio's peril.

www.everydayfinance.blogspot.com

Is this 13% Yield Worth the Risk?

I came across a closed end fund today that may make for a nice addition to the self directed IRA account. The Van Kampen Dynamic Credit Opportunities Fund (VTA) is showing a steady monthly yield of $.152 per month, which puts it at a 13% yield given the current $13.77 share price. Although the share price has declined since launch last summer with the rest of the financials, I think it's overdone here since it started accumulating assets once most of the sub-prime carnage was already known and starting to circulate. Given that the dividend has been paid steadily at $.152 every month since launch, and will be in March too, it may be worth buying this one that may be unfairly punished for guilt by association.

VTA doesn't show up on dividend screeners, nor does it even show a percentage yield in Yahoo! Finance, but if you check out the dividend history in "historical prices", "dividends", you'll see the steady history. So, to the question, "Is this 13% Yield Worth the Risk?", I think the answer is a resounding "Yes".

www.everydayfinance.blogspot.com

Going once..

I posted before that I am looking to see if someone else would like to take over running the Under 30 Honor Roll and Festival of Under 30 Finances as I don't have the time to develop it into something better - if anyone's interested, please let me know!

Theme and Gleam

I've moved the new theme for Aridni out of the sandbox and onto the main page.? While this isn't exactly the final product, I wanted to get it launched as soon as possible.? There will be a couple smaller changes with some color tweaking and minor spacing issues resolved.? As well as some ‘big ticket' changes.? Primarily with the image on the top left, I'm not liking the weird moon looking shape.

On the right, there is a new feature for Aridni called ‘Bookit!'? With that you will be able to see what books we most recently reviewed and read.

Well, that's all the news for right now.? Have a good day.

Todd

Gotta Quit Singing The Blues

The market hits an all time high but most people think the world is coming to an end. In addition, lots of people say 'so what?' because the market is getting a bit ahead of where it was seven years ago. Number wise, yes but economically no. Seven years ago we had the dot.com nonsense with PEs so out of whack that the bottom had to fall out and it did.

Check out this MarketMinder.com article on the new high. It has one line that should be imprinted on your investing eyeballs so you see it every day which is---Pessimism and undue worry are the stuff of bull markets; euphoria is the bane.

Remember that and read on.

Happy Anniversary!

10/10/2007

Story Notes:

• Yesterday the bull market celebrated its fifth anniversary, but you’d never know it by reading financial headlines over the same period



• Fears about stocks gaining “too much too fast” and “too many years of an up market” aren’t based in reality or logic



• Strong economic and market fundamentals supporting stocks’ climb are still in place—making the immediate future look bright

MarketMinder doesn’t like to dwell on the past because it can’t tell you much of anything about the future. But we feel it’s incumbent upon us to highlight a scarcely recognized fact: The bull market for global stocks is five years old. Here’s one of the few acknowledgements we found:

Happy Birthday, Bull
By David Landis, Kiplinger
http://www.kiplinger.com/features/archives/2007/10/bullmarket.html

Five years ago yesterday, the S&P 500 closed at 776.76. Today, it sits around 1560…over a 100% recovery in five years. Good times!

According to Standard & Poor’s, in those five years Energy stocks were the winner, gaining over 236%. Other economically sensitive sectors also flourished, including Materials with 157%, Industrials with 124%, and Technology’s 144% gain. Traditionally defensive sectors like Consumer Staples and Health Care lagged, each with about 40% gains. An outlier was Utilities, which racked up a whopping 168% rise in the period. On balance, that’s very close to what you might expect from an economy experiencing sustained expansion and high demand. And these are merely US returns—foreign stocks fared even better.

Perversely, such a big recovery scares many—they proclaim it’s been “too much too fast.” But history tells us this recovery wasn’t all that big. The current bull is actually the second weakest of seven post-World War II bull markets that lasted five years or more, according to Standard & Poor's.

The “aging bull” argument doesn’t fly either. It’s a strange thing to believe stocks should go down just because they’ve been going up. This is a perversion of the mean reversion theory, which simply doesn’t pertain to stocks. There’s no mathematical, economic or financial law that says earnings, economic growth, or stock prices must revert back to any kind of average. Trends can last as long as underlying fundamentals support them. (See our past commentary “Vector Investing” 9/27/07 for more.)

To wit, the fundamental drivers propelling this bull remain intact: Better than expected corporate earnings and global GDP, high M&A and share buyback activity, and relatively dour sentiment (among many other positives out there) are all very much a reality today.

Yep, it’s been a good five years. We hope you enjoyed the ride, but we suspect most didn’t. Thinking back, folks fretted over everything from dollar doldrums, energy prices, terrorism, trade and budget deficits, carry trades, credit crunches, inflation, and consumer spending (to name a few). At one time or another each was hailed as the Apocalypse, yet NONE had the potency to slay the bull. We think that’s a great thing: Pessimism and undue worry are the stuff of bull markets; euphoria is the bane.

Today’s real risks (yes, there are always risks) are minimal and well contained. Deleterious government regulation, protectionism against free trade, and monetary or fiscal policy errors are remote. (For more, see yesterday’s commentary, “The Real Risks.”)

Looking back, it’s apparent stocks reflected reality—not media hype—over the past five years. And while it’s crucial to remain vigilant, don’t forget to step back once in awhile and appreciate the positives of this dynamic and wealth-creating global economy. More gains are just ahead.