Ellicott Accountant Writes On: “The Fashionable Trend Towards Renting (Not Buying)”

“There is no medicine like hope, no incentive so great and no tonic so powerful as expectation of something tomorrow.” – O.S. Marden

Earthquakes, hurricanes, and … homeownership?

Well, the first two have left us in a mixture of annoyance, grief (there has been real tragedy in the wake of Irene, I must say), and a growing cynicism over crisis alarms.

And well, the last issue — perhaps I threw it in so I could segue into what I want to write about this morning:). Though, in fact, it’s a topic which has continued to be thrown into real debate. The mortgage deduction is under fire from politicians and the housing market still looks shaky.

However, I’m really not interested in getting into debates with clients or friends over this issue. Because despite what I will write here, every situation is different. There are real tax implications for whatever you decide — and which might call for an expert opinion (ahem).

But it’s en vogue now to be “anti-homeownership” given the recent crash in home prices and all the shenanigans the mortgage companies, banks and Wall Street firms pulled over the past several years. People tend to use the “recency effect” (considering the most recent dynamics over any others, simply because they’re closest to mind) and confirmation bias (whereby we naturally gravitate to arguments which confirm our own) to formulate their opinions.

I’d like to enter the fray for you.

Because these arguments dictate important lifestyle and financial decisions for you and your family. So, before I receive any quick-tempered emails for this thesis;), let me clarify a few things:

* Many people CAN’T own — that’s a fact of life. If owning a home isn’t an option for you, for numerous reasons ranging from finances to career, then making a choice between renting and owning isn’t something that mandates weighing the options.

* Many people SHOULDN’T own — perhaps during the days of easy credit or even today, you have the funds to buy a home, but there might be some factors that would make this a poor choice.  Perhaps you need to relocate every couple years due to your line of work, perhaps you’re in the middle of a divorce or child custody battle, or perhaps your income is quite variable.  It might make sense for you to rent until there’s more stability in your financial situation.

* Many people COULD own, but don’t. That’s my target audience here.

Read on … and remember that we are here for YOU. I mostly want to stir up your thinking, and show you how the planning decisions we help our clients make require multi-variable thinking.

John Curtin’s

“Real World” Personal Strategy

The Rental Decision

Long-time renters often cite all the negatives of home ownership, and there are some to be sure.  But many of these oft-cited reasons have a valid counterargument OR these old paradigms are no longer accurate:

Current Conception #1: It’s More Expensive to Own Than to Rent — This is probably the biggest myth out there that many proponents of renting continue to propagate. Primarily, at this point in time, with home prices having crashed and interest rates at record lows, the rent-to-buy ratio is favoring “buy” in many parts of the country, more so than at any point in recent history.

Now this isn’t just a rah-rah “buy a home” Note, and I would concede that it is entirely plausible that home prices continue to decline for several more years. But if you’re not buying to sell, but rather buying to live, it can be MUCH more economically efficient to own over rent, especially at this time.

Here is the data (rent vs buy favors buy in 75% of US cities), aside from the other intangibles listed below: http://money.cnn.com/2011/08/16/real_estate/buy_rent/index.htm

Let me repeat:  It is becoming cheaper to own and it is becoming more expensive to rent.

In my analysis, this trend will continue for years.

Why?  First off, the Fed’s policy has been to reward debt holders and punish savers with the unprecedented a) zero interest rate policy and b) projecting out through 2013 that rates will stay low.  This in turn, is pushing up gold prices and equities prices, and investors are pricing in future inflation. This bodes well for landlords, and poorly for renters. See, this interest rate/inflation phenomena mixed with the new ratio of renters over owners is flooding the market with renters and starving the market for buyers. This makes homes more affordable, while landlords are embarking on higher annual rent increases.

Current Conception #2: Homeowners Have to Pay to Maintain a Home Instead of the Landlord. Put aside the premium you might pay if you got in a bidding war over a home or made some upgrades to your home that weren’t necessary. Simply baseline the same property and look at renting versus owning it. Everything you pay for as a homeowner, the landlord has to pay for as well.  Who do you think pays for that? Do you think the landlord pays for snow removal, replacing carpets, fixing leaks and a new roof every 15 years out of the goodness of their heart?  No — you pay for it!  It’s all priced in over long-term rent trends. Landlords are in this business to make money and if they weren’t making money they wouldn’t be landlords.  You are paying to put their kids through college and for their Caribbean vacations.

Basic economics dictate that over a long period of time, you are losing money by renting, not just because you’re not building any equity, getting a mortgage tax deduction, etc., but because you are paying for the upkeep, depreciation expense and maintenance of the home in your rent — PLUS a tidy profit to the landlord.

Many renters are convinced they’re “beating the system” because they don’t have to pay for these things, but they are — it’s just not itemized out in tidy fashion for them.  It’s all in the rent.  This is logic — and reality.

Current Conception #3: Renting Provides for Much More Flexibility to Move. This is a major (and legitimate) reason NOT to own.  After all, closing costs, transfer taxes, realtor fees and such are nothing to sneeze at.  However, what a lot of renters end up doing is deciding to rent instead of own, but then they never move!  They end up renting for years on end when they could have owned.

And that flexibility? Well, the landlord also has the flexibility to keep increasing prices year over year at whatever rate they so choose — which then requires a calculus on your end as to how much of an increase makes it worth moving out, in order to just rent somewhere else.  Additionally, you’re often locked into an annual lease (which isn’t very flexible), they can sell the home or put new tenants in each lease cycle (which isn’t very flexible), and you can’t do many things to the place you live in without their permission, or perhaps not at all (not very flexible).  So, you’re trading the  slight mobility flexibility for a lack of flexibility in virtually everything else that the landlord controls.

To reiterate, if you’re a current renter, you may feel this Note is critical of your situation. It’s not.  It’s an economic reality that many Americans never have had, or never will have the economic means to be a homeowner. This is a mathematical certainty. The point here is to get my clients and friends thinking who DO have the means to save for a down payment, and who may be better off financially as owners than renters… but who continue to muddle along in complacency because they’ve convinced themselves that homeowners get hosed and renters have all the perks.

If you’re especially interested in math, here’s a helpful exercise for you to consider.

http://www.khanacademy.org/video/renting-vs–buying-a-home?playlist=Finance

Lastly, I’m here to HELP you, only and always. Let us help you through the important financial decisions in your life, while taking a holistic view of ALL of the costs.

To You and Your Family’s Peace of Mind!

Ellicott Tax Professional’s: “Back-of-the-Napkin Financial Principles Even *I* Use”

"The game of life is not so much in holding a good hand as playing a poor hand well." – H. T. Leslie

Meeting with clients this past week (and the week before) has been a blast.

No — really! And yes, I know, I should get out more.

The reason we enjoy doing this (especially this time of year), is that seeing the look on clients’ faces when we identify tweaks and quick moves which carry a significant ROI on their tax dollars … well, it’s worth all of the time we’ve put in to learning this craft.

Sometimes during these meetings, I’m duped into sharing some of the ‘private’ details on how I think about taxes, finances and investing for my OWN family. Yes, I do try to practice what I preach in these Notes to my clients and friends! (And yes, I do have a private life outside of tax forms.)

Enough people have told me that these back-of-the-napkin principles which I share have been helpful, that this morning I’ve been motivated to put some of them down for you in easy-to-digest form!

So, without further ado, John Curtin’s Napkin Financial Strategies…

John Curtin’s
"Real World" Personal Strategy
Economic Principles in Action for Your Family
Whether you’re running a Fortune 50 corporation, or just trying to keep your household expenses from exceeding your salary, the same basic financial concepts which I use in my personal life can apply for you. These are fundamental building blocks for wise financial decisions.

Quick Interest Calculations: The Rule of 72
Want to double your money? The Rule of 72 can tell you how long it will take, based on the specific interest rate you’re looking at. Just divide 72 by the interest rate. For example, if you’re looking at an investment with an interest rate of 6 percent, then 72 divided by 6 gets you an answer of 12 years.

This is a rough estimate, of course, but it’s pretty effective.

In fact, you can also turn the equation around to determine the interest rate you’re looking at if someone promises to double your money in a set amount of time. Twice as much money in 12 years? Divide 72 by 12 and you get an interest rate of 6 percent. This rule lets you evaluate investment opportunities quickly and decide where to put your money.

Opportunity cost.
What do you need to give up in order to get something you want? It’s a question of money, but also time and value: Pursuing an advanced degree may take years–are you willing to put in that amount of time? Will a sports car give you enough enjoyment to offset going into debt for it?

Sunken costs.
This is money you can’t get back–a non-refundable airline ticket, for example. Keep sunken costs in perspective. It’s easy to start thinking "Well, I’ve already spent $100, what’s another $25?"  You’ve got to be willing to walk away sometimes.

Time value of money.
According to this principle, a dollar you receive today is worth more than a dollar you’ll get tomorrow. You’ll have opportunity to invest that dollar immediately and begin earning more revenue from it (and also avoid losing value because of inflation).

Again, this helps you make calls about your purchases — and your income. It’s the old "a bird in the hand" theory in action for your wallet.

Re: Guarding Against Your Own Private Downgrade

"No one is in control of your happiness but you; therefore, you have the power to change anything about yourself or your life that you want to change." – Barbara de Angelis

Last week, we were all reeling a little from the S&P downgrade and all of the other chaos flying around the "body politic" (and economic, to boot).

After the cool light of a week’s news has passed, businesses and families seem to be adjusting to a new normal. Consumer confidence is at its lowest in decades and the political future seems murky — will these serious budgetary problems be addressed with any kind of certainty?

It remains to be seen.

But, I’ll blush a little to say that my advice from last week seems to have proven wise. I’ll rehash it here with a few expanded comments:

Curtin’s Key Reminder #1: The only thing certain about the stock market is that it’s volatile. I believe you saw the truth in this statement? Even today, as I write, we’re north of 100 points higher … and that’s after a wild roller-coaster ride of down, and up, and down, and now up and up. Hold fast — sure, the short-termers may have profited from any of these gyrations, but what’s most important, for your family’s financial future, is that you keep the loooong view. Which, of course, leads me to my second reminder…

Curtin’s Key Reminder #2: What you choose to "ingest" over these next few days will greatly impact your state-of-mind. If you chose to ignore this advice, it’s likely your blood pressure felt the consequences. Truly — the "mass" media do better (financially) when there is chaos, so there is a very real, monetary at least, incentive for them to highlight turmoil. If you’re wise, you steer clear. I’m not suggesting that you stick your head in the sand, just … use a strong filter.

Curtin’s Key Reminder #3: The only thing you can truly control is yourself. With every passing week, I see the growing truth of this statement. The economy, your job situation, your retirement — it’s all out of your hands, in a very real sense.

That said, we met with families and clients last week who were taking positive action. With our advice, just a few small tweaks can realize six figures of true savings over the course of years.

Which is why I’m giving you one more chance on what I suggested last week:
Call my office this week: (410) 203-2201 and request one of our limited Tax Planning Saver Sessions. During this session, we will analyze your current situation and identify clear action steps for the last quarter of 2011 — designed to save your bottom line hundreds (or even thousands).

You CAN control your tax strategy … and we can help.

To You and Your Family’s Peace of Mind!

Guarding Against Your Own Private Downgrade

"All mankind is divided into three classes: those that are immovable, those that are movable, and those that move." -Benjamin Franklin

What a messy weekend. Heartbreaking news from Afghanistan, the S&P downgrade — and now all of the resultant (and gruesomely predictable) political posturing. Oh, and as I write this, it’s no surprise that the stock market is "reacting" a bit.
   
Curtin’s Key Reminder #1: The only thing certain about the stock market is that it’s volatile. So those of you with many assets resting there, don’t make moves out of panic. Sit down to discuss a tax-advantaged strategy … not a knee-jerk fear response.

Curtin’s Key Reminder #2: What you choose to "ingest" over these next few days will greatly impact your state-of-mind. Garbage in, garbage out, as they say. And, of course, the opposite is true–when you surround yourself with excellence and clear-eyed determination, you find that your heart and mind carry much greater strength. Temper your media intake this week, as they are (quite literally) merchants of fear.

Curtin’s Key Reminder #3: The only thing you can truly control is yourself. You can’t control the market, you can’t control the US debt rating (unless, of course, Messrs. Geithner and Bernanke are reading this — perhaps you guys can!), and there’s a real sense in which you can’t even, really, control your salary and income.

So, with those key reminders in mind, here’s what I suggest:
Call my office this week: (410) 203-2201 and request one of our limited Tax Planning Saver Sessions. During this session, we will analyze your current situation and identify clear action steps for the last quarter of 2011 — designed to save your bottom line hundreds (or even thousands).

You CAN control your tax strategy … and we can help.

To You and Your Family’s Peace of Mind!

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