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Two weeks ago, I wrote an article about Financial Documents You Should Save. This list is a little different. Some legal documents are more important than others. Some you don’t need, and some you need. Some legal documents everyone should possess at all times.

Will
A will is a legal, signed document that states your wishes regarding disbursement of your property after your death. Making a will when you are healthy and in sound mind, can save your family a lot of time, energy and money when you are dead. If you die intestate, which means without a will, a large chunk of the money from your estate will likely go towards higher legal fees as well as additional taxes. If you’re wondering where is the safest place to keep your will, you could keep a copy of the document in your bank locker. Make sure you appoint an executor to the will and keep your will in a place where this individual or entity will find it easily. The executor of your will could be either an attorney or a family member or even a trust company. In the event of your death, the court will appoint an executor if you have not named one.

Letter of Instruction
It would also be a good idea to leave a letter of instruction, which is a letter informing your family about your last wishes including the funeral or burial arrangements you’d like to have and who you’d like them to notify upon your death. This letter cannot and will not be used as a substitute for a will. It is an informal letter. You could also include details about where your will and other important documents are located, the money that you owe to various people or the money that is owed to you by various people.

Trusts
Contrary to popular notion, trusts can be used by everybody and are not only for the super rich. In fact you should talk to your financial planner or lawyer about creating a trust. Whatever assets you place in your trust will automatically be given to the beneficiaries; there are no probate costs involved. A revocable living trust states who will have control over your assets while you are living as well as when you are dead.

Durable Power of Attorney for Health Care
This legal document ensures that in case you were to become incapacitated, your affairs will be looked after as per your wishes. If you have not named one, the court will appoint someone they deem most appropriate. It is also called a living trust and the person nominated will be responsible for taking care of your health care as well as your financial arrangements.

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It’s difficult to imagine a city like San Francisco or New York becoming less affordable for the average person. Even with the recent market downturn, 2 bedroom/1 bath homes with around 1,000 square feet go for well above $500,000 in San Francisco. In Manhattan, you would be lucky to get a 1 bedroom/1 bath condo with under 1,000 square feet for less than $500,000. So, with prices way out of whack with the rest of the country, they can’t become much more unaffordable, right?

According to Chris Mayer, director of the Milstein Center for Real Estate at Columbia University, homes in these “Superstar” cities may become even more unaffordable. He sites three trends that he believes will occur to inflate home prices in these cities:

The aging population

As baby boomers begin to retire in the next several years, they will begin to look at where they want to spend the rest of their lives. Ask anyone that has been to Florida, and they will tell you that many of them will prefer sunny skies and sandy beaches. Cities in California, Florida, and other warm climate states such as Arizona will see a huge demand for property that is relatively fixed (or at least scarce) in supply.

The rich getting richer and the poor getting poorer

Those that are wealthy and already live in the aforementioned cities with rapid property value appreciation will continue to stay in those cities. This will cause them to become even richer at a faster pace than those with normally appreciating homes. In 25-35 years, the population in these “Superstar” cities may be overly rich. Of course, they will still need the rest of us as maids and chauffers, right?

Globalization

At first glance, this seems like a trend that would push the rich towards other countries thus putting downard pressure on the major cities. At the same time, though, millions of rich people from other countries will begin to compete for our best real estate as well. This increase in demand will surely drive prices upwards in the most desirable cities.

To make a long story short, if you want a home in a “Superstar” city for retirement, you may want to buy it sooner rather than later. If Mr. Mayer’s trend predictions come true, retirees may find it difficult to retire in style in any of today’s hot locations.

Source: CNN Money

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I read a disturbing article at CNN Money today titled A Last Chance to Get Rich in Real Estate? The article profiled a real estate investing “university” called Nouveau Riche. This unversity sells real estate investing services and products to those who want to use real estate to achieve financial freedom.

At first glance it seems innocent enough, after all there is an entire industry of so-called gurus explaining how anybody can not only get rich in real estate but do so with no money down. But after reading further, it becomes increasingly clear that Nouveau Riche is setting people up to fail.

Here are some excerpts from the article and my comments:

In April, Cuevas plunked down tuition of $16,000 and attended a weeklong program in Phoenix. …emboldened by her instructors and an advisor assigned by the university, she [bought] - sight unseen in one case - three investment properties through a real estate agency controlled by Nouveau Riche.

A couple of things to look at here. First, I think $16,000 is outrageous for a week long education on real estate. She could have spent a tiny fraction of that money on real estate books and learning her local market to find out where deals could be had. Second, she purchased real estate through this company SIGHT UNSEEN. So, not only did they get her $16,000 tuition payment, but they also got the commission on the selling of these properties.

Nouveau Riche borrows heavily from the investment philosophy…by real estate guru Robert Kiyosaki…Like Kiyosaki, Nouveau Riche teaches that working for a salary is a fool’s game; the road to riches requires leveraging debt to amass a portfolio of income-generating properties.

I’m pretty much neutral to Robert Kiyosaki. His teachings aren’t necessarily wrong, but, like Nouveau Riche, he tends to downplay the risk involved. You can’t just throw money at real estate and plan to come out ahead.

…the buyers put 10% down, borrowing the rest using an interest-only loan. Trouble is, the rents on the condos won’t cover the total cost of owning them. No problem. Investor Concierge explains that it has arranged for the seller of the condo complex to subsidize the rent for as long as two years at above-market rates. The seller will also pay all the management fees and real estate taxes for two years. As a result the investors should be $145-a-month cash-flow positive.

Where to start? First, if it the deals are not cashflowing with 10% down and an interest-only loan, they are not good deals to start with (if you plan to rent them out). Second, one thing I didn’t catch in this quote was that this deal happened in a town in Michigan that has been hit hard with the auto industry slowdown. Their inventory of unsold homes has multiplied over the past couple of years. Also, what happens when the subsidy ends? Will there be anybody left in two years to rent to?

With enough effort, real estate investing is certainly a viable way to become wealthy. It has many great advantages over other types of investing such as:

• Favorable tax treatment
• Ability to leverage
• Ability to influence value more directly than some other assets (such as stocks)

However, before investing, it is important to understand what you are getting into. Don’t follow the lead of salesmen when putting your financial future at risk. Read some books that pertain to the method of real estate investing you want to pursue such as foreclosures, tax lien certificates, notes, etc. Next, understand your local market, so, when opportunities arise, you can identify them and act upon them.

For further reading, check out my article Tips to Avoid a Bad Mortgage.

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In my previous post I talked about a few ways the U.S. government is looking to regulate the subprime mortgage market. While these regulations may cut down on foreclosures related to dishonest lending practices, it won’t help those that simply get in over their head. Before signing on the dotted line and buying a home, there are a few things that you absolutely must do:

Make a Budget

Budgets are at the core of most good financial decisions. It is easier than ever to keep track of your budget using any budget spreadsheet that fits your situation. Make sure you are honest about the numbers you use, and, if anything, be conservative.

Determine What You Can Afford

Using your newly created budget (or previously created for those of you ahead of the game), determine the amount you would be comfortable paying as a whole for your entire mortgage payment. This total mortgage payment will include the loan payment, home owner’s insurance, private mortgage insurance (PMI), and property taxes. You may not have PMI, but you will more than likely have the other three.

Next, subtract your estimated monthly property tax, home owner’s insurance, and PMI payments from your total mortgage payment. Plug the remainder along with your estimated down payment and interest rate into this calculator. The result will be the amount of the loan you can afford given your budget. This loan amount plus your down payment is the amount of house you can afford.

Shop Around

A lot of borrowers tend to skip this fundamental step in obtaining an optimal mortgage. They often rely on the recommendation of their realtor, a friend, or a family member. By shopping around you are looking to compare several factors:

• Rate: This is the obvious factor, but not necessarily the most important. All else being equal, you want this to be as low as possible. But since the rate can be lowered by various other factors that make you worse off, you can judge a deal by rate alone.
• Points/Up Front Fees: One of the ways lenders can reduce your rate is by asking you to pay points up front. One point is one percentage of the loan amount. Points are typically useful if you will be in the house for a long time (my rule of thumb is around four or five years.) Otherwise, get rid of the points and pay the slightly higher rate. Other up front fees can be compared across lenders and can often be negotiated to some extent.
• Prepayment Penalty: Lenders can also reduce your rate by including a prepayment penalty clause in your mortgage. The penalty can apply to selling your home, refinancing, or both. They are usually quoted as either a percentage of the outstanding principal balance or a specified number of months of interest. As with points, a prepayment penalty can be worth it if you will be staying in the house a long time. Many prepayment penalties expire in less than five years.
• Private Mortgage Insurance (PMI): PMI is paid when you have greater than an 80% loan to value. Many knowledgeable brokers can get you PMI for less if you meet certain criteria. Some can find lenders that will waive PMI altogether if your credit score and financial situation is good enough (this is rare, though.)
• Hire a Home Inspector: After my recent home-buying experience, I had to add this to the list. I was set to purchase a property that on the surface looked great. Internally, however, the home needed over $20,000 in urgent repairs. This would have been financially devastating and would cause many buyers to head toward foreclosure.

Following these basic tips will allow you to find a mortgage that fits you and your situation. In an upcoming post, I’ll compare the various loan types (fixed, ARM, interest only, etc) and describe situations where one may be better suited than the others.

Do you have any tips to add? If so, leave a comment.

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It is no secret that subprime mortgages have caused widespread heartache and financial distress to many people across the U.S. Borrowers were simply not able to handle the jump in mortgage payments once the rate lock was removed.

Now, because of the subprime mortgage market’s enormous potential impact on the U.S. economy (originations in 2006 were around $1 trillion), the government wants to step in and “help.” This worries me not because I believe there is no place for the government in the economy (a.k.a. a 100% free economy), but because they typically hurt more than they help.

Many ideas have been thrown around about how exactly the government should regulate the subprime market, but the following seem to be the most pervasive:

1. Require Better Disclosure

I agree with this type of regulation if it is implemented correctly. Lenders should be required to at the very least show the potential borrower the effect of the rising interest rate on their monthly payment. The average person will understand how a higher payment will effect them financially (or should anyway).

2. Rate Caps

I don’t agree this type of regulation since it will prohibit many individuals from purchasing a home. There are many reasons why a person can become a subprime borrower that are not necessarily related to their recklessness in acquiring large amounts of debt. These reasons include things like expensive medical treatment that insurance won’t cover and a death by the primary income earner. Perhaps the borrower can’t borrow as much, but they shouldn’t be denied if they don’t fit the risk profile for the rate cap.

3. Product Offering Restriction

Again, I don’t like this regulation. ARMs and interest only loans are great financing tools if used correctly. This regulation would throw the baby out with the bath water (so to speak.) Let the borrower decide which financing tool works for them by giving solid disclosure of the negatives for each type of loan.

One thing to remember in all this talk about consumers being the big victim in this ordeal - the lenders (and those who invested in the securitized assets made from the loans) lost too! The loss in itself will cause lenders to further scrutinize potential borrowers and improve their ability to convey the pros and cons of each type of loan product they offer.

Maybe there is no cause for any regulation at all. What do you think?

Read more: CNN Money

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