Mortgages, Imputed Rent, and Early Retirement

mcman286In a Quora question What do economists think about buying vs renting a house?, in addition to the previously-mentioned answer by Alex Tabarrok of Marginal Revolution, there was another well-ranked answer by Erik Brynjolfsson, professor at MIT Sloan. One of his three points was about the value of imputed rent (read the other ones as well):

Second, there’s a huge tax benefit to housing which comes from the hidden “dividend” it pays. I’m not talking (just) about the (too) generous mortgage deduction, but rather the fact that you don’t have to pay taxes on the implicit rent you earn on your house since its paid to yourself. A house generates enormous rental value each month — like a dividend. If you rent it to yourself, you take the money out of one pocket and pay it to the other one, and the IRS doesn’t tax that. In contrast, if you earn money some other way and then use that money to pay rent, you probably also have to pay taxes. That can add up.

From the Wikipedia entry on imputed rent:

Consider a model: two people, A and B, each of whom owns property. If A lives in B’s property, and B lives in A’s, two financial transactions take place: each pays rent to the other. But if A and B are both owner-occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market. The amount that would have changed hands had the owner and occupier been different persons is called the imputed rent.

In other words, as a homeowner you could be considered both the landlord and the renter. Let’s say you would rent your house for $1,600 a month. If you were in the 25% marginal tax bracket, you have to earn $2,133 a month pre-tax to cover that rent (and pay $533 in income tax).

As part of my “rough model” of early retirement, I recommend setting your mortgage payoff date to coincide with your retirement date (for those that choose to buy a home). Part of the reason for that is that you won’t have to generate that extra income to pay your mortgage anymore. This could lower your marginal tax bracket into the next lower bracket, and also the tax rate on your capital gains.

For example, $1,600 in monthly rent equates to nearly $20,000 a year in after-tax expense, or nearly $26,000 in gross income at the 25% tax bracket. Here are the 2016 federal income tax rates (source):

2016taxschwab

Ideally, I would target my household expenses to stay in the 15% tax bracket for married joint filers in retirement. Being able to reduce my taxable income by over $25,000 would definitely help someone stay in the 15% tax bracket range. Also, if you are the in 15% ordinary income tax bracket, your tax rate on qualified dividends and long-term capital gains becomes zero!

Now, the idea of imputed income could be extended further. When I cook at home, I save the money from eating out an Applebee’s. Let’s say a dinner out costs $40 for the family. To reach $40 after-tax, I’d have to generate $53 of income at a 25% tax rate. Same with childcare, housekeeping, laundry, yard maintenance, etc. But housing is an area with significant impact, usually the biggest item in a household budget.

Mortgage Rates at 3-Year Lows: Refinance Check Time Again?

Mortgage rates for 30-year fixed loans are at the lowest level in three years, according to this Bloomberg article:

The average rate for a 30-year fixed mortgage was 3.58 percent, down from from 3.59 percent last week and the lowest since May 2013, Freddie Mac said in a statement Thursday. The average 15-year rate slipped to 2.86 percent from 2.88 percent, the McLean, Virginia-based mortgage-finance company said.

This is visually confirmed by this historical rate chart from HSH.com:

hsh2

Depending on your area, your home value may also have increased over this time period. Combine these two, and it may be a good time to check if a mortgage refinance can save you some big bucks over the term of your loan. You may lower your interest rate, shorten your term into a 15-year mortgage, and/or get rid of private mortgage insurance.

Comparison shopping mortgage rates. There’s average, and then there is what is actually being quoted for people in your situation. The Consumer Finance Protection Bureau (CFPB) has a nice Owning a Home resource page including a new rate data tool that takes into account your credit score, state of residence, house price, and down payment size to see what other interest rates people are getting. I like they show an actual distribution of rates and the number of lenders offering that rate:

cpfb_april2016

You can try the big networks like and Quicken Loans, or you can ask around for a referral to a reputable local broker. The CFPB recommends that you get quotes from three or more lenders. You should get an standardized 3-page form called a “Loan Estimate”. That way you can compare and even negotiate one off the other.

Get quotes from three or more lenders so you can see how they compare. Rates often change from when you first talk to a lender and when you submit your mortgage application, so don’t make a final decision before comparing official Loan Estimates.

Depending on your situation, you may face a lot of paperwork during the mortgage approval process. But hopefully the money saved will be worth it.

Think mortgage rates might go even lower? I don’t recommend playing such guessing games, but you could keep an eye on 10-year Treasury rates. Here’s an interesting chart comparing the 10-year Treasury yield and 30-year mortgage rates from Calculated Risk:

mort10ust_april2016

Real Estate Crowdfunding Experiment #1: Patch of Land Final Update

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pol_final0My first investment into real estate crowdfunding has completed. In April 2015, I invested $5,000 into a fix-and-flip loan at the site Patch of Land. There are more details in my initial update, but here’s a quick recap of the loan details:

  • Single-family home in West Sacramento, California
  • Loan secured by property, in the first position. Backed by personal guarantee from borrower.
  • 6-month expected term (roughly April 15th to October 15th). Fix-and-flip.
  • Loan-to-value is 75% per independent 3rd-party appraisal.
  • 11% APR interest, paid monthly.
  • $5,000 invested.

Here are the initial and final numbers on the property itself:

  • Developer Purchase Price: $155,000
  • Estimated Remodel Costs: $55,000
  • Developer Contribution $31,000 + closing costs + origination fee
  • Developer Loan Request: $179,000
  • Independent 3rd-party After-Repair-Value: $238,000
  • LTV based on Independent ARV: 75%
  • Developer estimated selling price: $275,000 to $300,000
  • Actual selling price: $300,000

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Here are the final numbers for my partial investment:

  • 4/20/15 – $5,000 invested.
  • Proceeded to collect $45.83 of interest on the 15th of every month (pro-rated on partial months).
  • 9/23/15. Loan extension granted.
  • Kept collecting $45.83 of interest on the 15th of every month (pro-rated on partial months).
  • 3/15/16. Notified that house in under contract for $300,000.
  • 3/30/16. Loan was paid in full.

The loan term was supposed to be for 6-months (one of the main reasons I chose it) but the process took longer than expected and the total loan period ended up being nearly 12 months. My total interest payments were $517.91. I also received an additional $75 fee for the loan extension. I thus received a total of $5592.91 over 346 days, for an annualized return of 12.5%. Without the extra $75 penalty fee, my interest payments would be right at the promised 11% APR.

Takeaways from the process:

  • Be patient but decisive when selecting your investment. You should be comfortable with the local market situation as well as the numbers like loan-to-value ratio. You should know what you want, ignore anything that doesn’t fit your criteria, and act quickly when you see something that does. This is really the only part of the process where you have control, so use it wisely.
  • Understand the contract. Just because there is a “6-month expected term” doesn’t mean you’ll get your money back in 6 months. You should read the terms carefully to see what options are available to the borrower if they can’t make that date. Is an extension automatically granted? Is there an increased interest rate? How long does the extension last?
  • Liquidity and more patience. One of the defining features of this type of investment is that it is highly illiquid. If I buy a mutual fund, I can sell the entire thing and get fair market value as cash in my bank account in a few business days. With an investment like this, the borrower could pay it back early, take their sweet time, or even default entirely and they’d have to liquidate the home before I get my principal back. That could take another several months. You should not need this money any time soon.
  • Low-maintenance. The good part of having no control is that you don’t have to do anything. I just sat back and had the interest automatically swept to my bank account each month. I received a simply 1099-INT for the interest earned through this loan, and it was quite easy to deal with at tax time.
  • Updates. I did not receive constant updates on this loan, but I think the updates were adequate. I was given a couple of photos on the remodel progress and updates on loan extension, house listing, house listing changes, and house being under contract. You do not have any two-way contact with the developer.

I will admit that I was nervous for a little bit on this house. I could track the house listing on real estate sites like Zillow and I questioned some of the cosmetic choices that the developer made, including painting the house an gunmetal-grey stucco. I also questioned the high listing price of $325,000, which I thought they’d never get and would scare off potential buyers. It all ended well as the house was repainted into a neutral beige and the developer agreed to sell at a good price.

Will I invest again? Well, I can’t help but be satisfied with my 12%+ annualized return, but things could also have dragged out a lot longer. I will probably invest again, but at a different real estate site, if only to see how they might handle things differently. I’m in it to make money, but I’m also in it to learn as this is my “experimental money” fund (even Burton Malkiel and Jack Bogle have such accounts).

Account screenshot:

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RealtyShares $100 Sign-Up Bonus Promo Code

realtyshareslogoThe real estate crowdfunding scene is rather competitive right now. I recently got paid $100 to sign up for an account with RealtyShares.com and link a bank account. This bonus is again available to other accredited investors in order to encourage you to check them out. Here are the directions.

  • Visit my referral link and sign up for a new account. You will need to answer some qualifying questions, and I believe you need to be an accredited investor. The $100 bonus should be noted on the top of the page.
  • If you are cleared to open account, proceed, and don’t forget to link your bank account immediately. You’ll need the usual routing and account numbers.
  • After your account is successfully linked, you will receive an e-mail with the subject line “Congratulations on Linking Your Bank Account”. In order to guarantee that you receive your $100 bonus, reply to this e-mail stating that your signed up using the promotional code JonathanPing. This is important. You should receive a reply confirming your bonus eligibility.
  • Within 30 days, you will see a $100 deposit arrive in your linked bank account. Again, it will show up in your bank account directly, not in your RealtyShares account. It just shows up one day without notice. :)
  • As a registered user you can now browse through the private real estate investments. You do not have to make any investments. The bonus is yours to keep. I believe you must wait until a 30-day cooling off period before making any investments anyway.

Once you receive your $100, I will receive $100 as well (thanks!). Here’s the quoted terms and conditions:

In order to receive $100 sign up bonus, user must register, connect a bank account, and use the promocode provided in the email they received about the program. Payouts to user will be within 30 days via your linked bank account. RealtyShares reserves the right to stop or modify the referral program at its discretion at any time.

Here’s the auto-generated e-mail that I could send you, but you can just use the link directly:

Hey,

Check out this site: https://www.realtyshares.com/campaign/investor-referral-page?firstname=Jonathan&lastname=Ping

It’s a real estate investment marketplace that gives you access to private real estate investment deals vetted by industry professionals.

If you follow the link above and use my code JonathanPing, then you get $100 for signing up.

Enjoy!

Real Estate Crowdfunding Experiment #2: Fundrise Income eREIT Review

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Update 1st Quarter 2016. I have received my first dividend income “check” for my investment in the Fundrise Income eREIT. Based on my $2,000 investment on 1/6/16, I received $20.99 on 4/12/16 (sent directly to linked bank account). Here is a screenshot from my account:

fundrise2016q1

It was also reported that the Income eREIT earned approximately a 9.7% annualized return during the first quarter of 2016 and issued approximately a 4.5% annualized dividend to investors for this period. The income percentage matches my numbers: $20.99 / $2,000 x 365 days / 85 days invested time = 4.5% annualized.

This is the first complete quarter of activity, so the dividend size is expected to increase once funds are fully invested. The portfolio currently includes 13 commercial real estate assets from across the country in 8 different metropolitan areas, with approximately $31.5 million committed as of March 31, 2016. So far in Q2 they added one more property. I am simply sharing my own results, not making an investment recommendation as I don’t know your situation. This is a higher-risk, speculative investment.

Original post:

I’ve made my second real estate crowdfunding investing “experiment”, placing $2,000 into the Fundrise Income eREIT. (REIT = Real Estate Investment Trust.) Their investment claim is being the “first ever low-fee, diversified commercial real estate investment available directly online to anyone in the United States, no matter their net worth.”

Fundrise is one of the first real estate companies taking advantage of the recent JOBS Act that allow certain crowdfunding investments to be offered to everyone, as previously it was limited only to accredited investors. You must be a US resident and your investment cannot exceed the greater of 10% of your gross annual income or net worth.

Here’s a quick overview of the features:

  • Low investment minimum ($1,000)
  • Quarterly cash distributions
  • Quarterly liquidity (you can request to sell shares quarterly, but liquidity is not always guaranteed)
  • Low Fees (claimed to be roughly 1/10th the fees of similar non-traded REITs). Until Dec 31, 2017, you pay $0 in asset management fees unless you earn a 15% annualized return.
  • Transparency (you get to see exactly what properties are held)

Essentially, instead of investing in a single condo building, I am now putting my money into a pot of money that will invest in a basket of different commercial real estate properties.

Why not just invest in the Vanguard REIT index fund? Well, I happen to think most everyone should invest in VNQ if they want commercial real estate exposure. I own a lot more of VNQ than this Fundrise investment. VNQ invests in publicly-traded REITs, huge companies worth up to tens of billions of dollars. VNQ offers wide diversification and you have daily liquidity. But as publicly-traded REITs have grown in popularity (and price), their income yields have gone down.

As with other crowdfunding sites, Fundrise deals with specific, smaller deals with (hopefully) higher risk-adjusted returns. This eREIT diversifies your money across multiple properties, but we’re still talking examples like a $2 million townhouse complex, or a $2 million boutique hotel. An analogy might be made with “micro-cap” investing. From their FAQ:

Specifically, we believe the market for smaller real estate transactions (“small balance commercial market or SBC”) is underserved by conventional capital sources and that lending in the market is fragmented, reducing the availability and overall efficiency for real estate owners raising funds. This inefficiency and fragmentation of the SBC market has resulted in a relatively favorable pricing dynamic which the eREIT intends to capitalize on using efficiencies created through our technology platform.

A positive feature is the ability to request liquidity on a quarterly basis, but it is not guaranteed that you can withdraw all that you request (similar to some hedge funds). Here’s a comparison chart taken from the Fundrise site:

fundrise_ereit1

Why Fundrise? It can be hard to differentiate between the various crowdfunding websites. One way that I feel that Fundrise differs is they are more picky about the deals they choose to fund. The CEO Ben Miller often talks about “high standards” in his public remarks. Talk is one thing, but I’ve been tracking them for a while, and Fundrise really does offer far fewer deals than the other competitor sites I have signed up with. For about a year now, every deal that I’d been interested in has been gone well within 24 hours.

Even this eREIT has a 10,000+ person waitlist just to get the chance to buy into this investment. I had to sign up on the waitlist early, wait my turn, and then commit my $2,000. My guess is that they can’t grow it any faster because they only have 7 underlying properties at this time. Will this selectivity last? I don’t know, I hope so. Will their selectivity produce higher, safer returns? I don’t know, I hope so.

My first quarter hasn’t ended yet, so I have no performance numbers to report yet. Here’s a screenshot from my account page:

fundrise_ereit3

I think the Fundrise Income eREIT is an interesting concept. It appears that they will start another “Growth” eREIT next, with more focus on capital appreciation and less on regular income. This is a speculative investment with limited liquidity. I threw a small percentage of my net worth in there, and as with my other experiments I’ll provide updates as to my investment returns.

Here is the full Offering Circular at SEC.gov.

Real Estate Crowdfunding 10-Month Update – Patch of Land

pol_house200Here’s an update on one of my real estate crowdfunding experiments. In mid-April 2015, I invested $5,000 into a loan for a single family fix-and-flip in West Sacramento, California. The loan was supposed to be for 6-months (one of the main reasons I chose it). (More details in my initial update.) Well, the short version is that the fix part happened, but it has now been 10 months and the house is still on the market. The borrower took the option of a month-to-month extension. The loan is still current. Here’s a screenshot and some more thoughts:

pol_feb16

Interest received in a timely manner. So far, I’ve been receiving my $45.83 every month ($550 annualized) on my $5,000 initial investment (11% APR). I enabled the option of having my interest automatically swept to my bank account each month. So far, this investment has required zero maintenance.

Read your contract. Just because there is a “6-month expected term” doesn’t mean you’ll get your money back in 6 months. You should read the terms carefully to see what options are available to the borrower if they can’t make that date. Is an extension automatically granted? Is there an increased interest rate? How long does the extension last?

Liquidity, liquidity, liquidity. One of the defining features of this type of investment is that it is highly illiquid. If I buy a mutual fund, I can sell the entire thing and get fair market value as cash in my bank account in a few business days. With an investment like this, the borrower could pay it back early, take their sweet time, or even default entirely and they’d have to liquidate the home before I get my principal back. You must be prepared for all scenarios.

Be happy with your loan-to-value ratio. I personally believe the house is listed for too high a price, but that part is not under my control. What was under my control was choosing to invest only in a loan where I was comfortable with the collateral. For example, they may be asking ~$320,000 but the loan amount was only for $179,000. As I am (one of the folks) in first position lien on the property, the house would need to sell for under $179,000 in net proceeds for me to lose principal.

In other words, have an adequate cushion so that you don’t lose sleep about it at night. It also helps that I’ve already earned 8.6% of my initial investment back over the last 10 months, cash in hand. Finally, I will repeat that this is a speculative investment using “experimental money” that makes up a very small portion of total assets. (Even Burton Malkiel and Jack Bogle have such “funny money” accounts.)

Tax documents. I received a 1099-INT for the interest earned through this loan. The 2015 form was made available in a timely manner on January 27, 2016. As such, it should be rather easy to add this in at tax time.

Behavioral Economics on Bigger House vs. Shorter Commute

mcman286Inside a post about what economists think about buying vs. renting a house, Alex Tabarrok of Marginal Revolution ended with a nice sentence that I think applies to both buying and renting:

One final point: behavioral economics tells us that we quickly get used to big houses but we never get used to commuting. So when you have a choice, go for the smaller house closer to work.

In general, our current choice of house is aligned with this advice. We could get a bigger, newer, and/or cheaper house in exchange for a longer commute, but are happy with our size (2,000 square feet) and location (I work primarily from home and my wife’s distance to work is 3.5 miles). Our jobs are relatively stable, however, as jumping to a new job could easily change our commute.

Going for the shorter commute over the bigger house certainly feels like good advice. But what are the behavorial economics studies that support this statement?

First, let’s take the statement we get used to big houses. The overall concept of the hedonic treadmill has been found in a variety of circumstances. Brickman, Coates, and Janoff-Bulman (1978) found that lottery winners and paraplegics eventually returned to their baseline happiness levels over time. That is, both the joy of winning the lottery and the sadness from being paralyzed was not permanent. Per Wikipedia, Lucas, Clark, Georgellis, & Diener (2006) also “ultimately concluded that people completely adapt, return to their baseline level of well-being, after divorce, losing a spouse, birth of a child, and females losing their job.”

However, but I couldn’t find one that studied housing specifically. There’s probably one out there? Perhaps a bigger house can simply be lumped in with other consumer material goods.

Second, if we can get used to being paralyzed or losing a spouse, who says that we don’t get used to commuting? Perhaps this is taken from Stress That Doesn’t Pay: The Commuting Paradox (Stutzer and Frey, 2004). Abstract (emphasis mine):

People spend a lot of time commuting and often find it a burden. According to economics, the burden of commuting is chosen when compensated either on the labor or on the housing market so that individuals’ utility is equalized. However, in a direct test of this strong notion of equilibrium, we find that people with longer commuting time report systematically lower subjective well-being. Additional empirical analyses do not find institutional explanations of the empirical results that commuters systematically incur losses. We discuss several possibilities of an extended model of human behavior able to explain this ‘commuting paradox’.

If you know of more please let me know in the comments.

Big List of Free Consumer Reports (2/2): See Your Confidential Housing, Insurance, & Employment Data

magUpdated and checked for 2016. As these are available only every 12 months, it is a good idea to check them the same time each year.

Here is the second part of my big list of free consumer reports from over 50 different reporting agencies. The first part included your credit, banking, and subprime lending-related information. This part includes your housing, insurance, and employment history. Request your free copy of what these databases have stored about you and are telling prospective landlords, insurers, or employers.

Again, you may not need to check all of these, and many may not even have a file on you anyway. But for example if you are a renter then you’d want to make sure your rental history is clean and correct, because if I was a landlord I’d avoid anyone with previous blemishes on their record.

Rental History

Realpage Consumer Report. Provides tenant screening through their LeasingDesk product, including “the industry’s largest rental payment history database.”

CoreLogic SafeRent. SafeRent provides both tenant and employment screening data, including information regarding landlord tenant and criminal public court records. One free report every 12 months.

Experian RentBureau Rental History Report. “Every 24 hours, Experian RentBureau receives updated rental payment history data from property owners/managers, electronic rent payment services and collection companies and makes that information available immediately to the multifamily industry through our resident screening partners.”

First Advantage Resident History Report. Tenant and employment background checks. One free report every 12 months.

Contemporary Information Corp. CIC provides background checks on prospective tenants and/or employees and contractors for landlords and management companies. Keep records of any rental evictions.

Tenant Data. Provides tenant history reports, including any reported damages, unpaid balances, evictions, lease violations, noise complaints, or unauthorized pets.

Screening Reports, Inc. A national provider of background screening service to the multi-family housing industry.

TransUnion Rental Screening Solutions, Inc. SmartMove provides tenant credit, eviction, and background checks.

  • MySmartMove.com FAQ page
  • To verify your identity and obtain a copy of your report(s), please contact customer service at 866-775-0961.

Auto and Property Insurance

C.L.U.E. Personal Property Report. A division of LexisNexis, CLUE stands for Comprehensive Loss Underwriting Exchange, which collects information that is used to calculate your insurance premiums. This report provides a seven year history of losses associated with an individual and his/her personal property. Includes date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name. This also means you can find out about previous claims on the house you are currently renting or recently bought, even if they weren’t made by you.

C.L.U.E. Auto Report. This report provides a seven year history of automobile insurance losses associated with an individual. Includes date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.

Verisk Analytics aka ISO aka A-PLUS Loss History Reports. ISO stands for Insurance Services Office, A-PLUS stands for Automated Property Loss Underwriting System. Auto and property loss claim history.

Insurance Information Exchange (now owned by Verisk). Provide reports including your motor vehicle records and driver history, including any traffic violations or related criminal history. May require proof of adverse action to obtain free report.

Utilities

National Consumer Telecom and Utilities Exchange. NCTUE is a “membership of companies that provide services (telecommunication, pay TV, and utilities) […] to aid in risk mitigation.” Basically they track when people don’t pay their phone, cable, or utility bills. One free report every 12 months.

Medical History

MIB (previously known as Medical Information Bureau). Run by 470 insurance companies with a “primary mission of detecting and deterring fraud that may occur in the course of obtaining life, health, disability income, critical illness, and long-term care insurance.” They record information of “underwriting significance” like medical conditions or hazardous activities. If you have not applied for individually underwritten life, health, or disability income insurance during the preceding seven year period, then you probably don’t have a record.

Milliman IntelliScript. Tracks your prescription drug purchase history. “Milliman IntelliScript will have prescription information about you only if you authorized the release of your medical records to an insurance company and that company requested that we gather a report on you.”

Employment History

The following companies all offer background screening services for employers. Most will not have any information about you unless you authorized a potential employer to run a background check on you (probably during the application process). Some will not provide you information unless there was adverse action. Otherwise, you can get one free copy every 12 months.

The Work Number. (division of Equifax) They also keep historical income records.

Accurate Background, Inc.

American Databank, LLC.

EmployeeScreenIQ.

General Information Services.

HireRight.

Info Cubic.

IntelliCorp.

Pre-employ.

Professional Screening & Information, Inc.

SterlingBackcheck (formerly Sterling Infosystems)

Trak-1 Technology.

Reminder: Also see Part 1: Big List of Free Consumer Reports with Your Credit, Banking, and Payday Lending Data.

Sources: ConsumerFinance.gov, FTC.gov, AnnualMedicalReport.com, Wikipedia

Big List of Free Consumer Reports (1/2): See Your Confidential Credit, Banking, and Payday Lending Data

magLinks checked and updated for 2016! Since these are available every 12 months, it is a good idea to check these near or around the same time each year.

There are many companies out there that make money by collecting and selling data – your personal data. In the past, it was often difficult if not impossible to see what they were telling prospective lenders, landlords, even employers about you. Under the FCRA and/or FACT Acts, many consumer reporting agencies (CRAs) are now legally required to send you a free copy of your report every 12 months, as well as provide a way to dispute incorrect information.

Some have an online request form, but many require snail mail with proof of identity. You probably won’t want to bother checking all of them (for example if you rarely write checks or use payday loans), but if you’ve experienced any sort of rejection or adverse reaction in these areas the cause might be found inside one of these databases. Keep in mind that you may not have a file with all of these places.

Credit-Related

Experian, Equifax, and TransUnion. The three major credit bureaus track your credit accounts, payment history, and other related information like bankrupts and liens. Free copy of each once every 12 months.

CoreLogic Credco. One of the largest credit-related CRAs and often used by mortgage lenders, your CoreLogic Credco Consumer File can contain: previous homeownership and mortgage info, rental payment history, any reported delinquencies, and other debt obligations like child support. Free copy once every 12 months.

LexisNexis. One of the largest personal information databases that includes public records, real estate transaction and ownership data, lien, judgment, and bankruptcy records, professional license information, and historical addresses on file. Free copy, must mail in form.

Innovis. A supplementary credit report and identity verification provider. Free copy once every 12 months.

SageStream, LLC (formerly IDA, Inc.) Per their site, they are a “a credit reporting agency that produces credit reports and scores from our repository of consumer information contributed by a wide array of companies including leading financial services organizations, wireless providers, utilities, retailers, auto lenders and many others” Free copy, must fax or mail in a written form.

Microbilt and subsidiary Payment Reporting Builds Credit (PRBC). Microbilt is a credit reporting agency, per their site a “leading provider of alternative credit data to businesses that want to offer credit and other financial services to the approximately 110 million underserved and underbanked consumers in the United States.” Free copy once every 12 months.

Banking-Related

Chexsystems. A consumer information database used by an estimated 80-90% of all banks to help determine the risk of opening new accounts. Think of it as the banks’ version of a credit bureau. If a person commits check fraud or overdraws their account, it will be listed here. In addition, the simple act of opening or closing a bank account may be recorded in their database. Having a negative ChexSystems record can leave you blacklisted from opening bank accounts at most major banks. Free copy once every 12 months. Must order by phone, mail, or fax.

TeleCheck. Per their site, they provide “industry-leading check acceptance, check processing and risk analytics services to merchants and financial institutions.” One of the major companies that protect businesses and banks from bad checks. Must order by phone or mail.

Certegy Check Services. Per their site, a “check risk management company that provides verification, guarantee and risk analytics to thousands of businesses that choose to accept checks as a form of payment for goods or services.” Clients include check-cashing stores and casinos. Free copy once every 12 months. Must order by phone or mail.

Early Warning Services. A collaboration between a group of big banks including Bank of America, BB&T, Capital One, JPMorgan Chase and Wells Fargo. Provides fraud prevention and risk management in relation to bank accounts and payment transactions. Must order by phone.

Subprime-Related (Payday Lending)

The following companies focus on subprime customers with clients including payday lenders, title loan lenders, rent-to-own stores, and subprime auto loan providers.

Teletrack (affiliated with CoreLogic).

FactorTrust. Free copy once every 12 months.

Clarity Services, Inc. Must mail or fax form.

DataX Ltd. Must mail form.

Sources: ConsumerFinance.gov, FTC.gov, Wikipedia

Realty Mogul Review: Fractional Investment Property Ownership, Hard Money Lending

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Added bonus for new sign-ups. I’ve been a registered member of RealtyMogul for a while, and they recently emailed me that if I referred a friend, we’d both get a $150 Amazon gift card just for completing the registration process (i.e. zero investment required). Here is a screenshot. The restriction is that you must be an accredited investor, which means either a single income of $200,000, joint income of $300,000, or net worth of $1 million excluding primary residence. I’ve registered at a few of these sites, and you may need to send in a scanned W-2 (was allowed to remove SSN) or brokerage statements for verification.

This is a nice carrot if you are already interested in hard money lending or fractional real estate ownership. You must either use this special sign-up link or use the promo code JONATHANP7 during registration. Offer expires 12/31/15.

*The referrer and the referred will each receive a $150 gift card (redeemable at Amazon.com) upon successful completion of the investor registration process at RealtyMogul.com by the referred party. Gift cards will be mailed within 30 business days to the address on file. This promotion is limited to 6 referrals per referral code and is only valid until December 31, 2015.

Original post from mid-2013 below:

Realty Mogul is a new “crowdfunding” start-up that lets you invest in residential investment property for as little as $5,000. You either take a partial ownership position in a property, or you become a lender to (experienced) house flippers. The new thing here is that you can do it completely online with a few mouse clicks (no mortgage brokers, real estate agents, or tenants) and again that low minimum $5,000 investment. (Thanks to reader Johnson for the tip.)

Taking an equity ownership position means that you own a little slice of a single-family home or multi-unit complex while a professional does the buying, fixing up, renting out, and eventual selling. Realty Mogul only has done one deal like this so far (fully funded) and the intended timeframe is 5-7 years. You earn rent while the house hopefully appreciates in value, and cash out when the house sells.

Being a lender looks very similar to the age-old practice of hard money lending, just with smaller chunks. You lend the money to a house flipper who needs a short-term loan (3 months to a year) and doesn’t want to deal with traditional mortgage lenders and their closing costs and long underwriting delays. The loan is backed by a personal guarantee (not too special, you can try to sue and/or hurt their credit score) and more importantly you usually have a first position lien on the property (if they don’t pay, the lender gets the title to the house). Most of the previously funded loans have an annualized interest rate of 8%.

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Realty Mogul states that they differentiate themselves from other similar startups like FundRise and Prodigy Network by (1) outsourcing the real estate expertise to vetted professionals and (2) keeping a focus on cashflow, either via rent or interest payments. Right now they’ve only had about 7 investments, but they seem to open a new one up after the last one fully funds.

Currently, the SEC limits this type of investment to accredited investors, which means either a single income of $200,000, joint income of $300,000, or net worth of $1 million excluding primary residence. When I tried the application, the only screening process was to check a few boxes and state that you qualify. Supposedly, the recently passed JOBS Act will allow them to drop this requirement later this year.

If given the option, should I drop $5,000 into this to try it out just like with person-to-person lending? $5,000 is still a lot of money to put into an investment where you are not able to do much due diligence. Getting good returns on a single investment project is all about the skill of that particular rehab team. Will the teams that sign up for capital via Realty Mogul always be the good ones, or those that are having a hard time getting funding from elsewhere? I thought that hard money lending rates were more in the 10%+ range; I don’t know if I’d be happy with 8% but maybe that’s the going rate now. Even if you have collateral, recouping your principal in case of a bad loan can get complicated and time-consuming. At least with P2P lending I can spread $5k over 200 different loans such that even though I am certain to get some defaults, it is unlikely I will get a negative return overall.

More: TechCrunch, LendAcademy, BizJournals, The Verge

Case-Shiller Home Prices Index, Adjusted For Inflation 2015

homefrontHere’s an update on residential real estate prices via the July 2015 update of the S&P/Case-Shiller Home Price Indices. Included is this chart of their 20-City Composite Home Price Index, which tracks the value of residential real estate in 20 metropolitan areas of the US:

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Overall, the S&P/Case-Shiller U.S. National Home Price Index recorded a 4.7% increase over the last 12 months. You can check more cities in the PDF, but the ones with the highest gains over the past 12 months are San Francisco at 10.4%, Denver at 10.3%, and Dallas at 8.7%.

What do home prices look like after being adjusted for inflation? We all tend to think of house prices in terms of nominal values. For example, I bought my first house in 2007 (of course) and I’ll always remember my original purchase price. But that was 8 years ago and even though inflation hasn’t been high it has still been inching along. From June 2007 to June 2015, inflation rose 12% (CPI-U).

As shared in previous updates, here is the Shiller 20-City index adjusted for inflation (CPI-U). Both data sets are not seasonally-adjusted and scaled to 100 as of January 2000.

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Home prices are rising even after accounting for inflation, but this bottom chart presents a more tempered view of things.

Still, I feel for first-time homebuyers faced again with housing prices that appear to march upwards every month (and potentially out of reach).

Economic Trend: Affordable Housing via Multi-Generational Living

As a parent of young children, the following chart from this CityLab article definitely caught my attention:

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The trend is clear that as time goes on, more and more people are living with their parents. At what point does it start being called living with your children? For the purposes of this chart, is child living with a parent (suggesting parent is head-of-household) different from a parent living with a child (suggesting that child is head-of-household)? I think so. Otherwise, you’d think there would be a bump at ages past 65.

The article speculates the eventual effect on housing:

Jordan Rappaport, a senior economist for the Kansas City Fed, uses these figures to explain the transformation in the multifamily housing market over the past 30 years. Rappaport’s paper explains that, in the short term, young adults are driving the market for new multifamily housing construction. Over the long term, however, retiring Baby Boomers will drive multifamily housing construction as they downsize. […]

As Baby Boomers begin to retire and downsize, they will drive the construction of new multifamily housing. What that means, we don’t fully know yet. This new construction might not look much like the condos and apartments that developers are building today in order to chase young-adult households. It also might not look like the downsizing options preferred by seniors in the past.

I agree that the overall economic trend is going to be more multi-generational housing. It’s just cheaper. Housing costs eat up a huge chunk of income, and sharing housing can reduce overall costs for both parties involved. As quoted in my previous post Economics of Shared Living: Estimated Savings From Having Roommates, Scott Burns notes that “Cooperation is a wonderful but generally overlooked substitute for money.”

In places where land is quite expensive like California and Hawaii, “in-law” or “ohana” units are quite popular. The official term is “accessory dwelling unit”, or ADU, where separate living quarters are created on what was previously a singly-family home. This could either be a detached studio or the converted wing of the original house with a kitchenette to add privacy and separation. Your parents could live there, or your adult kid could live there, often both.

Often, these are only legal if you have a direct relative living in them. However, new legislation has been introduced in many areas to make these legal rental units. In San Francisco, you can now apply to legalize your un-permited unit. In Honolulu, a bill to legalize ADUs of up to 800 square feet was just signed into law. Basically you can now add a little, legal rental on the side of your house.

I think these shared-but-separate living situations will start popping up more and more in the rest of the United States. Many new home designs now include such units from the very beginning. It is a way of creating more affordable housing for renters and additional income for homeowners.