Navy Federal Membership Open to Veterans and Family Members

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Navy Federal Credit Union is the nation’s largest credit union and has recently surpassed $100 billion in assets as reported by DepositAccounts. I can understand their growth, as many of their financial products have very competitive rates, including certificates of deposit specials and mortgage rates. If the recent rate drops have you looking to refinance, I would definitely compare their rates against the major rate quote sites like LendingTree, especially if you are looking for a jumbo loan or other non-standard mortgage type.

You can now join Navy Federal without serving in the military. It is true that until 2017, it was hard to become a member of Navy Federal unless you were active military, Department of Defense worker, or a military retiree. Even honorably discharged veterans couldn’t join! However, the current membership rules are more open. Here is their eligibility tool.

If you have ever served in the military, you are now eligible to join. This includes:

  • Active Duty Army, Marine Corps, Navy, Air Force or Coast Guard
  • Army or Air National Guard
  • Delayed Entry Program
  • Officer Candidate / ROTC
  • Reservist
  • Veteran, Retiree or Annuitant

Beyond that, if one of your immediate family members serves or has EVER served in the military, you are also eligible for membership. Immediate family members include:

  • Parents and grandparents
  • Children and grandchildren
  • Siblings and spouses

This applies even if they are not a NavyFed member themselves. You may need some form of identifying document that shows your family member’s military relationship. Call NavyFed at 1-888-842-6328 and they should be happy to assist you.

This change greatly opens their field of membership, which I am sure has contributed to their impressive growth in assets. We have never served, but we do have both past and current family members in the military.

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Rates Drop Under 4% = Refinance Check! 7 Million People Can Lower Mortgage Rate By 0.75%+

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A mortgage broker once told me that he didn’t care if rates were high or low. He just wanted them to change. As long as interest rates move enough in either direction, more mortgages will be created. He’s probably getting a lot of calls right now, as the average 30-year fixed mortgage has dropped down to 3.82% from nearly 4.5% over the last 3 months (source).

The result? Nearly 7 million Americans can now refinance and potentially lower their existing rate by at least 0.75% according to mortgage analytics company Black Knight (source):

According to Axios, the average principal and interest payment would be reduced by $268 per month. Your number may differ, but still that’s every month! If you are looking for opportunities with a high return-on-time-invested, this could be a big one.

Bottom line. If you have a mortgage, now is a good time to compare your existing rate with what is available. Get an accurate full quote with all the costs involved with a online comparison site like LendingTree (tip: don’t enter a phone number if you don’t want them to call you) or go local and call up your neighborhood broker. You might also try an “instant quote” below that doesn’t require any personal information. If you can save money, lock in the rate as they can pop back up quickly.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

The Personal Finance Index Card: Book Version Differences

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After rediscovering the young adult versions of fitting personal finance advice on an index card, I decided to go back and read the book The Index Card: Why Personal Finance Doesn’t Have to Be Complicated by Helaine Olen and Harold Pollack. (I was able to find it via library eBook.)

I noticed that the book version of the “index card” was slightly different. The original card had 9 items, but two of them were merged away into each other (401k/IRAs) and (Pay Attention to Fees/Buy Index Funds). I bolded the new additions below. (You can see all chapters on the Amazon page.)

  1. Strive to Save 10 to 20 Percent of Your Income
  2. Pay Your Credit Card Balance in Full Every Month
  3. Max Out Your 401(k) and Other Tax-Advantaged Savings Accounts
  4. Never Buy or Sell Individual Stocks
  5. Buy Inexpensive, Well-Diversified Indexed Mutual Funds and ETFs
  6. Make Your Financial Advisor Commit To a Fiduciary Standard
  7. Buy a Home When You Are Financially Ready
  8. Insurance – Make Sure You’re Protected
  9. Do What You Can To Support the Social Safety Net
  10. Remember The Index Card

Here again is the original:

Here are my notes on the newly-addressed topics of home-buying and insurance.

Home-buying. This will always be a hard topic because it mixes in emotion, personal history, peer pressure, and all that fuzzy stuff. If you want to own a home, you need to make sure the purchase won’t blow up your overall financial picture. Nothing really surprising, but still good advice.

  • Get your debt under control first.
  • Save up as close to a 20% down payment as you can.
  • Stick with a 15 or 30 year fixed-rate mortgage.
  • Prioritize what you really want and need in a home. Stay within your budget.
  • Location, location, location.

Insurance. There are low-probability events that can destroy decades of hard work, and that’s why humans invented insurance to spread the risk. Here are their cut-to-the-chase bullet points:

  • Emergency fund – Maintain one!
  • Life insurance – If you’re young(ish), just buy 30-year level term insurance.
  • Property insurance – Raise your deductible as high as you can handle.
  • Health insurance – Always sure you stay in-network.
  • Liability insurance – Coverage for at least twice your net worth.

I’m glad that this book still retained its “quick-and-dirty” nature. No single rule will cover every scenario, but it’s good to have a clear and concise collection of the big points along with just enough explanation that you understand the basic reasoning behind it.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

PeerStreet Review: Stats and Returns (IRR) After 2.5 Years

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peerstreetlogo

Updated April 2019. I started investing in PeerStreet real-estate backed loans in July 2016. I’ve always like the idea of hard money loans, but I wanted more diversification as opposed to tying all my money up with one single property. For this type of lending, you have to be an accredited investor. Here are my overall numbers so far, with details below:

  • Total invested: $25,000
  • Total interest earned: $3,091
  • 43 loans made and paid off, 8 remaining active loans, and 2 are in foreclosure.
  • Internal rate of return (IRR) of 7.21% as of 4/18/19.

Short-term loans backed by real estate. Real estate equity investors want to take out short-term loans (6 to 24 months) and don’t fit the profile of a traditional mortgage borrower. They are professional investors with multiple properties, need bridge financing, or they are on a tight timeline. As a real-estate-backed loan investor, you lend them money at 6% to 12% and usually backed by a first lien on the property. The borrower stands to lose the equity in their property, so they are incentivized to avoid default. In the worst case, you would foreclose and liquidate the property in order to get your money back. However, this is better than Prosper or LendingClub where it is an unsecured loan and your only recourse is to lower their credit score.

What are PeerStreet strengths? Here are the reasons that I decided to put more a higher amount of money into PeerStreet as compared to other worthwhile real estate marketplace sites:

  • Debt-only focus. Other real estate (RE) sites will offer both equity and debt (and things in between). PeerStreet only focuses on debt, and I also prefer the simplicity of debt. There is limited upside but also less downside. Traditionally, this might be called “hard money lending”.
  • Lower $1,000 investment minimum. Many RE investment sites have minimums of $10,000 or $25,000. At PeerStreet, $25,000 will get me slices of loans from 25 different real estate properties. You can even reinvest your earnings with as little as $100.
  • Greater availability of investments. Amongst all the RE websites that I have joined, PeerStreet has the highest and most steady volume of loans that I’ve seen. I dislike having idle cash just sit there, waiting and not earning interest. They apparently have a unique process where they have a network of lenders that bring in loans for them. They don’t originate loans themselves, they basically buy loans from these partners if they fit their criteria. This steady volume allows the lower $1,000 minimums and more diversification, as well as easy reinvestment of matured loans.
  • Automated investing. The above two characteristics allow PeerStreet to run an automated investment program. You give them say $5,000 and they will invest it automatically amongst five $1,000 loans. You can set certain criteria (LTV ratio, term length, interest rate). When a loan matures, the software can automatically reinvest your available cash. I don’t even have to log in.
  • Consistent underwriting. You should perform your own due diligence in this area, as you can only feel comfortable with automated investing if you think every loan is underwritten fairly. The riskier loans get higher interest rates. The less-risky loans get lower interest rates. The shady borrowers are turned away. I want to just sit back and let them choose for me.
  • Strong venture capital backing. PeerStreet just closed a $30 million Series B round in April 2018. Andreessen Horowitz did a $15 million Series A round in November 2016. Michael Burry was an early seed investor, using $6.1 million of his own money according to TechCrunch. You may recognize this name from The Big Short.

Here’s a screenshot of the automated investing customizer tool:

peerstreet4

What are PeerStreet drawbacks? In my opinion, the main drawback is lower yields. This is just my limited understanding and I may be wrong, but PeerStreet has a network of lenders bringing in these deals and they also need to paid some sort of “finders fee”, so the net yield to the investor feels lower than other sites. You could argue that this is also their secret sauce that brings in the high loan volume (and ideally the ability to be more selective), but at some point the rate is too low to justify the risks being taken.

As of mid-2018, it is also my opinion that too many crowdfunding sites are chasing too few loans, which has been driving down the interest rates offered. I started out being able to find a lot of loans in the 8% to 9% range, but now the more conservative notes are in the 7%-7.5% range. In the current yield environment, my target is an 8% return while also maintaining a loan-to-value ratio of 70% or less.

Here’s the 1-minute video pitch from PeerStreet:

How does PeerStreet make money? As with other real estate marketplace lenders, they charge a servicing fee. PeerStreet charges between 0.25% and 1%, taken out from the interest payments. This way, PeerStreet only gets paid when you get paid. When you invest, you see the fee and net interest rate that you’ll earn. In exchange, they help source the investments, set up all the required legal structures, service the loans, and coordinate the foreclosure process in case of default. In some cases, the originating lenders retains a partial interest in the loan (“skin in the game”). Here’s a partial screenshot:

peerstreet_fee

What if PeerStreet goes bankrupt? This is the same question posed to LendingClub and Prosper, and their solution is also the same. The loans are held in a bankruptcy-remote entity and will continue to be serviced by a third-party even in a bankruptcy event. From their FAQ:

PeerStreet also holds loans in a bankruptcy-remote entity that is separate from our primary corporate entity. In the event PeerStreet no longer remains in business, a third-party “special member” will step in to manage loan investments and ensure that investors continue to receive interest and principal payments. Additionally, investor funds are held in an Investors Trust Account with City National Bank and FDIC insured up to $250,000.

Tax forms? For tax year 2018, I received both a 1099-INT and a 1099-OID. Basically, both include your gains that will be taxed at ordinary income rates (like bank account interest). Here’s what PeerStreet says:

PeerStreet investors will be issued a consolidated Form 1099 for the income distributed from their investment positions. Investors may receive one or more of the following types of 1099 form:

1099-OID for notes with terms longer than one year (at the time of issue)
1099-INT for notes with terms less than one year (at the time of issue)
1099-MISC for incentives, late fees or other income, if more than $600.

My personal performance. I started with a $10,000 investment in 2016 and then added another $15,000 in 2017 for a total of $25,000. This way, each of my loans was less than 5% of the total portfolio. Everything was set for automatic reinvestment whenever a loan in paid back or the interest adds up to $1,000. Starting in June 2018, I stopped reinvesting my proceeds as I felt that the rates being offered were starting to become too low when considering the gap between other bond alternatives. (For example, I think a 7% rate at a 75% LTV is not good enough.) If the rate premium improves, I will deposit more money back into the account.

Here is a screenshot of my account:

As of this writing 4/18/2019, my internal rate of return (IRR) is 7.21% annualized net of all fees and taking into account the short periods where my cash was idle. However, 2 out of my 51 total loans (works out to about 4%) are in some phase of the foreclosure process. These loans are all less than 70% LTV, but I don’t know what the final recovery amount will be. I expect my final IRR to be in the 6% to 7% range. In my experience, this is a critical difference with private real estate loans. You can’t make a few clicks and get your money back. I may have to wait a year or longer if the loan requires a property takeover and sale. This is why it’s a good idea to diversify across many $1,000 loans.

Bottom line. PeerStreet offers high-yield, short-term loans backed by private real estate. As compared to traditional “hard money lending”, accredited investors can diversify with $1,000 minimum investment per property, automated reinvestment, and steady nationwide loan volume. In exchange, PeerStreet charges a servicing fee between 0.25% and 1%, taken out of the interest charged to the borrower. The returns you see in the listing are net of their fees.

If you are interested and are an accredited investor, you can sign up and browse investments at PeerStreet for free before depositing any funds or making any investments.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Real Estate Crowdfunding: Realtyshares Foreclosure Process Example 2018

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Final update. I’ve invested in multiple real estate crowdfunding websites, including $2,000 into a single debt investment at RealtyShares. Unfortunately, this loan backed by a multifamily unit went into foreclosure and I outline what happened. There are risks in every investment, and my loss is your learning opportunity!

rs_okeefe1

Initial investment details.

  • Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
  • Interest rate: 9% APR.
  • Amount invested: $2,000.
  • Term: 12 months with 6-month extension option.
  • Total loan amount $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
  • Loan secured by the property in first position. Personal guarantee from borrower.
  • Stated goal to rehab, stabilize, and then either sell or refinance.

Brief recap.

  • January 2016. Funds committed. Loan closed.
  • July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
  • May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
  • June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
  • September 2017. Judgment granted in Wisconsin court. By law, there will be a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment plus interest, taxes, and costs.
  • January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
  • February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
  • April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
  • June 2018. Property is under contract for sale. Exact price unknown.
  • July 2018. Property sold. Final disbursement of $1,133.73 received.

Final numbers. I invested $2,000 and got paid $210.84 of interest and $1,133.73 of principal for a total of $1,344.57. This means I only got back 67% of my money after more than 2 years. On the other hand, I have made over 50 different real estate-backed loans now, and it was only a matter of time before I got a full default. This was my first investment that finished foreclosure, but it won’t be my last.

The question is how often that happens and the size of those losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections typically only got you pennies on the dollar. In this case, I got back 57 cents on the dollar when you exclude interest.

Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.

Lessons. First, don’t put too much weight on a BPO (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018. The final sale price was probably closer to $100,000. That is a big gap.

Second, you should consider the local economic situation. This area is hurting, and if you do some digging you’ll see foreclosures all over the place. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book Evicted: Poverty and Profit in the American City (my review). Many of the properties mentioned in this book were literally down the street from this unit.

Third, you need to diversify. If this was my only investment, I might have an overly negative opinion of the asset class. If my successful Patch of Land loan was my only investment, I might have a overly positive opinion. Instead, this is one of 50+ investments for me (mostly at PeerStreet) and while I maintain a positive return higher than cash across my investments, there is the occasional foreclosure like this. Basically, when you read about my experience or someone else’s, you must take into account sample size.

Finally, I believe that some marketplace/crowdfunding sites may be better at sourcing and underwriting loans than others. As of November 2018, Realtyshares has stopped accepting new investments (they will continue to service existing investments). Even before that, they abruptly stopped doing residential loans to “focus” on commercial properties. I knew their specialty was more commercial real estate, but I didn’t want to commit $25k to a single commercial investment, so I went with this smaller residential loan. Since then, I have shifted my residential debt investing to PeerStreet as they allow me to split my investments into $1,000 minimums and they also have a slightly different model.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here are some sample updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. But what is that really like? The purpose of this post is to provide real-world dates and numbers for a completed foreclosure on a marketplace real-estate investment site. I haven’t seen any other similar resources.

My current active investments are at PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt).

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Infographic: Where Did Housing Prices Crash the Most and the Least?

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The Washington Post had an article looking back 10 years later: How the housing market has changed since the crash. Inside was an interesting map of where the home prices crashed the most and the least (click to enlarge):

I wish they had a similar map that shows how much each individual state has also rebounded from the bottoms. According to this NYT article, the national median price is up 44% over the last 6 years:

When the housing bubble burst a decade ago, property values dropped by as much as 60 percent in some areas. Millions of Americans lost their homes to foreclosure. Nationally, the median price of existing homes today is $269,600 — up 44 percent in the past six years.

There are so many local variations. The house that we bought in 2007 was supposedly near the market top, but today the market value is still probably worth 50% higher. That’s far behind stock market returns, but you also have to consider that we could have bought that house with a tiny downpayment. If you put $40,000 down on a $400,000 house and it goes up to $600,000, then you roughly quadrupled your money (after fees). This goes right along into the conclusion of the WaPo article:

Among the lasting fundamental changes brought about by housing crisis, says Sharga, is that people today look at a home as place to live, not as an investment.

“It’s important to realize that homeownership is something to aspire to, but it’s also important to be ready for it,” he says. “It can be a wealth builder, but, as we saw, it can also be the quickest path to financial devastation if you’re not prepared.”

You can still buy a house with zero to 3.5% down payment these days, and that’s big leverage. Leverage goes both ways. It can make you rich much more quickly, but it can also make you broke much more quickly.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

US Housing Market Breakdown Chart

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I don’t have any clever observations to share along with it, but the WSJ Daily Shot shared an interesting breakdown of the US housing market. Occupied or Vacant, Owned or Rented, Mortgage or Not, Negative Equity or Not, Foreclosure or Not, and so on.

There was also a chart of the historical rate of mortgage foreclosures.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

LendingTree Chart: Mortgage Rates vs. Credit Score 2018

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Mortgage rates are rising. Home prices are still at recent highs. Yet, mortgage applications are also up, which suggests that people are worried about not being able to afford a house if they wait. Online mortgage comparison site LendingTree publishes a monthly update (March 2018) of what their real customers are getting approved for on their mortgages. Credit score, average APR, down payment, loan-to-value ratio, etc. Here is a chart of mortgage rates vs. credit score.

lendingtree_1803

Clean up your credit score. The survey suggests that the rate difference between the top credit scores and lower scores are widening:

Consumers with the highest credit scores (760+) saw offered APRs of 4.72% in March, vs 4.99% for consumers with scores of 680-719. The APR spread of 27 bps between these score ranges was unchanged from February and still near the widest since this data series began in April 2016. The spread represents over $14,000 in additional costs for borrowers with lower credit scores over 30 years for the average purchase loan amount of $238,593.

I recently paid my income taxes with a credit card, netting some profit but also using up over 50% of the total credit limit. My credit score monitoring services told me this increased debt utilization lowered my credit score by 40 points! This is exactly the type of thing you shouldn’t do if you are in the market for a new mortgage or refinance. If anything, I should have paid off the balance immediately before it was reported to the credit bureaus.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

50 State Infographic: How Much Income Do You Need to Afford the Average Home?

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50state_homeafford

HowMuch.net compiled an infographic about the income you need to afford the average home in every US state. The key is that “afford” means that the total cost of housing take up no more than 30% of gross income. The highest income required is in Hawaii ($153,520 for a house worth $610,000) and the lowest is in West Virginia (West Virginia: $38,320 for a house worth $149,500).

I suppose the next level analysis would be to divide by the actual median income in each state to measure relative affordability. The same job can pay different salaries in different areas, so it can still make sense to move to a place with higher incomes and high real estate prices.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

The Real Estate Crowdfunding Capital Stack: Equity vs. Debt

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Before I share more about my real-estate crowdfunding experiments, I wanted to take a quick step back in order to provide better context. Just as ETFs and mutual funds are separated into stocks and bonds, real estate can be separated into two general types of investments:

  • Equity = an ownership interest in the asset.
  • Debt = a loan, typically collateralized by the asset itself or other assets of the equity owner.

In the business world, I could buy a piece of Amazon or Apple and participate in the ups and down of the business value, or I could invest in bonds issued by Amazon or Apple and get a fixed return as long as Amazon and Google keep making their interest payments within the stated period of time.

This is called the “capital stack”. In residential real estate, the stack can be quite simple. There is one homeowner and one mortgage-holder (debt). If they ever sell the house, any proceeds must first go towards the mortgage-holder. Anything left over goes to the homeowners. If the house gets sold for $400,000 and had a $300,000 mortgage, the homeowner would get $100,000. When you see the image below (source), imagine water filling up a container. The bottom layer gets paid first. If there isn’t enough “water”, the next layer doesn’t get paid. If there is excess “water”, that goes to the equity owner. (image source)

recapitalstack1

In commercial real estate, here are the four most common layers of the capital stack: common equity, preferred equity, mezzanine debt, and senior debt. Preferred equity, as its location suggests, is in between common equity and debt in terms of cashflow priority and return upside potential. It has a more senior position to cashflow than common equity, but it still junior to mezzanine and senior debt. Mezzanine debt can be explained as similar to when a homeowner might also take out a “home equity loan” that junior to the first mortgage (and thus usually at a higher interest rate). Both of these intermediate stacks are more complex in terms of how much extra return are you getting for how much extra risk, and thus I tend to avoid them. (image source)

recapitalstack3

The expected return of each layer is then adjusted based on its position in the stack. Keep in mind that as your expected return increases, so does the possibility that your actual return is zero or negative. (image source)

recapitalstack4

My equity investments. My initial feeling was that publicly-traded REITs do a pretty good job on the equity side. The big REITs hold big apartment complexes, hundreds of public storage facilities, etc. Is there an opportunity for higher returns from smaller properties? Perhaps, but the problem is that it takes years for equity investments to pan out. My plan is to invest another $1,000 into Fundrise eREITs and hold on to them for 5 years as a long-term experiment. As the dividends are paid and the net asset value is updated, I can compare side-by-side with the dividends and net asset value of the low-cost Vanguard REIT ETF (VNQ).

My debt investments. I prefer the idea of providing short-term, 7%-9% loans backed by a hard asset like real estate. This is an area traditional referred to as “hard money loans”. I can’t replicate this type of deal with an ETF or mutual fund. I plan to increase my investment in PeerStreet to roughly $25,000 total as they focus 100% on the debt side and I like their platform so far. I invest only in notes with a term under 12 months, and in the first position (most senior). This remains under my “5% Speculative Portfolio” and will track my returns regularly.

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Housing Has Higher Long-Term Returns Than Stocks?

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housemoneyI finally got around to reading an academic paper that looked a bit dry but had a great title: The Rate of Return on Everything, 1870–2015 [pdf] by Jorda, Knoll, Kuvshinov, Schularick, and Taylor. I wonder which of the authors came up with that.

One of the major findings that was residential housing – when you add up the returns from both price change and imputed rent – had a higher overall average return than stocks (equities). Not only did housing have higher returns, but it also had lower volatility (standard deviation). Here’s a chart that compares housing and equities:

jorda1b

When the paper was released, places like the Financial Times discussed the paper’s conclusions but none of them addressed my two immediate questions.

Did they account for the maintenance and management costs of rental real estate? If you own a rental property, you may still have to pay for lawn maintenance, replacing roofs, HVAC units, interior and exterior painting, replacing carpets, and various other issues. To be fairly compared with equities, you should also account for property management costs. Here’s are excerpts that deal with maintenance and repairs:

To the best of the authors’ knowledge, this study is the first to present long-run returns on residential real estate. We combine the long-run house price series presented by Knoll, Schularick, and Steger (2016) with a novel dataset on rents from Knoll (2016). For most countries, the rent series rely on the rent components of the cost of living of consumer price indices as constructed by national statistical offices and combines them with information from other sources to create long-run series reaching back to the late 19th century.

A number of additional issues have to be considered when constructing returns on housing. First, any homeowner incurs costs for maintenance and repairs which lower the rental yield and thus the effective return on housing. We deal with this issue by the choice of the benchmark rent-price ratios. Specifically, in the Investment Property Database (IPD) the rental yields reflect net income (i.e., net of property management costs, ground rent, and other irrecoverable expenditure) received for residential real estate as percentage of the capital employed.

Did they account for the annual property taxes required on residential real estate? In many US states, the annual property tax bill can exceed 1% of the value of the house. Some are closer to 2% annually, and these are owner-occupied numbers. Rental properties may be higher. That’s on top of any potential capital gains you’d owe upon sale of the house, and any taxes you’d owe on rent received. Here’s are excerpts that deal with taxes:

Although the extent of real estate taxation varies widely across countries, real estate is taxed nearly everywhere in the developed world. International comparisons of housing taxation levels are, however, difficult since tax laws, tax rates, assessment rules vary over time and within countries. Typically, real estate is subject to four different kinds of taxes. First, in most countries, transfer taxes or stamp duties are levied when real estate is purchased. Second, in some cases capital gains from property sales are taxed. Often, the tax rates depend on the holding period. Third, income taxes typically also apply to rental income. Fourth, owners’ of real estate may be subject to property taxes and/or wealth taxes where the tax is based upon the (assessed) value of the property.
This section briefly describes the current property tax regimes by country and provides estimates of the tax impact on real estate returns.

With few exceptions, the tax impact on real estate returns can be considered to be less than 1 percentage point per annum.

This is an interesting paper that tries to cover a huge amount of stuff. Estimating the return of all businesses from all countries for the last 150 years? Estimating the return of all residential real estate from all countries for the last 150 years? They mix together a bunch of different datasets, so it’s hard to know exactly the quality level of each and how well they accounted for things like taxes and maintenance.

I’m not sure why they prefer to use arithmetic averages instead of geometric averages, but even if you shave off 1% for additional property taxes and another 1% because you don’t think they account for maintenance costs adequately, housing returns are still at least comparable to equity returns.

Here is the most recent update of the Case/Shiller home price index from Multpl, which tracks US housing prices on an inflation-adjusted basis:

shiller1890

Some people use this to argue that housing returns only keep up with inflation, but home prices ignore the value of rent. The fact that most housing purchases involve a mortgage loan does complicate things a bit.

Bottom line. An interesting paper that compares the long-term returns (last 150 years!) of residential housing and equities. In the long run, some may be surprised that residential housing returns at least matched equity returns, and housing returns had lower volatility. This is a reminder that you can also build wealth via residential real estate, taking into account that rent makes up half of the total return. Stocks are not the only game in town. (Just like with stocks, can is not the same as will.) New services like AirBNB provide an alternate path to monetize residential real estate.

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Coffin Homes: Living in Tiny Spaces As a Last Resort

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cof

The Atlantic has a photojournalism article The ‘Coffin Homes’ of Hong Kong which startled me and challenged my idea of a “tiny” living spaces. The size reminded me of capsule hotels in Japan, except these are in much worse condition and are permanent residences. A sad and extreme example of high population density and lack of affordable housing.

Cheung reports that there is a “dark side to the property boom in wealthy Hong Kong, where hundreds of thousands of people priced out of the market must live in partitioned apartments, ‘coffin homes’ and other inadequate housing.” These residents are among an estimated 200,000 people in Hong Kong living in such tiny subdivided units, some so small that a person cannot even fully stretch out their legs.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.