Bill Roberts - "Baby Boomer" Retirement Planning

Buy Low, Sell High by Bill Roberts

All the stock market pundits echo this mantra but then they advise just the opposite in their specific recommendations. When prices are going down they say "SELL" and when prices are going up they say "BUY."

The technical analyst looks for a "breakout" formation before he recommends buying a particular stock or any stocks for that matter.

What does this mean? It means that the stock has come off its low and has BROKEN THROUGH a line on his chart that he labels as "RESISTANCE." What this means is that everyone has jumped on the bandwagon so you might as well jump on too. You are not going to get the best price but at least the price is moving up.

Then he advises selling when the price falls below another support line. So you have missed selling at the top. You sell, along with everybody else only after you have lost significant profits.

What kind of advice is that?

Well it is bad advice in my opinion. Especially if you transfer that kind of thinking to the real estate market. But that is what everybody does.

How often have I heard "I want to wait for the bottom before I buy"? Well the only way you are going to know when we have a bottom is when prices start back up. When prices "break" that support line. The same thinking as the bad advice from stock market technical advisors.

My advice is just the opposite. I say BUY when prices are going down. That's when you get bargains. But because real estate is a long-term investment I don't recommend selling when prices are going up. I may recommend "trading up" to maximize your Return On Investment (ROI) because most real estate is financed and you get the benefit of "leverage" on your investment. Keep your ratio between your invested equity and the value of your property to the maximum you are comfortable with. Over time you will become very rich.

Not The Stock Market

Remember, the real estate market is not the stock market. People speculate in the stock market because prices go up and go down on a daily (or inter-day) basis. Real estate prices have been trending up since the beginning of time.

They can and do issue more stock, especially when prices are going up, but they aren't making any more land to speak of. As populations grow and shift the demand for real estate grows (in certain areas). It is the job of the savvy real estate investor to figure out where the demand will increase and buy there sooner.

Historical note: Oklahoma is called the Sooner State because of the people that "jumped the gun" on the land rush and got there SOONER to stake their claim. Now don't tell me it doesn't pay to be sooner.

So my advice is BUY LOW (NOW) and KEEP.

If you are interested in maximizing your wealth through the intelligent use of real estate and real estate finance contact Bill Roberts 619-244-4610.

Have You Ridden The REO Express? by Bill Roberts

This morning on Good Morning America there was a story about a bus tour of foreclosed houses. I think it was in Pismo Beach, California, but it could have been anywhere. Apparently they charge $20 a head and they take a busload (what's that? About 50 people) around to look at REOs.

They give them the asking price and either the previous selling price or the previous loan amount. It wasn't clear. Maybe they just give them what they have and it varies. In any event these have got to be motivated buyers since they are paying $20 each or $40 a couple just to look.

After the segment they interviewed Mellody Hobson, President, Ariel Capital Management. She gave some good advice including a disclaimer that the houses would be purchased "As Is."

I would like to know if anybody has any experience with one of these "tours" and would like to share their experience or knowledge.

I liked the idea. I could see myself organizing a tour like that. Your input is really wanted.

Click on the link and watch the segment.

Thank you,

Bill Roberts 619-244-4610

billroberts5843@hotmail.com

What Good Is A Neg Am Loan? by Bill Roberts

There is a lot of talk lately about people getting stuck with PAY OPTION ARMs that are really negative amortization loans. The general consensus seems to be that the mortgage industry really took advantage of people with these types of loans. It is said that they allowed people to buy "more house" than they could afford.

WEALTH BUILDER LOAN

Well that is one of the purposes for a properly constructed WEALTH BUILDER LOAN, as a pay option arm is called. The idea is that houses may be unaffordable right now, but if you could buy at today's price, maybe you could afford it in five years or so after you have gotten a better job or just make more money due to anticipated pay raises and cost-of-living increases. As long as you can make the minimum payment you'll be OK.

One of the main problems with this type of loan is that when the borrower makes a payment for less than the interest that is owed, the unpaid amount of interest is added to the balance of the loan. This is known as negative amortization.

RECAST

And when the new loan balance grows to a certain ratio of the original loan, the loan will RECAST. This simply means that the loan will cease being a pay option and will become a FULLY AMORTIZED loan.
In simple English, the payment will increase. We are not talking about an increase due to an adjustment in the rate, but rather an increase due solely to having to make the full payment.

The problem with these loans is that some recast before you are ready to make the full payment. The ratio at which your loan will recast is spelled out in the loan documents. Some recast at 110%, some at 115%, and some will not recast until the loan balance reaches 125% of the original loan balance. The lower ratios could recast in as little as three years. But the 125% ratio might not recast for a full ten years.

In the very simplest terms, houses have "historically" doubled in value every ten years.

Here is a hypothetical example:

Let us suppose that the borrower(s) just barely qualified for this loan with $100,000 in gross annual income, but by the time the loan is ready to recast their combined income has grown to $250,000 per year. Now don't you think they can "afford" that house? Look at the equity they have been able to amass because of this loan product. They haven't paid anything on the principal for ten years but they have a 56.25% LTV (loan to value). WOW! That is why it is called a WEALTH BUILDER loan.

If you would like to get a Wealth Builder loan or utilize other mortgage planning techniques to increase your financial position, call Bill Roberts (619) 244-4610.

Baby Boomer Retirement Planning - The Basics by Bill Roberts

Retirement Planning is like planning for a trip. You can't really do much planning if you don't know where you want to end up. Just putting a little money aside with the idea that you'll need it when you retire is kind of like just driving around aimlessly, you'll end up somewhere, but not necessarily where you want to be.

So if we can agree that isn't the best approach, then what is?

Well, the process is quite simple. You start by creating a budget of your living expenses that you'll have when you retire. I wrote a couple of posts on this subject:

Fun With Ken and Barbie

Fun With Ken and Barbie, Part 2

Apples and Oranges

Now you need to adjust this number for the future because no matter what we do, the dollar is going to be worth less tomorrow than it is today. I like to use a 5% per year factor to make today's apples equal tomorrow's oranges. This isn't rocket science and we're not going to be accurate to six decimal places so I would just multiply the number of years until you expect to retire by 5% (i.e. 10 years times 5% equals 50%) then add that percentage to your answer. So if you need $10,000 per month now, you'll need $15,000 per month in 10 years.

Now we know how much we will need. Let's compare that with what we know we'll have:

Social security $ 2,500.00 per month

Company retirement plan $ 2,500.00 per month

IRA $ 1,250.00 per month

Total $ 6,250.00 per month

Options

Uh oh. It looks like we'll be a little short. But don't worry, we still have options:

• First option: Work ‘til you die.
• Second option: have more money to retire on.

I'm going to assume that you have selected the second option. So the question is what can you do to have more $$ to retire on?

I believe in the real estate market. I don't believe in the stock market. I think that your IRA invested in real estate will be worth more in ten or fifteen years than it would be if you leave it where it is now. On average mutual funds historically yield about 8% per annum in earnings and growth combined. When you start drawing down your IRA for living expenses (this is called a distribution) it will affect the continued growth of the IRA. If your IRA is invested in annuities, stocks, and mutual funds or money market instruments it won't be very big when you retire and your distributions will probably consume ALL of the account's annual growth. It will stagnate or even grow smaller as you take out money to live on.

Compare

We will now compare the difference between the two scenarios, a traditional custodian where you invest in equities, funds, or money markets and a custodian that allows real estate based investments. The "assumptions" will be the same:

• $50,000 current balance
• $5,000 per year additional contribution ("catch up")
• All transactions are at the beginning of each year
• 10 years before beginning distribution.

IRA at Traditional Custodian

Compare that to a real estate investment that grows 5% per annum (for inflation), but you only put 25% down. This gives you a 5% return on your investment PLUS a 15% return on the portion financed. Your actual yield is approximately 20% PLUS you may have income from the investment and more growth based on improvements to the property and enhanced demand for the neighborhood. The upside potential is tremendous.

Now all this is great, but your IRA custodian won't let you invest in real estate.

Of course they won't. The custodian is associated with the company that invests your funds and they are an insurance company, stock broker or mutual fund company. What you need is a custodian that will allow you to invest in real estate.

Now this isn't impossible, but it is a little more difficult than signing up with Fidelity or somebody like that. But it is well worth the effort.

The Self-Directed IRA

If You Haven't Saved Enough Money to Retire You Better Read This

What you need to do is to sign up with a custodian that allows self-directed IRAs.

Once your self-directed IRA is established you can roll over your existing IRA into your new IRA. Then you will need an LLC with a special operating agreement (that satisfies the IRS) to hold your IRA real estate investments. The whole process to establish your IRA and setup your LLC will cost from one thousand dollars to five thousand dollars depending on who you get to do it.
Once this is complete it will give you "check book" control of your IRA investments.

Now you want to aggressively put your money into good growth potential investment property. You want to be aggressive because you know that if your IRA doesn't grow fast enough and big enough you won't be able to retire.

A nice side benefit of having your real estate portfolio in your IRA is that you no longer need to do §1031 exchanges. You can just sell and keep all the profit in your IRA. Understand that your IRA grows tax free or tax deferred (depending on whether it is a Roth or Traditional IRA) and therefore a §1031 tax deferred exchange is not necessary.

After that, we will purchase additional properties utilizing cash flow and cash-out financing. Remember, this is an aggressive approach because we don't have that many years to build up enough money in our IRA to guarantee a comfortable retirement.

IRA Funds Invested In Real Estate

Now this looks pretty good, but it has some inherent flaws. We have NOT accounted for cash flow and we haven't specified what we are going to do with the additional contributions other than improve our property.

To maximize the return, the only "logical" thing to do with this money and with our increased "equity" position would be to buy additional properties or "trade up" to a bigger property. Rather than make "projections" here, I will let you imagine what you could accomplish if you moved up to a million dollar property in year five.

We will also need to "manage" our cash between transactions. We cannot afford to leave it in the bank at 2% or 3% if we expect to average 20% return on our investment. There are ways to do this. A good real estate retirement specialist can help you with this.

But if we did nothing more we are looking at 5 times the monthly distribution than what we could expect from the traditional IRA.

The Big Day Approaches

Once we are approaching retirement, we want to sell our residential income property (because it is "management intensive") and use the proceeds to build a commercial strip center. This will give us continued growth and good cash flow with much less demands on our time for management.

Self-Directed IRA Real Estate Investment Program

Now as you can see, with aggressive investing in real estate with your Self-Directed IRA you should be able to reach (and even exceed) your retirement goals.

If you need help setting up your self-directed IRA, contact Bill Roberts at Brooks and Dunphy Financial (619) 244-4610. We provide everything you need to get started for $995.00. including an LLC with the required operating agreement, the custodian that allows a self-directed IRA, the instructions to fund your LLC, registration with the IRS, and a bank account. Then all you need to do is buy something. We can help with that too.

A Special Request and A Special Gift by Bill Roberts

My ActiveRain friend from Kansas City, Chris Lengquist asked me to write a guest post for his blog, BBQCapital. Chris is in an area of the country that a lot of us can only envy. Income property actually produces income even with a mortgage in place. Where I am in San Diego all we know about is "negative cash flow."

The title of my post is Baby Boomer Retirement Planning - The Basics. Please visit Chris's blog and read my contribution. Check out the rest of his blog while you are there. He covers subjects from real estate investments to the best BBQ to the Kansas City Royals. Something for everybody (which should include you).

Please let me know what you think of Chris's blog. Prizes will be awarded for the best answer. Not really, just kidding. The prize is the blog itself.

But I still want to know what you think, so tell me.