This is always a fun topic to talk about.  First, I must admit I watch HGTV and A&E’s Flip This House.  I have always wanted to be like Than Merrill, which is one of the hosts of A&E Flip This House, and have my own show in Indianapolis.  That isn’t working out too well yet, but I am still trying.

So, let’s talk about investing in real estate.  There are numerous ways to do this, but I like to talk about three different types; flipping, renting and wholesaling.

Flipping a property is when you buy a property for a certain amount of money, fix it up and then sell the property.  For example, let’s assume you buy a property for $50,000.  You put $20,000 into the property to fix it up and then you sell the property for $100,000.  Your out of pocket expense so far is $70,000 ($50,000 + $20,000) and your gross profit is $30,000 ($100,000 – $70,000).  You will have some expenses when you sell, I usually account for $10,000, so your net profit is roughly $20,000.  This is considered a great deal in today’s market.

Next, let’s talk about renting.  This is similar to flipping but you are holding on to the property for cash flow.  Again, buy a property, fix it up and this time you rent the property to someone.  A lot of investors rent properties for long-term cash flow.  When it comes to what return on your money to look for, it’s simple, what you are most comfortable with.  I know one investor is only comfortable with a 10% return.  One may say 8% and another 5%.  There is no set number that is right or wrong.  It is whatever you feel comfortable with.

The final type of investing I like talking about is wholesaling.  This may not be as familiar to some people.  Wholesaling is when you literally find a distressed property, put it under contract without actually closing on the property and sell it to someone else.  Let’s dive into this a little more.  This is a little more confusing.  You find a distressed seller (someone that is behind on their payments or about to go into foreclosure) and purchase their house.  On the purchase agreement you put your name and the words “and/or assigns”, so you can assign the property to someone else.  Then go out and find an investor or rehabber to buy the property from you.  Sound confusing?  It is.  But it does work.

The most important aspect of investing in real estate is the acquisition cost.  You have to make sure you are buying the property correctly and for the right price.  Look at comparables and do your due diligence because you don’t want to be stuck with the property.  Real estate can be a very big headache if you don’t know what you are doing.  Consult a real estate professional before you do anything.

If you have any other questions regarding this issue, please contact me.  Go to my website, www.stonerealtyllc.com and there is a page designated specifically to investing.  Or you can always call me at 317-209-4355.

Because credit card companies are forced to change the ways in which they capitalize on our financial mistakes, they have turned to an age old solution: cutting expenses. They are doing this by jacking around their rewards programs. Yes, credit cards have all sorts of crazy rewards programs. These types of programs have been increasingly popular as companies realize that Americans will rob Peter to pay Paul (that is, of course, if they have one son named Peter and another named Paul). Rewards programs really got popular in the 80’s when people would smoke cases of cigarettes to simply earn points to buy stupid crap. Nothing says classy quite like a Joe Camel Mountain Bike. Or how about that Marlboro TV table set? These tobacco rewards proved two things: 1) people are easily tricked by these rewards programs 2) people still had trouble reading Surgeon General warnings.

Which brings us back to your credit card. Some of these cards are linked to airlines. Some are linked to Disney. And some are linked to online gift certificate stores. Well, the stores’ prices just went up. Credit card companies will be raising the “point price” of items in order to give you less bang for your buck. Thus, they are cutting expenses. Thus, they making more money in yet another unorthodox way. Therefore, you need to use your points NOW. Log on, and use your points as soon as possible. Earning points is about to get harder, and the price of rewards are going to go up. Do it now. Just don’t buy a ashtray with your rewards points.

The average American and banks are both reeling from poor decisions in regards to borrowing and lending. So let’s just start over. Let’s just act like none of this ever happened. I even have a place for us to get started: math. The banks can do whatever they want to induce us to borrow more and more money, but if you arm yourself with math, then your financial life will be spared. If math brings you to the conclusion that you should be renting, then embrace it.

Renting is not just for young people. Renting can make sense for retirees, and growing families. Renting can make sense for divorcees and people named Dave, Carlos, or Nolan. Before I go on much further you should know that my intent is to list every possible demographic. Renting can make sense for just about anyone. Renting can especially make sense if honest math doesn’t support your quest to own a home.

I admit that telling people to rent just feels awkward. But isn’t that the problem? We have been socialized to believe that home ownership is the American Dream. And this cultural directive is so strong that people trade their math for their peer pressure hat. I’m not much one for blame, but I would like to throw a few groups under the bus (What? Did you want me to just sit on the fence? I have to blame somebody). Here is my list of the top three groups to blame for this powerful social influence:

1. Our parents- And by our, I mean anyone under 38 (I, myself, am 32). Many parents are under the impression that their children “should not waste money on rent.” This notion just doesn’t make sense. I personally believe that this parental pressure has led to a number of poor housing decisions in the last 15 years. The lure of home ownership was different in the 60’s, 70’s, and 80’s. You can’t let your parents influence this financial decision based on 20-30 year old data.
2. Home builders- If the pressure to buy a house wasn’t hard enough to deal with, then homebuilders techniques to get you to commit to 360 mortgage payments can send you over the edge. Homebuilders got into the practice of subsidizing your first couple years of your mortgage via programs such as a 2-1 buydowns. These programs were meant to do one thing and one thing alone: Sell you a house now, and leave your financial future to chance. Builders didn’t care if you couldn’t afford the home, their job is to sell you a home. I believe that they shunned their fiduciary responsibilities, and for this, they receive partial blame. Don’t worry though, the karma train has entered the station, and some of the most unscrupulous national homebuilders have already gone out of business.
3. Michael Bolton

This concludes the “When math gets pissed” series. If you are looking for a tidy conclusion, then please allow this explanation to fly: use math and don’t think that you are immune to bad decision making. I would love to hear your comments on the series. Feel free to post them on the blog. Don’t forget to join my Facebook fan page.

The fact of the matter is that finding out that you can’t afford a home and then not buying that home, is a beautiful thing. It makes you a winner. It makes you wise. But unfortunately, it makes you a financial unicorn. In other words, rare, if not fictitious. It is common for people who can’t afford home ownership to question their value and self-worth. However having the discipline and self-control to say no when the math says no, is brilliant. You actually are doing something that protects the entire consumer based economy that we live in. Battle for your future, dammit. Battle.

Who is a better steward of YOUR money? You or a mortgage company? Right, it’s you. A mortgage company’s job is to make money. Your job is to make good decisions. Affordable is affordable. Relatively affordable is not an option. Yesterday’s blog addressed affordable. But you need to understand why affordability is even an issue. I have a story for you. Wanna hear it? Here it go.

A few years ago when mortgage banks were faced with a limited target market of “those that could afford homes”, they did what they thought was the best thing to do improve profitability: they grew their target market. They did something that was brilliant with a hint of diabolical. They made homes “more affordable”. This doesn’t necessarily mean making less expensive homes. This means expanding the definition of affordable. People who never could have afforded homes were all the sudden hot prospects. Initially this isn’t a bad thing. It is, in itself, an opportunity extended. However, affordable was a technical term. Affordable didn’t mean relatively affordable (like it does today). Mortgage banks kept dropping their lending requirements, and it was that practice which brought forth the sub-prime lending crisis. Banks, although they were making plenty of money on loans that they never should have given, freaked out when hard times hit. They suddenly realized that the people that couldn’t  afford the homes that they were financing were also in deep trouble.

You can try to trick math, but it will eventually chase you down and show you who’s boss. Join us tomorrow as we examine Part 4 of When math gets pissed. We will discuss the glory of renting.

Did you miss Part 1?
Did you miss Part 2?

Yes, math is pissed. But math doesn’t really care. You see, math is honest. Of course there is fuzzy math, but fuzzy math isn’t really math. Math will give you the answer to your housing dilemma. There are three numbers that are as foolproof as any, when it comes to homeownership decisions.

10 Can you afford a down payment of 10%? If the answer is “no”, then the answer is “no”. This is where most people absolutely lose their mind. You can either afford this, or you can’t. It’s really that easy. Just because someone or something will sell you a house or approve you for a loan that doesn’t require a down payment of at least 10% doesn’t mean you should do it. There are some restaurants that sell 5 pound hamburgers, but that doesn’t mean you should order one. Borrowing money for a down payment or even receiving a fortuitously-timed gift, also puts you in the “can’t afford it” camp. But again, don’t sweat the “can’t afford it” camp. It’s a smart place to be in. It’s a hell of a lot better than the “thinks they can afford it even though they can’t” camp.

25 Is your mortgage payment under 25% of your net monthly income? Yes, I realize this is a more conservative number than you’re use to. But that’s the point. People kept pushing the limits of 27% of gross income, and that obviously didn’t work. The problem is that some banks will lend consumers money even though their mortgage payment would be 33% of their net income. That leaves very little room for emergencies, utilities, and other necessities.

5 Do you plan on staying in the residence for at least 5 years? According to my book, 60 Days To Change (Yes, I’m quoting my own book. Get over it. That’s just how I roll) 85% of your payment for the first five years of a 7% 30 year mortgage goes towards interest. That means that a house generally is a terrible investment if you live in it for less than five years. Most young Americans just don’t have that sort of stability. Not only that, but 5 years is a good rule of thumb in a GOOD real estate market. And we are only in a GOOD market right now if by “GOOD” I mean “fecal”.

So there it is, Holmes. There is your math served up nicely in a giant wooden table-boat that gluttonous orders of sushi are served in. If you can figure out what 10% of a purchase price is, figure out what 25% of your take home pay is, and count to five, then you are privy to the good news and the bad news. The good news is that you have just earned your ticket to the “I can afford to own a home” club. The bad news is that they are out of t-shirts because they let a bunch of math-hating lemmings into the club. Again, this comes off a bit harsh. But subtle didn’t work. Subtle didn’t work when a bunch of kids that were bad at soccer got participation trophies (me included). Some people win. Some people lose. You don’t get a trophy for losing. There is absolutely nothing wrong with that. You still get your oatmeal cream pie and a juice barrel. Some people can afford a home. And some people can’t afford a home. But unfortunately, there are no more t-shirts. Don’t complain. That’s just how it is. Besides, the kid that was terrible at soccer but great at math isn’t complaining.

Oh, and if you think that I’m suggesting that you are a loser if you can’t afford a home, then you better read tomorrow’s Part 3. Sneak peak: if you can’t afford a house, then your fate is in your hands.

Join us tomorrow for Part 3.

Credit card changes law changes went into effect today. This clip from 24 Hour News 8 will help you understand how you can be affected.

We are actually entitled to a hell of a lot less than we think. This isn’t a limiting belief, in fact, I would argue that it is actually a good thing. Entitlement leads to complacency and a lemming-like society filled with figurative cliffs. The concept of the American Dream is one such entitlement trap. At some point in the last 50 years, the American Dream crossbred with a desire for home ownership. While this seemed as though it was a benign confusion that simply would result in more homeownership, it actually led many Americans towards the figurative cliffs that lemmings often find. And this is where we find ourselves. Our nation has become a dried riverbed of misplaced hope in a dream that merely contained a terribly misplaced premise. Now we know, the American Dream is not home ownership. For if it was, the American Dream would actually be a nightmare. This mutt of an American Dream with which we once felt entitled, has proven one thing: entitlement is a sucker’s bet.

I have long believed that the actual American Dream is opportunity. However, opportunity isn’t a one-act play with a predictable ending. Opportunity is the preamble to a life filled with challenges, successes and failures. The unique thing about opportunity is that it can be both given and self-created. Governments, banks, and other citizens can give Americans opportunity, but that doesn’t mean that the opportunity is objectively a pursuable end. In other words, if a bank offers you money to buy a house, that doesn’t mean that you should accept it.

At some point it became classist and inappropriate for me to say that “some people can afford houses and others can’t”. And my guess is that when you read that you thought, “ouch, he is being harsh.” But I’m not. Why is it wrong to say that some people can afford a house and others can’t? Unfortunately for America, math stopped mattering. Home ownership became a social issue, and not a simple math equation. Don’t hate on math. We are all faced with limited economic resources, and it is up to us to manage them, using math.

Home ownership took math, and made it irrelevant for about 15 years. Well, math is back, and it’s pissed. The American Dream has been surgically removed from the wanton desire for home ownership. And in an unfortunate twist of ironic fate, the American Dream has now become the dream of staying in a home that you can’t afford.

Yes, we are swimming through a murky pool of irony. We forsook math and rational thought in order to shoehorn ourselves into mortgages. But when the shiz hit the fan, and we realized the errors of our ways, we decided to re-dream the American Dream. We now dream of holding on to what shouldn’t be ours. As happens in a free market society, the fat has been cut. Middle management, salespeople, and marketing professionals which were once the salt of the middle class American earth have been cast aside like the leftover uneaten filet mignon that used to occupy the trash bins of your average corporate jet. Now we are simply trying to make sure that we can speak the word “income” without feeling that gut-wrenching, tear-inducing feeling that comes over us when we speak that of which we don’t have. But all is not lost. ALL IS NOT LOST. We still have math.

Join us tomorrow for Part 2 of The State Of Home Ownership in America According to Pete.

I believe that setting three financial goals for the years is the best way to have a focused productive year. Too many times people have too many goals, and that distracts them from actually accomplishing any of them. Once you accomplish your first three goals, then you can move on to three more. You can only have three goals at a time.

It is very important to me that you put pen to paper today, and write down 2010’s goals. Your goals should include a date and very specific details. For example; I would like to increase my savings account by $1000 by March 31st. Or maybe this: I would like to pay off my car loan by June 15th. Either of these goals would be great, and both of them are more achievable once you decide that they are important enough to write down.

Now it’s you turn. Print this document, and write down the three most important goals that you have in 2010.

1.

2.

3.

I would love to talk to you about your goals. Feel free to commentl or email me, and we can talk about ways to achieve these goals. Remember, you need an accountability partner to achiever your goals, and you know my email address.

There is a common misconception a lot of homeowners and some agents, including myself until I learned more, that banks want houses. In other words, banks get happy when people fall behind on their mortgage payments, have to foreclose and abandon the house. In all reality, that couldn’t be farther from the truth. Banks want nothing more than for you to stay in your house. You see, banks are in the business of lending money, not taking over real estate. Sounds obvious, but a lot of people don’t understand that.
So, what is the true cost of foreclosure? First, let’s discuss from the banks perspective. If we are talking cents on the dollar, if you sell your house in foreclosure, the bank will get $.30 on the dollar. In a successful short sale, $.70 on the dollar. So, it’s a win-win for the bank to sell your house in a short sale.
Now, let’s talk about the cost of foreclosure to a homeowner. This is much worse. Let alone losing your home completely, foreclosure also affects your credit score, current and future employment and how long you have to get another mortgage. Let’s dive into these a little deeper.
1. Credit Score: If you let your house go into foreclosure, you can expect your credit score to lower from 250 to 300 points. Typically, this will affect your credit score for over three years.
2. Current Employment: Employers have the right to check the credit of all employees. In many cases, a foreclosure is reason for immediate reassignment or termination.
3. Future Employment: Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases challenge employment.
4. Time Frame: A homeowner who loses their home to foreclosure is ineligible for a Fannie Mae-backed mortgage for a period of five years.
In a successful short sale, credit score lowers by only 50 points, it is not reported on any credit report therefore not challenging current or future employment and the time frame is only two years for a Fannie Mae-backed mortgage. Closing your home in a successful short sale is the best, and in my opinion the only, option a homeowner has if they are falling behind on their mortgage payments.
If you have any other questions regarding this issue, please contact me. Go to my website,  and there is a page designated specifically to short sales. Or you can always call me at 317-209-4355.

No matter who you ask, I think that everyone would agree that $37 is about as arbitrary a number as you can get. It won’t, in itself, help you retire. It won’t, in itself, replace the brakes on your car if they were to go out. But when you take numerous amounts of arbitrary and insignificant amounts of money and put them together, then you actually start to make financial progress.

Generally speaking, people don’t save money because they forget about saving money. If people are prompted to save money on a random occasion, then they are more likely to see the ease of doing so. At last count, yesterday’s experiment saved nearly $2000 based on those who let me know that they went through with the exercise. That’s pretty decent for such an insignificant and arbitrary amount of money.

The best thing you can do is this: don’t kill kittens. The second best thing you can do is this: setup a reoccurring transfer from checking to savings on a set day every month. Start with a small arbitrary amount of money, and then gradually increase it. For other great tips like this, pick up a copy of 60 Days to Change. I know, that was a choppy segue. Oh well.

12 or More Fixed Monthly Expenses Each Month.  That’s how many the average American has.  Don’t get sucked into buying more than you can afford this holiday season by adding another fixed monthly expense to your budget.  If you can’t pay for it now or pay it off right away, you can’t afford it.

11 Household Purchases Per Week Limit your household purchases to this many this week.  In a normal week, that includes gas, groceries, maybe a meal or two, and a few other expenses.  Since you’re spending big for the holidays, cut back on your other purchases to offset your additional holiday purchases.  Maybe that means cutting out lunch out or drinks with the guys.  If you can limit the number of times you spend money each week, you’ll actually end up limiting the amount you spend each week.  Really.

10 Percent of Your Monthly Budgets for Groceries and Entertainment.  The average consumer can easily reduce their spending on groceries and entertainment by 10 percent each month.  That’s easy money (and more than $50 for most people) that can be put toward holiday purchases.  Little differences like having a glass of wine before you go out or sticking to your grocery shopping list add up to significant savings.

9 Things to Look for in Your Free Credit Report. Get a jump on any post-holiday surprises by ordering your credit report now.  Once you have it in hand, you should check nine key sections to make sure your credit is a-ok.

8 Extra Cans of Food at the Grocery Store.  Charity doesn’t have to be complicated, and don’t assume that you can’t afford it.  Little things, like buying a few extra cans of food at the grocery store, sending your gently-used clothes to the Goodwill, or volunteering an hour of your time every week can make a world of difference to a person in need.

7 Steps to Improving Bad Credit. The holidays aren’t an excuse to put off improving your credit.  In fact, there’s no better time to start thinking about spending responsibility.  Don’t put all of your holiday expenses on your credit card.  Don’t max out your card.  Spend responsibly and you’ll be building good credit rather than doing damage.

6 Different Debts.  So you have six open lines of debt.  And maybe you’re about to create another this holiday.  Don’t do it!  And, more importantly, resist the urge to consolidate!  This might seem like a good idea, but actually it will prolong your debt, indebt you to another (the consolidator) and do further damage to your credit score.

5 Percent of Your Monthly Income. That’s how much money you have to spend on your guilty pleasure, be it cars, clothes, wine or home decorating.  Don’t think that just because you’re being generous with others this holiday season, it gives you an excuse to be overly generous with yourself.  Anything than over five percent is overspending.

4 Major Credit Cards. Seriously? You really need four-or more-major credit cards?  If you’re justifying your overspending this holiday by spreading it over multiple cards, you’re kidding yourself. Take your gas card, your back-up card, and that department store card, and cut them up!  No one needs more than one credit card, and you should be able to put all of your holiday purchases on it-then pay them off.

3 Tiers of Savings. Don’t let holiday spending-and post-holiday payments-put you off your savings plans.  You should always be thinking about saving for short-term emergencies, mid-range big purchases (a car, a home), and retirement.

2 Jobs.  Sometimes your full-time job just isn’t enough.  If you’re planning on making some major purchases this holiday season that you can’t realistically cover, it might be time for you to consider a part-time job.  Snowplowing, babysitting, you name it, a few hundred dollars extra each month can make a big difference and get you out of the hole a lot quicker than you might think possible.

1 Monthly Budget Meeting.  It’s a must.  Head off financial crisis-or just some big January fights-with your significant others by sitting down to a monthly budget meeting, where you look at your past spending and plan for the future.  It’s painful at first, but it only gets easier as you get more financially aware.

Layaway is a tool used by retailers to keep customers buying during tough credit times. The practice started back in, you guessed it, the Great Depression. Customers make a down payment on an item, and then continue to make payments on the item prior to taking possession of it when it is paid in full. It is quite the alternative to taking possession of an item prior to actually owning it. Back in the day (1980s), layaway was a huge strategy for retailers such as Marshalls and TJ Maxx. But the strategy disappeared when retailers figured out that they could instead “sell” you a store credit card, give you the item now, and then charge you ridiculous amounts of interest. Not only that, but since the customer had possession of the item, they were much more likely to make the payment on a non-standard payment schedule (read: late). That is why layaway disappeared. Don’t get it twisted.

And this is why layaway has reappeared. Consumers aren’t qualifying for the revolving credit that stores offer, therefore stores are turning to their old friend, layaway. And as you might have guessed, layaway has returned with a newfound sense of benevolence. Hooray, big business is still allowing consumers to buy things they can’t afford (Google search: sarcasm). But I would take layaway any day, over delay of pay.

About Green Candy™

Green Candy™ (www.GreenCandy.com) is an online financial assessment tool that helps Gen Y-ers and Millennials get on the right financial track before the “debt hits the fan.” Introduced by radio personality, comedian and financial expert Pete the Planner (www.PeteThePlanner.com), Green Candy’s ™ various “pods” allow users to assess their financial health and competency in common areas such as Debt, Budgeting, Investing, Charity, Risk Management and Major Purchases, as well as in areas unique to Gen Y. A subsequent series of targeted worksheets, podcasts, tip sheets, and action plans guides them to the financial promise land. Green Candy™: Get in control before the debt hits the fan.

About Pete the Planner

Pete the Planner (www.PeteThePlanner.com) is expert financial planner Peter Dunn’s super-saving alter ego. Peter is an award-winning comedian and rising star in the financial world. Named one of “Indy’s Best and Brightest” in finance in 2007 and media in 2009 by KPMG, Peter was also declared one of NUVO magazine’s “30 under 30 to Watch in the Arts” for comedy. Peter is the author of What Your Dad Never Taught You About Budgeting (2006) and is the host of the popular radio show Skills Your Dad Never Taught You on News Talk 1430 (WXNT). He blogs regularly at www.petetheplanner.com/blog. Pete appears regularly on Fox News and Fox Business as well as various CBS stations. His newest book, 60 Days to Change, is due out in November.

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About Green Candy™

Green Candy™ (www.GreenCandy.com) is an online financial assessment tool that helps Gen Y-ers and Millennials get on the right financial track before the “debt hits the fan.” Introduced by radio personality, comedian and financial expert Pete the Planner (www.PeteThePlanner.com), Green Candy’s ™ various “pods” allow users to assess their financial health and competency in common areas such as Debt, Budgeting, Investing, Charity, Risk Management and Major Purchases, as well as in areas unique to Gen Y. A subsequent series of targeted worksheets, podcasts, tip sheets, and action plans guides them to the financial promise land. Green Candy™: Get in control before the debt hits the fan.

About Pete the Planner

Pete the Planner (www.PeteThePlanner.com) is expert financial planner Peter Dunn’s super-saving alter ego. Peter is an award-winning comedian and rising star in the financial world. Named one of “Indy’s Best and Brightest” in finance in 2007 and media in 2009 by KPMG, Peter was also declared one of NUVO magazine’s “30 under 30 to Watch in the Arts” for comedy. Peter is the author of What Your Dad Never Taught You About Budgeting (2006) and is the host of the popular radio show Skills Your Dad Never Taught You on News Talk 1430 (WXNT). He blogs regularly at www.petetheplanner.com/blog. Pete appears regularly on Fox News and Fox Business as well as various CBS stations. His newest book, 60 Days to Change, is due out in November.