Saturday, August 28, 2010

Homeownership - Liability or Lifesaver? A Primer on Economic Fallout Shelters

  If you listen to the "Bubble-Bloggers", you'd be forgiven for coming to the conclusion that home ownership is Bad, BAD!...and that buying a home is, for the less-than-astute, unsophisticated and unwashed proles, something better left to those of means who know what they are doing.  With all due respect to these folks, their apparent owner-phobia might well be justified in the economic deserts of California or areas where home prices still have far to fall, but may be unwarranted, even unwise, in other parts of the country.

  This is, firstly, not to disparage bubble-bloggers or their views.  They make a lot of sense and can back up their assertions with the numbers.  But they also make a lot of assumptions, upon which those assertions depend.  Secondly, this post is not a rent vs. buy article - I'll leave that for another post at another time. There are good arguments for either side of the debate, depending on various factors, but this is not what I wanted to talk about today.

  One of the necessities of human life (and probably most animal life, as well), besides food, is shelter.  You need a place to live, a place to sleep, a place to keep warm in the winter, ect, ect.  It's a necessity, and, unless you consider perma-couch-surfing or living beneath a highway overpass to be an acceptable option, you're gonna need a place to live.  You will ALWAYS need a place to live, just as you will ALWAYS need food and water.  It`s not a luxury.  My own standards are quite low, but I draw the line at living in a van.
Been there, done that. For several months.  And assuming A) You aren't "well-healed", and B) The economy will continue to deteriorate for the foreseeable future, your standards should be low, as well.

  By this, I mean, you should consider purchasing the smallest, cheapest, low-tax home that you (and your family) can comfortably live in, albeit in a good neighborhood and in a good location.  My philosophy is that, in an era where all economic indicators point to some serious hard times ahead, with increasing instability and increasing unemployment, you want to have one of your main and most expensive needs all sewn up.  Housing is most peoples' single biggest monthly expense, but it doesn't have to be that way at all.   In fact, my rent here on Long Island is 30X (3,000%) higher, than the property taxes of a home I own in another State, and that home is 5X the size of where I am now.

  Most peoples' homes, are a liability. They bought more house than they needed, bought more house than they could afford, are mortgaged up to the hilt, and now, with the RE bust, many owe more on their homes than they are worth.  Worse yet, with unemployment rising and showing few signs of abating anytime soon, some of these folks have lost their jobs, making them unable to continue to pay their mortgages, putting them at risk of foreclosure,and eventual eviction.  I won't even get into the HELOC-abuse madness -those tapping into their ethereal "equity" to buy toys, remodel, add in ground pools or take lavish vacations.

  Unless you are in the land lording business, a home is NOT an "investment" - it's a place to live.  Nothing more. Assume it won't go up in value(*especially* nowadays!), and don't concern yourself with "property values", as no matter what your home's present value, no matter how much it may drop, it still provides 100% functionality for the reason you(should have) bought it for in the first place: a place to live.

  Now, many of you (like myself) have little or no  control over our earnings, job security, other cost of living items, and the prospect of reduced hours, incomes and inflation.  Most of us 'little people" are limited in our options for increasing earnings, and ultimately, are at the mercy of forces and circumstance beyond our control as regards how much money we make every week.  Even some small business owners are in the same boat. What you CAN control (or, at least, mitigate), are your costs and spending.  Particularly one of your biggest expenses: housing.

  This is where what I call "Economic Fallout Shelters" come into play.  Note that these are NOT "Doomsteads", as Doomsteads have other properties and characteristics that make them uniquely suited for post-crash survival, when TS has REALLY HTF, but that is a subject for another post and time.  What I'm talking about, are economic fallback properties, that you and your family can buy, on the cheap, and continue to live in, on the cheap, once the economy has us down to subsistence levels, competing with 3rd-world labor, at 3rd-world labor rates, while trying to continue to live in a 1st world country with 1st-world expenses.

  There are parts of the country where you can now buy a home for the price of a good used car.  Obviously, we aren't talking about LA or the immediate vicinity of NYC, or any other high-priced areas where the RE has not yet fully deflated.  Even deflated, many areas of the country are still overpriced and overvalued vs. their real utility.  This is where having a portable income really shows it's value,...nay, pricelessness, as it allows you to disregard the local job-market entirely, and just concentrate on finding the best place to live for yourself and your family.  If I had a portable income, I would've left NY nearly 2 years ago.  Instead, I was waylaid when the economy fell off the cliff, and unemployment more than doubled in the State of my intended relocation, as I'm still dependent on the job-market.

  So, what is a '"Fallback Property" or "Economic Fallout Shelter"?  My definition is s follows: A fallback property (or "economic fallout shelter") has some unique properties and characteristics: It needs to be cheap enough that you won't be needing to take out a mortgage to buy it.  Ideally, it should be inexpensive enough for you to purchase it with cash-on-hand.  Failing that, it should be cheap enough that you won't need anything much beyond the equivalent of a 3 or 4 year "car-loan" to purchase.  

  You want to avoid debt as much as possible, particularly in these times, as hyperinflation is not guaranteed.  If we slide into a deflationary depression, you may quickly find yourself hard-pressed to continue making payments that used to be modest and comfortable for you, just a few months earlier.  Of course, if you have a fixed-rate loan, and hyperinflation sets in, you'll be a winner, paying back the bank with dollars that are worth far less than the ones they lent you.  Fixed-rate is the key. If you *must* borrow money to buy your home, you do NOT want the lender to be able to raise your interest rate, should hyperinflation set in.  

  I know I'm kind of digressing here, but the WHOLE IDEA of this post, is for you to fast-track yourself into free-and-clear home ownership.  You don't want to be  rent-slave forever, you don't want to be stuck paying market-rate rents the rest of your life.  If hyperinflation sets in, rents will rise as well.  Have fun trying to keep up - bosses will be slow to catch on that you now need an extra "0" in your paycheck to buy what you used to get every month for 90% less, just 6 months earlier.  And if deflation sets in, landlords, being creatures of habit, tend to ignore all market indicators when those market indicators point towards lowering the rent.  And even if/when they do, they are slow and loathe to adjust rents downwards accordingly.  In the meantime, you'll be overpaying.  Heck, it MAY not even be POSSIBLE for a landlord to lower your rent, because he may be heavily leveraged and thus have large and not-very-negotiable payments of his own to make on his properties, so even if he WANTED to, he may not be able to lower your rent without running a net-loss every month.  HIS debt-problem now becomes YOUR problem.  Just one more reason to get off the rent-payer's hamster-wheel.   Soapbox /off.

  Getting back on track, what makes a good EFS(economic fallout shelter)?  What qualities and characteristics should you look for?  Well, I'll start by listing what to AVOID - this will streamline things a bit and make it easier to focus on what we want. 

  First and foremost, you want a property that doesn't "eat".  There is no point in buying a home if it bleeds you to death every month, no matter HOW cheap the initial purchase price may be. No point at all.  You may as well keep renting if you're going to do that - at least you'll retain your mobility.  For this reason, you want to avoid the following types of properties and characteristics:

  Condos, co-ops, townhouses, gated communities, and anything that is part of a Home Owner's Association (HOA) or Property Owner's Association (POA).  The last two are essentially the same thing - they just have different names.  ALL of these types of properties, have monthly or annual fees over and above the property taxes.  "Common Charges", "Maintenance Fees" and HOA/POA dues can easily add HUNDREDS of dollars per MONTH to your ownership costs.  Avoid them like the plague, no matter HOW "nice" or HOW "cheap" they are..  SOME HOAs/POAs are "reasonable", but there are other reasons to avoid them, IMO.

  Now, I'm not saying there aren't some communities with HOAs or POAs that are otherwise-decent places to consider, or that being in a HOA/POA community is without benefits, but HOAs and POAs also generally come with restrictions(some people view this as a Good Thing), some more anal than others.  Perhaps I'm just projecting my own tastes here, but I prefer as few restrictions as possible, on what I can and can't do on my property. And with so many non-HOA/POA homes available, I personally don't bother looking beyond the HOA.  If I see a property is part of a HOA or POA, I automatically move-on and look elsewhere.  Besides, the whole point of an EFS is to "eat" as little as possible. A HOA makes it eat more. We want LESS.

  Now that we've eliminated the unsuitable types of properties, it's easier to home-in(pun intended) on what you DO want.  Or at least, narrow it down some more.  Let's look at one of the main factors in the cost of home ownership: property taxes.  This is a BIGGIE.  This one factor ALONE can often determine whether a prospective home is, in fact, a EFS or dollar-draining albatross.  Property taxes vary *considerably* - in many areas of the country they are extraordinarily-high.  SO high, in fact, that I often joke about how even if someone were to GIVE me a house for FREE (here on Long Island), I'd have to immediately go out and get a second job, just to pay the taxes.  The Northeast is notorious for high property taxes. 

  For low property taxes, look to the South and the Midwest.  A typical home that here on Long Island would cost you $7,000 a year in property taxes, might cost you only 1/10th of that elsewhere.  And that often goes for home *prices*, as well -  a typical $400k home here on Long Island, could likely be had for around $40k elsewhere. And if $40k is too rich for your blood, fear not!  It's too rich for me, as well, but I didn't start this blog or write this article for a "well-off" or even "comfortable" audience.  I wrote it for us "little people" - those of us who slave away every week for a meager paycheck, and are tired of handing a disproportionately-large part of that paycheck over to a landlord every month, so stick with me - you're in good company!  And that's why we're gonna shoot for ONE QUARTER of that price.

  Remember, the whole point of acquiring an EFS, is to get yourself into a home that you (or soon will) own free and clear, get the landlord and rent-payment off your back, forever. Imagine going from a tiny studio apartment to a 2-3 bdrm home, and going from $500-800 a month rent, to $50 a month "rent".  Sure, there are other expenses - another $50 a month for insurance, another $100 or so a month for basic utilities, but that's still only $200,...let's go crazy, $250 a month.  To OWN.  Yes, you'll have to mow the lawn, but you won't have to ask anyone if you can have a BBQ party in your backyard, either.  Got an extra room?  Got a friend that needs a place to live?  Rent it out for $200-250 a month, and your housing costs are essentially free, or very close.  Even if you decided to keep the whole place to yourself, you'd still be saving a minimum of $250 a month - MORE if you WERE paying more than $500 for rent.  If you WERE paying $600 a month for your studio apt, the $350 (*NET*) a month you'd be saving, could easily finance the entire cost of buying a $10k home, closing costs and all, and pay it off in 36 months.  And that's assuming you put $0 down.

  Or, perhaps better yet, let's say you have a spouse and a kid or two, and were previously renting a house or 2 bdrm apt for $1200 a month(I'm being very conservative here, as small houses and 2 bdrm apts here on Long Island generally now go from a low of $1500 to about $1800-2k a month).  So imagine you and your family now moved into your new EFS and were now saving $1k or more, each and every month, over what you were paying for rent.  Previously, BOTH of you probably had to work, and a job-loss for either of you would've been disastrous.  But NOW?  One of you could probably quit your job and stay home and raise the kids - and work on building a portable income on the side.  Saving an extra $1,000 or so, *net*, every month, opens a lot of doors.

  Home prices are falling, and will likely continue to fall for some time.  Rents, however, don't seem to be following suite (perhaps for the reasons I mentioned earlier in this article), and if and when things ever turn around, rents will go_right_back_up_again, to whatever the market will bear.  Wouldn't you like to be *immune* to this?  And in the event of income-loss, the LAST thing I'd want to be, is a renter.  Even a homeowner who stops paying his mortgage is in a better position than the renter - at least they can probably squat in comfort for a year or so and save up money before the wolf finally comes knocking at the door.  Try THAT with your landlord! 

  Ok, so let's review:  your EFS should be cheap enough that you can buy it for cash outright, or if that's not possible, at least cheap enough that you can comfortably finance it for no more than 36-48 months.  It also must have low property taxes.  Anything with common charges, maintenance fees or HOA/POA dues shouldn't even be considered.  After all, you're NOT buying a vacation home, you're buying what will become your primary residence for riding out the Great Decession.  Consider it a strategic purchase.  Not *necessarily* "Forever", but it COULD be.  At least, now, you have a good idea of the "What".

  In the next installment, we'll talk about the "Where" - LOCATION - where, why, and what factors to consider when deciding   Geography, climate, demographics, proximity to vital and highly-desireable goods and services, income considerations, utility rates and quality of the local school system, .all play a role. Chances are, you're not going to be buying a place a block away, or even a few towns over, so we'll also get into how to research a lot of this stuff online - in many cases, right down to the neighborhood gossip, next-best-thing-to-actually-being-there-level.

Stay tuned.....;-)


Sunday, August 22, 2010

Gerald Celente: Now we're headed for the Greatest Depression (video)


"The fake "recovery" was nice while it lasted, says famous apocalyptic forecaster Gerald Celente, founder of the Trends Research Institute. But now the fun's over, and we're headed for what Celente describes as the "Greatest Depression."  Specifically, the always startling Celente says the country is headed for rising unemployment, poverty, and violent class warfare as the government efforts to keep the economy going begin to fail."

The "Portable Income" - Financial PFDs We Should All Strive to Obtain

   PFDs - Personal Flotation Devices (or Perfect For Depressions)

   In one of my works-in-progress, (with the working title "A Path to Prosperity - digging out from debt, firing your landlord and eventually, your boss - all on about $10 bucks an hour"), one of the key themes I try and hammer home, is the importance of a location-independent income - what I call a 'Portable Income". Unfettered mobility + an income that follows you wherever you go - being a sort of modern-day nomad with a paycheck, will give you a tremendous advantage over most others as the Great Decession deepens and settles in for the long haul. 

   You'll have an income, while others will be out of work, and eventually, out of UE benefits.  You'll be free to relocate to wherever you find most advantageous, while others will be stuck on the unemployment line, tethered by hope to a local industry that ain't coming back anytime soon, and chained by necessity and circumstance to an underwater home that's worth less than it's mortgage balance, that's costing them big bucks they simply no longer have to keep it, and that can't be sold anytime soon for anywhere near what is still owed.  And even if not behind on their mortgage, they will be geographically limited in how far they can go to chase what little paid work is out there.  There is a point of diminishing return, beyond which it simply won't pay to travel for work.  You, on the other hand, *ideally*, will have your work and income follow YOU.  This would free up your time, energy and resources to devote to more important things.

   And yes, yes,...I know what you're thinking; "Uhm,...wait a minute? rent and work for someone else!?!".  This is true, (and I was quite honest and up-front about that in my "About Me" page, no?)  but in my defense, if the economy didn't fall off the cliff at the most inopportune moment - an event an ordinary "little guy" like myself could not reasonably have been expected to foresee, let alone have any control over, I would've already achieved the first two items in the subtitle over a year ago, as I already bought and paid for the modest and inexpensive home I intended to relocate-to.  The best-laid plans of mice and men, and all that.

   I'm still quite a ways off from "firing my boss", though - the crash not only caught me off guard, it also personally affected me, has waylaid me and caused me to put my plans on hold.  It has also become apparent to me, that the economy is unlikely to recover, and will likely get worse.  Like everyone else, I need an income to live on, and have slowly become convinced that depending on traditional "employment" for one's livelihood in this increasingly volatile and unstable jobs-market is unwise.  It is why I chose to stay here and rent on expensive Long Island , rather than take a chance and relocate to a State where I know almost no one, and where the unemployment % is substantially worse - no matter HOW cheap it is to live there. Afterall, if your income drops to zero, it won't matter whether your housing costs are $1,500 a month or $150.  In the latter case, it will simply take somewhat longer before the lights go off, but *eventually*, off they will go, if you don't find another source of income.  Best to have that all sorted out before committing to a move.

 Although I would need little in way of income to live reasonably well once I relocate, it's become apparent I cannot count on finding employment there, and would be at serious risk of financial difficulties(if not disaster), should I lose my job in a State with 12+% unemployment and where I have no network through which to obtain another job fairly quickly.  It's also why I have begun focusing, in earnest, on creating my own portable income.  And you should, too.  But that's grist for another post, and I want to get back to the subject at hand.

  So, what exactly is a "Portable Income"?  Well, there are many various kinds in different categories and degrees varying from 100% active,  location-dependant to 100% passive, location-independent.  First off, the whole point of creating such an income-stream is two-fold -  in a nutshell:

1) You want to be as independent of the jobs-market as possible.

2) You want to be able to relocate to somewhere, where the cost of living is cheap.

  There are other factors to consider of course, especially regarding #2, but these are the two main reasons to pursue such an income.

  Now let's look at a few varied examples:

  At the left-end of the spectrum - "100% active,  location-dependant"

  The "100% active", means you have to keep working to keep making money. Now, this is not necessarily a bad thing - many people find dignity, and derive satisfaction and meaning from their work.  (I'm just not one of them, LOL;) There is absolutely nothing wrong  with honest work, such as working with your hands.  The main drawback, however, is that there may come a time when you are no longer able or willing to keep working.

  Which brings us to the location-dependant part.  Let's say you are a mechanic, and both you and your toolbox are portable.  You can fix things, you are good at what you do, and can charge a very reasonable amount for your services, since you don't have the overhead of a shop nor need to pay a shop-owner a percentage of your take.  You work out of your van, and can travel to your customers if for whatever reason, they cannot come to you.  You build up a clientele based on word of mouth and referrals, as well as repeat business.  But having done so, you cannot easily pack up and move to another part of the State, let alone country, without effectively losing your customer base.  So if you plan on making a go of this type of work, you'd do well to do your research as to where you want to settle down, and plan on staying put there.  This income is only portable in that you could conceivably start this nearly anywhere, albeit reasonably close to your intended customers.

  Further to the right of the spectrum, 100% active, (more-or-less) location-independent:

  You sell physical goods on ebay, NON-drop-shipped, and basically only need to be reasonably close to a Post Office or FedEx/UPS drop-off point.

  Further to the right some more."somewhat" active, location-independent.

  You work with a drop-shipper who handles the shipping and warehousing of goods, while you concentrate on the marketing and sales (ebay, your own website, ect)

  And further still, 100% passive, location-independent:

  This actually encompasses a wide range of income sources, from Social Security, disability pensions, annuities, rental income, pensions, structured settlements, reverse mortgages, dividend income, ect, ect, all the way to a fully-automated online business, such as selling an ebook you wrote via clickbank, and letting others do the marketing via an affiliate program, or creating or commissioning your own educational CD or DVD, using an order fulfillment house that handles reproduction and distribution of your CD or DVD.  Both of these last two examples are also what I call "work once, get paid forever"-types of endeavours.

  At this point I suppose I should mention telecommuting jobs, temp-work and the like - while it's certainly possible to make a living online, working for someone else, it is, IMHO, basically employment minus the commute (whether employee, temp or IC), and is still dependant on an employer, thus carrying the same risks of layoffs, no work available, a slowdown or mismanagement problem, as well as a good old fashioned falling out.  This, and my independent streak, tell me that I'd be better off in the long run by being my own employer, and to the extent possible, my own economy. 

 While going this route is certainly not without it's own set of risks, once up and running, the risks are spread out among hundreds of customers vs one or two employers.  If you lose a few customers, you won't be out of business.  If you lose your only employer. you ARE out of business.  It's a trade-off to be sure - while an employee-type situation generally means a steady paycheck, few worries and little control, it's also an "all your eggs in one basket"- scenario.  Which is fine until something happens to the basket.  In this age of uncertainty, disposable employees, business failures and layoffs - as well as constant worries about job security, I think it's better to shoot for something that is independent of the job-market as well.

  No one type of portable income stream is right for everyone, of course, but from the examples I posted, you can get an idea of the various types of portable incomes there are, and can probably use your imagination and creativity to get ideas of which one might work for you.  And surely, you can see the potential?  Not only the potential for being free of the hassles of holding down a job,once and for all, but also of being able to live in a nice, clean, healthy area with a low population density, low taxes and low cost of living - that may otherwise have been impossible for you to consider had employment prospects been a consideration.

  As long as your portable income is fairly steady and reliable, and can cover your basic living expenses with some room to spare, there is really no reason why it can't work.  If this sounds risky, keep in mind, you would be starting small, with little or no investment, from the  safety and (relative)security of your existing home and job. If you think basing an income that rests on the continued operation and functionality of the internet is risky, consider that if and when the grid DOES go down for an extended time - perhaps even the Last Time, taking the internets with it, you probably won't have a job for long, anyway.

So you might as well go for it.  And who knows, maybe you'll become one of those lucky YouTube stars


Saturday, August 21, 2010