Best of Blog Posts for Week of June 15th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

MyMoneyBlog wrote a good Scottrade Broker Review: Trading Experience & Tips (Updated 2012)

I use Scottrade myself and I'm pretty happy with them.

DoughRoller presents a Comparison of the Best iPhone Plans

Barb Friedberg discusses SHOULD YOU INVEST IN REAL ESTATE NOW? (Part 1) 
and has a nice list of the 25 steps to buying and managing rental real estate.
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Should You Finance a Rental or Pay Cash?

As I've mentioned in the past we own a few rentals.   Two of them are owned outright with no mortgage and the other two we have mortgages on.   We bought the two rentals with cash because they were distressed fixer upper  properties that were in poor condition and you'd have a harder time getting financing on.   The other two rentals with mortgages used to be my wife's primary residences and she kept them as rentals as investments.

Whether its better to pay all cash or to finance the rental investment depends on the situation.    Theres no 'one size fits all' correct way to go.

Lets look at some examples:  

You're thinking of buying a duplex for $100,000.   It rents for $500 each side for $1000 total rent.  Lets assume that you have 95% occupancy, annual repairs and maintenance of $1000, property tax and insurance totaling $2000 and you pay the water and garbage for another $750.  

That gives you rental income : $11,400
Expenses  = $3750
Net $7650

If you paid cash with $100,000 total then you'd be getting about 7.65% return on your investment.

If you financed the property with 30% down and got a mortgage for the remaining $70,000 then your mortgage payment would be about $350 per month or $4200.

So with a $30,000 cash investment you'd be netting $3450 which is a 11.5% return on your down payment.

Option 1 : Pay cash 100%.  Invest $100,000 and get $7650 /yr = 7.65% return
Option 2 : Finance with 30% down.  Invest $30,000 and net $3450 /yr = 11.5% return

In this example financing the rental would be a better overall investment since it gives you higher return on your investment.  

Now of course if interest rates on the mortgage were significantly higher then financing would start to be a poor option.

Lets run the numbers again but assume a 7% mortgage rate on the rental investment.

With 7% loan your payments would be $465 a month or $5580 a year.   That would give you a net of $2,070.   Thats a 6.9% return on your money.

What if your expenses are higher?    Lets say the property taxes, repairs and utilities are $2000 more and add up to $5750.   In that case you'd have lower cash flow in either case, but it would almost eliminate your cash flow with the financed purchase : 

All cash purchase $100,000 = net $5650 = 5.655% return
30% down payment $30,000 @ 4.5% loan  = net $450 = 1.5%

The lower the interest rate, the more appealing financing can be.
The higher the cash flow the easier it is to make a good return with a financed property.

There are other pros and cons to paying all cash versus financing.

Financing :
PRO: Its much easier to accumulate cash for a down payment rather than pile up enough money to buy a property outright.
CON : There is a lower margin of error for a financed property.  If you have a major $5000 repair on the property one year then that could easily eat up all your cash flow.

All Cash 
PRO : Paying all cash saves you on financing costs since you don't have to pay for closing fees on the loan.
PRO : Allows you to buy some properties that won't qualify for financing. 
CON : Sinks all your cash into an illiquid investment.

Leveraging has risks and rewards 

When you finance the property you are leveraging your investment.   This will have a significant impact if the property appreciates.  Lets say for example sake that in 10 years your property goes up from $1000,000 to $150,000 or +50%.   Thats a reasonable long term appreciation rate for real estate of around 4.1% annual growth.
If you pay all cash then you get a 50% return on that appreciation.  Thats pretty good.    However if you financed the property with 30% down then your $30,000 of initial equity now amounts to $80,000 equity.   Thats a 166% return on your money which is great.   If you get healthy appreciation then leveraging the property will give you a much better return on the investment. 

Of course we should all be aware due to the recent real estate collapse that properties do not always go up in value.  Say you bought this investment back in 2006 at the height of the real estate bubble.  It would not be unusual for you to  be underwater on the investment at this point by 20-30%.   Lets say you paid  $100,000 in 2006 and today its only worth $75,000.   If you paid cash you'd have lost 25%.  If you financed with 30% down then you'd have lost 83%.

Leverge is a two edged sword.    With 100% cash purchase you're a lot safer but you miss out on the great return on investment from appreciation.   When you finance you're hoping for some good appreciation and you can cash in a large return if you get it, but if things go bad you can lose all your money or worse. 

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FREE - $2 MP3 credit from Amazon

Amazon has yet another $2 free credit for MP3 downloads.   The promo code is MP3S4ALL

visit Amazon.com to claim the code

It has to be used before 11:59 p.m PST on June 15, 2012.  

I had to enter the code a couple times to get it to work right, not sure why.   But if it doesn't work for you then try it again.




I heard about this one on Slickdeals.net

--This article may contain referral links which pay this site a commission for purchases made at the sites.

History of Average Social Security Benefits 1956 to 2010

The very first social security check was received by Ida May Fuller for $22.54 back in 1940.  Today the average benefit is around $1175 a month.  I thought it would be interesting to look at how the monthly benefits have changed over time as well as compare how much social security benefits compare to overall income levels.

I got the data out of the Social Security Annual Statistical Supplement for 2011, specifically in Table 5.B8 

Here's a graphic representation of the average monthly retirement benefit for Social Security.  Note this is the average for all beneficiaries and combines people getting full retirement benefit and those who took early benefits.

Ok, you can see its gone up over time.   But thats a long period and inflation and increased wages would cause increases in social security.   Lets look at how social security compares to the median household income over a time period.   I couldn't quickly find older median income data so I'm just going to go back to the 70's for these charts.

Median income has gone up at a different pace and isn't as consistent.   Thats a little more due to the relationship between income and the economy in general.

Here's how much of a percentage of median income the average social security represents:

You can see it drifted around 25% for a few decades from 1980 to 2008.   Then post 2008 the % increased a bit but thats mostly due to a drop in the median incomes.

The law defining social security hasn't changed significantly since 1983.   So I'm assuming the changes in the benefits since then are mostly due to changes in incomes and demographics.

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