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A Monthly Newsletter Source of Financial Sources • Looking at Choices in an Infrastructure Pure Play Investment • Student Housing is the Clear Exception in the Near Collapse of the U.S. Real Estate Markets • Can a Portfolio of Rental Homes Create Necessary Cash Flow in Retirement? • Consumer Borrowing in 2009 will Require Making a Plan • Gay Seniors Cannot Depend On Estranged Children for Elder Care • Taking Required Minimum Distributions is No Longer Required • Paperwork Clarity is Key to Tax Preparation • Overwhelmed, Overworked, or Overscheduled? Fight back with a positive “O” word – Outsourcing ---------------------------------------------------------------------------------------------------------------------------- Looking at Choices in an Infrastructure Pure Play Investment Since President-Elect Obama’s economic speech at George Mason University on January 8th, there have been numerous stories about infrastructure investing. This sector is quite unknown to most reporters and certainly to most investment managers. Most reporters look at infrastructure and begin to review ETFs. These ETF’s are essentially utilities funds and have only minimal exposure to the companies that actually create the global build-out. As investors begin to look at this space, it is vitally important that they differentiate between infrastructure operations and infrastructure development, according to Robert Markman, Portfolio Manager, Markman Global Build Out Fund (MGBOX). Bob Markman's research shows that there are only two ETF’s that give an investor a shot at actual build-out exposure. The First Trust Global Engineering and Construction Index Fund (FLM) and the PowerShares Dynamic Building and Construction Portfolio (PKB). Further research shows that both of these options have significant drawbacks. FLM has most of its exposure in foreign stocks and will not benefit fully from anticipated U.S. Government infrastructure spending. Most importantly, the fund is very thinly traded—only about 10,000 shares per day—and thus is essentially useless to an advisor of any size. PKB suffers from similar faults. A large percentage of the portfolio is in consumer discretionary stocks like Home Depot and Lowe’s, diluting the pure play on large infrastructure projects. In addition it, too, trades in low volume. The Markman Global Build-Out Fund, designed as it is by a financial advisor who must work in the real and practical world, successfully addresses these issues. It is a well designed ‘pure play,’ has a very low expense ratio for a World Stock fund—95 basis points—is no load, and does not present any of the liquidity constraints of the other infrastructure development options. While the Fund was, in hindsight, launched a bit early (September 15) it has responded very well in the rebound since November 20, gaining a sector leading 53.96% from 11/20/08 through 1/05/09. Clearly, investors who want to maximize results in this sector should have MGBOX on their radar. Robert Markman, Managing Director, Markman Capital Management, Edina, MN, is the portfolio manager of the Markman Core Growth Fund (MTRPX) and the Markman Global Build Out Fund (MGBOX) bob@markman.com, 952-920-4848. Student Housing is the Clear Exception in the Near Collapse of the U.S. Real Estate Markets The threatened collapse of the US real estate markets is not the case in student housing. Demand for student housing is high, particularly at the more affordable state universities and colleges where out-of work people are seeking re-training for the new employment. In fact, the demand for privately financed student housing is not just holding even -- it is getting stronger, driven by two sources of demand: 1) Every hour since the year 2000 about 702 echo boomers have been reaching college age. And, 2) This year an increasing number of adults have been opting out of the depressing job markets and retraining for the jobs of the future. As a manager of many student housing properties reports: “More new students are in their 30, 40 and 50’s. The profiles of the older students are often former small business owners or employees of other downsized businesses looking to change careers. They won’t take the traditional two to a bedroom college dorm, and they don’t want the ANIMAL House three-decker shared with a household of major Budweiser consumers.” The rest of the real estate market is a mess. It began with the implosion of single-family home mortgages, then the collapse of single-family home prices and spread to commercial real estate. The year 2009 is now a financial climate where commercial real estate occupancy in almost every sector is coming under pressure. Office vacancies in high-tech driven Orange County California were 7% quite recently; they are over 18% today and climbing. Chicago office vacancy has held pretty steady at 10% for some years, but Jones Lang LaSalle believes it could hit 19% in 2009. Retail sales (excluding autos) were down 3.1% in December 2008 and much of that hit the Department Stores and smaller chain stores that drive retail malls and retail mall REITs. In Texas, according to The New York Times, “ Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt. Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.” But student housing is holding up, and even thriving. In particular, when money is hard to come by, parents are pressing their children to attend state colleges and universities, faced with the impossibiolity of affording more expensive private schools. The difference in tuition can be dramatic, one parent of a prospective student says a year at Hofstra in New York could cost as much as $60,000. An aid package for that middle-income parent might bring that down to $40,000 or so, including fees, room and board. By contrast a parent of a New York State resident student at one of the State University of New York campuses would pay under $5,000 in tuition plus $9,260 for room and board and, according to SUNY, a total estimated annual expense of $18,360. SUNY’s website estimates that its community colleges offering associate degrees would cost only $14,990. Multiply that times 4 years (typically students are increasingly likely to take 5 years rather than 4) and the difference would make a huge hole in the average family’s 401 K. When they are available, the good privately financed dorms near those campuses are more expensive than the dorms (if you can get in the dorms at all) but the additional expense is probably only about $500 to $1,000 per year. Parents who want their children safe, warm, and cared for are increasingly springing for that extra $500 to $1,000, even in these tough times. As a result, one developer who manages several thousand beds of student housing reports that in the Spring (2009) semester demand for the several thousand beds of student housing they have developed near campuses of the State University of New York is up, where the buildings used to be 95% occupied, they are now at 99%. Facilities that were formerly 98% filled are now 100% full with waiting lists. What happens next? Well the hope is certainly that once educated for the 21st century American job market. the echo boomers and their older classmates will find jobs, occupy houses, fill office space and start saving those retailers. Meanwhile, for the year 2009, the student niche may be the last, best hope for real estate investors. Michael Dowd, Senior Vice President of the United Group of Companies, specializes in real estate debt and equity financing. He can be reached at DowdBoston@aol.com or 781-893-4119. Can a Portfolio of Rental Homes Create Necessary Cash Flow in Retirement? Buying residential real estate as an investment is a major decision, made all the more difficult in the midst of the worst real estate market in this country since 2006. All real estate markets, throughout the U.S. have experienced declines over the last two years, the first time since the purchase and sale data was collected in the 1940s. But there are good reasons to buy real estate and now, more than ever, reasons to make sure a thoughtful and accurate analysis before any purchases are made. The questions about real estate in an investment portfolio are pretty straight forward:
Take John and Joan Marsh. They want five paid for rental homes that will provide cash flow for their retirement income. They expect the five homes to be a tool for financial independence and then conversion. Investment real estate needs to perform at least as well or slightly better than other investments available to the Marshes. Each home that is considered for their portfolio must submit to serious analysis about how the home is likely to perform. Most of the information that the Marshes need is publicly available. Sales and purchases of homes are tracked, discussions with local property management companies can confirm if rental rates for homes with certain configurations in certain desirable neighborhoods are reasonable. Prospective buyers can all validate property taxes, insurance, and utilities if included in rental price, as well as garbage removal, and a prudent maintenance reserve. The cost of a legal entity for the properties, such as an LLC, or LP should be established for tax purposes. The cost of a property management service should also be added in, about 5%-9% depending on the part of the country where the real estate portfolio is located, with an average of 8% property management fees for a well-maintained home in a major market suburb. A good analysis will always include capital expenses beyond the management reserve. Such things as a new roof, driveway or hot water heater, plumbing, or major pool repairs must be included in the analysis. Then, the buyers must be able to raise their rents. More than half of owners of residential real estate investments are afraid to raise rents because they do not want to lose their current tenants. But rents must be raised about 3% a year to prevent erosion of cash flow. When the goal is to have five or 10 properties to feed their financial independence to allow the Marshes to live without running out of money, real estate is pure cash flow play. The properties’ appreciation will not benefit the Marshes. Appreciation is not the point; an analysis that shows dependable cash flow is key. Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at U.C. Berkeley, and teaches the highly-acclaimed Real Estate Investments course at U.C. Santa Cruz and U.C. Berkeley. Rich can be reached at rich@consultrich.com or toll free (888) 290-9900. Consumer Borrowing in 2009 Will Require Making a Plan Many consumers are asking if this is a good time to refinance a home mortgage. The mixed messages delivered by the media range from “there is no money to borrow” to “interest rates are the lowest they have been in many years, and refinancing is on the rise.” Both statements can be true, depending on your current financial condition. If you’re planning to buy a home or take out any debt in 2009, the process is going to be a lot tougher without an excellent credit score and a significant down payment. So that means you’re going to have to work harder—and possibly wait a little longer—to borrow that money. According to Fair Isaac Corp., the creator of the credit score system used by the major credit reporting agencies, the best FICO score range as of late 2008 was 760 to 850. This range is higher than the previous year. Making sure that your credit score is as healthy as possible is among the most important “go/no go” factors in qualifying for debt. According to statistics from the Federal Reserve Board ending the second quarter 2008, since 2003, outstanding consumer credit has increased an estimated 25 percent to $2.5 trillion. This increased debt, coupled with a worldwide credit crunch, has limited lending to only the best borrowers. And even so, they too have to overcome more hurdles than before. If you maintain high levels of debt, then a small amount of money down and or a history of late payments will require some advanced preparation on your part before a lender should be contacted. Here is a list of core activities you can complete as part of your advanced planning: What is the best thing for you to do? You may be focused on paying off more of your debt, or perhaps pulling out more equity from your property, and might be wondering about the best approach would. Sometimes, your instincts may be inadvertently leading you down the wrong path of financial progress. This is a good time to get some advice and help understanding your options and most suitable decision. This is a good time to consult with a comprehensive financial planner or tax professional. Improving your FICO score: in 2010, Fair Isaac Corp. will be adjusting the way it scores credit. One of the more important changes to consumers is the way it calculates the use of available credit. According to the company, for optimal scoring of this metric, no more than 50 percent of your available credit on any account should be used: The higher the consumption rate of your available credit, the lower the possible scoring in this area. In preparation for next year, paying down credit cards and other debt with the highest interest rate and that exceed 50 percent of use would be a recommended approach. Review your credit report often: You have the right to get all three of your credit reports—from Experian, TransUnion and Equifax—once a year for free. You can do so by ordering them at www.annualcreditreport.com. Since it would be good to get a rolling view of your credit reporting to help manage your activity and fend off errors and identity theft, consider staggering your request throughout the year for these three reports (perhaps one report every four months). And be careful with outside advertisements offering free credit reports. Those offers generally require the use of a credit card from you, and you may end of inadvertently paying for something you don’t need down the road. www.annualcreditreport.com is truly a free service. Pay early, pay more: If you find yourself sliding in a late payment every so often, you may be taking unnecessary risks with your credit worthiness. Consider systematically paying each bill a few days early, and consider adding a few more dollars than required to the payment. Most banks offer electronic bill paying, which allow systematically paying recurring debt like credit cards and mortgages. And by applying a few more dollars to your balance due, you may be spending less on non-essential items and improving your credit score. As some point, you can get rid of your credit card payments entirely, and start paying yourself more for savings and retirement. Cut your cards, and leave your accounts open: Contrary to instincts, closing accounts—even those that have had zero balances for years—will not help you with your credit score. Lenders want to see a long record of responsible credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint. Easy qualify is out; documents are in. Forget no-doc or low-doc loan. Those days are long gone. Expect to verify your income and prove your financial life. If you are self-employed or do not have a lot of verifiable income, you will find getting a loan more challenging. Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. (888) 290-9900. See above for further contact information. Gay Seniors Cannot Depend On Estranged Children for Elder Care Gay seniors, fifty years old or older, urgently need to consider long term care insurance for a variety of reasons that are specific to unmarried couples. Many gay seniors did marry and have children. While it is changing, there may still be estrangement between gay seniors and their biological children who will not respond to calls for care giving. With most couples, the obvious caregiver is a spouse. Gay couples, however, for whom marriage and civil unions are relatively new, find there is less cohesiveness, and often no legal structure to bind a healthy partner with an unhealthy one. Even though federal law allows a non-relative to pay for medical care costs of $13,000 annually without it becoming a taxable gift when the payments are made directly to the provider, it seldom happens. If the relationship was fragile, the healthy partner may walk in the event of a catastrophic illness of the partner, compassion and morality aside. Many elderly gay seniors are reluctant to ask their family or children to help them pay for their care, or they try to go without it. Consider the following possible scenario of Scott and John, who became a couple after they met in gay father’s group. Neither had a relationship with their children. When Scott needed rehab care to recover from surgery, John was unwilling to pay for his care, jeopardizing Scott’s full recovery, not to mention the tension and strain on both. Long term care insurance becomes a very useful tool, even an essential tool, for long term care planning for unmarried couples and non-traditional couples. Such insurance may make it possible for an individual or couple to hire in-home care or to pay for the right kind of assisted living or nursing home care. When you have insurance you can hire the level of care you feel is appropriate for you providing it is within the parameters of your policy. In speaking to Stuart Armstrong, CFP(R), CLTC, a Financial planner with Centinel Financial Group in Boston -- 800-408-8606 or 617-424-0005, sharmstrong@jhnetwork.com Taking Required Minimum Distributions is No Longer Required The Worker, Retiree, and Employer Recovery Act of 2008 became law at the end of 2008. Part of the new law includes a waiver of required minimum distributions (RMD) for 2009. This is great news for people 70.5 or older as well as for those with inherited IRAs. People do not have to take money out of their qualified plans for any distributions that would normally be required for 2009. People who have delayed taking a 2008 distribution into 2009 must still take that distribution. The longer that protected, tax deferred money can avoid the taxes that occur upon distribution, the longer the money can work for you. In times of diminished accounts, it is also a benefit not to have to draw down an account that has experienced market losses, making paper losses “real” losses unless it is absolutely necessary. This is a significant change and may require that you contact your advisor to discuss your distributions and whether you want to put them on hold given the 2009 waiver. Some people have scheduled periodic distributions from their qualified plans whether on a quarterly or monthly basis. These clients may unnecessarily receive a distribution in 2009 that they then want to return to their plan. It is a complex process. It is far better to talk with your advisor now to see if you actually need to continue the distributions from your tax deferred, qualified account, or if you want to continue the income stream from a non-qualified source. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. 952-835-9000 - pfshim@usinternet.com. Paperwork Clarity is Key to Tax Preparation Tax season comes with a certain dread of not finding the documents you need. Knowing what documents and records you don’t need to hold onto will dramatically simplify a family or individual's tax preparation. "Paper Clarity at a Glance: What to Keep and When to Let Go" answers the nagging questions– Do I need to keep this or can I toss (shred) it now? This reference tool shows you how to take care of over 100 personal financial, medical and legal documents and records – in just 20 pages. Easy to understand and use, it takes the struggle out of the paper work and offers peace of mind. “I didn’t understand why it was so hard to find answers, especially since we all need them. Paper Clarity replaces those dense books full of jargon that only waste time and money, and frustrate people’s efforts to do the right thing. “ "It's important to replace fear with fact," says Moore. There’s only a 10 percent chance of being audited." When the IRS finds a mistake, it contacts you for information, but does not automatically generate an audit," she says. To avoid an audit and to file the most complete tax return, save and file the following for easy retrieval at tax time:
Moore wrote “Paper Clarity” because in researching the topic for her business, she found that the answers were difficult to find in an easy-to-read format, rather located in multiple, difficult-to-wade-through resources. Laura J. Moore, M.Ed., ClutterClarity at Home, Replacing Clutter with Comfort and Control. Moore is author of new resource book, Paper Clarity at a Glance: What to Keep and When to Let Go. Essential, easy to use and understand reference tool that answers those nagging questions: Do I have to keep this or can I safely shred now? Chart of over 100 personal financial, medical and legal documents and records, tips, and tax clarity all in just 21 pages. No more struggle finding answers. To learn more visit: http://www.clutterclarity.com/books/paperclarity 617-349-1661 (cell) or 978-897-1222 PridePlanners June 2009 Conference is Only Financial Conference to Focus on Financial Issues of LGBT Clients, Non-traditional Families and Unmarried Couples. Financial advisors working with the gay, lesbian, bisexual, transgender (LGBT) and unmarried clients will have the opportunity to learn vital information and understand the changing law for serving the complex needs of this market segment at the Fifth Bi-Annual National Financial Planning Conference of PridePlanners Association (www.prideplanners.org), at Hyatt Regency Pier Sixty-Six, Ft. Lauderdale, Florida from June 11 to June 13, 2009. The event features keynote addresses by:
The PridePlanners Association (www.prideplanners.org), is the only national organization of financial, tax, insurance, investment and estate planning professionals, represents financial advisors and money managers who specialize in meeting the unique needs of the LGBT community, non-traditional families, and unmarried couples. Further information about the Conference can be obtained from: Nicole Rosandich, Comer Consulting, Plymouth, Minnesota, Nicole@jcomerconsulting.com 877-540-0711 Or register at www.prideplanners.org Overwhelmed, Overworked, or Overscheduled? Fight back with a positive “O” word – Outsourcing. Overwhelmed? Overworked? Over-scheduled? The negative “O” words paint an ugly picture, but running a successful independent advisory firm is demanding. Whether you’re just starting out and must be completely self-reliant for all aspects of firm management, or you are a well-established firm coping with major projects, there will be times when the work/life equilibrium is not tipped in your favor. With growth comes a set of routine tasks that gradually interfere with the strategic plan running through the back of your mind. Sadly, the scale of effectiveness often reaches a bottleneck jam before advisors seek solutions. An ideal solution to keep progress flowing and maintain your sanity is to outsource those tasks that eat away at your strategic plan or life vision. Not sure where to begin? Start by identifying your own core competencies crucial to goal-setting, and then create a list of the responsibilities that chew up your time. Could this second list of tasks be performed more efficiently by someone else? Is there someone with greater competency who can execute these responsibilities? Could your time be spent on alternate and better uses? Outsourcing is key to freeing up time to focus on your priorities, and it can be a huge money-saving device in comparison to costly traditional conventions of adding an employee(s). Today’s technology reduces the need for on-site staff, and outsourcing to professionals skilled in project work for financial advisors ensures you pay only for the services you require when you need them. Of course, you want a good fit, so consider the following when researching potential opportunities:
All this may feel like a giant leap of faith, but done properly will help you realize your full potential, both professionally and personally. Fight back the negative “O” words with one positive one – outsourcing! Katrina McCurley is a registered Paraplanner and the president of Paraplanner Connection, a virtual resource providing back office support to independent financial advisors and financial industry professionals. You can find her on the web at paraplannerconnection.com. |
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