Buying Real Estate Investment Property in your IRA

Is It Appropriate for You?

Christopher Rhim, CFP®, CDFA™

Asked to comment on this subject by a real estate professional and friend, I jumped at the chance to dig deep into the nuts and bolts of this alternative investment.  The research revealed two perspectives with real estate professionals (brokers, agents, banks, trust companies) on the one hand and financial advisers (certified financial planners, registered investment advisers) on the other. 

[Full Disclosure:  I am a fee-only, certified financial planner with over 20 years experience in financial planning.  I have no skin in this type of transaction:  I sell nothing, only provide advice.  I've never been a stock broker; never sold insurance; am not an attorney; do not accept any type of commission or referral fee for anything and have a fully independent, unaffiliated financial planning practice.  In this discussion, I consider myself a better-educated-than-most financial consumer.]

A synopsis of the Pros and Cons is presented first with more detailed information on the mechanics of IRA real estate investing following.

SYNOPSIS OF RESEARCH

PRO

·        This is a unique alternative to traditional investing.  Some key elements with investment real estate include rental income and distributions, capital appreciation and the ability to enjoy the benefits of tax-deferred growth. 

·        If you have an entrepreneurial spirit and are savvy about the market and investment properties, this type of investing may appeal to you. 

·        Diversify your retirement portfolio in a wide variety of assets such as condos, raw land, commercial property and more.

·        Consider this investment within a Roth IRA instead of a traditional IRA. Distributions aren’t taxed after 5 years.

·        Partner with other IRA owners to invest in multiple or larger properties.

CON

·        Managing your own self-directed IRA is more challenging than putting money in the stock market. Custodians do not vet investments and take no responsibility for downside risk.  IRA owners or their financial advisers must perform all the due diligence.

·        A primary advantage of investment real estate is the deductibility of all expenses plus capital gains tax treatment (currently 15%) when you sell.  In an IRA, none of the expenses are deductible and profits are taken at higher ordinary income rates. No depreciation deductions. 

·        You are subject to tax penalties if you need to make capital contributions to the IRA or disqualify the account. 

·        Unanticipated repairs such as roof replacement, tax assessments, systems failure, and fire damage may deplete available cash diluting your return on investment.

·        Banks charge higher rates for loans than traditional residential mortgages.  Loans must be nonrecourse (banks cannot go after other assets and the IRA owner cannot extend credit to the IRA).

·        Once required minimum distributions commence (age 70.5) you may not be able to/or want to sell the property.  It may be possible to transfer part of the IRA to yourself to meet this requirement.

·        Taxes are due on the profits of leveraged real estate (UBIT).

CONCLUSIONS

§                    This is a unique investment for a relatively sophisticated investor who has already taken full advantage of and maximized use of more traditional investment opportunities   

§                    The onus of due diligence is on the investor alone.

§                    There are significant costs of entry and exit with real estate. 

§                    Liquidity is an issue.

§                    Knowledge of the real estate market and detailed specifics of the acquisition property are prerequisites.

§                    The advice of an experienced real estate broker, attorney and CPA would be recommended prior to acquisition.

WAYS TO BUY REAL ESTATE IN YOUR IRA

USE CASH

By far the simplest way is to pay cash.  After you've identified a great investment property or piece of raw land, simply plunk down (let's say $500,000) from the IRA and it's yours!

A few caveats in this scenario:  

a)     Neither you nor any disqualified person can use it (even if you subsequently rent it).

b)    The purchase can not be from a related party.

c)     The IRA cannot be used to enable either you or a disqualified person in any prohibited transaction.

Remember, this is a retirement asset with the long-view in mind (unless you are an experienced investor with a real estate background with the intention of ‘flipping’ the property).  So, you need to think of the property's income and/or appreciation potential.  Also, this cannot be some creative way to get your in-laws beachfront property. This has to be an arms-length transaction between unrelated parties with no undue influence.  

Disqualified Persons

The law specifically prohibits transactions between disqualified persons i.e.: a spouse; parents; grandparents; children (and their spouses); any fiduciary of the IRA; any entity (like an LLC) of which at least 50% is owned by the fore mentioned; officers, directors, greater than 10% owners or highly compensated employees of the entity.

[NOTE: Disqualified person under the Internal Revenue Code does not include siblings or aunts, uncles and cousins of the IRA owner.]

PERSPECTIVE

• While cash is the cleanest way to complete this transaction, there is a higher risk level with such a large cash outlay.  Investment managers rarely allocate greater than 4-5% of their principal to any single asset.  If you already own a home, you may be greatly increasing your aggregate real estate exposure.

• Real estate tends to be a cyclical investment.  One should contemplate a “what if” scenario of an extended down period where valuations and rents/income suffers.  You need to allow for enough cash to pay for the covering costs of the property under any future circumstances.

• It should also be stated that before any purchase is contemplated, the purchase should be in a reasonable proportion to your overall retirement portfolio.  As a separate asset class, a typical total allocation to investment real estate in a well-diversified portfolio is 5-10%; higher for persons with a real estate background or experienced investors.  Under this scenario, a real estate purchase of $100,000 would be appropriate for someone with a minimum portfolio size of at least $1 million or more in other assets.

OBTAIN A MORTGAGE TO BUY REAL ESTATE

A mortgage allows you to leverage the down payment, thereby freeing up the remaining cash for other investments.  For example, using a 10%/$50,000 down payment on a home allows you to obtain a property with a value of $500,000.  That's using leverage.  

When buying investment property in your IRA, the property is collateral for the loan.  There are some restrictions which include:

a)     Minimum down payment typically 30% or more.

b)     Not all banks will finance the debt without a personal guarantee.

c)      The loan cannot be guaranteed by the IRA owner or any disqualified person.

d)     An investment that generates income with debt financing (e.g., purchasing real estate with a non-recourse loan in an IRA) is responsible for Unrelated Business Income Tax (UBIT) in direct proportion to the gain/income that's debt financed.

ü      Taxes paid must come from the IRA.

ü      These taxes are paid at Trust tax rates which are generally higher than personal tax rates.

Self Dealing


Your IRA may not buy an investment from or sell an investment to a disqualified person. This is known as self dealing.  Your IRA may not:

·        Buy property that you currently own.


·        Buy property of your parents or in-laws (lineal descent).


·        Issue a mortgage on a relative’s new residence purchased by a family member who is a disqualified person as listed above.


·        Grant a child a second mortgage for the down payment on his or her first home.


·        Buy stock from the IRA owner.

·        Purchase restricted stock from a family member.

Question: What would happen if you couldn't make the mortgage payments (i.e. you depleted your IRA)?

Ø        You can't contribute more to make the mortgage payments without tax penalties.

Ø        Possible foreclosure

OTHER WAYS TO INVEST REAL ESTATE

Form an LLC

Your IRA can co-invest with other parties by first forming an LLC that will buy a property.  The IRA can participate in the LLC formation so long as the owner and related persons own less than 50% of the LLC in aggregate. 

This set up may create some problems of self-dealing and may be deemed a prohibited transaction particularly if you have a role in any entity in which your IRA is an investor.  Consult an experienced real estate attorney to understand what you can and cannot do.

Multiple Investors – No Financing

All parties plus the IRA purchase the property.  This way, you avoid financing problems and avoid UBIT issues.  Agreement between all parties is the key to success.  Exit strategy between multiple partners is critical.

Invest in Someone Else’s Business

Avoid the hassles of investing with others.  By investing in someone else’s business and staying out of management decisions, you could receive distributions just like an annuity only without the fees.

Buy Distressed Properties

If you have knowledge of the local real estate market and how to fix up properties, you could buy select properties, renovate and resell.  You would have to work with an experienced broker who knows what to look for and have a realistic understanding of investment costs, renovation costs and a feel for how long before you could sell the property and capture a profit. 

Disclaimer: Christopher Rhim of Green View Advisors is a financial planner and does not provide tax or legal advice.  Neither he nor Green View Advisors endorses or recommends any of the aforementioned strategies, any company, or specific investments.  Any information communicated is for educational purposes only and should not be construed as tax, legal, or investment advice.  Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.

Fidelity/Schwab Cash Reserves Concerns

I know we are all busier than normal this time of year but I am a bit concerned when I read about money market funds with exposure problems to troubled assets.
This message is directed to all money market investors and particularly those in the Fidelity Cash Reserves and/or Schwab Cash Reserves:

CURRENT SITUATION
Fidelity Cash Reserves, the largest retail money fund and Schwab Cash Reserves are holding several billion dollars in securities issued by Spanish and Italian banks.  While the banks remain highly rated, their stock prices have fallen 20-30% in November.  This is due to the ongoing uncertainty of the health of European banks.  In 2008, the collapse of Lehman Brothers caused the Reserve Primary Fund, one of the world's largest money markets, to break the buck, causing a run on the fund and a global slowdown.

POSSIBLE OUTCOMES
As a result of 2008, regulators have placed higher quality and liquidity restrictions on money market funds.  The problem is that these new rules haven't been tested under real market conditions and may be somewhat suspect in a market panic.  A review of some of the problems which may cause a market squeeze include:

• If money market investors get nervous and sell out, they could force money markets to sell assets, putting downward pressure on prices.
• If investors leave the money market sector, this could cause redemption problems for all investors in many funds.
  
• If European banks fail to attract new investors, they could face liquidity shortages

COURSE OF ACTION
Money market funds are designed to provide a very high degree of safety of principal and liquidity.  Any deviation from this mandate should cause an immediate review of your holdings.  As recent history has shown, one troubled fund can have a major impact on global liquidity and stability.  My recommendations include:

1. If Fidelity is your 401k provider, you should examine the holdings of your money market fund even if different than Fidelity Cash Reserves to determine your exposure to European banks.  Most money market funds will have some European exposure.
   
2. Review the money market fund holdings in your brokerage statements.  Determine how much in European debt, CDs, variable notes, etc. is held in the fund. 
3. If you are unsure, do not understand what a money fund is, or cannot identify your money market fund, ask for help! 
   
4. If you are concerned about Safety in your retirement funds and investments, now is a good time for a thorough review.  The risk profile of your safe assets may have changed.

Any questions or concerns, please feel free to ask.
Chris

How Bank Pay Practices Hurt Your Investments

A long time Wall St. criticism is that banks focus so much on quarterly results, they sacrifice good business practices for large year-end bonuses.  A report just released by the Council of Institutional Investors has concluded that despite Congressional and investor clamoring for changes after the latest market crash, pay practices at six US banks may have indeed worsened.

The report concluded that compensation is still tied to the short-term results.  Even worse, to get around regulatory curbs on pay, the banks simply gave absurdly large salaries ranging from $3.3 to $9.9 million.  In fact, after the banking crisis of 2008-09, some banks immediately rewarded executives with massive salary increases.... at the same time accepting bailout money from taxpayers.

Conclusion: After causing a freeze of the financial system, crashing the stock market, disregarding foreclosure rules to throw people out of their homes all while grabbing millions of taxpayer dollars to stuff into their pockets, you'd think it would be easier to refinance your home wouldn't you?  The large banks are still part of the problem, are not contributing to the recovery as anticipated and are anti-customer in every sense of the word. 

The silver-lining may be their future diminished role in our economy.  Pay for long-term performance and bonuses is more of a non-US bank standard.  Perhaps this is an opportunity for foreign banks to make inroads in the US market. 

Why Your 401k Provider is Robbing You

I was raised to believe that if you take something from someone and don't provide full disclosure, that's dishonest.

For years, 401k providers and the fund industry have been hiding fees from investors.  The industry created an official government fee-like sounding name, 12b-1 fee, to mask and obfuscate.

What are 12b-1 fees??


Administrative and legal fees, advertising, loan expenses, marketing and sales charges, miscellaneous and other... these are some of the expensive add-ons fund companies and service providers have been taking right out of your company retirement plan.

Finally, the Labor Department is requiring them to disclose, in great detail, the actual dollar value of these inflated charges.  The industry is fighting back demanding "an exception for the 401k industry".

The mutual fund industry has a notorious history of excessive management fees.  Introduced only in the 1980's,  12b-1 fees have grown to over $9.5 billion this past year.

SEC Chairman Mary Schapiro questions whether or not these fees have resulted in investors paying too much for services they may not even be aware of.

For its part, the 401k  industry is now asking for these additional expenses to max out at 0.75% (there are fee-only investment advisors who charge less than this) and that retirement plan providers should be exempt from fee disclosures.

CONCLUSION:  Retirement plan service providers do not want you to know that the excessive fees you pay.  They want you to continue paying their advertising costs to attract new retirement dollars to their accounts.

SOLUTION:  Review your 401k summary plan document to see if  partial rollover of your 401k plan to an individual IRA that you can control where there are no fees.  Fee-only advisors can provide guidance based upon what is best for the client.  With transparency today just a few mouse-clicks away, it is inexcusable to allow an industry to short-change workers' retirement funds without giving them a choice.     

Fear Mongers Scream: Sell Bonds NOW (And Why You Shouldn't)

Investors know Marc Faber (publisher of Gloom, Boom & Doom Report) as the guy who called the Black Monday crash of 1987 (he told investors the week before to sell their stocks) and correctly stated we were entering a 'bear' stock market in August 2007 (the S&P 500 peaked 2 months later before crashing over 50%).

Today, he is stating interest rates should begin to rise within 3 months, the US dollar is set to gain strength.  The government is forecasted to embark on a second round of purchasing government debt (QE2).  All of this is inflationary and potentially bad for current bond holders.

Even Warren Buffett has stated that investors who buy bonds now "are making a mistake".

So, why not sell every bond you can get your hands on?

Several reasons to maintain your bond holdings:

• First, like any good investment, your bond holdings were hopefully part of an overall asset allocation strategy; one that included bonds for income and principal preservation. 
• Upon purchase, you know exactly the yield-to-maturity of your bond which includes all interest payments and return of principal.  If you intention is to hold your bond until maturity, intermediate price fluctuations are irrelevant.
• Bond mutual funds provide excellent diversification depending upon the stated investment objective of the fund manager.  This is the area where investors need to exercise caution in a rising interest rate environment due to the nature of bond funds with an active strategy.  Due to turnover in the funds, an investor could realize losses with increasing interest rates.  
• US Government-backed bonds may be important to you.  These are the safest bonds and, if held to maturity, enjoy ultimate safety and liquidity.
• High quality general obligation (backed by the tax-authority of the issuing municipality) bonds are often exempt from federal taxes and, in some cases, state and local taxes.  More importantly, the secondary  market is dominated by retail investors (36%), mutual funds (34%) with retail trades accounting for 80% of trading volume. Foreign investors typically do not hold municipals.  The municipal market therefore tends to be less volatile than the stock market where hedge funds and larger institutions, on the worst days, drive volume and volatility.
• If you are employing a bond ladder strategy, it could prove disastrous to interrupt the maturity schedule by selling early and possibly losing principal in a rising rate environment.

CONCLUSION:  Rising interest rates provide a clarion call to review all investments particularly bond holdings.   Each asset whether it is a stock, mutual fund, bond, CD, etc. should be part of an overall strategy whether implemented by a fee-only, financial advisor or an individual.

Excellent Opportunity to Finally Understand Your Company 401k Plan

New Department of Labor regulations require more retirement plan information for investors. Starting in 2011, companies are required to give greater details about:

* Investment plan performance
* Fees and expenses
* A glossary to explain terms in plain language

With a goal of simplifying retirement planning, rules will also allow investors to make "apples-to-apples" comparisons among their investment options.

Investors Leave the Stock Market... And Watch the Stock Market Surge!

2010 3rd Quarter Memo                                   Green View Advisors

Blog: chris-rhim.blogspot.com                                            Email: crhim@greenviewadvisors.com

Still feeling the effects of the European debt and banking crisis, US investors continued a four month trend of pulling billions out of stocks and buying bonds, exactly the opposite advice of many fee-only, investment advisers.  For the quarter, the S&P 500, Dow Jones Industrial Average and NASDAQ stock indices all increased 10-11%, foreign stocks were up 16%, investment-grade bonds were up 5% and US Treasuries up almost 3%.  Why this occurred is due in part to a disconnect in the outlook between businesses and consumers.

 

Large corporations lead our economy in many ways.  Companies that do business nationwide may be dominant in their industry, have thousands of employees and contribute to the local economy.  Our leading corporations also sell goods overseas which buoy sales during domestic downturns.   As the recession deepened, companies slashed payroll, reduced overhead costs, closed less-profitable units and shifted work to cheaper regions while streamlining processes.  This has an immediate impact on their bottom line as cash has piled up.  Businesses profits are up 4% from the first quarter and over 26% from a year earlier.  While they have rebuilt inventory, they have been hesitant to resume hiring.  Businesses need clarity before committing resources to new initiatives.  Opportunities present themselves when a combination of factors come together making the risk worthwhile.  Muddling the picture even more, the government will have to decide to either extend the soon-to-be-expiring tax laws or create new potentially punitive ones.  In this environment, it is understandable why large corporate balance sheets look relatively healthy.  Economist Ed Yardeni says it typically takes about two years after a recession for business spending to pick up once the economy has stabilized.  It also explains why there is a lack of drive to change, innovate, acquire and take on risk in the face of such uncertainty.  As a result, balances sheets look healthy, companies have been buying back their stock, refinancing their debt, and their stocks have been surging.

 

The consumer has not realized as much improvement.  Unemployment is stuck around 9.6% with not enough companies hiring.  Consumers feel poorer due to plummeting home values which reduces the equity in their homes.  All types of consumer borrowing including credit card, home equity, and auto loans have dropped significantly.  Wages have either dropped or remained flat.  While government transfer payments such as unemployment insurance, Social Security, Medicare and Medicaid have increased, the growth of these payments, as a percentage of Federal spending, remains troubling.  These fixed payments along with new health care regulations, defense spending and the like present a growing burden for current and future tax payers.  While inflation is currently muted, there is a real threat of much higher rates which would not only mean more expensive mortgages and consumer loans but could further threaten those on fixed pensions. Given this backdrop, it is understandable why consumers remain a bit shell-shocked and have been buyers of bonds.  Unfortunately, extremely low yields on bonds and the risks of higher rates have made many bond investments a higher risk than the stock market.

 

Business should pick up once new tax laws are passed and companies sort out how the new health care rules apply to them.  Banks and lenders must also work much harder to resolve personal and commercial bankruptcies and foreclosures that continue to add uncertainty in the real estate market.  Once these losses are realized, proper property valuations can be made and lending will pick up to those waiting to buy, sell, refinance or take out equity.  The recent freeze on residential foreclosures hurts both homeowners and banks, delays the repricing of foreclosed homes and neighborhoods and adds greater uncertainty to the market as we approach 2011. Until some of these things happen, the disconnect between consumers and the stock market will continue. 

As always, please contact me at (301) 655-4970 should you have any questions or concerns.

Chris

Fee-Only  ◊  NAPFA-Registered  ◊  Financial & Divorce Planning  ◊  Investments  ◊  

Refinancings: The Achilles Heel of Economic Recovery

The commercial real-estate market, like homeowners, have faced declining values, delinquencies, foreclosures and bankruptcies.  This past quarter saw the national office vacancy rate (the percentage of space existing but not occupied) hit a new high of 17.5%, the worst since 1993.  Rental income from tenants provides the economic basis for building valuation.

With so much space now available, even if businesses begin hiring, it might take years to absorb the excess office space now on the market.  This becomes a major problem when you want to refinance building debt.  And therein lies the problem:  approximately $1.4 trillion in of debt is coming due within the next 4 years.  If the property value has fallen below the amount of debt, you can't refinance; a lesson millions of homeowners already know.

So, how does the economy crawl its way back with commercial property not being a dead weight?

* We've begun to see some of the first signs of rent stabilization.  The decline in rents slowed this quarter perhaps foreshadowing the bottom of rent decline.

* Second, the uptick in the national office vacancy rate was also smaller than anticipated.

* Coastal cities are beginning to see signs of competitive bidding on the most desired buildings while cities hard hit from overbuilding Phoenix, San Diego, Las Vegas continue to see rents slide.

* For new entrepreneurs and businesses, this may be the once-in-a-lifetime opportunity to secure a desirable office building with upgraded amenities, in a prime location at a discounted rate.  Pick a building you would like to work in, walk in the front door and ask for the management company is the best way to begin.

The key to recovery will be when forward looking business people see the possibilities before them and are in a position to take advantage of them.  This is how the Warren Buffett's of the world invest: buy when there's blood in the street. 

Getting Serious About Reducing Pension Obligations

Public pensions are now on the table for reductions across the nation as states grapple with budget deficits and unfunded pension obligations.  For years, public pensions have been an accepted part of public sector employee benefit packages.  The argument went something like this: by accepting a lower salary during working years, workers would receive a pension for life during retirement.  The pension would be funded with employer/employee contributions and investment returns.  It worked fine so long as the economy was strong and tax revenue kept rolling in.    Employees could also retire relatively young, take their pension, retirement accounts, perhaps even a retirement bonus, and then work in the private sector.

Like the issues we face with Social Security, the numbers work in your favor until either the number of workers change or the investment values drop.  Over the years, both the Federal and most state governments have been adding employees and with them additional healthcare, life insurance and retirement benefits.  Investment values across the board have plummeted reducing the pool of money to pay future and current retirees.  In California, about 80 cents of every government dollar goes to employee pay and benefits.  That is an absurdly high amount for compensation for any government employee.  At that rate, it would probably be less expensive to just forget about the government and cut people a check.  Contrary to popular belief, a recent article in the Washington Post disputes the myth that public employees are underpaid.  Public sector workers earn an average of $39.75 an hour in wages and benefits while private-sector employees average only $27.64, a huge 45% difference.  The difference reflects that fact that there are more professional  jobs in government.  Public employees generally enjoy better retirement benefits than non-public sector workers.

Employment costs are typically the largest expense an employer has when retaining top talent.  Governments have taken the same approach but have put future taxpayers on the hook for a growing public sector work force that has become an albatross around the neck of taxpayers.  All workers should take care of their own retirement.  That means saving, investing and learning a little on how to do so.  This should be about personal responsibility and not be a public expense.

True Colors

Often times, our perception of things, places and people is unwittingly clouded by our biases and preconceived notions.  What we think we see and know becomes an intimate part of who we are and how we come to see the world.  The challenge is to remain open to new information and reevaluate our positions for a better understanding of how we interpret our world.

I started out on a very overcast day driving down I-91 in Vermont to a introductory meeting with an partner of a New Hampshire trust company.  The forecast was for increasing rain as the first drops from Tropical Storm Nicole splattered my windshield.  Lucky for me, it was foliage season.  The hills were covered with brilliant red, orange and gold bursts of color.  The drive became somewhat hypnotic as mile after mile brought endless vistas of quaint little towns nestled in a bouquet of fall colors.  I smiled at my good fortune to be taking in the breathtaking views in such a wonderful setting.   I sipped my coffee and  flipped on the radio to catch the  morning's news. 

The commentary turned to a story on the local Vermont economy and how families have been coping the past few years.  I had always heard that Vermont was a relatively poor state.  I knew that local tax rates were quite high (and increasing), there were less job opportunities than the big urban areas and just about everyone I knew was belt tightening and being conservative with their money and investments.  What the announcer said next was what stopped me short. "In 2009, 19% of Vermont children lived in poverty".  According to the US Department of Health and Human Services, the poverty level for a family of 4 is in a range of $22,000-$27,000 per year depending upon which state you live in.  In Vermont, they define it has roughly less than $900 per month for a single person. A report by the Kaiser Family Foundation found a record number of Americans signed up for Medicaid last year bringing the total to 48 million people or almost 16% of the US population.   I'm a financial planner and, to be honest, I don't know how you feed, clothe and provide shelter for 4 individuals in America on so little let alone go to the doctor or pay for kids' schooling, music, camps, sports, etc. The countryside was indeed incredible, an idealist's paradise.  Yet, it also contained a lot of people struggling just to get by everyday.

The rain was picking up now and the incoming fog muted fall's colors into a mottled, mosaic of its former brilliance.  The radio switched gears to a discussion of the upcoming general elections in Brazil.  The two-term President of the eighth largest economy by GDP, the popular Luiz Inacio Lula da Silva was stepping aside as the law required.  Highlights of his presidency include paying off early the nation's IMF debt; overseeing an expansion of needed infrastructure and social programs; stabilizing the economy; enacting a pragmatic foreign policy; and an upgrade in the nation's credit rating from speculative to investment grade. Since his term began, the announcer stated the impact of Brazil's success has resulted in an amazing 30-35 million people added to the middle class.  This is an astounding number!  Imagine over 30 million additional US buyers of cars, homes, washing machines with additional Starbucks to serve them all coffee!  The investment opportunities that have been created in manufacturing, the service industry, banking, trade and construction create exciting possibilities for foreign investors.  No longer a nation known only for its slums, the beaches of Rio, Brazilian futbol and rain forests, this nation has transformed itself to become the dominant economy of the southern hemisphere and an increasingly important player on the world stage.

We take false comfort in what we see with our eyes and what we believe to be true in our minds.  Yet, that is no substitute for reality.  In an instant, a few simple facts can change your entire view of a nation or a small, New England state.  I've reoriented my thinking so that when I stop at a local farmer's market, I may be helping put money on the table of a family that so desperately needs it.  I can also see a country like Brazil with new eyes and realize its great investment opportunities and can understand some of its dynamism.

Rain and spray kicked off the highway in front of me.  You could still see the trees but there was less clarity and more uncertainty in the driving and the view.  Having an accurate world view is important for investing opportunities or identifying problem areas in  your own backyard.  We need to see things they way they really and not fall back on comfortable assumptions of what we think we know.

Buy Gold?

An ounce of gold crossed the $1,300 threshold yesterday and has appreciated over 350% since 2000.  Is now the time to buy?  Many money managers and large institutions have been aggressively buying exchange-traded funds (mutual fund-like trading vehicles) and physical gold (coins and bullion).  Companies are buying storage capacity, coin dealers are charging premiums, volatility measures suggest people are not just speculating but hanging onto their gold and more professionals are switching to ongoing bullish forecasts.


Q: Should you buy gold?
A: Perhaps, but only for the right reasons.


First, most homeowner's insurance policies severely limit the amount of money, silverware, goldware and coin collections to a few hundred dollars.  Additional amounts you can cover under a separate Personal Articles Policy but bullion is generally not covered.  You would be best served placing these types of assets in a bank safe deposit box.  There are ongoing expenses for this service plus you won't have 24/7 access.  Transporting gold is burdensome and not immediately marketable unless through a dealer.  You would also have to be familiar with the current market rates for your bullion and coins.


Second, you can access gold and other commodities via ETFs, mutual funds, and the commodities futures markets.  There are costs and taxes for buying and selling but you generally have greater liquidity.  The big caveat here is: know what you are buying.  When retail investors mix with big institutions, hedge funds and other professional money  managers, you are at a decided disadvantage.  Commodities are volatile and big players can move markets... or have them move against them in a hurry.  They place large trades, have better information and teams of analysts and traders to take advantage of inefficiencies in the markets.  You also have to know there are significant differences whether you are buying a futures contract, gold bullion, stock in a mining company, how much leverage is involved and the history of the manager.


Third, perhaps the most important question: why has gold run up in price?  The two main reasons are ongoing worries about another U.S. or global recession and devalued currencies.  People have been buyers of gold throughout this recession. Gold is traditionally thought of  has a safe haven and even more so with the falling value of the dollar.    The pros said we hit the top around $1,100.  Today, many are capitulating and changing their tunes.  Currently, there is great momentum with gold.  However, the signs of mania in the gold market are clearly there. Troubling is that jewelry and industrial demand has weakened, the US government may have to intervene again and buy more debt (inflationary/weaken the dollar), and our low domestic interest rates will continue to weaken our currency.  The conditions that created this environment may be fleeting and fickle.  A new economic report could change sentiment very quickly.  So, let the investor beware.


Long-term investors in gold and commodities would do well with a small tactical allocation.  Identifying the right type of investment, the costs and risks would, however, best help investors temper their expectations.

Lawyer Rules

[WRITER'S NOTE: The following is a partial account of an actual letter written, I suspect, from my neighbor's lawyer over said neighbor's tree threatening my house. It states the facts, is tongue-in-cheek, and ends with some reflections and questions on how things could have played out differently.  My hope is simply that this may help others who deal with problems with neighbors before involving lawyers.]

What a disappointment to get a letter from a lawyer written supposedly by my neighbor over a dangerous tree.  While a phone call and timely addressing of the issue would have gone a long way to solving the problem, this was unfortunately not the case.  Ultimately, a letter from a lawyer should be a last resort and has only served to shut down meaningful dialogue and alienated both neighbors going forward.

Background: There remains today, a large mostly dead Ash tree overhanging our house. Last February, a violent windstorm caused a cascade of branches and debris to rain down onto our roof and property.  The tree sits on her side of a stone wall and while a survey has never been done, neither of us dispute the wall as the boundary of our properties.  So many branches were hitting the roof, my daughter refused to sleep in her upstairs bedroom.  It was indeed, the only time I've ever been afraid in my own home.

Come Spring, I lobbied for the tree to be cut down.  I received estimates between $1,600-$1,800 of which I offered to pay half.  My neighbor complained about money and said she'd get back to me (I sensed this would be difficult).  Summer came and went with no reply.  This September, a relatively small branch
fell and punctured the metal casing of my grill and the grill cover tarp. Result: $84 damage. I called and left a message saying we had minor damage and I wanted resolution before Winter.  My wife called and spoke directly to the neighbor reiterating our concerns.  I now had a second cost estimate which would involve me in assisting a tree pruner to save money.  Finally, I called again and left another message: I would work with a pruner to remove only threatening branches for a total cost of $500.

A few days later, I received a certified letter (never a good sign) on a neatly typed legal envelope.  Inside was a perfectly typed 3 paragraph letter.


The purpose of the first paragraph was a complete unwillingness to take any responsibility for damage to the grill cover.   

Rule 1: Never take responsibility for any damages. Letter states "By no means was it (payment) an admission of responsibility for the tree, or for any damages that result...".  A good lawyer states this first, right up front.

Rule 2: Deny legal basis for any action.
"As far as I know, there is no evidence that this tree is on my land...".  It seems silly to make the argument to not recognize a border which, up until this point, has been recognized.  Of course, the current circumstances do make it awfully inconvenient to recognize it!

Rule 3: Accuse contra party of claiming a desire to assign liability and blame towards neighbor.
"...since you have shown a tendency to want me to be liable for minor property damage that I do not consider my responsibility...".  Well, would it have been better to wait until a tree branch went through my roof?  Or if a branch hit a person?  Were you actually wanting major damage before acting?

Rule 4: Establish firm rules prohibiting all access, for any reason, to property.
"I must plainly state that I do not give my permission for you, the members of your family or any of your agents to use my land... at any time... for any purpose.".  That would be fine, except, according to you, we don't really know where your land begins and mine ends!

Rule 5: Express sympathy with the situation and state unqeuivocably that compensation is a gift.
"I am truly sorry that the situation has reached this conclusion...I am sending a check for $250...Please keep in mind, however, that it is a gift to you from me personally."  Well, I've never been given a gift from any other neighbor for no good reason so I guess I'm really glad to know you!  I actually understand the lawyer needing to state this but it is so phony it is almost laughable.

Aside from me paying 100%, how could I have avoided this?  Was it inevitable?  How could I have handled things differently?  I mean, I couldn't just ignore it and let something serious happen.  We felt threatened everytime there was a storm.    Due to circumstances, we are both relatively new neighbors to each other (neither of us has lived in our respective homes much the past 2 years). 

I am a bit sad because I never wanted to allow petty things like this come between neighbors.  We both examined this situation from our own self-interest.  As a result, we were both blinded to the plight of our neighbor.