Sunday, September 25, 2005

Investing in Real Estate

I've been trying to figure out how to start talking about Real Estate without losing any audience I might have. I will start out by talking about the reasons to believe that the returns are higher and more reliable than other investments. As I go, I'm going to have to note various topics that I'll address later. I expect you to be sceptical, because I was too, at first. But the promised gains were good enough that it was worth setting the scepticism aside long enough to look at the evidence. The evidence was good enough that Janet and I have been taking classes and reading books for the last year and a half, and have been buying real estate over the last six months. We now have tenants in Phoenix, and our property there has increased in value by about the amount that it cost us to purchase it.

Real Estate Returns

Real Estate investors expect returns of 12% per year, minimum, not counting serious calamities, and not accounting for (often expected) supernormal returns due to rapid appreciation. Unlike stock market investments, you can investigate the recent performance of an investment, and then expect to reach that metric reliably. Some of the reasons that real estate returns are reliable are (compare these to stocks market investments or running your own business)

  • you can get insurance to cover property losses;
  • you can look up rental rates and vacancy rates before you buy
  • tenant don't like to move; most of the time they just keep paying the rent
  • the bank initially owns 80%; they verify that the property is worth the price

One of the main reasons that real estate returns exceed other investments are that individual investors are in competition with businesses and institutional money (REITs, for example) for properties, which sets the returns, but individuals can get bank loans with 10 or 20 percent down, which multiplies your expected returns by five or ten. In addition, the government insists that you account for your property as if it's losing value every year, and gives you a tax deduction for the depreciation even though the value is usually increasing.

The bottom line is that it's not hard to find investment properties for which the rental income will be within a hundred dollars plus or minus of covering all your expenses, including the mortgage. So you gain equity even before you take appreciation into account. And appreciation is pretty reliable--there are few areas where annual appreciation changes much from year to year. The worst historical cases that I know of were times when housing prices dropped 10 or 20 percent. And it's much more common that appreciation rates change by only a little bit in any locality from year to year.

Much more commonly (though not at all common), homeowners get upset about a crash of their local market because appreciation drops from double digits to single digits, or goes slightly negative. But if you are an investor, you can liquidate, accept a minor loss on top of the gain you've earned over some number of years, and reinvest somewhere where appreciation continues. Or just wait it out while the renters continue to fund your equity and the market recovers. The renters who funded the run-up still need a place to live, so prices and investment income don't fall by much.

Here is a list of some topics that I ignored in order to get started.

  • Bubble Babble, and why it doesn't bother investors
  • Bay Area real estate (buy your own home if you can, but don't invest here)
  • "Risky" loans (manage your mortgage; if equity increases faster than debt, you're ahead)
  • Resources for learning more about Real Estate
  • Resources for investigating properties and markets

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Monday, September 19, 2005

Blame Finding Commission Won't Hear About This

I don't usually flaunt my scepticism, but there's a great story on Real Clear Politics (thanks to Catallarchy for the pointer) about all the things that went right in the aftermath of Katrina. My scepticism is about the congressional investigation into what went wrong. Do you think there's any chance they'll invite any testimony about the decentralized ad hoc community that went in and did what they could?

It does turn out that many of them were government rescue squads, military and national guard helicopters, the Louisiana Department of Wildlife and Fisheries, and so on, but that's because those are the groups that had the ability to come out in force, not because central direction or an any disaster recover plan called for it. Each of those groups acted on their own, without much coordination other than talking to other people who were helping out, and moved as quickly as they were able.

The official from-the-top reaction was slow in getting started and gave the wrong orders when they gave any, and stranded, abandoned, and hindered people more often than they helped for the first few days. Private actors helped when they could (often it was only people acting alone who could get around the official barricades). The larger organizations (the Red Cross and WalMart were notable) were prepared to help, and did what they could when officials didn't get in the way.

If that message gets aired in the congression blame finding commission, there would be some danger of a resolution to decentralize our disaster planning and management. I don't expect this message to be part of the testimony.

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Sunday, September 18, 2005

EscapePod: Science Fiction PodCast

One of the podCasts I've been listening to is Escape Pod, "the Science Fiction Podcast magazine." Stephen Ely reads (or has someone else read) a new science fiction short story a few times a week. They're usually around a half hour long, though he also throws in "flash" fiction which can be as short as 5 minutes. Ely has also rebroadcast a couple of interviews that he's appeared on, but that's rare, and not the point of the podcast.

I don't remember any clunkers, and there have been a few really good stories. Some of the stories take standard settings or well-known situations and give them a new twist. I particularly liked Seamstress, which took another look at the work that gets done behind the scenes in order to keep a Fairy Godmother stocked with gossamer dresses, glass slippers, and tantalizing appetizers.

Ely's taste is consistently good, and his readers do a good job of animating the text. I haven't had to replay segments in order to hear what was going on, and any stumbling over words has been edited out very professionally. He's aiming for upbeat stories, since he expects a lot of his audience to be listening during their commute, and he doesn't want to leave us on a down note to start the day. It seems like he has hit the mark with this focus.

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Sunday, September 11, 2005

Gen LaGreca: Noble Vision

Gen LaGreca's Noble Vision is a nominee for the Prometheus award. At this point, I think it has a decent chance of winning. It's a well-written, if mildly strident, medical thriller. The protagonist, David Lang is a neurosurgeon, who has developed a new technique for regrowing damaged nerve fibers, but he's up against the obstinate might of New York's new state-wide managed health care system. The conflict arises when Nicole Hudson, a dancer he admires, has an accident and will be permanently blind without his new treatment. The treatment doesn't have government approval, and there isn't time to apply for a waiver if Nicole's sight is to be saved. Additional conflicts between Lang and his wife, brother, and father (all doctors or medical administrators) are used to show how the government health care system co-opts and compromises the integrity of everyone it touches.

The book's Randian sense of life is evident early on as we see Nicole escaping from an uncaring child care system and emerging as a sensational ballerina on Broadway. She plays Pandora in ballet telling the story of Prometheus, titled "Triumph", but in this version "Prometheus and Pandora, armed with fire and hope, chase [humanity's] woes back into the box and save the human race". Lang is captivated by her performance, and sees the show again for an emotional boost whenever events in his life are getting out of control.

Lang is the classic Randian hero, refusing to bow to the state's demand for conformance with the system, and willingly courting ostracism in order to pursue his dream. There are only a few speaches on the unjustness of it all, and the reasons why socialized medicine inevitably leads to uncaring bureaucrats making trade-offs for its disempowered subjects are more often demonstrated than pontificated.

Several other subplots are woven skillfully through the story. Each adds to the drama, tension, or romantic vision. LaGreca shows that the boundaries between really venal but well-meaning politicians and well-meaning politicians who have compromised on some of their values in order to achieve others is really gray. In her world, none of these compromises achieves the higher goals. Compromises always accept a loss to one value without any longer term benefit.

I prefer classic escapist science fiction in exotic settings, but if there aren't any well-written and clearly libertarian entries this year, Noble Vision is likely to get my vote.

Thursday, September 08, 2005

Recovering from Katrina

A couple of thoughts about New Orleans in the wake of Katrina.

Thinking ahead to any eventual attempt to rebuild, it seems clear that people won't be allowed in until it's safe to walk the streets. Unfortunately, the rescuers are currently going house-to-house checking for survivors and the dead, and that means they're having to bust down doors and break windows in order to get in. That's going to make officials even more leery of allowing people back into the city, unless they can ensure that unattended property will be safe. With the survivors scattered across several states, it's going to be very hard to coordinate the return to any neighborhood.

Many people undoubtedly want very much to get just one trip back to their old house to recover keepsakes and valuables. Even houses that were flooded to the eaves will have a few valuable or sentimental items that could be salvaged, cleaned up, and treasured or sold. But officials can't let them back until the evacuation is complete, the water is drained, and the buildings are secured again. What are they going to do, schedule individual trips with each of the 400,000 ex-residents to visit their home and try to salvage a little? Even if anyone wanted to try to plan such a thing, there's no way to get in touch with all those who fled, and no obvious contact for the refugees who want to find out what the plan will be.

I don't have a solution, just ruminating on another aspect of this huge tragedy.

One more thing: I've been getting into real estate investment over the last year or so. It seems obvious that many property owners in New Orleans would have decided not to move back, and many of htem are desperately short of cash. And there are always speculators in the world who can afford to take a flyer on property that is currently undervalued, and might become more valuable later. But it seems likely that anyone who offers to buy property in New Orleans for its current worth will be lambasted for taking advantage of the disaster. But the owners are desperate to sell, and the property's value is truly unknown and unknowable at this point. Perhaps the thing that will dampen speculation, and slow down the transactions until things are clearer (to the detriment of those desparate to get access to any value remaining in their property) is that the real estate industry, and the property transfer offices at the county level won't be prepared to handle the transactions until things dry out.

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Monday, September 05, 2005

Hacker's Diet;The only diet book I ever read

Many years ago, I read an on-line copy of John Walker's The Hacker's Diet. It takes an engineering approach to dieting. You need to understand the problem in order to affect a solution. He starts out by pointing out that the hard part about dieting isn't deciding what to do, it's sticking to the plan. And sticking to the plan is a problem of motivation and feedback.

One of the first steps is to realize that the reason it's hard is that in order to lose weight, you have to eat fewer calories than your body is using each day. Your body has a natural mechanism designed to correct this deficiency: hunger. In order to succeed, you need a motivation stronger than hunger, and a feedback mechanism stronger than the one that evolution provided you with. The book helps provide the motivation, but you have to maintain it on your own once you've finished reading the book.

The main contribution of the book is that it proposes some techniques for tracking your weight that can act as the feedback you need in order to be know each day how much you can eat and how it will effect your goals. Without it, the most constant reminder you'll get is your body's built-in reminder system that you haven't eaten recently. The most important of the techniques is weighing yourself every day, and keeping track of your weight. If your tools let you know your weight and how it has changed over the last few days, and you pay attention to what they say, you can take that into account when deciding when or how much to eat. If you don't know, then hunger will be the likely driver, and your body has a different motivation than you do.

When Walker wrote the book, he supplied a set of Excel spreadsheets to use. I used them for several years, tracking my weight (nearly) daily on paper, and occasionally transfering the numbers to Excel. But then Walker released a program for the Palm called EatWatch around the same time as I started carrying a Palm Pilot all the time. Now I record my weight in EatWatch every morning, and immediately know how the trend is moving, and whether it's time to cut back for a few days.

Most of the time, my weight stays in a fairly narrow band, and I can eat by habit. I have cold cereal for breakfast, and Janet plans most of the dinners. I pay a little more attention at lunch, ordering more or less depending on whether my weight has been trending up or not recently. But after a vacation or a holiday like Thanksgiving or Christmas (no bathroom scale, and bountious meals on someone else's schedule), I know to be a little more careful until I reach the target band again. If you don't weigh yourself every day, you don't know to correct until your clothes fit too tightly.

With this tool, I can tell whether I can have desert with no consequences, or how long it will take me to get back to where I want to be. Sometimes I splurge, knowing that I have the tools to gradually work it all off.

Hacker's Diet also contains some advice and suggestions about exercise and the part that can play in losing or maintaining weight. That hasn't affected me as much, since I'm active by choice. But people who need a reminder to be active might find EatWatch's tools for monitoring your exercise to be useful as well.

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