Oh, it’s Just a Rental!!

Headline: Oh, It’s Just a Rental: Renter’s Insurance Can Be Important

Date: 12/21/2020

Body: This one hits close to home, literally.   I found a great article on The Penny Hoarder about the importance of Renter’s Insurance.  (Link is below.)

What Is Renters Insurance? An Ultimate Guide to Finding a Policy (thepennyhoarder.com)

Why is Renter’s Insurance So Important?

Most likely, the Landlord already has insurance to cover the value of the home.   After a disaster, they will be made whole.   But a Renter’s policy will pay for your losses.  Without doubt, after a disaster you will have to replace all of your clothes, shoes and the household items that were damaged in the disaster.  A renter’s insurance policy normally covers your personal property (up to a certain amount), liability coverage, and will cover your temporary accommodations while repairs are being made.  Even given this broad coverage, the policies tend to be relatively inexpensive.

Nationally, this is a problem.  In one study, 95% of homeowners had policies, but only 40% of renters had a renter’s policy.  For you, personally though, if there is one room for rent, and you are competing with another prospective tenant, your renter’s insurance policy does give the landlord more protection, and you can bring this to the attention of your landlord.  He or she will thank you for it.

Renter’s Insurance actually covers a few things that I wouldn’t have thought of.

1. Medical expenses for injured guests (up to a limit of $1,000-$5,000 depending on your policy.)
2. Damage your kid causes to others.  (Mine’s an angel, NEVER does ANYTHING  wrong or illogical.  Yours might be different.)
3. Dog Bitesà If you have a dog who is over-protective of your space, and there is a bite, you will usually be covered.  Do check your policy for details.
4. Occasionally, you do rent “stuff” or long-term “borrow” it from roommates.   If it is in your possession, it is covered.

So, what doesn’t it cover?

If you have a very expensive (portable) item, like a really nice tennis bracelet, bedecked with diamonds, you might want to have a separate policy on that item alone.

How expensive is “relatively?”

Per the National Association of Insurance Commissioners, these policies range from $15-$30 per month.  Nothing to sneeze at, to be sure, but 2-3 trips to the local coffee shop avoided can instead buy you peace of mind.  Not a bad deal.

The exact amount largely depends upon a few factors:

1.  Locationà  Your location will be at either a high or low risk of crime and environmental-related damages.   Both risks will be weighed as a factor in your premium calculation.
2. Amount of Coverageà Every person has a different amount of “stuff” to cover.   My current neighbor is a clothes horse and would likely need a lot of coverage.   When I lived closer to DC, my roommate moved in with 2 large suitcases and an older laptop.
3. Deductibleà If you choose a higher deductible level, your premium will likely be reduced.   (Think of a balloon, squeeze one end down, and the other end inflates greatly.)
4. Your Credit Scoreà Your prospective insurance company will use your credit score as a measure of risk as well, and the higher your score, the lower they will assume their risk will be (and your premiums will be less as a result.)
5. Previous Claims Historyà If you had a lot of claims in the past, the company presumes that you will expose them to a lot of risk in the future, and your premiums go up. 
6. Replacement Costà Insurance policies will offer benefits to replace your household goods either at the “replacement cost” or the “actual cash value” level.    For instance, you might’ve paid $225 for the Members Only jacket back in the day, but, it’s not worth that anymore.   So, if you go with the “replacement cost” the company will pay you the $225 (or close to it), but if you go with the “actual cash value”, you might get $60-$80 for it.  Unsurprisingly, the second option offers much lower premiums.  (Not to cast aspersions on Members Only, I still have one. It’s my favorite, still.)

 Are there ways to save on Policies?

In a word, yes.

1. You could bundle your policiesàIf you purchase both Auto and Renter’s policies from the same vendor, they are likely to give you a deal.
2. Sometimes there are special discounts for certain professions.  Please don’t hesitate to ask, but, be honest about what you do.  Not everybody is a police officer who is a National Guard Chaplain on the weekends.
3. Ask about a Claims-Free Discountà If you go a certain period of time without filing a claim on your renter’s policy, the company might reward you with a lower premium.  It never hurts to ask.

What if there IS a theft loss or damage?

Report it immediately.   Always, if there is any loss or damage, report it immediately to your landlord.   If it is a theft loss, please file a police report as soon as you can.   Then, once filed with the police, within 72 hours of discovery, call your insurance company.  This gives you the best chance of getting your valuables back.  Do everything in your power to document the extent of your financial loss.

REFERENCES

7 Little-Known Benefits of Renters Insurance – NerdWallet

The Benefits of Renters Insurance | Apartments.com

6 Reasons Every Tenant Should Have Renter’s Insurance (thebalancesmb.com)

Renters’ Insurance Claims for Damaged or Stolen Property | Nolo

Editor’s Note: The information in this blog should not be construed as tax advice.   Each individual has attributes that could change the recommendations in a material manner.  For this reason, please enjoy this blog, but before taking action, consult a CPA or tax professional to discuss the details of your situation.

Direct Payments

Headline: How do Direct Payments help in Fiscal Stimulus?

Date: 6/7/21

Body  Whew!!  What a year and a half THAT was!!!  What?   We still have some room to go before returning to an economy similar to 2019?   Well, yes.  

So what did the government do?   They ramped up unemployment payments, they gave out loans to businesses to meet payroll AND they sent out direct payments (several) to individual taxpayers.   So, the question that I have is, do these direct payments to individuals really provide the fiscal stimulus they were aiming for?

What is Stimulus?

Fiscal Stimulus is defined as “action by the government to encourage private sector economic activity by engaging in targeted, expansionary monetary or fiscal policy.”  (This  definition is furnished by Investopedia.)   According to the Center on Budget and Policy Priorities (CBPP), “The federal government provides fiscal stimulus when it increases spending, cuts taxes, or both, to shore up households’ and businesses’ demand for goods and services during a recession.”

Let’s unpack that a bit.     When the economy falls into a recession, the government wants to do various things to help encourage private enterprise to invest in the economy.   Often, this is done by changes in monetary or fiscal policy.   When focused on monetary policy, the Federal Reserve will do things like buying back bonds, thereby inserting more liquidity into the market,   They might also lower the discount rate, or the rate at which financial institutions can borrow.

Fiscal policy focuses mainly upon changes in Tax Law, meant to encourage investment.   They might do something like offer forgivable loans (a la the PPP) to ensure that the businesses continue to invest in their employed workforce.   Or, they might give the individual taxpayers direct payments to encourage them to spend within the economy.    There is always a debate about the most effective manner to offer fiscal stimulus, and much of it today seems to focus upon the effectiveness of direct payments.  (I know that my landlord certainly appreciated my ability to pay rent, I suspect your landlord or mortgage company might’ve been similar.)  But, there are some scholars who suggest that direct payments are not the best method.

What is the Support for Direct Payments to Individuals?

There is much evidence to suggest that direct payments to individuals is effective in providing stimulus to the economy.  The logic of this argument is simple: When a household receives a direct payment, they already have bills to pay, and the funds received are immediately used, and funneled into the larger economy.    We have not had enough time to analyze much of the effectiveness of these most recent direct payments, but, looking at what happened in 2001 and 2008-2009 can yield some constructive ideas about the effectiveness of direct payments. 

In a study of the effectiveness of direct payments in 2001, researchers found that the payments were initially used to pay down credit cards and other debt.  But, within 9 months, credit card spending increased significantly (about 40%), indicating that people were using the payments to provide more energy to the economy.

A recent research paper from Northwestern University’s Kellogg School of Management, however, suggests that on average, households spent half the amount of each 2008 stimulus check within the same quarter that it was received.  In fact, scholars who are of this mindset often point to inflation being the indicator light that the economy has received enough stimulus.     As of yet, inflation seems to be essentially absent.  In another study of the 2008-9 direct payments, economists estimate that 50-90% of the payments were spent within 3 months.   This argues persuasively for the effectiveness of the direct payments

There is some research already on the effectiveness of the present direct payments, and these are largely supportive of the effectiveness of direct payments.   In another study by Northwestern University, among households without substantial savings, almost half of their direct payments were spent within 10 days.  When considering the entire population receiving direct payments, 29% of the payments were used within the first 10 days.

Scholars continue to make the point that direct payments will not make up for a lost job, but it could encourage people to spend into the economy instead of saving.

What is the case against Direct Payments to Individuals?

The people most against direct payments often point to the payments adding to an already incredible debt load.  In view of these arguments, many more financially-conservative officials have argued that the debt load that we already have should encourage policy-makers to not engage in distributing direct payments.    They do have a point that our debt has to be dealt with.   But, given the very low interest rates in the present economy, the new debt could be easily dealt with when we are on a firmer fiscal footing.

  These critics contend that if there are direct payments, to be effective, they should be targeted precisely.  They point to the data that if a family had $3,000 of savings, they were unlikely to use much of the CARES payments, but, if they had less than $500 in savings, they spent 50% of it within 10 days.  They also posit that people worried about being taxed on those direct payments would be reticent to use them, leading to less effectiveness in providing needed stimulus.

Very often, these individuals argue that it would be more effective to bail out specific industries, like restaurants and airlines.  They claim that these bailouts would target the most vulnerable of out citizens as these are the industries that tend to most often employ them.   This is intuitively a good argument, but in recessions of the past, we have bailed out the airlines, and after the infusion (and a few years) they return to the policies that got them into trouble in the first place.

The Verdict

It would appear that the direct payments are effective in providing economic stimulus.   While critics claim that the direct payments make the price of legislation too high, there are some other considerations.   Looking at the longer span of history (think of the recovery from the Great Depression and the Great Recession) it would seem that the greater danger lay in not doing enough to stimulate the economy.  In both cases, the recovery took much longer than was necessary and this was very harmful to the citizens of this nation.   Further, with interest rates so low, the additional debt is not nearly as serious a danger as at almost any other time in history.   For these reasons, I think it is safe to say that the direct  payments were an effective portion of the stimulus plan.

 REFERENCES

https://www.forbes.com/advisor/personal-finance/stimulus-packages-throw-money-at-financial-crises-but-do-they-actually-help-the-economy/

https://review.chicagobooth.edu/public-policy/2020/article/how-effective-were-stimulus-checks-us

https://www.hamiltonproject.org/assets/files/Sahm_web_20190506.pdf

Economic relief and stimulus: Good progress but more work to do

https://www.npr.org/2020/12/10/944903654/many-would-like-direct-payments-included-in-next-relief-package Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or

Bank on it, Pal!! Well, maybe.

Headline: Credit Unions v. Banks

Date: 12/14/2020

Body: I saw this article on the site Penny Hoarder, and it is linked below.

Credit Union Vs. Bank: How to Decide Which Makes Sense For You (thepennyhoarder.com)

Given the time of year, it seemed to be a good opportunity to review the differences between these 2 financial intermediaries.    To be sure, both offer savings accounts, checking accounts, money market accounts and several types of loans. Both are insured by the US government through different insurance programs.   But, there are key differences.

What are the differences?

Banks are businesses and are there to earn a profit from the financial transactions they mediate.  Credit unions are organized as not-for-profit organizations and the dividends (usually relatively small) go directly to the members who own the organization

Each type of financial institution has its benefits and drawbacks. Here’s how credit unions and banks stack up across eight essential categories:

1. Credit Unions often offer a better interest rates.
2. Credit Unions usually offer lower fees on the accounts they have.  Many offer free checking which is rare among banks.
3. Credit Unions are more likely to work with members who have borderline credit, to offer them a product they can sustain.
4. Banks often have better rewards programs on the credit cards or other accounts they offer.
5. Banks usually have more physical locations and a better selection of ATM locations (but some credit unions have a relationship with a network of ATMs that allow for a good selection.
6. Customer Service is usually better at a credit union, but, small banks do offer similar service.
7. Credit unions often offer many more opportunities for financial literacy.  Very often, they have seminars, webinars and other educational opportunities to teach their members about financial topics.
8. Banks usually have a better IT infrastructure, and they have a more secure experience online.
9. Banks are very easy to join, and credit unions might require that you have a certain job or employer.

Maybe I can open accounts at BOTH a bank and a credit union?

You could do this.   I thought seriously about doing this and decided against it because of the following:

1.  The Bank I was considering had a very good online banking portal, and friends in the security business attested to how secure it is.
2. The Bank I was considering had an agreement where I could use ANY ATM, and this bank would pay me up to $15 per month to compensate me for these foreign ATM fees.
3. The Bank I was considering offered investment services, mortgage loans and many other services that I might want, all under one roof.  Thus, my financial life could be made “simple.”  (Later, I realized that there were many other better mortgage servicers and the bank stopped doing investments.  Currently, I am thinking about moving.)

I am not sure I qualify for that Credit Union

It is true.   There are requirements to become a member of a credit union.  Typically, you need to either be in a certain profession or belong to some type of community.  (For instance, there is a NASA Credit Union, and I assumed that you had to be a NASA employee to join.  But, per their website, if you are not a NASA employee, if you join a group called The National Space Society first, you can then become a member of the NASA FCU.)  I used to work for a public accounting firm, and they had a relationship with Montgomery County Teachers FCU, where employees of my firm could join the credit union.  So, these membership requirements are usually not too onerous, and there is often a “work-around.”

The Verdict

So, which institution should I trust with my hard-earned money?    It depends.   But, a few “brightline” rules seem to be apparent.   If you want more personal service, education, and occasional hand-holding, a credit union might be right for you.    If however, you just want a bank account with a good IT infrastructure, it might be best to go with a larger Bank.  If you are concerned about the compromises you might be forced to make don’t worry.   There are larger credit unions that have VERY competently managed IT systems, and a good mobile app.    There are also some (not a lot) local community banks where you can obtain some old-fashioned service from people you know, with the strength of a Bank behind you.

REFERENCES

The Pros and Cons of a Credit Union Versus a Bank | Banking Advice | US News

What’s The Difference Between A Bank And A Credit Union? – Forbes Advisor

What’s the Difference Between a Credit Union and a Bank? | Credit Karma

Bank vs Credit Union: What’s the Difference? (thebalance.com)

Editor’s Note: The information in this blog should not be construed as tax advice.   Each individual has attributes that could change the recommendations in a material manner.  For this reason, please enjoy this blog, but before taking action, consult a CPA or tax professional to discuss the details of your situation.

Give me SOME credit!!

Headline: Give Me SOME credit

Date: 12/12/2020

Body: I was reading a great article on obtaining a better credit score.   The article is linked below:

5 Credit Factors That Affect Your Score (and 5 That Don’t) (thepennyhoarder.com)

Thru my entire life from age 8 to my mid 30s, my parents kept prattling on about how important it is to have a good credit score.   To my ear, it sounded kind of like the Public School principal saying “It will be on your Permanent Record” , whatever that might mean.   But, due to a constellation of personality attributes and personal conditions, I always paid my credit card in the current month, and took it on faith that this responsibility (their word) would be rewarded, someday.   It was. 

One fine spring day just after starting a new job in a new town, I decided to buy a house, and found one for sale.   This house was immaculate and the rehabilitation process was VERY complete, and it was located a scant mile from my place of business.  My parents said that I could make a more compelling case if I was pre-approved for a mortgage, and could certify that for the seller.  I had a credit score of 812, and never really used it, to that point.   We pulled into the parking lot of a High School, and after a 20-minute phone call with my bank, I had a mortgage commitment.   THAT’S why you need to maintain good credit, as far as you can.

How is this credit score calculated?

The 3 major credit bureaus, Experian, Equifax and TransUnion each calculate an independent credit score for you, but assuming that there are no errors on your report, the scores are usually within a small range of one another.  They range from 300-850, and the higher your score is, it is an indication to the financial institution (or potential landlord)  that you might be a better credit risk. A higher score will qualify you for better terms in most credit situations.   (As a Maryland resident, I am entitled to check your credit scores every year for free, and if available to you, this is recommended.)

To calculate the credit scores, each bureau begins with your FICO score.   This is from the “Fair Isaac” company (hence FICO, clever, huh?) and they are secretive about the exact algorithm they use. But, they have divulged the 5 main attributes that they look at.   Since each of them are key, I will also address the ways to improve that attribute.

Attribute	% of Importance in Calculation of the FICO score	Reason that this attribute is important.	Methods to Improve each attribute.
Payment History	35%	The best predictor of future payment is past performance of payments.	Pay off your credit card in full each month.  If you cannot, contact your creditor immediately; They might be able to help you.  Communication is key.
Credit Utilization	30%	This is an indication of how much more financial capacity you have to make good on future debts.	This is the % of the credit available to you that is being used.  To improve this number, ask your creditor for a higher limit.   Or, you can open another credit card, and just do not use it.
Length of Credit History	15%	The longer credit history allows for potential creditors to understand your spending patterns.	If you plan to make a significant purchase in the short-term, be sure not to close any credit accounts.   DO make as many as possible as low as possible, but keep them open and do not open any new accounts.
Credit mix	10%	Opening multiple credit cards could presage a future financial issue.	It’s better to have several kinds of credit (e.g. credit cards, store cards, loans) but this is a small factor.
New credit and “hard” inquiries	10%	This proves that you have experience managing a variety of credit instruments.	Opening a new credit account will result in a “hard” inquiry and affect your score for 6-12 months, but this is a small factor.

Please note that checking you own credit report is considered a “soft” inquiry and will not affect your credit score.

How do I check my credit score?

If you do check your credit score on an annual basis, you have time to improve it before making any major purchases.   Also, if you get a score annually and there is a significant change, you can look at your credit report and dispute any inaccurate information.    There are any number of sites online to check your credit score, but please beware that you don’t sign up for any subscriptions.     If you have a checking account, your Bank should be able to help you get a credit score.

The Verdict

Your credit score is extremely important to your financial success.   The higher your score, the lower interest rates will be charged to you.    But, the good news is that even a modest 20-point improvement in your credit score can save you thousands of dollars over the life of the loan.

REFERENCES

How Are Credit Scores Calculated? | Equifax®

How Your Credit Score Is Calculated | Kiplinger

5 Factors That Determine Your Credit Score (thebalance.com)

Your Credit Score: Learn What It Is and How It’s Calculated | Money

Editor’s Note: The information in this blog should not be construed as tax advice.   Each individual has attributes that could change the recommendations in a material manner.  For this reason, please enjoy this blog, but before taking action, consult a CPA or tax professional to discuss the details of your situation.

Debt Before Yielding

Headline:  Debt before Yielding: the potential problems of Medical Debt

Date:11/16/2020

Body:  I just read and article that, frankly, made me feel a bit ill.  The article was about Medical Debt, and the excellent article can be found here, in its’ entirety:

https://money.com/worst-dogs-for-home-insurance/

Sometimes, we need to get medical treatment, and that treatment can be quite expensive.  Just recently, with good insurance, I went to the dentist’s office and left with a bill for $3,000 for (mainly) the 2 crowns that he installed, and referred to as “emergent.”  I still have several more appointments to go, I am hoping to be able to stretch into the new calendar year.  (Thanks again for the teeth, Dad.)  

All joking aside, this brings up a good point.  Some people do not have the dental insurance afforded me by my job in the Federal Government.   When they have an “emergent” issue that requires exotic dental work, what do they do?  Some finagle loans from friends and family members, but, for some, this is not feasible.  Some have no choice but to go into Medical Debt, and get a loan to cover the procedure.  This is troubling.

What is Medical Debt?

Per Money Magazine, a medical loan is essentially just an unsecured loan you can take out in order to pay for health care expenses.  The article indicates that this title is really only for Marketing purposes.  The loan is exactly like any other unsecured debt that you might take out.  The unsecured part is important here, because, that means that the bank or funding institution is taking on a much larger risk.  And that risk is most often compensated for by charging higher rates of interest.  (By comparison, when you get a car loan, the loan is secured by your car.   If you fail to pay the note, your car is repossessed.)  I think we can all breathe a little easier knowing that repossession does NOT apply to a Medical Loan.

Is this Really a big deal?

In a word, yes, it DOES matter and IS a big deal.   I say this because of 2 things:

1.  The HUGE amount of Medical Loan Debt that there is in the U.S.
2.   The fact that the interest rates can be nearly usurious. 

The Huge amount of Medical Loan Debt in the U.S.

The company CreditKarma did a study of 22 million Americans about their medical loan debt, and found a total of $45 Billion dollars of loan debt related to medical procedures.  I would like to bring a few things to your attention:

1.  The sample was rather large, so, I think it is likely credible.
2.   This is likely an under-count as it does not include the medical debt that is funded with a credit card.
3. This is likely an under-count as some people are likely ashamed of how much medical loan debt that they have.   So, likely, more than a few reported a lower level than reality would attest to.

In sum, yes, I think there is a problem when the probably under-counted average is $2,200 per consumer.

The almost usury-level rates of interest.

The National Consumer Law Center has a wonderful infographic of the changes currently under consideration in State Houses across the U.S.

https://www.nclc.org/images/pdf/debt_collection/fact-sheets/fact-sheet-med-debt-state-reform.pdf

But, right now, the interest rates being charged range from 6% to 30% per year, per the article in Money magazine.   This (or should be) outrageous!!    This is especially unfair because, by definition, the consumer is under duress when he or she makes the decision to take out the loan and incur the debt.   At that point, the only alternative might be a painful death. 

What are the alternatives?

Fortunately, there are a few alternatives (even before your State House gets its’ Act together.)

1.  You could pay with a credit cardà But, this incurs revolving debt, which could significantly hurt your credit score and darken your financial future.
2. You could negotiate with the hospitalà Especially if you anticipate only needing a few months to get the money together, it is not unheard of for the hospital to give you this time to pay.  But, this is a chancy thing, and that doesn’t make ME feel well.
3. You might be able to pay by tapping your home equityà You could setup a home-equity Line-of-Credit (HELOC) to finance your medical procedure.  In the past, this had tax advantages, but now, it seems that medical debt does not have the same tax advantages as using the HELOC to improve your home, under new Tax Law.  A Home Equity Loan might be your best option because it is secured debt (secured by your home) and has a much lower rate of interest.

REFERENCES

137 million Americans are struggling with medical debt. (cnbc.com)

7 Ways To Get Out Of Medical Debt : NPR

Medical debt – Wikipedia

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

You’re Killin’ Me, Malls

Body:  For decades now, the banner achievement for a municipality has often been welcoming a mall to the town center.   It would seem, from this article, that the times are indeed a-changin’.

https://www.marketwatch.com/story/simon-property-gives-up-on-four-struggling-malls-why-more-could-follow-11605362409?siteid=yhoof2

This is an interesting article, though, rather bleak for a Generation X baby like myself.    The “thing to do” when you were looking to go out on Friday or Saturday, and you were not of age, the mall was usually your destination.   But, I promise, the nostalgia of that ends here.

To construct a mall, adding all of the infrastructure needed, all of the internal systems, parking lots and the like, is very expensive.   Thus, the people who had the vision of “the mall” knew that they were going to need financial contributions from many investors to raise the financial resources needed.   Enter the real estate investment trust, often known as the REIT.  Simon Property Group is one of the largest REITs within the U.S., and focuses upon retail real-estate, and in the Mid-Atlantic, they own numerous malls.    Though there are other types of REITs, (some focus upon warehouse space, some, on mixed-use developments or other types of real estate development), malls have long been the one REIT people are most familiar with.

What is a REIT?

Per Investopedia, a real estate investment trust (REIT) is a business entity that owns or operates revenue-producing real estate. REITs operate akin to a mutual fund, and aggregate the investments of many individuals.  In this manner, the individuals can financially benefit from investment in realty without the administrative headaches that can accompany that ownership.  REITs can trace their heritage back to the  Cigar Excise Tax Extension of 1960, where Congress wanted to give retail investors the opportunity to invest in these vehicles.

Why is it attractive to start one?

It is attractive to start a REIT mainly due to tax concerns.   A REIT is governed by the IRS under the Internal Revenue Code Sections 856 and 857.   In plain English, in most other circumstances, the REIT would be considered a corporation and be subject to double taxation.   But, because REIT organization applies (as long as all circumstances are met) there is no entity-level taxation, and the dividends are only taxed at the individual level.  But, there are restrictions, chiefly:

1.  The REIT needs to obtain 75% of its’ revenue from retail real estate activities.
2. The REIT must pass on at least 90% of its’ revenue through to its’ shareholders, in the form of dividends.

Why should I care?

The REIT concept can be rather difficult at the outset to understand, but, because it is required to pay so much in dividends (and because it is forced to have obtained its’ revenue from its’ principal business purpose) it can form one part of a very secure portfolio that can last a person through a long retirement.  Given how unpredictable the stock market is, and how low interest rates are (and are likely to stay there for a while, per Jerome Powell) this could be a very attractive area to invest in.

As a matter of interest, there is a National Association of Real Estate Investment Trusts (NAREIT) and this association maintains an excellent website that provides a lot of good information, including many examples of REITs, with basic information about each, and links to the individual websites.  Many investment magazines often have articles that suggest REITs to think about investing in.  As a result, research is usually quite simple.

The future of REITs?

Agreed, the future of the shopping mall type of REIT seems to be near “smoking ruin” status.   But, the REIT structure is so advantageous to all parties, and it is so flexible in its’ function, it seems unlikely to go anywhere in the near future.  Some of the most interesting REITs in my estimation are the ones focusing upon the construction of medical doctors’ offices or  other medical-related purposes.  My reasoning is simple: with the combination of the pandemic (in the short term) and the aging of the Baby Boomers (in the longer term) this seems probable to be a vital and growing portion of the economy.

REFERENCES:

Real Estate Investment Trust (REIT) Definition (investopedia.com)

The Basics of Investing in REITs | Millionacres (fool.com)

Real Estate Investment Trusts (REITs) | Investor.gov

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Get Rich in the Market in only 3 Easy Steps!!

Headline: How to get me Rich by Investing in the Stock Market!!!

Date: 11/14/2020

Body:  Promise of future riches!!!  Breathless excitement!!!  A truly outstanding investor wants to share with ME how to get rich on trading stocks.   But, first, I have to subscribe to his newsletter for at least $49 per year.  We have all received offers like this one either virtually or in the old-fashioned snail mail.

https://orders.stansberryresearch.com/?cid=MKT473164&eid=MKT474616&step=start&assetId=AST143058&page=3

I have done some research on the guru in this article, and he seems to have a pedigree behind him, and I do not doubt that he is far smarter than I might be.  But the fact is simple: By reading his newsletter (any newsletter, really) he is not talking to YOU alone.   Instead of a one-to-one video-conference, his forum is the equivalent of a Zoom call with thousands of participants.  Being that he is human (and ostensibly, you are too) there cannot be one-to-one communication in such a forum.  For this reason and many others, he cannot be dispensing truly inspired stock trading ideas tailored to you and you alone.   It’s just not possible, regardless of how brilliant he is.

For your interest, there are indeed educational programs that aim to help you write advertisements and Sales Letters just like this, and I have personally taken the course in hawking a financial newsletter.   In a way that I don’t think they totally meant; it WAS quite an education.    They teach you techniques to inflame your prospect’s greed, tug at heartstrings and even make some educated guesses about the demographic description of your ideal customer.

For instance, the guru might make many correct guesses about you: your age, education, even getting pretty close to your income, and all of these things are important when recommending investments.  But, without knowing things like your risk preference or your time horizon, his recommendations might be totally inappropriate for your situation.    Even beyond making thousands of dollars from the stock market (and being able to brag about it at cocktail parties when they start up again) one must be able to sleep at night.

It seems to me like Mom and Dad were right on this one, too.    “If it seems too good to be true, it probably is.”

For my money, there is only one way to make money on the stock market, and it’s very “simple”:

1.  Pick good companies that provide goods or services that are impossible to outsource.
2. Write down why you bought the stock and at what price you’ll sell it, being happy that you’ve succeeded.
3. Make the purchase, and stay in the position for the long-term.

Of course, my tongue is firmly in my cheek, because each of these “simple” statements can be unpacked into a pile worthy of a backpacking expedition to Antarctica.  But, the boil out is pretty simple: The process is (should be) a slow one.  It takes a good while to do research sufficient to find a company worthy of your hard-earned money.   It is very difficult to stomach the flips and turns of a turbulent market, and stick to your plan.  And pressing that TRADE button can be terribly difficult.

Don’t get me wrong, newsletters can be powerful helpers in your education on the stock market.  Often, they are filled with important information, often discussed in an entertaining manner.  (I personally receive several and enjoy perusing them sometimes.)  But, at the end of all things, you have to be comfortable with the investments that you make, and able to explain to at least yourself, why you made them.  Until you can do that with a crayon, (Per Peter Lynch) you might be better off putting your money elsewhere.  Perhaps you can give it to me?

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

FAANGs for the memories…

Headline: The Market is up, and I just feel down?

Date: 11/13/2020

Body: Every day, it seems, I hear 2 things:

1.  A friend has lost their job.
2. Stock markets rallied and hit a new all-time high.

At first sniff, these two statements don’t appear to be in the same article.    Often, when I speak with somebody about this seeming dichotomy, they shrug and offer age-old advice along the lines of “The stock market is NOT the economy, stupid.”  Perhaps I should work on getting more supportive friends.

My relationship issues aside, I cannot let the subject slide, as it seems so antithetical to common sense.   If my neighbors and friends are so often being laid off (furloughed seems to me like a polite fiction) how does the stock market get pushed to new heights?   The latest jobs numbers indicate that non-farm payrolls have dropped about 15%, and yet, the stock market has rallied more than 30% from March 2020 lows?  My antennae were a-twitching.

So, I reached out to the Internet and read some articles written by some people who are far smarter than I am, and I am left with one impression; In this very strange time, the relationship between the stock market and the larger economy is even more mixed up than usual.  

Size Matters

Sorry, I don’t want to make anybody uncomfortable, but in this economy (and the stock market fits in here too) it appears that bigger can be better.     For many years, we have been told that small businesses are “the engine of the economy.”   And, for the moment, that was true.   But, they were hit by a double-whammy: As their services were in declining demand, many of their employees became personally affected by COVID-19.  Because they are smaller, they can bear only small bumps in their business cycle.    This has been a protracted hiccup, and often, the patient cannot respond.    The boil-out is that they go out of business.   As they are a small business, they have no shares on offer at any stock market, so, their demise goes largely un-noticed by the investing public.   At the other end of the spectrum, we have the mythically-sized tech firms (Often called the FAANG stocks: Facebook, Apple, Amazon, Netflix, Google, arguably Microsoft).   These firms are VERY LARGE and have cash hoards that can get them over the protracted hiccup.   But, being tech companies, they are rewarded in the pandemic economy because they allow us to connect with friends and communicate in ways that would now be deemed unsafe.  So, they started out very large, and are getting rewarded for supporting our needs to be connected with one another.   So, their stock prices have gone up a lot.  This seems obvious in a capitalist society like the U.S.

What was not so obvious to me was how powerfully these few stocks affect the stock market.    I had an object lesson in this when I looked at my brokerage statements.   I had purchased 2 different index mutual funds (one based upon the S&P 500, one based upon the NASDAQ.)   The logic was that both indexes would offer me good diversification because of their different constituents.   But, I looked more closely at the holdings of each index fund.   It turns out that there was slightly more than 20% of overlap in the 2 indexes, and this overlap was because of the before-mentioned FAANG stocks.  In effect, if the stock market is a trailer with a load, each normal stock is like a Toyota Camry or a Ford F-150, each one pulls as hard as it can, but even together, forward momentum is hard-won.   The FAANG stocks are like bus-capable tow trucks, and their effect is far more impressive than any mid-sized sedan  or light truck.

What I am saying here is that it appears that the stock market is being massively bolstered by the pillars of the FAANG stocks.  Factor them out, and perhaps the stock market might show a story, more in concert with what you hear at the coffee shop.   And, please, please, take time to patronize your local coffee shop.

REFERENCES:

What is FAANG? The 5 big tech stocks and their importance – Business Insider

Investing in FAANG Stocks (thebalance.com)

Is This What’s Behind the Unstoppable FAANG Stock Rally? | The Motley Fool

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

The Master (Monster?) Limited Partnership.

Headline: Mastering the Limited Partnership

Date: November 11, 2020

There was a recent Yahoo Finance article, entitled, “COVID Pandemic has Upended MLP’s” https://www.yahoo.com/now/covid-pandemic-upended-mlps-190000693.html

This article made me think that I might benefit from learning more about this very interesting investment possibility.

What is a Master Limited Partnership?

A Master Limited Partnership (MLP) is a partnership (listed and traded similar to equities) that obtains 90% of its’ revenue from extraction, refinement or transportation of natural resources.  MLPs are often organized to build pipelines and similar large structures to support the fossil fuel industries. As of late, their popularity has mushroomed: Per Barron’s, in 2000, there were just 18 MLPs with market cap of only $14B.   A few years later, Barron’s ran the same survey, and located 113 of them with a market cap of $460B. 

In this form of business, there are limited partners and one general partner.   The limited partners make contributions when they purchase units of the partnership, and can expect to obtain regular cash flows.   The general partner is also entitled to receive incentive distribution rights, which motivate them to run the partnership profitably.   Since the MLP is required to make quarterly distributions, this investment can make sense for those who require current income.

Are there different varieties of MLP?

Yes, there are different varieties of MLP.   There are “upstream MLPs” that focus upon the exploration, development and recovery of fossil fuels and other resources.   There are “midstream MLPs” and these focus upon the gathering and transportation of the resources.   This portion represents the majority of the MLPs in the marketplace today.  They can sometimes be defamed with the sobriquet, “toll collectors”, but in this role, they can weather many changes in economic environments.  Finally, there are “downstream MLPs’” that focus upon distribution of the resources to end users.

Why is this form of ownership attractive?

This form of ownership is very attractive because of its’ tax attributes.  First, it is a sort of partnership, so, it avoids double taxation (as there is none at the entity level.)  Second, the MLP will often distribute cash in excess of the taxable income (because it is based upon Distributable Cash Flow), and this excess of cash is a “return of capital” and is tax-deferred, lowering the cost basis of the investment.   If the cost basis is minimized to zero, then the further distributions are considered to be capital gains, and are taxed at preferential rates.  Upon sale of the MLP, the unitholder will derive both ordinary income and capital gain.  Further, if this investment is used as an estate planning strategy, the heir will likely get a “stepped up basis” and will be able to sell it immediately sans any capital gains tax.

If one is concerned about diversification, there are EFTs that trade in MLP ownership.

What is unattractive?

Basically, paperwork can be more involved for this type of investment.  The unitholder will receive a K-1 to record distributions, and taxes will often be due to several states.   For these reasons, the unitholder will likely end up paying their tax preparer more to prepare their more complicated paperwork.  It should also be noted that when an MLP incurs a loss, it is passed thru to the unitholder as a passive loss, only usable against passive income or when the interest is disposed of in a taxable transaction.

What is the future for MLPs?

We are unlikely to become materially less dependent on oil and other resources in the near future, so the MLP’s future might seem secure.  But, many MLPs are converting to corporations.  This is a result of the recent decrease in corporate tax, and the additional costs of the IDR payments.

References:

Master Limited Partnership – MLP Definition (investopedia.com)

What Is a Master Limited Partnership? | The Motley Fool

SEC.gov | Updated Investor Bulletin: Master Limited Partnerships – An Introduction

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Oil’s Well that ends Swell?

Headline: Mastering the Limited Partnership

Date: November 11, 2020

There was a recent Yahoo Finance article, entitled, “COVID Pandemic has Upended MLP’s” https://www.yahoo.com/now/covid-pandemic-upended-mlps-190000693.html

This article made me think that I might benefit from learning more about this very interesting investment possibility.

What is a Master Limited Partnership?

A Master Limited Partnership (MLP) is a partnership (listed and traded similar to equities) that obtains 90% of its’ revenue from extraction, refinement or transportation of natural resources.  MLPs are often organized to build pipelines and similar large structures to support the fossil fuel industries. As of late, their popularity has mushroomed: Per Barron’s, in 2000, there were just 18 MLPs with market cap of only $14B.   A few years later, Barron’s ran the same survey, and located 113 of them with a market cap of $460B. 

In this form of business, there are limited partners and one general partner.   The limited partners make contributions when they purchase units of the partnership, and can expect to obtain regular cash flows.   The general partner is also entitled to receive incentive distribution rights, which motivate them to run the partnership profitably.   Since the MLP is required to make quarterly distributions, this investment can make sense for those who require current income.

Are there different varieties of MLP?

Yes, there are different varieties of MLP.   There are “upstream MLPs” that focus upon the exploration, development and recovery of fossil fuels and other resources.   There are “midstream MLPs” and these focus upon the gathering and transportation of the resources.   This portion represents the majority of the MLPs in the marketplace today.  They can sometimes be defamed with the sobriquet, “toll collectors”, but in this role, they can weather many changes in economic environments.  Finally, there are “downstream MLPs’” that focus upon distribution of the resources to end users.

Why is this form of ownership attractive?

This form of ownership is very attractive because of its’ tax attributes.  First, it is a sort of partnership, so, it avoids double taxation (as there is none at the entity level.)  Second, the MLP will often distribute cash in excess of the taxable income (because it is based upon Distributable Cash Flow), and this excess of cash is a “return of capital” and is tax-deferred, lowering the cost basis of the investment.   If the cost basis is minimized to zero, then the further distributions are considered to be capital gains, and are taxed at preferential rates.  Upon sale of the MLP, the unitholder will derive both ordinary income and capital gain.  Further, if this investment is used as an estate planning strategy, the heir will likely get a “stepped up basis” and will be able to sell it immediately sans any capital gains tax.

If one is concerned about diversification, there are EFTs that trade in MLP ownership.

What is unattractive?

Basically, paperwork can be more involved for this type of investment.  The unitholder will receive a K-1 to record distributions, and taxes will often be due to several states.   For these reasons, the unitholder will likely end up paying their tax preparer more to prepare their more complicated paperwork.  It should also be noted that when an MLP incurs a loss, it is passed thru to the unitholder as a passive loss, only usable against passive income or when the interest is disposed of in a taxable transaction.

What is the future for MLPs?

We are unlikely to become materially less dependent on oil and other resources in the near future, so the MLP’s future might seem secure.  But, many MLPs are converting to corporations.  This is a result of the recent decrease in corporate tax, and the additional costs of the IDR payments.

References:

Master Limited Partnership – MLP Definition (investopedia.com)

What Is a Master Limited Partnership? | The Motley Fool

SEC.gov | Updated Investor Bulletin: Master Limited Partnerships – An Introduction

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.