Should You Buy Your Kids A Home?

Home affordability is no longer affordable for most, especially for kids graduating from college. According to Zillow, the average home price is $293,349, up 15% from last year. In Austin, it’s $600,000. My daughter will graduate with her Master of Social Work degree next May, and she wants to buy a home in the Austin area, but home prices are skyrocketing. She regularly scans Zillow looking for bargains, but she is not finding many.

The low rate environment is helping fuel the housing boom, with mortgage rates below 3%. In 1981, they peaked at 18.5%! If you bought a $500,000 home in 1981, your mortgage payment was $7,739. Today it’s $2,081.

All interest rates are low, not just for mortgages. The yield on the 10-Year US Treasury Note is 1.30%, the one-month T-Bill rate is .06%, and your bank account is likely paying you zero percent. The current amount of savings deposits is $10.67 trillion, up 14.44% from last year, so there’s a lot of cash sitting on the sidelines earning close to nothing.

Low rates, rising home prices, and large cash balances are a perfect storm for helping your children buy their first home. Here is how it works. Your child wants to buy a $500,000 home, but they’re getting outbid because they can’t pay cash. If you have $500,000 in your savings account or invested in a low-yielding bond portfolio, consider using the proceeds to buy a home for your child. Once the home purchase closes, your children can pay you back in the form of a mortgage payment. If you charge them 3%, they’ll pay you $2,108 monthly, or $25,296 per year.[1]

If you follow this strategy, your cash flow will increase. For example, if you park your money in a bank savings account, the interest rate is probably .01%, so your annual interest payment will be $50 on a $500,000 balance. If you purchase a 10-Year T-Note at 1.30%, your annual income will be $6,500, far below $25,296!

Another benefit of this program is that you can eventually forgive the loan and transfer the home’s title to your children. The forgivable loan is not taxable to your children, and you remove the asset from your estate. Of course, you can make them pay you until the loan matures, and if you pass away before it comes due, they’ll continue to make payments to your estate.  

National Family Mortgage® can assist you with the transaction, and they will help you manage the mortgage allowing your children to receive a tax deduction for their payments. Here is a link to their website: https://www.nationalfamilymortgage.com/

Owning a home is an American dream for most, but it’s slipping away because of the rapid rise in prices. Buying a home for your kid will give them an economic boost, build equity, avoid wasting money on rent, and get them out of your basement.

Happy house hunting!

If I were asked to name the chief benefit of the house, I should say: the house shelters daydreaming, the house protects the dreamer, the house allows one to dream in peace.” — Gaston Bachelard

July 15, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] Payment based on a 30-year mortgage with a 3% interest rate.

Inflation?

Chipotle announced they’re increasing menu prices by 4% because of rising wages.[1] Likewise, Campbell’s Soup is raising prices this summer due to higher costs.[2] According to AAA, gas prices at the pump have increased 48%. The price of lumber jumped more than 32% in the past year. And there is currently a shortage of everything from computer chips to potato chips.

The Consumer Price Index jumped in May, and it’s up 4.93% for the past year – a hot number. The US Inflation Rate currently stands at 4.99%. The 107-year average inflation rate is 3.22%.

Despite the surge in CPI, inflation, gas, lumber, and burritos, the bond market signals a different story. If investors were anxious about inflation, interest rates would be rising, but this is not the case. The yield on the 10-year US Treasury Note is 1.53%, down from 1.74% in March. The 50-year average yield on the 10-year is 5.98%. Also, the yield on the 1-month US T-Bill is .01%, down 93% from last year!

The Federal Reserve said the current surge in inflation is transitory, resulting from the pent-up demand from COVID. Other words for transitory are brief, fleeting, or short-lived. I agree. I believe the surge in inflation will be transitory. If history is a guide, inflation spikes are ephemeral. If you traveled recently or dined in a restaurant, you know the economy is in full swing, but the pace will slow down at some point.

However, if you’re concerned about inflation, here are a few things you can do today to protect your purchasing power.

  • Buy stocks. If Chipotle raises prices, they’ll make more money, and when they do, its stock price will rise. If you’re a shareholder in Chipotle, you’ll also profit. For example, the price of a Disney World Ticket in 1980 costs $7.50, today it’s $109, an increase of 1,353%,[3] whereas Disney’s stock price increased 18,850% during the same time frame. Stocks are an excellent tool for combating inflation.
  • Buy real estate. Real estate prices have historically tracked the rate of inflation. Therefore, if inflation rises, real estate prices should follow.  
  • Buy TIPS. Treasury Inflation-Protected Securities (TIPS) will pay you more income as inflation rises. TIP bonds are up more than 7% over the past year. Long-term bonds, by comparison, have fallen 9.5%.
  • Buy commodities. Anything coming out of the ground can perform well in an inflationary environment. Commodities like oil, gold, silver, copper, wheat, soybeans, and sugar are short-term inflation hedges. For example, the Invesco DB Commodity Tracking ETF (          DBC) is up 57% over the past year, but it’s down 21% for the past fifteen years. I’m not a fan of commodities because they don’t perform well over time, but if you want to allocate a few dollars to this asset class, limit your purchase to 5% of your portfolio.
  • Invest in a money market fund. The yield on a money market can rise if interest rates go higher but don’t keep a large cash balance in a money market fund, checking account, or savings account because your purchasing power will fall over time. For example, a US postage stamp cost 10 cents in 1974, so you could buy ten stamps for a dollar. Today you can buy one stamp for one dollar.[4]

Don’t fear a steady rise in inflation. It’s healthy because it signals the economy is growing. A more significant concern is deflation, where prices fall as they did during the Great Depression. The moral of the story is to diversify your assets in stocks, bonds, and cash to take advantage of all market conditions.

There are two main drivers of asset class returns – inflation and growth. ~ Ray Dalio

June 10, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.cnbc.com/2021/06/08/chipotle-hikes-prices-to-cover-the-cost-of-raising-wages.html, Amelia Lucas, June 8, 2021

[2] https://www.wsj.com/articles/campbell-says-inflation-weighed-on-quarterly-profit-11623245692, Annie Gasparro, June 9, 2021

[3] Money Guide Pro My Blocks

[4] https://about.usps.com/who-we-are/postal-history/domestic-letter-rates-since-1863.htm

Buy or Rent?

To buy, or not to buy, that is the question.

A home can be both an asset and a liability. Over time, real estate is a solid investment, but in the short-term it can cause financial heartache.

My parents have lived in their home for more than 45 years and they have significant equity. They’ve used their home throughout the years as a source of funds to pay for weddings and college educations. However, they’ve also had to replace roofs, windows, garage doors, air conditioning units, etc.

It takes time to build equity in your home, so if you plan to stay in your city for ten years or more, then buy a home. According to Freddie Mac, the average length of homeownership at the end of 2017 was ten years.[1]

My first reaction is that owning a home trumps renting. A home builds equity through monthly mortgage payments. The old argument is that it’s a forced savings vehicle. In addition, interest payments and property taxes are deductible to a point.

The Case-Shiller Home Price Composite 20 Index has averaged an annual return of 4.1% since January 2000 despite a 34% drop in housing prices during the great recession.[2] The S&P 500 Index, by comparison, averaged 5.3% for the same period.[3]

Aside from financial benefits, there are several emotional reasons to own a home. A home is a place to hang your hat, a refuge for children to return to during college breaks, and a storehouse for generational gatherings. And, regardless of economic conditions, it’s your home.

We lived in Connecticut for a few years and our home had a finished basement covering about three quarters of the area. The remainder of the basement was storage for our tools, kayaks, bikes, workbench, etc.  When my daughter was young, we painted some fall leaves on butcher paper.  In addition to the butcher paper, we also painted a portion of the floor. At first, I was upset but then I thought this is our house and we can do whatever we want. It also added a touch of character to the basement and when I saw the paint on the floor it was a nice reminder of the joy my daughter and I had that afternoon.  We also used our pantry to measure her height. Each new notch on the door frame represented growth for our family.

Owning a home does not guarantee nirvana as there’s always something that needs a tweak or twist and every few years a major expense pops up. Replacing windows, a roof, or an air conditioning unit is not cheap. Annual maintenance and upkeep can cost you about 1% of the value of your home. If your home is worth $500,000, expect to spend about $5,000 per year.[4] Depending on where you live you may have additional fees like HOA dues.

Renting makes sense if you’re on the move every few years. If you’re in the military or some other profession that requires you to relocate often, renting makes sense. Also, if you’re new to a city and you want to get the lay of the land, renting a home is better than buying – especially in a city that is experiencing rapid growth, like Austin. Renting will give you an opportunity to explore different neighborhoods and travel patterns. The average rent in Austin, New York and San Francisco is $1,518, $3,415, and $3,772, respectively.[5]

Saving money for a down payment is another reason to rent. If you don’t have enough money for a 20% down payment, then renting a cheaper home or apartment while you build up your cash reserve is a smart move. The median home price at the end of December was $253,600, so a 20% down payment is $50,720 – a big nut to cover for most people.[6]

I’ve found that people who rent to save money usually don’t. If you’re renting to save, then you should invest the difference. Establishing an automatic investment plan will help you be intentional about saving. It will also remove the temptation to spend the difference.

Affordability is another issue. Don’t buy a home you can’t afford. Your monthly mortgage payment should be less than 28% of your gross pay. If your gross income is $10,000, then your monthly payment should be $2,800 or less. A mortgage payment of $2,800 equates to a $372,000 mortgage for a 15-year loan and $569,000 for a 30-year loan.

A couple of downsides to renting is that your landlord can sell the land under your feet or raise your rent. Renting is forever and you never have an opportunity to build equity. I know renters will say they don’t have to pay property taxes, but taxes are deductible, and rent is not. Several cities will cap their property taxes at a certain rate or age as well. Packing and moving every couple of years is also a deterrent to renting.

Here’s a recap to help you with your decision to buy or rent your next home.

  • If you plan to live in your city for ten years or more, buy a home.
  • If you want to build equity, purchase a home.
  • If you move every few years, rent.
  • If you don’t have enough money for a down payment, rent.
  • If you want to be mobile and explore new cities, rent.
  • If you’re a homebody and don’t like to pack, purchase a home.

Be it ever so humble, there’s no place like home. ~ John Howard Payne

February 18, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] http://www.freddiemac.com/blog/homeownership/20180206_2017_housing_trends.page

[2] YCharts. Case-Shiller Composite 20 Index, 1/1/2000 – 11/30/2018.

[3] Morningstar Office Hypothetical Tool, SPY ETF, 1/1/2000 – 11/30/2018.

[4] https://www.thebalance.com/home-maintenance-budget-453820, website accessed 2/14/19

[5] https://www.rentjungle.com/average-rent-in-san-francisco-rent-trends/, website accessed 2/14/19

[6] https://ycharts.com/indicators/sales_price_of_existing_homes, 12/31/2018

What’s Your Home Worth – Right Now?

Did you check the price of your home today? Did you get a text on your phone that your home appreciated 5%? Did the commentators on CNBC mention it on TV?

Zillow, and a few other real estate sites, let you check the price of your home daily. When the value rises, do you call your real estate agent to sell it? When it falls in price, do you panic?

The S&P Case/Schiller Index tracks home values across the country. The 12-month return for the 20-city index was 6.31%, the 10-year return was 2.42%. The index fell 20.5% from May 2008 to March 2012.[1]  Did you sell your home because of these price changes? I doubt it. If you’re like most real estate investors, you did nothing.

Home owners are the ultimate buy and hold investors because it’s not easy to move in and out of houses on a regular basis. On a recent trip to Los Angeles I noticed a friends’ home was for sale. He purchased it about 50 years ago for $35,000; it’s currently listed for $850,000. On a gross basis, he generated an average annual return of 6.58% – a decent return. However, if he invested $35,000 in the Investment Company of America mutual fund, he’d have $5.7 million today![2]

Stock investors are obsessed with daily price movements. A tick up, they get excited. A tick down, they get depressed. Stocks are expected to rise so when they fall, investors want to know what’s wrong with the market. Why is it down? Is this the beginning of a correction? Should I sell? Has the market peaked?

Did you know the S&P 500 fell 23% from August 5, 1974 to September 30, 1974? The market lost about a quarter of its value in less than two months and I bet a few investors panicked and sold their stocks. If you apply short-term thinking to long-term problems, you’ll make catastrophic mistakes. The S&P 500 has risen 4,574% since September 30, 1974.[3]

Here are a few suggestions to keep you invested for the long haul.

  • Think generationally. Focus on decades, not days. You may work for 40 years and be retired for another 35. Once you start working and contributing money to your investment accounts, it’s possible you won’t touch your money for 50, 60 or 70 years.
  • Plan. A financial plan will keep you focused on your short and long-term goals. If you know where you’re going, you’re less likely to get distracted by bumps in the road.
  • Buy the dip. The market does fluctuate, so take advantage of down days. Historically, the stock market has risen 73% of the time. When it does drop, use it as an opportunity to buy great companies at discounted prices.
  • Disconnect. TV shows, radio programs and social media sites that report on the stock market cause angst and stir the pot. If you disconnect from TV and social media, you won’t get caught up in the hype. Real estate investors are fortunate because they don’t have to listen to commentator’s pontificate about price movements or stare at a ticker tape scrolling across the bottom of their TV set.
  • Diversify. Purchase several low-cost mutual funds and hold them forever.

Most real estate investors succeed because they think long term and they don’t make thoughtless sell decisions. When they purchase a home, their intent is to own it for several years. Stock investors would be wise to follow their lead. Who cares if the market fluctuates because in the end, it usually wins.

“It fluctuates.” ~ J.P. Morgan

August 30, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] https://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index

[2] Morningstar Office Hypothetical Tool – 7/1/1968 to 7/31/2018.

[3] https://finance.yahoo.com/quote/%5EGSPC/history?period1=-630957600&period2=1535518800&interval=1wk&filter=history&frequency=1wk

Moving?

Real estate signs are popping up like dandelions, spring is in the air and people are on the move. Moving for a new job is one reason for the mobility. How often are people moving? According to the Bureau of Labor Statistics people change jobs every 2.5 years between the ages of 18 and 48.[1]  In another study, 71% of the working population is currently looking for a new job.[2] With the unemployment rate below 4%, employees are feeling embolden to leap to a new job.

A new job is exciting. However, it does raise questions about your former retirement plan. Should you take it with you or leave it behind? Here are a few suggestions –

  • Leave it. You have the option to leave your assets in your former employer’s plan. You don’t have to make any changes. It makes sense to leave it in the plan if it has several low-cost investment choices, and you’re happy with the performance.  An advantage of this decision is you don’t have to decide on when or where to move your assets, it’s a known quantity. One downside of leaving it behind is that you’ll no longer be contributing to your account or receiving an employer match.
  • Roll it into your new plan. If your current employer allows for in-coming rollovers, you can transfer your old plan into your new one. This could be a good choice because you’ll be able to give your new plan a boost especially if it has a good line-up of low cost investment funds. However, if it has limited choices or expensive funds you’d be wise to look elsewhere.
  • Rollover your assets into an IRA. An IRA rollover makes sense if you want more control over your investments. An IRA will allow you to invest in a plethora of investments – almost unlimited. In addition, you’ll have the ability to control your costs and trading activity through your investment selections.
  • Cash out. Cashing out of your old 401(k) is an option – but not recommended, particularly if you’re under the age of 59.5. Taxes and penalties will eradicate a big chunk of your assets if you remove them from your plan. If you take this path the IRS will benefit greatly.

In addition to your rollover decisions, another issue that needs to be highlighted is your future retirement balance. Jumping from job to job will hinder the growth of your retirement assets. Some companies have a waiting period before they’ll allow new employees to join their plan, typically six months. Meaning, if you change jobs every 2.5 years for 30 years, you won’t be able to make a company contribution for six years, or 20% of your working years and that’s a lot of downtime.

“Everybody has talent, it’s just a matter of moving around until you’ve discovered what it is.” ~ George Lucas

May 21, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk.  Your returns may differ than those posted in this blog.

 

[1] https://www.bls.gov/nls/nlsfaqs.htm#anch41

[2] https://www.washingtonpost.com/news/on-small-business/wp/2017/10/19/study-71-percent-of-employees-are-looking-for-new-jobs/?noredirect=on&utm_term=.893854abeb4c, Gene Marks, 10/19/2017

 

Marcia, Marcia, Marcia!

Eve Plumb, AKA Jan Brady, recently made headlines for selling her Malibu beach house for $3.9 million after buying it for $55,300 in 1969.   A tidy profit for sure.

I’m a child of the ‘70s and grew up with a heavy dose of the Brady Brunch.  If you grew up watching the Brady Bunch, I’m sure you can recall almost any episode at a moment’s notice.  To this day people are still enamored with this sitcom classic.   One of my all-time favorite episodes was the Tiki Caves.

Ms. Plumb did well with her investment.  How can you go wrong buying Malibu beach front property?  Malibu real estate is probably one of the shrewdest investments one can make.  The return on her investment, before taxes, was 9.4%.   Her investment performed well because she found value in her home and owned it for four decades.   She probably could have sold it many times before and made a decent profit.  However, generational thinking is needed to make a substantial profit.

What if she invested her money in the stock market instead of buying the beach house?  Let’s take a look at a few investment alternatives.

A $55,300 investment in the S&P 500 index in 1969 made an average annual return of 9.8% giving her $4.47 million today[1].   This index purchase put an extra $570,000 into her pocket.

The same dollar investment in the Investment Company of America (AIVSX) mutual fund 47 years ago is now worth $6.9 million for an average annual return of 10.79%.[2]  This mutual fund purchase would have given her an extra $3 million.

A similar purchase in the Fidelity Magellan Fund (FMAGX) is now worth $15.63 million for an average annual return of 12.73%![3]    This investment delivered an extra $11.73 million!  That’s a lot of sand dollars.

What can we learn from Ms. Plumb’s purchase?

  1. She did well with her real estate purchase and found value in her investment.  If you find value in your investments, you’re more likely to hold them for a long time.
  2. She probably purchased the home because of its location and the enjoyment it would bring to her family.  I am positive she didn’t purchase the property at age eleven thinking in four decades she would sell it for a nice profit.
  3. Time wins.   The best way to create wealth is to look to the horizon.  Think long term and do not get spooked or side tracked by short term thinking.   A short term, trader’s mentality will leave your bank account with fewer dollars.
  4. Real estate does well because most people don’t flip homes like they do stocks.  Real estate holders do well because of their long term thinking. Stock investors should follow the lead of Ms. Plumb and other successful real estate investors.
  5. Stocks win in the end.  The long term performance of great companies is hard to beat.  If you want the opportunity to grow your wealth, add stocks to your portfolio.

For the record, I probably would have made the same investment choice as Ms. Plumb.  What eleven-year-old wants a portfolio of stocks?

When it was time to leave, we left and continued on our way. All of them, including wives and children, accompanied us out of the city, and there on the beach we knelt to pray.  Acts 21:5

[1] Dimensional Fund Advisors Matrix Book 2016, page 14.

[2] Morningstar Office Hypothetical Tool.

[3] Ibid.