The 5 Best Places To Live in America

St. George, Utah, the 6th-best place to live in America.

St. George, Utah, the 6th-best place to live in America.

 

San Diego? No. Prices are too high and California is a test kitchen of awful laws.

Sharon, Massachusetts
(Money magazine’s top place to live)? Similarly restrictive laws, with the added benefit of cold weather. Also, you’d be surrounded by Massholes.

San Francisco?
“What’s this foul-smelling squishy thing I just stepped in? Why, it’s a homeless person. Yeah, another one. We’ve been walking on an unbroken carpet of them all the way from Fisherman’s Wharf. I hope the hypodermic needle that last one stabbed me with is at least infected with a treatable strain of hepatitis.”

Louisville, Colorado (also on Money’s list)? No offense, but we’ve never heard of you.

 

Money and common knowledge are idiots. Here’s our list, the definitive one. We’ll do them in ascending order, add to the drama. Presenting the 5 Best Places To Live in America:

 

5. An apartment you’re renting.

It’s not like we haven’t said this before, repetition being endemic to personal finance blogging, but every dollar you spend here is a waste. Think about the way this transaction works:

You: Hi! Here’s 1/4, maybe 1/3 of my gross income.
Landlord: Thanks. Here’s a floor. Oh, and I still get to keep it. I also get to keep your money.

You’re an adult, right? Then buy a house. Or at least a townhome or a condo. One more time: this is about building wealth. While wealth doesn’t drop out of the sky, at least for most people, it also doesn’t grow of its own accord. You need to start with the raw material, i.e. some amount of money, before you can do anything with, i.e. invest it. Renting, and thus forking over a big chunk of that investable money, handicaps you from the start. You have to live somewhere anyway, so why wouldn’t you build equity while doing so? Renting is a great way to enrich someone else.

Yeah, let’s hear it. “The housing market crashed and people got foreclosed upon. Why should I let those greedy mortgage companies have another opportunity to profit off my hide?”

The only people who got hurt by the housing “crisis”, which is now over, were those who were in over their heads in the first place. They bought too much house, they crossed their fingers in hopes of appreciation, and plenty of them lied about their income on their applications. (Just the same, those overmatched borrowers should probably blame the lending agents for believing their lies in the first place. Nothing is ever anyone’s own fault.) Being in over your head with anything, whether house payments, student loans or credit card debt is beyond the scope of this site anyway. Go join the other hand-wringers at the more querulous blogs if finding commiseration is more important to you than being rich is.

After a 4-year double nadir, prices and mortgage rates are finally rising but still historically low. You can use that as an excuse for not buying if you want, or you can see it as the tremendous opportunity it is.

No, you can’t afford a house when you begin the transition from student to wage-earner. Renting is an unfortunate necessity for most of us at some point in our lives. That point should be as early as possible. Save like your life depends on it – or your livelihood, which it does – until you’ve got enough for a down payment. Once you do, and if you’re motivated enough it shouldn’t take more than a few months, a standard monthly mortgage payment won’t be much more than what you’d otherwise pay in rent. And even if it is, you’re building wealth. Even in a bad-case scenario in which your home doesn’t appreciate as much as you’d like. Your house isn’t going to lose 100% of its value unless you live in Detroit. Your rent payment will lose 100% of its value every single time.

That is, unless you choose

4. An apartment you’ve signed a lease option for.

A lease option. It’s like an ordinary lease, except that at the end of the term you have the option (not the obligation) to buy the property. Lease option renters love this because they think that they’re building toward something, unlike the poor folks under item No. 5. Lease option holders are indeed in a better position than those who have no hope of buying their residences, but…

Care to guess how many lease option holders actually exercise the option? Here’s a quote from Maggie Hawk, who sells real estate in east-central Florida:

In 18 years selling real estate, I’ve never seen it happen.

Renters, by and large, embody certain characteristics. If you smoke, buy lottery tickets, own a pit bull, have a neck tattoo, have ever paid for a UFC pay-per-view, and/or have a couple of DUIs and should’ve walked on one of them but your lawyer screwed you over, it’s far more likely that you rent than own. If you hold a lease option you might think that by the end of the term you’ll have enough wherewithal to buy the place and take advantage of an unsuspecting landlord, but the real world shows a glaring paucity of such renters. Should you be disciplined enough to be one of the few renters who can capitalize on a lease option, you’ll do fine. And will eventually leapfrog over No. 3:

3. An apartment you’re sharing.

Life is going to have financially unhappy episodes. The idea is to compress them into as short a time as possible. If you’re dumb enough to have incurred credit card debt, paying it off in 9 months is always going to be better than just making one more splurge and then ending up taking 18 months to pay it off. Debt bloggers and the staff at MSN Money either don’t know or won’t acknowledge this, but that’s their problem.

Having roommates blows unless you’re one of those odd extroverted people who actually enjoy others’ company more than their own privacy, but again, it’s about minimizing the duration of the pain. Paying half or a third of the rent instead of all the rent means you’ll be on the road to No. 2 all the more quickly:

2. Your own home.

Congratulations. This is where it leads to. Read again from the top if you’re unclear. Equity buildup. Mortgage interest deductions. No matter how much you choose to insist that the glass is half-empty, and that renters are blessed because they don’t have to spend money on everything from landscaping to basic home repair, it’s hard to find a valid counterargument to the point that rent always gives a return of 0.

1. Your own 2nd home.

No one said you had to stop at one. Find a renter – God knows there are enough of them – and you can solve your residential cash flow deficiency easily. Repeat as necessary, and passive income goes from a nebulous concept into something tangible that can make a real difference in your life. It beats the hell out of obsessing over replacing your light bulbs with CFLs and keeping your tires properly inflated, too.

Once you’ve bought a first house, buying a second is surprisingly doable. And relatively easy to achieve if, as we’ve been saying since we learned how to talk, you buy assets and sell liabilities. It’s all in here.

Our Bank Loves Us And Wants Us To Be Happy, Pt. 1

Our 1st house was in Brobdingnag

Our 1st house was in Brobdingnag

 

Welcome to one of those rare 1st-person stories in which we give a smattering of detail about our personal financial life, which is comfortable, so that you can apply the decision to your own life and watch the benefits accrue.

Among the houses in the CYC Land Empire, which still totals a few thousand square miles fewer than John Malone’s, is a handsome 3-bed/2-bath number which we rent out in Clark County, Nevada.

(Fun Fact: The home is in Las Vegas, but that’s not the Fun Fact. The Fun Fact is that in the 1990s, and possibly still today, Citibank operated a check processing center and several other concerns on the outskirts of town. Convinced that their clientele were dumb enough to think that monies addressed to “Las Vegas, NV” would somehow end up on a baccarat table or inside a slot machine before finding their way to Citibank, the company used the county name in place of the city identifier. Beyond that, Citibank created fictional towns that people could send correspondence to without fear. Red Rock, NV was one. The Lakes, NV was another. These cities never existed in any form, but the postal service didn’t care as long as you used the right street address and ZIP code.)

In April of 2005 we refinanced the house, which we’d bought a couple years earlier, for $160,000. A couple of paper transactions later – a sale to a trust we own, and then to a limited liability company of which we’re the directors and officers – and the house is now more than ¼ of the way to being paid off. Well, that’s not exactly true. The mortgage term is more than ¼ over – 7½ years out of 30 – but we’ve dented only ⅛ of the principal. Which is how these things work. The portion of the monthly payment that goes to principal accelerates as we get approach the end of the mortgage. Math.

If you remember, 2005 was an awful time to buy a house and a similarly bad time to refinance one. The bubble was about at its limits, a nationwide mountain of unsustainable debt ready to prick it at any provocation. Still, the proper comparison at the time wasn’t to 2008 home prices. (For one thing, we didn’t know what those were going to be.) The proper comparison was to other investments. We had nothing at our disposal that would (almost) guarantee $1200 or so a month in cash flow, so we committed to the house. Which last appraised at exactly a quarter-million, which probably says less about our shrewdness as investors than it does about the appraiser’s love of round numbers.

The current monthly payment is $1078. The house is in a pleasant if not affluent area, with no visible meth labs nor signs of suburban decay. The neighbors are clean and quiet, as best we can tell. In other words, the street started off OK and doesn’t seem to be getting any worse.

ANYHOW…yesterday we received an ominous phone call from someone purporting to be from a bank. “Hi, this is Christina. Please call me back at this number.” She didn’t address the person she was leaving the voice mail for, which seemed suspicious. A few seconds of Googling did confirm that she was indeed a bank employee and not a sophisticated criminal who dupes people into calling them back with their financial information. (We may have been born at night, but…) Then our skepticism made way for good old-fashioned Catholic guilt. “Oh my God, are they repossessing the house?” No, our payment record is perfect. “Sweet Jesus, are they calling because someone hacked into our account and…?” Even if that were true, what could such a person do? Pay off our balance? We’re debtors here. Anyone who impersonates us is going to be impersonating someone with 22½ years of financial obligations.

Or 15 years. When we finally got a hold of Christina, she made us an offer:

Your credit history is perfect. You’re paying too much. If you want to refinance again, we can put you in a 15-year mortgage for only $100 a month more than you’re paying now. It costs $420 to do this. You want me to send you the paperwork?

Yes, you can send us the paperwork.
But no, we don’t want your charity.

Our current rate is 5⅞%. The new one was supposed to be 4½%. The new monthly payment would indeed have been $100 more, but we’d also be cutting 7½ years off our obligation. (Not forgetting the $420 upfront cost, of course.)

So it’d take 2 years for this to pay for itself, and again, it frees up 7½ years worth of investment potential, new opportunities to take advantage of. If we held onto the house for 2 years and 1 month, assuming the market doesn’t crash again, this would seem like a shrewd move. Except for one thing. Well, 2 things. First, the closing costs worksheet the bank employee sent us used a rate of 4⅞%, not 4½%. Baiting-and-switching us isn’t a good way to start this relationship off. Second, just look at this (changed slightly since we stole created the graphic):

 

15-year

 

The worst rate listed on Bankrate is 3.68%, that from Mutual of Omaha. With all due respect, we think we’re entitled to the 3⅜% that Roundpoint customers are paying.

Say we hold onto the house for another 5 years. Sparing you the calculations, if we take advantage of the bank’s “generous” offer we’ll have paid down an additional $14,994.89 in principal. We’ll also have forked over an extra $10,504.80 in monthly payments. Is doing this worth $4,490.09, given that it takes 5 years to realize?

No, because there are better offers out there. Paying 120 basis points over market price is insanity. Not quite as insane as staying in our current loan, but at least now we know we have options. In the interests of full disclosure, we’ll shop around and give you our findings next week. And tell you how much we’ll end up saving.

Cash Flow or Windfall?

Wanna buy it? Make us an offer.

Wanna buy it? Make us an offer.

 

Good news, readers! While getting our total credit card debt down to $45,623.12 this month, and keeping our student loan balance stable at $101,456.44, we managed to add $1200 to our emergency fund! Whoo-hoo! Who knew targeted saving could be so much fun! Yay for us!

Now that we attracted a few additional eyeballs with that moronic opening paragraph, it’s time to tell you how smart people make financial decisions.

CYC owns a modest house in a pleasant part of our hometown. (Well, we own several houses. And it’s actually a pass-through entity that owns them, because paying income taxes at individual rates is for the little people.) Those aren’t realtor euphemisms, either. The house is modest, not decrepit. The neighborhood is pleasant, if not expensive, with gated access and an autocratic homeowners’ association.

The tenants who live in this house have been happy with it throughout their tenure, or at least we assume so. We don’t know for sure, because dealing with their concerns is the property manager’s problem. She earns her 8% by putting out any fires so that we don’t have to.

Alas, the tenants recently chose not to renew their lease. Which left us 30 days to find a new tenant and enjoy (92% of) the concomitant cash flow. Except that getting the house reoccupied is also the property manager’s problem. She doesn’t get her cut when there’s no rental income to get a cut of, so she’s got plenty of incentive to keep the landlords (love that word, it sounds so magisterial) happy.

The typical strategy here is to think within the envelope: How do I find a new tenant fast?

Or as we specified, our immediate problem is slightly different: How do I get the property manager to find a new tenant fast?

Alright, those are only true within the existing conditions of the problem. A true non-enterprising human would have asked:

Should I really be investing in a house that I don’t live in, instead of just contributing to my 401(k) and hoping my employer matches it? (And while I’m at it, maybe I should sell my extra stuff on eBay and categorize my coupons by denomination, too.)

The rich indeed get richer, and not only is that a good thing, it’s the inevitable result of rich people understanding their options. Poor people – e.g., every imbecile with a personal finance blog – are only interested in minimizing damage. Paradoxically, they end up perpetuating the damage because they’re too busy trying to reduce tiny defeats instead of building for big victories. Success begets success. When the 1st (or the 2nd, or maybe the 3rd) avenue generates positive cash flow, it’s easier to see subsequent avenues open up. That always seemed like a better way to go about life than despairing over how much work it’s going to take to reach zero.

Back to our real-life problem, is “How do I find a tenant?” even the right question to ask? How about:

How to profit the most from this?

Which means looking at cashing out.

To determine how much the house might sell for, we looked at comps. That’s industry slang for “comparable houses”, which are easy for us to find thanks to a realtor license that’s cheap to maintain from year to year. That license also provides access to the secret weapon of the real estate investor, the Multiple Listing Service.

Here are 3 recent and 3 pending sales. Like our property, these houses all have 3 bedrooms, 2 bathrooms and a 2-car garage. If it isn’t obvious (given that we’re calling them comps), they’re all in the same part of town, too:

 
Date Sold
Price
Square Footage
Price/Square Foot
Property A
(Model and Subdivision Match)
Pending207,0001508137.27
Property B7/10221,0001523145.11
Property CPending171,0001594107.28
Property DPending205,5001594128.92
Property E
(Short Sale)
5/10170,0001651102.97
Property F
(Pool)
6/20240,0001594150.57

Property E was a short sale and, not coincidentally, the lowest price per square foot. Property F has a pool and the highest price per square foot. Because these 2 are thus the least comparable, we’ll disregard them. The remaining 4 average $129.65 per square foot. Assuming a linear relationship, and that said line begins at the origin (as if), if we multiply $129.65 by our 1508 square feet we get $195,505. Property A is an “exact match” for ours, which is in quotes because while no 2 properties are identical, realtors still use the term in cases like this. These two properties are a model match and a subdivision match: you can figure out what that means. Property A’s pending sale is for $207,000. Therefore, our property should sell between $195,000-215,000.

Here are the proceeds at the top of that range:

Sales Price
215,000
Net Proceeds19,705
Less Costs
Commission12,420


Closing Costs5,375
Loan Payoff177,500

Or, are we better off putting another tenant in the property for a year (or two) even if that means the property is vacant for 2 weeks to 1 month?

Here’s what those numbers look like:

Download (PDF, 45KB)

For what we could sell the house for, we couldn’t get another one (you didn’t think we were going to just pocket the money, did you?) at a comparable 3 1/2% loan. We don’t need the windfall, so we’ll take the cash flow. And we’ll take an educated guess that real estate prices will continue to rise after that historical nadir of a couple years back.