ThomasGoodwin.com

Buying rental property is an entirely different ball game than buying your home that you want to live in. When you’re looking for a roof over your head you’re most concerned with your individual needs, style, personality, and budget. For instance, if you are married and have a couple of kids (especially if you have at least one of each gender) you are probably looking for at least a 3-bedroom house but most likely a 4-bedroom house. If you’re young and single and don’t want to spend your free time mowing the lawn, you might buy a condo.

The rules change when you decide you want to invest in real estate rather than live in it. For the real estate investor, you’re biggest concerns are your cash flow and your return on investment. You want to invest your money and earn a return (the rent you charge your tenants as well as any property appreciation you can capture on the sale when you dispose of the property). You want the monthly cash flows that come from collecting rent.

Buying that rental property therefore means you have to evaluate whether or not you can make a reasonable rate of return on the property. This “reasonable rate of return” will be different for each investor and depends on the amount of time and energy that the investor wants to spend working on a property. For instance, one investor might be happy earning a 10% return on investment, so if the investor purchased a $100,000 duplex the investor would be happy earning at least $10,000 in annual rental income from the property. Another investor might be happy with only earning 8% or may want an even higher return (say 12%) before investing in the same duplex.

Since every investor has his or her own set of investing criteria, it’s important to look at what comparable rental properties sell to investors for in the same area as the property you’re considering buying. Likewise, it’s important to see what similar properties are renting for in the same area as where you are purchasing. If you need to make at least 10% return on your money in order to go forward with buying the property, you wouldn’t be happy to learn that similar properties only rent for $650 per month. That would only get you $7,800 of gross annual rental income, well below the $10,000 (or 10%) that you want in your $100,000 investment.

The concept we’re looking at here is called using rent multipliers, namely the above example was done using Gross Rent Multipliers (GRM). If you have every purchased a property, whether for yourself as owner-occupied or as an investment, you may have received a copy of an appraisal of the property’s value at the time of purchase. Many appraisers will include this gross rent method in a different form - they call it the Income Valuation or Income Approach on the appraisal. To calculate the GRM you take the sales price and divide by the monthly rental income (or you could also use the annual rental income). When you divide the sales price by the monthly rental income you should come up with a number that represents your GRM.

In using the monthly rental income this would be how many months it would take for you to recoup your investment (the sale price) assuming you earn that constant monthly rental income with no gaps (vacancies) and with no changes in rent price, hence ignoring inflation, etc. As a side note, if you used annual income instead of monthly, the GRM would tell you how many years it would take to earn back your investment. Since real estate is a longer-term investment, that is, one that is not as liquid as cash or stocks and bonds, I always prefer to use the annual GRM figure to know how many years I will need to hold the property to earn back my initial investment (the sale price). Of course, many people finance their investment properties so the sale price doesn’t truly represent their investment; rather, the down payment in the property and any amount they pay back to the lender represents the owner’s investment in this situation. But for simplicity sake we will ignore that for now as the important thing is to always be comparing apples to apples on various properties, which means we need to use the same metrics (i.e. sales price).

In our example, the $100,000 used to purchase the duplex earning $10,000 per year in rental income, the annual gross rent multiplier is $100,000 divided by $10,000 = 10.0 So in 10 years you will have made $100,000. The nice thing about this investment of course is that you earn that rental income and then if/when you decide to sell the property you get whatever your sale price is as proceeds. So, say we sell the property at the end of year 10. You have made $100,000 of rental income. If you sell it for $200,000 at the end of year 10 you doubled your investment from a basis standpoint, basis being what you invested to purchase the property. The rental income counts against your annual income reported to the IRS every year while the appreciation of the property is a long term capital gain in year 10.

Now you just have to decide what is an adequate gross rent multiplier for you. If you find a property that you like and the rents are too low, will you be able to increase them? Or perhaps the seller is simply asking too much for the sale price considering those rents are too low, will you be able to get the seller to come down low enough to make the GRM appropriate for the property? These are questions that only you, the buyer, can decide.

I have created a program in Excel that helps make these decisions easier. I will post a copy of this program (assuming technology cooperates with me and allows me to do so). If this website does not cooperate, I will post a blog saying I could not get it to upload and to please contact me and I will email you the program to calculate the GRMs for you. I know it’s easy to calculate the GRM but I have several other fun tools programmed in my Excel with the GRM so it’s quite the handy tool for investors. As always, I appreciate any feedback or comments…

Call me a skeptic. As much as I want to believe that the free market economy is efficient, evidence continually presents itself to say just the contrary. Don’t get me wrong, I’m not a socialist by any means and I don’t feel oppressed. Nor do I feel like there is some kind of conspiracy against the middle class or those working in poverty. In fact, maybe I am too naive in thinking just the opposite - that you can still get ahead in America by working hard and continually trying to improve your skill set through additional education.

So, you ask, what evidence am I referring to that the free market system isn’t efficient? Let’s look at high profile jobs in sports and their respective pay. Recently there was an article in the USA Today newspaper (November 16, 2006, page A15) about the dramatic increase in the number of college football coaches who make more than $1 million per year in salary. The article of course pointed out how this number was dramatically higher than last year or years past and increasing each year. It went on to describe how these coaches make more money than the very presidents of the universities where they work. Imagine… making more money than the CEO of your company!

My question is this: if economics holds true, that in the free market the wage paid will be determined on the supply and demand of labor, why is there such a dramatic rise in college football coaching salaries?! I mean, there is certainly no shortage of qualified candidates who would kill to coach a college football team. In fact, I bet most high school coaches, college assistant coaches, even NFL level assistant coaches would salivate at the very thought of getting the head coaching job of any given college. I’m sure if you were the president of the University of Texas in Austin you could put an ad in the newspaper with something to the effect “Wanted: Head Football Coach” and without writing one more word you would be flooded with resumes, emails, and phone calls. The reason is that this is such a high profile job that there are qualified candidates that will apply regardless of the amount the university is willing to pay.

So why does a university like Iowa pay its coach $4 million plus perks? Think of all the qualified candidates that would be willing to work for half that amount! And half is still a hefty seven figure salary! You could take half of what Iowa pays its football coach and then take 10% of THAT! Yes, I still think you would be able to find a well-qualified coach for a $200,000 salary.

If the college brings every qualified candidate into a room and says, “one of you will be hired today but the job will go to the lowest bidder”, the college could essentially pit each candidate against one another and the college would get a qualified candidate for the lowest nominal cost to the institution.

If you’re nodding your head saying “yeah, this makes sense”, then you just applied the concept of a silent auction to the labor market. Similar to websites like lendingtree.com or such where consumers go out and name the product or service they are looking for and vendors pitch them what they have to offer and their terms, i.e. price. In the silent auction, the bid gets driven up as buyers often over bid/over pay to ensure that their bid will win. In our particular case, the bid is driven down to determine the lowest salary that a candidate is willing to accept in return for the coaching responsibility.

So, as someone who cringes when colleges announce tuition increases, this sounds like a great way to drive down the cost of higher education, right?! Oh, wait. There’s a major problem with doing this. If we can do this with a coach’s salary, couldn’t we do this with your job as well? I mean, if you work as an accountant and you were looking for a job with a Big 3 accounting firm, you would probably be willing to work for a little less than if Joe Schmoe CPA firm called and wanted to hire you. Why? Because the growth opportunity and the name recognition of the bigger firms carry some value, much like Coca Cola has brand name recognition compared to a store brand cola.

Or take it down yet another step. If you work as a minimum wage farm worker there are some illegal migrant/immigrant unskilled laborers that are willing to work for less than you.

So therein lies the economic question. What is the fair price of labor? Why are we willing to pay someone an exorbitant amount to work a high profile, highly sought after job that someone would do for much less? Conversely, why do we pay someone so little for a job that no one wants to do (to the point that some people will sneak into the country illegally and do for much less)? Similarly, why do we implement laws to establish minimum wages to prevent basic, unskilled jobs from losing their economic value to society?

As always, your thoughts are welcome and encouraged…

It’s a buyer’s market here in Cincinnati, Ohio. Much like other major metropolitan areas throughout the U.S., the current supply of homes on the market is exceeding the number of sellers. If you listen to the radio, watch tv, or pick up a newspaper you continually hear reports that the real estate market is in a tailspin, a downturn, or even the dreaded words that every seller hates to hear “a bubble burst”.

The problem with this commentary is that the news agencies have taken localized data from all over the U.S. and aggregated it, so they produce headlines that can be sold at news stands across the country (such as the Wall Street Journal, New York Times, or published on the web like on CNN.com or Yahoo! etc).

Here in Cincinnati prices have come down slightly, and there is an increase in the number of homes on the market. But you simply can’t compare the “slowdown” of Cincinnati, Ohio to the likes of Las Vegas, or Miami, FL, or numerous parts of California. We simply did not have the huge increases in prices over the past few years that these areas had. Therefore, while some areas of the country were increasing at 25% or more, Cincinnati was a more modest 3-8% depending upon the particular area of the Cincinnati metro area that you examined.

Similar to our home prices not expanding rapidly, the sales prices have not come down rapidly either. And furthermore the Cincinnati area is not over built as some metro areas, so the “glut” of homes is not severe. The supply and demand are more level in Cincinnati.

My last few blogs have focused on investing in the stock market. This blog begins a series of posts examining our local real estate market (Cincinnati and Dayton, Ohio) and comparing the statistics here with those national headlines you read about in the national newspapers or see on cable tv. I will also try to add posts that mix in valuable tools and ideas for anyone who is interested in the local market or considering buying or selling in the near future.

As always, I welcome your feedback…

Money magazine. This publication has been around for many years, 30+ I do believe. And I admit to being a subscriber. I enjoy most of their articles and think the magazine has a lot to offer. But I recently wrote a blog entry about the 30 stocks that make up the Dow Jones Industrial Average (DJIA).

As I was reading my most recent issue of Money, I came across a regular (monthly) piece that they have, written by Michael Sivy, who happens to be one of the publication’s senior writers. Mr. Sivy publishes a list of 70 stocks that he “recommends” and updates the performance of these 70 stocks every month. I use the term recommends in quotations because he doesn’t come out and directly say to buy them. I mean, everyone’s financial situation and investment objectives can be quite different so what is good for one person may be poison for another. But he highlights these 70 stocks to give the small investor some excellent, quality equities to choose from without having to do extensive research.

My problem with the monthly column is this. Mr. Sivy has done little more than suggest you index your money. 21 of the 70 stocks that he is recommending are part of the 30 stocks in the DJIA. He is recommending that you buy 2/3 of the DJIA, however he never says how much of each stock in his pick of 70 you should own in comparison to the other stocks, but he recommends 21 of the 30 DJIA stocks nonetheless.

Now most investors won’t go out and buy 70 stocks. Or even 20 for that matter. Every time you purchase or sell a stock you will most likely incur a fee from a broker. So most small time investors only own a few stocks. So for Mr. Sivy to recommend buying 21 of the 30 stocks in the Dow, well it would simply be easier to buy an ETF that tracks the Dow. You would pay less in trading fees (i.e. it’s easier to pay a fee to trade 1 ETF share as opposed to 21 different company stocks) and it would be easier to track your gains and losses as you bought and sold shares. To the average investor it doesn’t make sense to create a basket of stocks based on Mr. Sivy’s recommendations unless you enjoy doing more work for a similar return.

Later on, perhaps in my next blog entry, I will highlight some of my personal favorite stocks that I think Mr. Sivy has overlooked in presenting his 70 that he picked. But for now just know that Money isn’t doing you much of a favor by picking these 70 stocks.

You might be wondering, which of the 30 stocks in the Dow did he leave out of his super 70? The nine stocks that he does not feel compelled to “recommend” are as follows: Altria Group Inc (a tobacco company), AIG (insurance and investments), AT&T (telecom), General Motors (automotive), HP (computers), Honeywell (diversified industrials), McDonalds (food), Merck & Co (pharmaceuticals), and Verizon (telecom).

Now I am not necessarily faulting him for leaving some of these companies off his “recommended” list of stocks. General Motors is going through a tough time trying to cut its losses right now, and AIG recently (within the past year or two) was having problems with its former CEO and founder. Merck was left off but Mr. Sivy had rival and fellow Dow component Pfizer on his list.

Ultimately though, I want people to realize that the rise in Exchange Traded Funds (ETFs) have begun to make mutual funds a thing of the past and furthermore are making individual stocks seem expensive to own, hold and trade. ETFs fluctuate in value throughout the trading day like the underlying stocks that make them up, which is in contrast to mutual funds where you get the price at the close of the business day. A lot can happen between 9:30am EST and 4:00pm so if you put in an order at 11am to buy a mutual fund and you don’t know your price till 4pm, you could end up paying more (or perhaps less) than you thought you would. Ultimately, this delayed pricing model of mutual funds will lose out to the efficiency of ETFs. And why invest in Michael Sivy’s 70 (or any portion of his 70) stocks when you can invest in an ETF that diversifies within the individual shares.

More to come, as always I welcome your feedback…

There are 30 stocks that make up the Dow Jones Industrial Average in the stock market. Name them.

Well, it’s not fair to discuss investing without first talking about some of the major components of the market. I can’t think of a better place to start than by talking about “The Dow”… or more appropriately, the Dow Jones Industrial Average (referred to as DJIA from here on out).

Many people catch brief glimpses of the Dow during the course of the typical day. Either you hear about it on the way home from work on the radio - “the Dow gained/lost X number of points today” or you see it on the evening news. You may even see the daily value posted on numerous websites, from the front page of Yahoo! to MSN, CNBC, CNN, or even local newspapers and their respective websites. Most places you see it, whether online or on tv, even make it easy to read by color-coding it, red means the average fell, green means it was up from the start of the trading day. But very few, and I would say this even applies to investment professionals, can even name the companies that make up the Dow.

Your John Q. Public probably doesn’t know much more than this: if the Dow goes up, the stock market went up. If the Dow went down, it was a down day and the stock market went down. But that is hardly the story.

If the Dow went down today does that mean the entire market went down? Of course not. Even when the overall market declines there are still some stocks that go up. Many of these we would say have an inverse relationship with the overall market, or are known as counter-cyclicals. Often this is expressed by having a negative Beta. But let’s back up for a minute.

I mentioned most people don’t know what makes up the Dow. If you use a broker to manage your investments try this next time they call to pitch you an investment idea (and if you use a broker you know just as well as I do that they like to call with the next biggest thing that you simply have to invest in!)… next time they call, ask them, “hey Ima Broker, I have been thinking about just putting some of my money in the stocks that make up the Dow and ride the average, which ones do you think I should consider?” Or you can flat out play dumb and ask them, “Ima Broker, what exactly makes up the Dow?” and if they give you a simple answer “Oh, 30 of the biggest stocks in the U.S.” you can pry farther and say, “oh yeah, which ones are those?” I bet you most professionals can’t name even half of the list. (And I’m not saying I can by the way!!!)

The reason for this blog isn’t to make your relationship with your broker comparable to your relationship with your ex-wife/ex-husband. In fact, most people don’t have a broker. They have an account with a company, say through their employer (like a 401(k) plan, 403(b) for you government or institutional folks, etc) or have an IRA at a bank or brokerage like Fidelity or Vanguard. Therefore, you call a toll free number and could speak to any one of hundreds of licensed professionals working in a call center, etc.

What I’m getting at is that it’s important to know this: when you hear that the Dow went up 40 points, you know what makes up the Dow and what implications that can have for your own investing.

So what makes up the Dow?! Well, I am not much for rote memorization so I had to look it up myself. 30 stocks, the biggest ones in the U.S. And the DJIA is weighted according to the size, so the bigger the company/stock, the more weight it carries in the average. Here is a link to the list of the 30 stocks that make up the Dow.

So how do they come up with the daily DJIA value and how much it gained or lost in value? As I mentioned in the previous paragraph, the DJIA is weighted accordingly for the bigger companies to have more pull, but that isn’t everything that makes up the number. Here is a more detailed explanation from Investopedia.com

Should you stress out about a sharp decline in the Dow or rejoice exceedingly in a huge gain by the index? Well, that depends… do you own a significant amount of the Dow components? If so, yeah. But even then does the Dow accurately track the entire stock market? Probably not. There are some days where the Dow can be pulled in one direction or another by a huge change in one its components, say if Procter & Gamble announce a huge acquisition like they did when they acquired Gillette. In the grand scheme of things remember this, it’s only an average composed of 30 companies. In contrast, the S&P 500 is a list of 500 companies. Now you will notice a lot of these averages move in the same direction as one another on any given day. Well, your 30 companies that make up the Dow are also in the S&P 500. And even when the stocks are not in both (or multiple) averages, the larger companies such as the 30 in the Dow, tend to trade in the same manner as the overall market due to their enormous size.

We’ll explore these industry averages more in the future, but hopefully you understand more about how the averages are valued and how they were derived. You may have noticed I used a website called Investopedia.com in my research. I have found this to be an excellent source for common investment questions, etc. As always I welcome your comments.

My name is Thomas Goodwin. I am a graduate of Miami University of Ohio with a B.S. in Finance and I’m a Lifetime Member of the Alumni Association. I am currently working on my MBA at Xavier University in Cincinnati, Ohio.

I am an Ohio licensed real estate agent (Realtor) since 2001.

I am an Ohio Licensed Insurance Agent (Series 11-35 & 11-36) since 2002. The series 11-35 license is issued to agents involved in Life & Health insurance and Variable Annuity products. Series 11-36 Ohio Insurance license is for the property/casualty lines of business.

I have held my NASD Securities License (Series 6 & 63) since 2003. You will find that most registered representatives hold either the Series 6 or Series 7 securities license and then most of the people that hold either of those licenses also hold the series 63 license. The explanation of these licenses and the numerous others available to investment professionals are explained in great detail on the NASD website, please refer to the NASD.org website by clicking on this link for more information.

In the past I have served as the Secretary, Treasurer, then finally as the President of my homeowner association.

I have experience in writing business plans and filing articles of incorporation - I am one of the founding partners of a real estate investment company, AG Properties LLC and I am currently the sole owner and founder of another real estate venture called Northern Pine Properties Inc.

I’m sure you will hear more about my adventures in entrepreneurship, real estate, and investing as I write and post more!<

If this were a hard bound book that you picked up in the store the first thing you would probably do is flip open the inside cover to read more about me, the author. After all, what is it about me that makes me so qualified to write and maintain this blog and what is this blog suppose to be about anyway?!

This blog is intended to cover a wide variety of personal finance topics - from the stock market to real estate. You may ask, why have such a broad range of financial topics? To answer the question in short, I believe these various financial components are all intertwined in our everyday lives and one can affect the other. You can’t think about saving and investing without also considering insurance and protecting your assets. You can’t think of owning a home without considering homeowner’s insurance. Over the years, as I have gained more experience and education, I have labeled myself Your Source for ALL things financial. Please take a moment to read the About the Author blog post to learn more about my background and education.

Thanks for stopping by, please check back soon for more updates!

Welcome to ThomasGoodwin.com, my personal website and blog. Over the past couple of years my website has evolved from a simple HTML page to a fully interactive website featuring this blog and the ability for you to send me messages or post replies to my blog topics. I cannot take personal credit for this transformation. The technical details and set up of this website are solely the result of Aaron Forgue’s efforts. You can learn more about the webmaster by checking out his own website and blog on AaronForgue.com On the other hand, all of the content of this website is the result of yours truly, Thomas Goodwin.

I probably can’t do Aaron justice by trying to explain his technical capabilities. I can only speak to the extent that I have seen his work. This man is truly a genius when it comes to website design. I have known Aaron since 1999 and have watched his capabilities grow over time. He has developed websites since before I met him in 1999 and although I don’t know when he first started in this business I wouldn’t hesitate to say that it has been at least a decade of experience now. Aaron graduated from Miami University of Ohio in 2003, the “Harvard of the Midwest”, with a B.S. in Systems Analysis (or perhaps it’s more appropriately called Computer Systems? You would have to ask Aaron to clarify). He has recently completed his MBA at Northern Kentucky University close to his home in the greater Cincinnati, Ohio area. His MBA has a concentration in Entrepreneurship, and I can attest that Aaron has been involved in a number of small businesses, helping them launch and get their websites developed.

Please take a moment to visit his website AaronForgue.com and be sure to come back and read more on ThomasGoodwin.com as I hope to update on a weekly or bi-weekly basis depending on the developments that take place in the world of personal finance, namely real estate and Wall Street. Thanks for blogging! Please bookmark or sign up for notifications of updates so you won’t miss a beat! And as always, your feedback is greatly appreciated and encouraged!