Category Archives: Real estate

Are You an “Affluent Worker?”

Forbes magazine recently had an article about some of our favorite clients. They call them the “High Net Worker.” These are people who are successful mid-level executives in major businesses. They range in age from 40 to the early 60s. They earn from $200,000 per year and often more than $500,000. They work long hours and are good at their jobs.

According to the Forbes article, many have no plans to retire. Our experience is different; retirement is definitely an objective. But many have valuable skills and plan to begin a second career or consult after retiring from their current company.

At this time in their lives they have accumulated a fair amount of wealth, own a nice home in a good neighborhood, and may be getting stock options or deferred bonuses. That means that at this critical time in their lives, when they are focused on career and have little time for anything else, they have not done much in the way of financial planning.

When it comes to investing, most view themselves as conservative. But because of their compensation their investments are actually much riskier than they think. It is not unusual for executives of large corporations to have well over 50% of their net worth tied to their company’s stock. Few people realize the risks they are taking until something bad happens. For example, the industrial giant General Electric’s stock lost over 90% of its value over a nine year period ending in 2009. The stock of financial giant UBS dropped nearly 90% between May 2007 and February 2009. These companies survived. There are many household names, like General Motors and K-Mart whose shareholders lost everything.

The affluent worker’s family usually includes one or more children who are expected to go to college. Many of these families have a 529 college savings plan for their children. Most have IRAs and contribute to their company’s 401k plan, but because many don’t have a financial planner they do not have a well thought out strategy for this part of their portfolio.

At a time when many less affluent families are downsizing, many families in this category are either looking to upgrade their homes, buy a bigger home, or buy a second – vacation – home. They may even help their adult children with down-payments.

If you are an Affluent Worker, give us a call and see what we can do for you. If you already have a financial advisor, it may be time to get a second opinion.

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The lure and risks of “alternative investments.”

The financial world has been deluged marketing offers from investment firms offering “alternative investments.” “Alts” are non-traditional investments.  They include non-traded REITs, hedge funds and private equity.

The lure of “alts” is summarized in a quote from Financial IQ:

“The 2008 financial crisis scarred investors enough that they’re still seeking new ways to diversify out of stocks and bonds. Meanwhile, investors also are hungry for yield amid persistently low interest rates.”

The problem with “alts” is that they are not well understood.

Many are not liquid – in other words they cannot be sold at a moment’s notice.

In addition, most are not transparent – you can’t always tell what you own because the “alts” managers are secretive, unwilling to reveal their strategy in detail.

Third, the fees charged by “alts” managers are often much higher than those charged by traditional managers.

Many of the “alts” use derivatives which are difficult to understand and can lead to risks that are not obvious. An example are the “guaranteed” structured notes created prior to 2008. When Lehman Brothers collapsed it was revealed that the “guaranteed” notes issued by Lehman were backed by the claims paying ability of a bankrupt company.  People lost millions and learned a painful lesson.

Our philosophy is to invest our money in securities we understand. We always want to know: what’s the worst thing that can happen? If we don’t understand the risk, we don’t invest.  It’s a lesson learned over the years as we keep in mind the first rule of making money:  don’t lose it.

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Benchmarking Inverts the Basics of Investing

The problem with “benchmarking”  – that is measuring your investment performance against market indexes (known as “benchmarks”) – is that it often leads to buying into asset bubbles.

During the tech boom of the last 20th century, billions of dollars went into internet stocks whose values became wildly inflated.  People who participated in this as a way of reaching for high rates of return, found that no one rang a bell when the party was over.  Many lost their retirement savings and saw their 401(k)s devastated.

Certain stocks become wildly popular, industries become wildly popular and investing styles become wildly popular, all of which leads to wildly inflated values.  This almost inevitably leads to financial pain.

But this does not only happen in the stock market.  In the first decade of the 21st century, real estate seemed to be a way of making outsized profits.  Of course, when the housing bubble collapsed, many not only lost money, but their homes.

The focus of serious investors is to align your portfolio with your personal objectives.  The focus should be on long-term – multi-year – performance.  The only benchmark that should concern you is the one you set for yourself.

At Korving & Company we keep our clients grounded and work with them to meet their personal benchmarks.  Contact us to do the same for you.

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Castles On Deep Discount In Eastern Germany

For those who have everything, here’s an unusual gift”

Mutzschen Castle


For sale: 18th century castle with a medieval prison tower, moat and lake on 14 acres. The price: 350,000 euros ($445,000), less than the cost of a Manhattan studio. The catch? It’s in eastern German.

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Avoiding the Housing Trap in Retirement

Homes are a money pit. This morning the HVAC repairman showed up to fix the broken attic fan. Painters are coming next week. The insurance bill on the home is due soon. The landscaping needs some work. Let’s not forget real estate taxes and the mortgage payment.

Many people think of their home as a financial asset. Most people thought real estate was a safe financial asset. People were flipping houses for fun and profit. Then 2008 came along and we learned a whole new set of terms, like “liar loans” and “short sale.”

What does this have to do with retirement? Just this: many people are over-spending on their dream home or holding on to costly vacation homes. There is a term for this: being “house poor.” It describes the homeowners who spend too much of their income on housing costs.  How much is too much?  If it’s nearing 40% it’s definitely too much.

We won’t go into the reasons for this; they are well-known. The answer is to either make more money or to get rid of the money pit. It may be a very difficult emotional decision, but over the long-term, the financial markets have done better than the housing market. Another benefit is that the financial markets are liquid while your home is not,  sometimes taking a year or more to sell.

We are big believers in home ownership. But in our experience a home is not a financial asset that is used in retirement. In most cases the home does not become a financial asset until the owner gets too old and has to move into a retirement community or a nursing home. By that time, retirement is nearing its end.

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Buying a Retirement Home

After the children have gone the old home may be too big.  The yard may be too much to take care of.  What should retired people look for under these conditions?  If moving into Senior Housing is not on the immediate agenda, many people may decide to move to a smaller home or move closer to their children.  But there are pitfalls in this process.

A retired couple may not care about the school system serving their neighborhood, but it could be very important when the house goes on the market again and young couples don’t want to buy because the schools have a bad reputation.  Another consideration is the financial strength of the city or town they live in.

In Allentown, Pa., weak property values are starving the city of a primary source of cash. Springfield, Ill., has seen pension costs nearly triple in the past decade. Providence, R.I., raised taxes and fees and cut benefits to offset losses in state aid. Fresno, Calif., has so little available cash that officials worry one unforeseen event could reverse nascent improvements.

Living in a community that’s forced to cut back on police and fire protection may not be an attractive place to live.  People in Detroit have seen property values drop so low that they many can’t sell at any price.

When buying a home, whether it’s your first or your last, keep in mind what the next buyer will consider and buy with an eye toward resale.  You know that your home will go up for sale at some point and it could well be your single biggest investment. As we learned in 2008, real estate can go down as well as up in value.  When buying a home always consider what the next buyer will want.

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A castle that costs less than a NYC apartment

There was a fascinating article in BuzzFeed that had the interesting (to me) title: 6 Castles That Cost Less Than An Apartment In NYC

Here is the first pair:

Castle in FrancePRICE: $1,621,200

This 13,993-square-foot, 6-bedroom castle sits on 24 acres of land overlooking the countryside of Midi Pyrenees. Features include a large entrance hall opening to the courtyard, salon with a fireplace, grand staircase, elevator, large dining room with fireplace, two kitchens, a bedroom wing with a hall onto the courtyard, study rooms in the towers, two garages, and access to the chapel and east wing.

Apartment in NYPRICE: $1,650,000

Here’s a 1-bed, 1.5-bath, 1,200-square-foot apartment on East 30th Street. It’s conveniently located near nothing interesting.

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Interest Rates

10-year-yields-and-30-year-fixed-since-2008[1]  The graph at left shows how the interest rate on the benchmark 10 year has changed from January 2008 till today.

Note that the 30-year fixed rate mortgage tracks this almost perfectly because banks us the rate in the 10-year treasury bond to set the rate on fixed rate mortgages.

The rise in rates in the last year was triggered by the Federal Reserve’s hints that it would stop “easing” at some time in the future.  The recent announcement that it would not stop easing yet has caused the 10-year bond yield to decline from nearly 3% to about 2.65%.

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Passing a Vacation Home to the Next Generation

We have a few clients who have vacation homes and the article in Financial Advisor IQ seems to cover the issues involved when it comes time to pass it on to the next generation.

There’s the issue is who gets to use it and when.

Advisors’ challenges can include helping adult siblings negotiate, say, who sleeps in the bedroom with the ocean view.

While the parents are alive, they set the rules.  Once they are gone, the potential for conflict escalates.

 In some cases, one sibling lives near the vacation house and can use it often, while others live far away. One solution, says Mossanen, is to turn it into a rental property. For example, two siblings could rent the home to strangers for $1,000 a week and split the income, and rent it to each other for $500 a week. “That equalizes things,” Mossanen says.

Who will take care of the property?

The sibling who lives closest to the house is likely to be the one who goes running when the roof starts leaking — another potential source of conflict.

Suppose one sibling wants to keep the home another wants to sell, what are the tax consequences.  Often it’s best to put the property up for sale but give the siblings the right of first refusal.   Read the entire article for some additional ideas.

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Richest Island Owners

If you are rich enough, the private jet and luxury yacht no longer sets you apart.  Owning your own island is now the new status symbol.

Here are five billionaires and their private islands.

1. Lawrence Ellison: Lanai Island, Hawaii Net worth: $43.9 billion Country: U.S. Position: Co-founder, Oracle


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