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Things to Consider Before Paying Off Your Mortgage

One of the most common questions we are asked is:  Should I payoff my mortgage? There are a lot of things to consider when thinking about paying off your mortgage and a lot of misconceptions. Many pundits promote a debt free philosophy which may or may not make sense for everyone. The real issue is making sure your debt is structured in such a way as to help ensure you reach your long-term financial goals. Let’s take a look at the details.

First, there is nothing wrong with having a mortgage, especially if you have the fiscal ability to manage a mortgage and save for retirement. But if you are considering paying off your home, you need to determine if the rate of return you need to reach your overall financial goals is higher than the cost of servicing your debt. If it is, it doesn’t make sense to pay off your mortgage.

If you are 65 years old with a significant amount of retirement savings; a steady, guaranteed pension; or decent social security income, it might make sense. Whatever your situation, you should make this decision without emotion.

Don’t Count on Social Security

In this article from the Philadelphia Inquirer, David Blain cautions younger investors that Social Security may not be available when they retire.

Amazing Shrinking Social Security

In this article from InvestmentNews, David Blain cautions young investors about the availability of Social Security when they retire.

Reality of Taxes Lost on Many Taxpayers

David takes a closer look at the disconnect between taxes withheld and taxes paid in the eyes of taxpayers.

Top Government Expenditures

David continues his look at programs that benefit the most from government expenditures.

How the Government Spends Your Tax Dollars

David reveals how the government spends your tax dollars.

Predictions and Self-Fulfilling Prophecies

David cautions against putting too much stock in year-end predictions by TV, radio and other media pundits. He also talks about changes in social security and medicare costs for 2012.

Dusting Off the Old Three-Legged Stool for Financial Security

David begins a discussion about his improved three-legged stool for financial security.

Buffett Needs to Write a Check

David explains the difference between marginal and effective tax rates and why the Buffett Rule doesn’t really mean anything.

Fix the Tax Code!

-David makes the case for not extending the payroll tax cuts, but rather fixing the tax code.

Extend the Payroll Tax? No, Fix the Tax Code

David makes the case against extending President Obama’s payroll tax cut.

When Is a Tax Cut Not a Tax Cut?

David explains why the payroll tax is not really a tax at all, and why the temporary cut given by President Obama didn’t work anyway.

Traders Have a Need for Speed

David explains high-frequency trading and how it adversly affects small investors. He also points out things that the small investor can and should control.

The Debit Limit: Separating the Truth from Politics

David explains the reality of reaching and perhaps exceeding the Federal debit limit.

Income Producing Real Estate

By David L. Blain, CFA

There was a time when the three legs of the retirement stool were Social Security, pensions and personal savings. But those days are gone for good and the stool needs new legs. Today, building a more stable three-legged stool requires three key components: (1) paper assets (stocks, bonds, ETFs, etc.), (2) ownership in an operating business, and (3) income producing real estate.

The third leg, income producing real estate, is an excellent way to generate income for retirement, but for many people, purchasing real estate—especially commercial property—is out of the question. An alternative for establishing the third leg (really, the first leg too) can be Real Estate Investment Trusts, or REITs, an investment vehicle created by Congress in 1960 to give the average investor the opportunity to invest in large-scale, income producing real estate.

The typical REIT is engaged in the ownership and operation of income-producing properties such as office buildings, apartments, shopping centers, hotels, etc. Most REITs specialize in only one of these categories, but many are beginning to engage in other real estate-related activities such as leasing, maintenance and tenant services.

As with other large public companies, the day-to-day operations of a REIT are managed by a team of professionals. These professionals are in turn overseen by a board of directors elected by shareholders. Because they are publically traded, REITs are subject to the same corporate governance and disclosure rules as other public companies.

The number and variety of publically-traded REITs make them an excellent vehicle for diversifying an investment portfolio. Our research shows that as of January 1, 2011, there were 153 REITs registered with the SEC, representing $389 billion in market capitalization. And, because the majority of these trade on the major exchanges (NYSE, AMEX and NASDAQ) they provide the same level of liquidity as a stock.

REITs are required to annually distribute at least 90 percent (some distribute 100 percent) of their taxable income to shareholders. If this income is derived from a comparatively predictable and reliable stream of rental fees, the REITs will likely return higher than average dividend income.

One thing to be aware of with REITs is how the income they generate is taxed. REIT dividends are paid out of the company’s taxable income which means that in most cases, shareholder dividends are taxed as ordinary income. Like other dividend paying companies, REITs distribute shareholder tax information on IRS Form 1099-DIV.

REITs offer the potential for moderate, long-term share price appreciation, but it’s their dividend yield that makes them an attractive addition to a properly allocated portfolio. To identify which REITs are best positioned to offer such a steady income stream, you should look for companies that demonstrate the following characteristics:

  1. The company should have a history of consistently paying dividends (suddenly spiking yields could indicate a one-time event that the company may not be able to repeat on a regular basis).
  2. Low relative rental rates. Companies whose rents are at or below current market levels have more flexibility to raise rents, giving them more upside potential and protection against economic downturns.
  3. The company should have strong strategic vision with a proven track record of bringing new properties online quickly and cost-effectively using only moderate leverage. They should also have strong tenant relationships.
  4. Location, location, location. Be cautious of REITs that conduct their business primarily in markets that are currently depressed. After all, not all types of properties recover at the same time, so it can take years for certain segments of an overall real estate market to regain momentum after a severe downturn.

While the U.S. is still the largest market for publically traded REITs, the market for like or similar securities is becoming increasingly global. More than 30 countries now offer REIT-like investment vehicles including developed nations like Australia, Canada, Italy and the U.K., as well as emerging market countries such as Bulgaria, Dubai, Malaysia and Pakistan.

REITs may not be for everyone, but for those investors who need or want to add real estate to their portfolios; REITs can provide a transparent, cost-effective way to gain such exposure. In addition to dividend income and potential share price appreciation, REITs provide the benefit of diversification to a properly allocated investment portfolio.