23yo College Grad - Needs Money Advice....?

Question

Graduated from college in 2005 and have been working since. Worked my butt off in school and landed a job paying in the mid 70's starting. still live at home to save some cash (thank god for mom and dad). Been able to save over 30k in 2006 and will prob be able to do the same in 2007 (savings is earning 5% annually ). Have my 401k covered as well as a company pension plan (will be well taken care of after retirement, 42 years from now). Have an IRA and some stock investments (not much $$$ in them). My question, what should i look into for investments? I live in los angeles where a 2 bedroom shack costs $500k so real estate may be out of the question nonetheless i am banking on this bubble to burst. should i continue to save and go on a shopping spree when real estate prices come back to normal? advice from a seasoned pro would be nice....

Answer 1

First I would like to say good job on starting saving so young. Many young people today do not have the wisdom to understand long-term prosperity VS have-it-now gratification.

I am not a real estate professional, but I recognize your situation. I live in Los Angeles as well and despite my high income, I cannot afford a house w/land. Two or three-bedroom condo is more like it.

In my humble opinion, the bubble has just barely started. The reason is the income/price variation is so huge. What I mean is that the median price of homes in cities like L.A. is so much bigger than the median affordable income. Example, cities like Northridge where the average household income is only 65k, but the average home price is 650k. That is a 10:1 ratio.

Home owners are supposed to be able to spend less than 40% of their total income on their mortgages which means that to have a 550k mortgage, that family needs to be earning well over 100k.

Fact is there are simply not enough high-income-earners to support the current asking prices for real estate in cities such as ours. Developers are wondering why houses that cost 1M and up are sitting on the market so long. Well let's see,...
To afford an 800k mortgage my household income needs to be roughly 250k?

Who earns 250k and wants to live in Chatsworth?

If I was earning that, I would find some secluded land and build my wife's dream home with a lawyer and a contractor. I wouldn't touch these new overpriced track homes with a 10-foot pole.

In other words, you are not alone with regard to real estate woes.

On the other hand, you could afford to take more risk with your other investments. 5% is a pretty low ROI. Spotting stocks that have value and a catalyst to see 6-12 month success is not that difficult if you invest some time with the right books. Finding great stocks can mean 25% annual returns if you are willing to accept the risks. I am not going to recommend stocks to you, however.

Don't get too cozy at home. You may love your parents completely, but 23 is pushing it. You may soon need to be the head of your own household, even if it means you get to invest slightly less next year.

Be blessed.

Answer 2

So far you are doing great things. Max out your 401k and your IRA and also do a Roth IRA. These are all great because they will grow tax deferred, which will far outperform anything that is taxed. They also lower your current income tax due, which is important for a single person making 70K. Invest them all in stock funds, some international stock funds, some growth, some value oriented funds. Stocks as an asset class outperform other assets.

If you have money left over, open a brokerage account and look at the publicly traded Canadian oil royalty trusts like HTE and CNE which trade on the NYSE like stocks. They have dividends of 15% to 17%, which are stable as long as oil is $50 bbl, which it will likely be. Then use margin to double up your position. You will earn 30%-35% per year before margin interest of 9%, which is 21-26% after margin interest. That will double your money in 3 years as the dividends pay off your margin debt. If oil goes up, you win big. This is the way to get some of the leveraged return traditionally associated with real estate while waiting for real estate prices to crash. Then take your doubled oil trust money as a down payment for a nice house.

Crap, I hope my kids are as forward looking as you are. They way you are going, you will be able to retire at 40. Keep it up.

Answer 3

The bubble has burst, It won't get any better than it is now. Interest rates are around 6% which is also great. Believe me, I have lived through 8% to 12 % interest rates with 2 points to close. That won't get much better either. Look into a condo to get you started. It's a ladder approach. Buy something that will do you for the next 4 to 5 years. Then trade up.
Don't plan on keeping a job till your 62, corporate America has a way of dumping on you when you hit your late 50's They can hire 2 20 year olds for what they pay you.

If you buy a $300k condo and put $30k down, and live there for 4 years and the value increases 5% a year then it will be worth over $360k. When you sell you will get 90K out in equity which will have earned you 200% on your investment over 4 years or 50% a year.

Answer 4

I'm not a seasoned pro, but I can say this. Because you are so young, you should go after mainly agressive type stuff. I like mutual funds, because you get a good diversified bunch of stuff, and it's low maintance. Go to a professional shop like Charles Schwab, they can help you with spicifics. I can tell you, it helps to go with a profesional.

I am 18, and I started my college fund when I was 6, when my dad died. Most people can expect to double their money every 8 - 10 years, but I did much better than that. You honestly get what you pay for, and a good financial planner/adviser can really help you get a sense of your entire financial picture.

Answer 5

What are you talking about ? In Real estate , the market is actually a buyers market right now.

Answer 6

Study/work hard. Be yourself. Be nice. Have fun! :)