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I’m taking a bit of a break, so now through July 4th I’ve combed the archives to find earlier content that might interest new readers (as most of my readers are new). This article originally ran February 23, 2006.

MSN Money has an excellent article on not biting off more house than you can chew. Any first time homebuyer has heard it from older relatives: “buy a little more house than you can afford right now, you’ll grow into it”. The article lists reasons why that advice worked last generation, but doesn’t translate well now.

• Inflation. Rapidly rising prices in the 1970s and early 1980s meant you could count on hefty annual raises. Today, you can’t rely on double-digit income boosts to make your mortgage payment less of a burden each year.
• Two-income couples. A generation ago, single-income families were more common. If the breadwinner lost a job, the other spouse could go to work to save the house. With more two-income families needing both paychecks to make the mortgage payment, there’s no one on the sidelines to take up the slack — unless you put the kids to work.
• The lending industry. Thirty years ago, it was pretty tough to get a mortgage for more than you could really afford. Today, it’s fairly commonplace. More lenders have loosened their criteria, knowing that the vast majority of their borrowers will do whatever it takes to pay their mortgage — even if it means trashing the rest of their financial lives. 
• Retirement. A much bigger proportion of the workforce was covered by traditional, defined-benefit pensions 30 years ago — which means they didn’t have to save massive amounts of money on their own to have a decent retirement. Today, the onus is typically on you to carve enough out of your budget to fund 401(k)s and IRAs.

All of these are great points, but it doesn’t help you figure out how much house you can truly afford. There are a few tables to figure out how to calculate how much house you can afford, but I prefer the budgeting method.

Do a budget for six months. That is a long enough time frame to start to figure out necessary monthly expenditures (one year would be better). Using that data, figure out what you can truly afford to spend monthly on a house. Subtract 10% from that amount to give a little monthly wiggle room. Now, subtract $200/month for taxes and insurance (or figure out an approximate amount for houses in your area). Take that remaining amount and plug it into an online calculator to figure out how much house you can afford.

One important last step, though. House repairs generally cost 1-2% of the value of the home each year. So, if you purchase a $200,000 house, expect to sock away at least $2,000 per year for home repairs. Take this amount into account and re-calculate the house you can afford. This will give a little more wiggle room if the house needs major repairs, or if you want to replace carpeting or tile.

We went through a similar calculation when we bought our house. We ended up spending a tad more than we calculated initially, but the house came with a Aon Home Warranty for the first year, which gave us breathing room on repairs. It allowed us to allow our salaries to catch up and gave us a little cushion on repairs.

That’s just my suggestion, however. There are tons of resources on the internet on how to determine how much house you can afford. I will suggest one more thing, get a traditional 15 or 30 year mortgage and avoid the interest-only and other bizarre mortgages that have cropped up in the past few years. It will skew your calculations and could lead to a greater chance of default and selling the house for a loss. That’s not good.

When I initially discussed the Blackstone Group’s upcoming IPO, one of the issues that I pointed out was the murkiness of the tax situation. Congress has come out with a bill that essentially takes away the tax advantage that Blackstone would have over other publicly traded entities. The reason for the difference is that Blackstone is structured (technically) as a limited partnership while most publicly traded entities are corporations. Partnerships do not pay tax on their income while corporations do.

Well, the IRS didn’t much like that idea. Senators Baucus and Grassley, the Chairman and Ranking Member of the Senate Finance Committee respectively, have introduced a bill to eliminate that advantage by taxing all publicly traded entities as corporations. On top of not paying taxes, the companies can generally structure their operations so that all their income is treated as capital gains in the hands of their partners. That lowers the partner’s tax bill from 35% to 15%.

While private equity and hedge funds are the primary focus of the bill, there could be precedent in Canada for the type of tax playing that goes on when such an advantage is available. Canada used to have a structure called an income trust that worked similarly to a Real Estate Investment Trust. As long as the company paid out a high percentage of earnings (usually 90%), there was no tax levied at the company level.

Well, when tax consultants figured out how to shoehorn other companies into this structure many companies converted to this income trust. The initial target for this kind of trust was small oil and gas companies that have little operations and basically operate as partnerships, large corporations began converting so that they would have a market advantage. The two largest telephone companies in Canada, Bell Canada and Telus, planned to convert until the government took the exemption away. The value of income trusts dropped around 20% in the days after the budget was introduced.

Could the same happen here? Blackstone has said that the legislation would have a material effect on their valuation and stock price, and some analysts have floated the idea of 20%. The Washington Post says that the Senators were concerned about other firms testing the waters after Blackstone’s IPO, expected by next Friday.

I wouldn’t have invested in the IPO before, but the murkiness of the tax situation has to give investors additional pause. Like I said earlier, I doubt that Blackstone will have trouble placing the shares, but I’m not sure I want to be holding them at the end of the day.

I’ve written before about Conde Nast’s Portfolio magazine, a high end glossy for business types, and I can’t say enough about the excellence of their blog coverage. An offbeat item posted today on the Tech Observer blog goes way beyond business and gets down to real life advice to tell students as they graduate from high school. While all of it is good advice, I’m particularly struck with #1, #3, and #4.

While I had excellent grades in high school and was National Honors Society and all that, once I hit college none of that really mattered anymore. I also got excellent grades in college, but once I got my first job it didn’t matter again. Grades are a way to open doors for college and the first job when the person doing the selecting has little else to go on. Once you get there, you have to prove yourself with your skills and your knowledge. Once I was looking for my second job they never asked what my grades were in college. They asked what I knew.

While I remember various items from Chemistry and a little bit of Calculus, I’ve never used either. I have used Algebra, but I can’t say I’ve ever seen a use for knowing the derivative of a function.

Oh, and I largely stopped finding new music after high school. Even with my iPod, I purchase about three albums per year (though one was Lily Allen, that I’m still listening to). You won’t be cool anymore kids, sorry.

Any other tips for graduating seniors?

One of the coolest “inventions” I’ve seen in the past few years is the Enertia house. The Enertia house is a log home that is built to create its own environment inside the house.  This is done by building double walls of a certain type of wood that allows geothermal energy to circulate throughout the house while the wood regulates the temperature of the air by holding in heat and then releasing it at night.

Part of the design of the house is a bevy of windows on the south side of the house that capture heat in the morning when the Sun is low in the sky. As the day progresses, the heat of the Sun is reflected off of the roof, keeping the heat away from the house. What heat does get into the house rises up and out through vents in the roof, pulling cooler air from the basement along with it and into the house (three feet down, the Earth is a constant 50 degrees Fahrenheit). In the winter, the Sun is always lower in the sky, so the house captures more of the heat and it is circulated at night.

Another part of the thermal “envelope” is the building material itself. Southern Yellow Pine is used as the primary building material because the wood has amazing thermal properties. It is able to absorb an enormous amount of heat, which allows it to regulate the temperature in the “envelope” by absorbing or releasing heat as necessary to regulate the temperature.

The builder claims that houses built properly will not need heating or cooling, just an open Southern sky and tree cover on the other sides of the house (furnaces will need to be put in, however, because insurers won’t insure a house without a heat source). A backup heat source may be recommended for colder climates and those with heavy snow cover.

The Enertia house was named 2007’s Modern Marvel in a contest sponsored by the History Channel.  The Enertia website has plans for sale (it’s DIY, but they provide the outside building materials). They’re not exactly cheap, but they’re not hugely expensive either. The cheapest kits are available from $60,000 and the website says most houses are built for 3-4x the price of the kit (the house would be less than $250,000 under these conditions). That plan is a one story home that is about 1900 sq ft including basement. It only includes two bedrooms, but the basement is available to add more bedrooms as it is largely unfinished.

It’s an interesting concept, and I’d love to see how one of these homes work. It may be more expensive to build than a traditional “stick” home, but you’ll save money in heating/cooling bills and it is built with a much more hardy material than the lumber and siding you’ll see in new homes, lowering maintenance costs as well. It’s probably not a solution for urban areas due to space requirements, but for those living in rural areas it’s a great way to save money and lower pollution.

I’ll admit it. Networking is one of the single hardest things for me to do. I am extremely shy and don’t like to talk to people I don’t know (it probably borders on fear). I have several nervous habits to boot, so I come off as “that weird guy in the back of the room” as one of my college acquaintances called me before knowing me.

Yahoo!’s Personal Finance portal has an article from Forbes on how to network without speaking. It has several excellent tips for getting off on the right foot (provided you don’t then stick it in your mouth).

1. Dress professionally. There’s a reason the basic business suit hasn’t changed in a hundred years.
2. Watch hand gestures. Looking at your watch and running your hands through your hair are telltale signs you are nervous. Keep them on the table if you are sitting and use them for emphasis whether sitting or standing.
3. Relatedly, practice that handshake. A good handshake doesn’t necessarily mean crushing the other person’s hand. A nice, tight handshake will always be more appreciated than a broken hand.
4. Eye Contact. Always look people in the eyes and keep looking them in the eyes (US only). This is one that I have a supreme problem with naturally and have to override my circuitry constantly in order to get the necessary eye contact.
5. Look authentic. Actively listen and look like you are. If I don’t watch it, I tend to wonder off similar to JD on Scrubs (though not that bad) and this is part of the eye contact problem.

A lot of these are pretty common sense, but it’s still important to remember and practice all of the ideas. It will complement what is coming out of your mouth and will make people remember you. Which, after all, is the whole purpose of networking.

Today is the day that millions of forwarded messages told you not to buy gas. The message tells you that the oil companies have artificially inflated prices and that they’ll lose so much money today they’ll drop prices to <insert price here>. It even worked in 1997!

Of course, the e-mail is crap. It’s been circulating since 1999 according to Snopes. As the date approaches, more and more people forward the message around and then promptly forget it. Hardly anyone takes them seriously and even if they did, it would never work.

See, even if no one bought gas for one day they would have to buy it eventually. All the gas that would be sold today will be sold tomorrow. The only thing that would happen is that there would be longer lines for gas tomorrow. There are two ways to lower gas prices: find more oil or use less gas. If you’re not doing one of those two things you can’t change gas prices.

If you get the message delete it immediately. Actually, that’s a good theory for any forwards that you get. You can check Snopes but 99.99% of them are fake so just delete them and move on.

Oh, and buy as much gas as you want today.

As part of Yahoo!’s continued improvement of their standard setting Finance portal; they have added a massive amount of personal finance content in the past year. On top of having columns from columnists such as Ben Stein, Dr. Jeremy Siegel, and Ram Charan, they have several other regular features that need to be checked out.

One of those features is their how-to guides. These guides are not all encompassing, but they are very well written summaries of heavy personal finance topics. They include tips for buying a car, an excellent overview of mortgages, and financing options for small businesses.

The mortgage basics how-to not only goes through the basics of different types of mortgages, but tells you what lenders (should) look at when determining if you qualify for a mortgage, when you should pay points, and when an Adjustable Rate Mortgage may be right for you. 

If Yahoo!’s personal finance section isn’t a daily stop in your websurfing life it probably should be. And if you are looking for basic information on any personal financial topic,  Yahoo!’s how-tos should be your first stop.

*Hallelujah chorus begins*

US News and World Report (via Yahoo!) reported on Friday that the Department of Education was shutting down its student loan database because of marketing abuses. Between my wife and I we get, on average, three solicitations for student loan consolidation every single day. Most of them could be graciously called confusing and are written to look like they are coming from a company that already has your student loan.

We’ve gotten pretty good at shredding the adverts but every once in a while they’ll get us to take a second look to make sure it’s not something important. We consolidated both of our loans when interest rates were in the toilet and are paying something like 2.25% on our loans. Though it’s a nice try to trick us into a higher rate!

Lenders are complaining that some loans will take longer to process because of the shutdown. They say it may affect where kids can go to school if they can’t get a timely response. That would be an issue, but there has been clear misuse of the system and it’s about time the Feds did something to prevent the gross misuse of the information.

It may be the case of a few bad apples, but in this case they really do spoil the bunch.

Lifehacker has the goods on a couple of services that allow you to use your mobile to check out real estate listings.

Homefront allows you to text the street address of a home to HOUSE (46873) and you’ll get back the number of bathrooms, the number of bedrooms, year built, and estimated value. You may also get back other bits of information depending on the location.

Zillow Mobile is an offshoot of the widely discussed Zillow website that estimates home values anywhere in the US. It basically does the same thing. You text a message to z@labs.zillow.com and you get the same information: number of bathrooms, the number of bedrooms, year built, and estimated value. The estimated value is the Zestimate, Zillow’s proprietary valuing guess.

So, if you’re house shopping and came across your dream Victorian and want to know if it is in your price range, you can know instantly whether you’d have to sell your children to afford it.

The big news in the financial markets this morning is the proposed IPO of Blackstone, the uber-private equity firm. Many market analysts are drooling over getting a look at Blackstone’s operations, which have essentially minted cash for the firm in the past few years. Media outlets have reported that the average Blackstone analyst has generated nine times more profits than the most profitable investment bank (Goldman Sachs, naturally).

Investors are looking to get in on the private equity action without having to be an accredited investor. Like I said, Blackstone has been able to mint money the past twenty years or so. Since 1987, Blackstone’s private equity funds have averaged a return of 23% per year after fees. Their real estate holdings have averaged a return of 29% per year since 1991, when they began buying real estate.

Those numbers are simply eye-popping. However, anyone looking to get an idea of how Blackstone does what it does will be sorely disappointed. Investors will essentially be buying sight unseen. On Page 62 of the S-1 (as pointed out by Footnoted), investors will have limited voting rights and no right to select management of the firm. Basically, you’ll be buying the right to profits and hoping for the best.

The bigger question is why private equity is going public now? My guess has something to do with the flood of money coming into these entities. Returns are likely to drop in the future as they have to put more money to work (internally generated funds as well as new money). People are throwing money at them begging them to take it. This is a chance for senior management to cash out. When senior management wants to cash out, I start to worry. Especially for an entity that has so avoided the limelight and tried to keep its financial information so secret.

Part of the allure of being purchased by the Blackstones of the world is that management generally makes out like bandits with ownership percentages and payouts. I doubt that the managers at Blackstone would cash out unless they expect returns to drop and they have decided now is the best possible time to maximize their payout. I certainly don’t blame them for that, but I don’t necessarily want to be on the other end of the transaction.

I think this is a buyer beware transaction, but I highly doubt Blackstone will have any trouble finding buyers for the $4 billion in shares they are selling to the public.

UPDATE: Marketwatch points out another issue with the investment. It’s structured as a limited partnership, which means that your share of income will be taxable whether or not you actually get any cash from them. Because of the complexity of the business, Blackstone estimates that they will not get the Federal K-1 to investors in time for them to file their returns and all Blackstone investors should plan on filing Federal and State extensions every year they own a share of the firm. It’s not a big deal if you are holding the shares (they should be called “interests”) in a tax deferred account or if you are used to owning partnerships, but for the general public it could get confusing.