The “condominium” (or “condo” for short) is generally seen as the missing link between renting an apartment and owning land with a house. Commonly, at least in my experience, a condominium is an apartment building in which the units are individually owned but the common spaces are jointly owned by all individual owners.

There is one primary advantage in owning a condominium unit above renting: your equity an an asset with a possibility of appreciation. There is also one primary advantage above owning a house and land, the probability of finding a comfortable dwelling for a lower price.

The disadvantages are numerous:

Lifestyle of dwelling. Living in a condominium is much like living in an apartment building. You are close to your neighbors, and no matter how things appear initially, the walls and ceilings are never as thick and sound-proof as they appear to be initially. If I want to hear the children living downstairs screaming at 3:00 in the morning, I’d prefer to stay in an apartment.

Price won’t increase as much as a single-family house. Even when the real estate market is in an upward trend, beneficial to sellers, the price of condominium units won’t increase as much as the price of houses. There seems to be an endless supply of condominiums. Apartment buildings are often converted to condos when the market is favorable to such a move. Houses, and more importantly the land they sit upon, are much more limited in supply. If you own a condominium you own a certain cubic feet of air within your particular enclosure. You do not own the biggest driver for appreciation, the land.

Association fees. The common areas in a condominium are owned jointly and are usually governed by a board of directors or another group of representatives. In addition to your mortgage and taxes, you will also be responsible for association fees. These fees ensure there is enough funding to mow the lawn, fix the roof, insure the owners against liability, and advertise unsold units.

Association rules. Rules vary from one condominium to another, but they are designed to keep the appearance of the buildings professional and uniform. This supposedly keeps property values higher. Don’t expect to be able to paint the outside of your unit in a way that reflects your personality. Your landscaping options are limited. In many cases, you won’t even be allowed to erect a small flag on your door frame or window. Some associations don’t allow pets.

While I reserve the right to change my mind, I’d rather skip “Apartment Living Part 2” when it’s time for me to “upgrade” my living situation. My intention is not to insult condo owners, it is only to discover what is best for me.

Photo credit: edkohler

This article was written for Consumerism Commentary by Antelope, an entertainment lighting designer working hard to achieve financial security.

In the last year, my wife and I have sold a house in one city, and bought and sold another house in another city. After a bad experience with a home inspector when we were buying our second house, we learned a ton about home inspectors. You can do all of the research you would like, but sometimes you learn things in the School of Hard Knocks.

Believe it or not, some states have no certification requirements for a person to call themselves a “Home Inspector.” if you live in Delaware, Colorado, Florida, Hawaii, California, Idaho, Maine, Minnesota, Missouri, Michigan, Nebraska, New Hampshire, Utah, Vermont, Washington, Ohio, Wyoming, Kansas, Iowa, or New Mexico, your state does not have licensing requirements for home inspection companies. This means that a person could call themselves a Home Inspector, charge you $300 for an inspection, and completely miss major issues. Even when dealing with an inspector in a state with licensing requirements, you are not protected from bad experiences. My wife and I had one such experience with an inspector in Oklahoma City—Oklahoma has licensing requirements—who lied to us during the inspection. After we realized we had to immediately drop $20,000 for a new roof, the inspector told us he thought the seller was a criminal and we should have never bought the house. Unfortunately for us, we had already signed a document holding the inspector for a monetary amount covering only the cost of the inspection.

If you’re interested in finding out what each state requires for its Home Inspectors to undergo for licensing, check out this information provided by Kaplan. States are all listed with the requirements and classroom hours each inspection candidate needs in order to complete state licensing. The Independent Home Inspectors of North America has useful information on this topic as well.

It also helps to check up on references of home inspection companies. Check places like Angie’s List to find reviews for inspectors or their companies and the Better Business Bureau to see if a particular inspector is involved with any disputes or lawsuits. Even searching Google for your selected company can reveal issues with their reputation.

Unfortunately, sometimes you just get dealt a crappy inspector who delivers a crappy inspection. Life isn’t perfect, and real estate often brings out the worst of it.

If you enjoyed this article, please stay tuned to Consumerism Commentary for more from Antelope.

There is a certain allure to the idea of “passive income.” After all, who wouldn’t want a continuous stream of income without having to trade your time or effort for it? But true passive income is quite elusive. True passive income can be defined, and is defined by the Internal Revenue Service, as “cash flow generated by activities in which the tax payer does not materially participate.” But outside of portfolio income, cash flow generated solely by appreciation of an asset like a stock (and liquidation of the earnings), there are few examples of true passive income.

Even Wikipedia gets it wrong.

Real estate: the classic example is false. Rent on a habitable property is generally called “passive income,” but it’s not. If you want to have tenants and consistently earn income from the property, it must be maintained. At the simplest level, as a landlord, you must interview prospective tenants, arrange background checks, respond to maintenance issues, keep the property attractive and in working condition, process rent payments, draw lease agreements, and maintain connections with plumbers, electricians, painters, and real estate agents (or do that work yourself). Even if you outsource management to an outside firm, you must develop the contract and oversee the management.

The more work you’re doing, and being a landlord is a lot of work, the less passive your income is. Outsourcing more of the work results in less income overall.

You won’t hear about this in the motivational books and seminars, but the only way to ensure high cash flow from real estate is by owning and renting out a lot of properties, and outsourcing the management of all of them. Incredibly high volume would hopefully make up for the thin margins due to outsourcing the management. But building this real estate empire takes the kind of time and effort that those with “passive income” written on their forehead with indelible ink may not understand or accept.

The allure of AdSense. Time and time again I hear from people who are excited and motivated to start a blog with the intent of throwing up some advertising to earn passive income, expecting almost immediate returns. Unless you plan on scraping other websites and stealing their content—and if you do, I hope those who provide the income will discover this tactic and stop providing the income to you—this concept is miles away from the idea of “passive income.” While there are always exceptions, for the most part you can’t just throw up a website, add advertising, and expect passive income to roll in.

If you want to really earn money online, you have to work. You must create lots of content, relevant content, and you must continue doing so. This is highly active income, not passive.

Like the real estate empire, you could simply register hundreds of domain names—there are programs that will do this for you, for a fee—and throw up one page on each full of advertisements. With incredible volume, you’ll make more from your thin profit margins. But what benefit does an empire of hundreds of websites devoid of content provide to the internet at large? It just creates more junk websites that are nuisances to anyone who is attempting to properly perform research on the internet.

This seems like a strange message coming from me. I’m earning a multiple of my day job’s salary by working with the web in my “spare time.” But this work is so far from what anyone could consider “passive income” that I’m almost insulted when I hear that. My strongest efforts wax and wane with the moon, and so does the resulting income. Consumerism Commentary won’t “run itself” and continue generating income for long.

In general, I have an option: either be a positive force, adding to the wealth of information online, even if the information is more interesting to me than to anyone else, or don’t do it at all.

When I read about the truth about earning money from real estate, like in The Complete Real-Estate Investing Guidebook by David Crook, rather than ambiguous, motivational bull (I won’t mention any specific authors, but you know who you are), I see that real estate management is not truly passive income, and success won’t come for most people who try, particularly those after a quick buck. I know from experience that the same holds true for earning money online.

Simply: If you want to earn income, you have to work for it; that is, income is active. The IRS may call certain things “passive income,” but the term itself is a lie.

Things are a little different from an investor’s point of view, and I’ll tackle that approach soon.

CNN Money is featuring stories of 15 households that are facing dire financial straits thanks to the economic downturn. Even a rebate check this summer won’t go far to help these families. While some better decisions may have helped them prepare for the direct effects of a recession, hindsight is always 20/20. Here are the some of the highlights from the featured stories:

Suzzanne Cromwell: A $250 commute

Suzzanne is a 39-year-old program coordinator from Massachusetts. “Sadly, my husband and I were priced out [Cambridge] when we decided to buy our first home almost two years ago. We decided to move to Lowell, about 10 minutes shy of the New Hampshire border… I will most likely need to leave my wonderful job as program coordinator due to the rising cost of gas. It costs me about $250 a month to commute to work…”

Billie Romero: Pocketbook strain hits home

Billie is a 32-year-old nurse from Louisiana. “We have two kids we are TRYING to keep in private school. [Like] most working couples, we want the best education for our children, because not just ‘the rich’ deserve private school. We want to be able to buy a home AND pay the bills.”

David Martorano: Waiting for the bust

David is a 37-year-old physician from California. “I am a physician renting in Pacific Palisades, where my practice is located… I have been a holdout from purchasing for the past two years because of my belief that the market is at least 20% inflated… People are still lining up to purchase entry-level properties, and paying absurd amounts, up to $700 per buildable square foot… When I ask them why, they still say it’s the Palisades and it can’t go down.”

Tracey Feller: Relocation disaster

Tracey is a 37-year-old purchasing analyst from Alabama. “I accepted a job in February 2007 that required relocation… we were sure that our house in Three Rivers, MI would sell. Not the case… our home in Michigan is set to got into foreclosure April 11 and we also fell behind on our home in Alabama, but were able to work out a repayment plan with the lender.”

RJ Hernandez: Subprime surprise

RJ is a 27-year-old vice president of business development from California. “As a single, 27-year-old executive and first-time homeowner who got a subprime loan (which resets in 2010) and who got laid off from a project management job after three years to find himself now working for a subcontractor working for senior management, let me tell you—these are strange days…”

Shannon McCauley: Burned by fuel cost

Shannon is the 28-year-old owner of Smokin’ Stokes BBQ & Catering. “Our in-store sells have dropped almost 50%... There are so many less people eating out these days. We have opened credit card accounts just to pay our bills, and those are almost maxed out… We are in our late 20s with a 2-year-old child and a mortgage. We are at the end of our rope. The answer is obvious: CUT FUEL COSTS NOW.”

These are just a selection of the stories, but the theme is clear. If a recession is prolonged (which I don’t think it will be, but I can’t see the future) many people are going to have to change their expectations. Private school may not be an option for the kids. It may be time to trade down to a more affordable house. Will fuel prices go down? Probably, but what if they don’t? The good job in the good location may be out of reach thanks to commutation. The dream of having a Full House like The Brady Bunch or Eight is Enough may be replaced with Two and a Half Men.

What other expectations will the “typical American” consider changing if faced with a new reality of recession?

America’s Money: In their own words [CNN Money]

As my partner and I are active landlords and property investors, it’s no surprise that people approach us with real estate offers. Sometimes they’re great deals, too – people occasionally inherit properties they want to get rid of quickly and therefore cheaply, or learn of a house at a great price that just isn’t selling. With the current housing market downturn, it’s happening more and more.

Recently, a good friend approached us when a realtor suggested he look into renting his house instead of selling it. Though his house was on the market and he was looking to find a buyer, he’d instead gotten an offer from a prospective tenant. Since he wasn’t interested in becoming a landlord, he came to us.

You’ll know from my Ten Tips for Buying a Residential Rental Property series that I closely evaluate all real estate decisions according to a number of criteria including price, location, structure, size, maintenance issues, safety and local regulations. I called upon those ten critical commandments yet again as I analyzed the opportunity. Read the rest of this article »

This article was written for Consumerism Commentary by Adfecto, a mid-20s guy with a masters degree in engineering. He aspires to be wealthy and writes frequently for his own blog, Adfecto Abundantia.

When I purchased a home it was not a lifetime commitment. I view a person’s choice of housing first as a financial decision and second as a lifestyle decision. A house gives you place to live and the added bonus of potential price appreciation and tax deductions. If it is cheaper to rent then by all means that is the way to go. Owning your own home can also give you a tangible increase in your standard of living, but personally that is considered a distant second when compared to the financial benefits. What I find interesting is that so many people tend to make emotional decisions about the home rather than rational ones.

Frequently, when home owners find themselves with a little extra cash at the end of every month, the idea of paying off the mortgage is often brought up. Is early payment the right way to use the money? Should the money be invested instead? Is my real motivation to build wealth or to play it safe?

The first step in analyzing this decision is to compare the interest rate on the mortgage to expected investment returns. Historically the S&P 500 with dividends reinvested has returned 10.43% annualized from January 1926 to December 2007, and the current rate for a fixed 30 year mortgage is about 5.76% according to www.bankrate.com. Based on this simple comparison it is plain to see that in the long run you will build more wealth by investing than by prepaying your mortgage.

If you want to further hone this comparison of rates, next you can consider not just the entire history of the stock market, but also every 30 year rolling period of stock market data. Since 1953 the S&P 500 has returned at least 9.34% over every 30 year period which is again well above the interest rate for a 30 year mortgage. Plowing your money into prepaying your mortgage has a huge opportunity cost that will hurt your ability to build wealth.

Why then would people consider prepaying their mortgage? Most people consider their home as a safe investment, and paying off a mortgage as a guaranteed return. A certain piece of mind comes from owing the bank less money. There is a big problem with this argument; there is still a great deal of risk involved with your primary residence!

Additional risk comes from the fact that until your loan is paid in full, the bank still holds the mortgage on the property. The bank will not give you credit for the extra payments made to pay down the debt if you start to struggle further down the line. Even if you are way ahead on your mortgage, a hardship may cause you to miss payments. The bank can foreclose even if you spent years paying down the mortgage balance early.

Investing your free cash into your mortgage is very similar to investing in a bond. It may seem odd, but you are literally investing in a fixed income asset, the mortgage, lent to yourself. The return you get will be equal to the interest you would otherwise pay on your mortgage. One problem that arises is that the bank has first crack at the collateral; your house. Even worse, your mortgage isn’t even a very good deal when compared to the types of bonds; for example, Toyota AAA rated bonds currently pay as much as 7.652%. I bet your mortgage rate isn’t that high.

Furthermore, understanding the nature of your mortgage as a bond brings to light another risk; improper asset allocation. Mortgage prepayment shifts your asset allocation to rest more heavily in fixed income type investments than you might otherwise consider. A 40 year old person should have at least 60% but more likely 80% percent of his/her portfolio in stocks, but add in all of that mortgage prepayment in the bond category and you may find yourself far out of line from you ideal asset allocation.

Another risk related to mortgage prepayment is a lack of diversification. You may think that your mortgage is not very risky because you believe in your own ability to pay. This personal bias can cloud a person from see the true risk factors such as job loss, poor real estate conditions, natural disaster, and a plethora of others. A single unfortunate event can wipe out a large chunk of the equity. A single job loss may bring about a short sale or foreclosure that could wipe out the value of your home. Would you advise someone in your circumstances to invest in individual mortgages? I sure wouldn’t, and neither should you.

Deciding whether or not to prepay a mortgage is another financial and lifestyle choice which depends on several factors, but most of all it is a choice between building wealth (logical) and piece of mind (emotional). People who focus on paying off their mortgage seem to be more in love with their house and the idea of having it paid off than the goal of building wealth. These people are also blind to the risks that come from investing too much of their finances in a single residential structure. I think that for the majority of people the ‘right’ decision would be to keep the mortgage and invest the extra money.

Image credit: Oracio
If you enjoyed this article, please visit Adfecto Abundantia to read more from this guest author. Consider subscribing to Adfecto’s RSS feed as well.

When it comes to getting rich slowly, I’m generally a skeptic. The typical example prescribes investing $1,000 a month for thirty years into the stock market, earning 8% each year. At the end of thirty years in this example, you will find yourself with $1.5 million, but there are major assumptions that must be overcome:

1. Do you have $1,000 each month to invest? Many people live paycheck-to-paycheck. $1,000 may be 25% to 30% of your monthly pre-tax income.

2. Will you earn 8% each year in the stock market? It’s possible; over long periods of time, the stock market has provided this level of return, but it isn’t guaranteed. Taxes and fees eat into this return as well. Many professionals believe 8% is too aggressive an assumption; stock brokers will tell you it’s too conservative.

This also doesn’t address a major problem: inflation. If you accept the government’s measurement which declares that money loses purchasing power at a rate of about 3% each year, to find the “real value” of your future investment, reduce your assumed return percentage by that amount. Suddenly the $1.5 million 30 years from now looks more like today’s $836,000. That six figure amount is nothing to sneeze at, sure, but that in itself does not make someone “rich.”

Despite my thoughts about the fallacy of getting rich slowly, an enticing but ultimately disappointing endeavor, people make it work. Paul Navone from Vineland, New Jersey is an example. He worked in a mill for never more than $11 per hour, but he retired with millions. He doesn’t say how much he has to his name, but it was enough to become a significant philanthropist, giving away millions of dollars.

The day he turned 16, Navone left the eighth grade and applied for a factory job at Wheaton Glass in Millville. When he got his first paycheck two weeks later – Navone was earning 75 cents an hour – he thought he was a Rockefeller… At 21, he joined the Army and spent two years assigned to the base post office in West Germany. Back home, Navone moved in with an older sister until he had saved $6,500. With that stake, he bought his first property. He moved into one half and rented out the other…

“I lived on the income the one unit provided me, and I saved my wages from work,” Navone said. Not just saved, invested. He acquired a second rental property, then a third. Eventually, with the advice of stockbrokers, Navone expanded his investments.

So while Navone was working at is $11 per hour job at the mill, he was also earning money in property. That’s the key in this particular case, despite Navone’s penchant for cutting expenses. Even so, living frugally puts money in the bank and certainly contributes to a large bank account.

• He seldom watched television.
• He has never read a book. (What?!)
• The last girl he had a crush on contracted tuberculosis and died; he has avoided relationships since.
• He has no children. (Now this certainly contributes a lot to his bottom line!)

• All of his clothes come from thrift shops.

  Navone’s mantra is, “I’ll work for the money, and then I want the money to work for me.” It sounds to me like he attributes his wealth to his investing prowess rather than his extreme frugality habits.

  Donor built millions on $11 an hour [Philadelphia Inquirer]