With the collapse of our financial system and a tightening of the credit markets for most business owners, the accredited investor will find opportunities abound.
In addition to a few other categories, an accredited investor is defined to include:
(a) any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of investment in the common stock of the company, exceeds one million dollars ($1,000,000);
(b) any natural person who had an individual income in excess of two hundred thousand dollars ($200,000.00) in each of the two most recent years or joint income with that person's spouse in excess of three hundred thousand dollars ($300,000.00) in each of those years and has a reasonable expectation of reaching that same income level in the current year; or
(c) any trust with total assets in excess of five million dollars ($5,000.000.00), not formed for the specific purpose of acquiring common stock, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D.
There are an abundance of "private" equity opportunities for those investors that qualify as stated above. I have reviewed deals with investor relations firms, private hedge funds, real estate funds, and even a company in the high-end wholesale garden products business. Proper due diligence must be employed when reviewing any of these types of deals and "partnering" with a skill business attorney may help you make more rational decisions. Be prepared that all these deals will look good when presented by the owner who is seeking the capital investment. Here's a few basic rules (you will develop some of your own from experience): (1) always meet the owner - never invest where the owner is too busy or unavailable to meet with you; (2) do some background research on both the company and the owner - with the internet this should be somewhat easy; and (3) research the industry paying attention to particular trends which might help or hurt the company/opportunity.
My firm is in the process of publishing an accredited investor newsletter designed to highlight available opportunities and bring companies & investors together. If you'd like to be added to our mailing list, please email us.
November 19, 2008
October 1, 2008
How Do Credit Cards REALLY work?
Guest Author: Julie Ann Hepburn
For more info, visit http://www.nationalprivate.com/resources.php
All rights reserved for reproduction or use strictly prohibited without express written consent.
I often find myself answering this question. I recently found myself embroiled in a debate and conversation with my own credit card company regarding an interest charge. It was only $13.00 but I wanted to get to the bottom of this great misunderstanding and regular debate as a public service to my clients.
The following is the explanation and example, courtesy of my Citibank card services representative.
When you agree to accept a credit card, you are agreeing that you will pay the amount they are loaning you for that month [or “billing cycle”] back in full or you will pay interest on the entire amount regardless of how much you have paid [down or off]. You will continue to pay that interest until that amount is paid off. If you use the card in the meantime, say the next month [billing cycle] that will also be added on and usually to the end. So you will not be able to pay on that amount until you pay off the prior amount.
Example: January you have a credit card with a $2000 limit & 22% interest rate. You charge up $2,000 on that card during January. The bill comes at the end of the month and you pay $1,000 of that bill. February you will pay 22% on the total $2,000 because you said you would. You also agreed that you would pay 22% until that original amount is paid off. If you didn’t use the card and you paid the final $1,000 off when your February statement came, you would be paying the $1,000 plus 22% interest on the $2,000. If during March if you still have not charged more on the card you would potentially have the interest for the $1,000 at 22% interest and be done.
What About Balance Transfers?
Tragically most people don’t know this, nor do they understand that by charging more on this card the problem just continues to compound and snowball. Hence, the statement often comes up, “I should be ok because I rolled mine over to a “0%” card for 1 year [or some other specific term]. That is fine, however, there are two additional pitfalls which can [and do] significantly change this ideal temporary recovery window. First, you potentially will have to pay a fee, typically this is a percentage of the balance transferred. If it is a large balance, this will equate to a large amount. Second, if you use this [new 0%] card after you have rolled over debt from another card, you will have to pay off the transferred balance prior to beginning to pay on the new charges you have added which are accruing at whatever the assessed rate of the card will be following the “one year zero interest period” ends.
The following example is courtesy of one of my clients.
Example: The client transferred $20,000 from a high interest credit card to a zero interest credit card for 12 months. He was short on cash one evening and strictly and out of convenience, he used this [new card] for the dinner bill of $70.00 bucks. After speaking with the card services rep. he was informed of the following. In the agreement he signed for this [new] card, he agreed that the balance transfer amount would be assessed at 0% interest. However, if he uses this card the charges would “hunt to the end” or come behind the $20,000 to pay off, if you will. Meaning, the $20,000 is at 0% interest but the $70 which he could not pay off until the $20,000 is paid off, is accruing at 29% and would continue to do so until the initial $20,000 is completely paid off. Only after this initial transfer was paid off, would the client be able to pay off the $70 plus interest at that point.
For more info, visit http://www.nationalprivate.com/resources.php
All rights reserved for reproduction or use strictly prohibited without express written consent.
I often find myself answering this question. I recently found myself embroiled in a debate and conversation with my own credit card company regarding an interest charge. It was only $13.00 but I wanted to get to the bottom of this great misunderstanding and regular debate as a public service to my clients.
The following is the explanation and example, courtesy of my Citibank card services representative.
When you agree to accept a credit card, you are agreeing that you will pay the amount they are loaning you for that month [or “billing cycle”] back in full or you will pay interest on the entire amount regardless of how much you have paid [down or off]. You will continue to pay that interest until that amount is paid off. If you use the card in the meantime, say the next month [billing cycle] that will also be added on and usually to the end. So you will not be able to pay on that amount until you pay off the prior amount.
Example: January you have a credit card with a $2000 limit & 22% interest rate. You charge up $2,000 on that card during January. The bill comes at the end of the month and you pay $1,000 of that bill. February you will pay 22% on the total $2,000 because you said you would. You also agreed that you would pay 22% until that original amount is paid off. If you didn’t use the card and you paid the final $1,000 off when your February statement came, you would be paying the $1,000 plus 22% interest on the $2,000. If during March if you still have not charged more on the card you would potentially have the interest for the $1,000 at 22% interest and be done.
What About Balance Transfers?
Tragically most people don’t know this, nor do they understand that by charging more on this card the problem just continues to compound and snowball. Hence, the statement often comes up, “I should be ok because I rolled mine over to a “0%” card for 1 year [or some other specific term]. That is fine, however, there are two additional pitfalls which can [and do] significantly change this ideal temporary recovery window. First, you potentially will have to pay a fee, typically this is a percentage of the balance transferred. If it is a large balance, this will equate to a large amount. Second, if you use this [new 0%] card after you have rolled over debt from another card, you will have to pay off the transferred balance prior to beginning to pay on the new charges you have added which are accruing at whatever the assessed rate of the card will be following the “one year zero interest period” ends.
The following example is courtesy of one of my clients.
Example: The client transferred $20,000 from a high interest credit card to a zero interest credit card for 12 months. He was short on cash one evening and strictly and out of convenience, he used this [new card] for the dinner bill of $70.00 bucks. After speaking with the card services rep. he was informed of the following. In the agreement he signed for this [new] card, he agreed that the balance transfer amount would be assessed at 0% interest. However, if he uses this card the charges would “hunt to the end” or come behind the $20,000 to pay off, if you will. Meaning, the $20,000 is at 0% interest but the $70 which he could not pay off until the $20,000 is paid off, is accruing at 29% and would continue to do so until the initial $20,000 is completely paid off. Only after this initial transfer was paid off, would the client be able to pay off the $70 plus interest at that point.
New Jersey Used Car Lemon Law Tips
Sergei Lemberg, an attorney specializing in lemon laws is sitting in the guest blogger’s chair today. He’s outlining some of the ways that consumers with used car lemons can get justice.
I don’t know anyone who doesn’t feel at least a little bit of trepidation when they buy a used car. Always lurking in the back of your mind is the thought that you might just be buying someone else’s troubles. Unfortunately, although every state in the nation has a new car lemon law, few states have lemon laws covering defective used cars. Luckily, New Jersey is one of them.
New Jersey's Used Car lemon law requires dealers to provide express warranties to consumers who buy used passenger cars for personal use costing $3,000 or more, are less than seven years old, and have odometer readings of less than 100,001 miles. The law prohibits you from waiving your rights to a warranty if the odometer reading is greater than 60,000 miles and the waiver is in writing.
The length of the required warranty is based on the vehicle's odometer reading. The warranty must last 90 days or 3,000 miles (whichever comes first) if a vehicle has 24,000 miles or less on the odometer. The warranty must last 60 days or 2,000 miles (whichever comes first) if a vehicle has between 24,001 and 59,999 miles. The warranty must last 30 days or 1,000 miles (whichever comes first) if a vehicle has between 60,000 and 100,000 miles.
Vehicles aren’t covered if they’re sold for less than $3,000, are seven or more years old, have been declared a total loss by an insurance company, have odometer readings of more than 100,000 miles, or weren’t purchased from dealers.
According to the law, the dealer has to fix problems associated with the engine, transmission, and front- or rear-wheel drive (although you’re required to pay $50 for each repair attempt). The car’s considered a lemon if the dealer doesn’t fix the problem after three attempts, or if the vehicle has been out of service for a total of 20 days while the dealer is trying to fix it.
If you think you have a lemon, it’s best to consult with a lemon law attorney who can explain all of your options, as well as the settlement you might receive.
September 8, 2008
Protecting Your Assets from Creditors & Predators
I recently submitted this article to a dozen or so medical journals for publications. Although it is directed toward medical professionals, its concepts are appropriate for any person concerned about protecting their assets.
"Medical professionals alike, especially the high-income earners, are constantly concerned over being sued. In a world of constant litigation, the all look for strategies and methods to protect the assets they accumulate through their work: their home, investments, real estate, etc…
The topic of asset protection is always being written about. Some practitioners swear by methods of “bullet-proofing” your assets. Others claim that asset protection doesn’t really work. This article has been written to explore both extremes of this industry and to find a common ground of reasonable security for the medical professional who would like to take adequate steps to protect their assets without injecting too much complication into the way they manage their affairs.
First of all, can you “bullet-proof” your assets? If you perform a Google search for “asset protection” or “bullet proofing your assets”, you will uncover may sites which profess that with the right structure in place, and having done so with no potential law suits on the horizon, you can successfully protect your assets. The Asset Protection Consulting Group, http://www.apcg.com/, writes about asset protection and uses the O.J. Simpson case as an example:
“Essentially asset protection is a legal way to put your assets beyond the reach of those who would like to take them from you by filing a lawsuit. Here is an example you are likely familiar with that demonstrates its effectiveness and legality.
Remember the O.J. Simpson case? O.J. went to trial in 1995 and was acquitted of murder charges. His story is a perfect example of how and why asset protection works. Now there’s a whole criminal side to O.J.’s case. So let’s put aside the moral issues surrounding O.J. We’re just talking about asset protection here. The point here is that the nation was able to see for the first time how an alleged murderer was able to have a judgment entered against him and no one was able to collect any money. So let’s outline what happened here. By the way, do you know how O.J.’s doing now? Do you have any doubts he’s living all right?
What happened after he was acquitted from the criminal charges? The Goldmans sued him on a wrongful death case in civil court and obtained a judgment for $33.5 million. Yet have they collected anything? All they got was his Heisman trophy. The piano he said belonged to his mother. But what happened to his money? Well he was lucky. O.J. had pensions, or retirement plans through the NFL and the Screen Actor’s Guild (SAG), and both pensions were exempt from judgments by law in California.
What about his house? He had a nice home near Beverly Hills. What happened there? The house was worth $3.5 million. He had a first mortgage for $1.5 million. The question everyone asked was what happened to the rest of the equity? Why didn’t they take it? Well, he had what are called equity stripping mortgage liens placed on it. By the time they got to the house all the equity was encumbered in favor of his attorneys. His home was leveraged to the hilt so by the time the Goldmans got to it there was nothing left for them to take.
Other groups ward against these techniques and quote various court cases and legal decisions that demonstrate their point. Almost all reported cases are those whereby the debtors had transferred or attempted to transfer their assets into an asset protection structure once litigation or potential litigation is on the horizon. Of course, the logical course of events are such that with arrangements that work, litigants will settle and often for pennies on the dollar.
This article is about creating structures that add “layers” to your assets, making it more difficult and costly for litigants and creditors to attach them with a judgment from a court of competent jurisdiction. By creating entities such as corporations and limited liability companies in different states and even foreign jurisdictions, it becomes difficult for a judgment creditor to attach assets since judgments cannot be obtained and enforced within statute of limitation time limits. Also, suing and enforcing judgments in multiple jurisdictions becomes very costly to do so. Remember however, your “structure” must have a legitimate business purpose beyond just that of avoiding creditors.
Here’s an example:
Dr. J establishes a Delaware “Series” Limited Liability Company. This type of entity allows you to segregate assets, for liability purposes, from each other within the same entity. The sole member of the LLC is a Nevada Corporation which is filed blindly as allowed under Nevada law using a nominee appointed for such purpose. Therefore, Dr. J’s information remains out of the public record. All stock in the Nevada Corporation (which can be issued as “bearer” certificates) is owned by another limited liability company created in the jurisdiction of Nevis, in the British Virgin Islands. Created in 1995, Nevis past legislation that allows for the creation of an LLC without public filings and a statute of limitations on judgments of only six months. The Nevis LLC could be owned by an asset protection trust in the Cook Islands located in the Pacific Ocean enroute to Australia.
Now, this is an extreme example and probably includes more “layers” than would be necessary in most situations. Probably a Delaware Series LLC would suffice or a Nevada entity could be used if the professional wishes to file blindly. As an alternate, off-shore jurisdictions could be used where it is suspect as to whether a foreign court would even enforce a US-obtained judgment.
The point in these examples are this: given a complex and costly structure, most litigants will think twice about instituting suit. Generally, a good litigation attorney would first conduct an asset search to determine if the prospective defendant had anything worth pursuing and the suit might end there or insurance settlement offers may be accepted.
There is one important key to creating an effective structure: putting it in place well before any problems arise. So called “rainy day” planning should be completed as soon as possible. Whenever working with new clients, we seek to create an asset protection strategy, as part of the doctor’s estate plan, that contemplates the accumulation of assets over time. In almost all cases where defendants have lost and forfeited assets that they were trying to protect, the persons had transferred assets at a time when the potential litigation had already reared its ugly head. Fraud and fraudulent transfers never work, no matter how complex the structure.
Also, remember this: never use a structure, especially off-shore arrangements, to avoid the payment of federal income taxes. The IRS can always access assets and you can be liable for criminal charges as well."
"Medical professionals alike, especially the high-income earners, are constantly concerned over being sued. In a world of constant litigation, the all look for strategies and methods to protect the assets they accumulate through their work: their home, investments, real estate, etc…
The topic of asset protection is always being written about. Some practitioners swear by methods of “bullet-proofing” your assets. Others claim that asset protection doesn’t really work. This article has been written to explore both extremes of this industry and to find a common ground of reasonable security for the medical professional who would like to take adequate steps to protect their assets without injecting too much complication into the way they manage their affairs.
First of all, can you “bullet-proof” your assets? If you perform a Google search for “asset protection” or “bullet proofing your assets”, you will uncover may sites which profess that with the right structure in place, and having done so with no potential law suits on the horizon, you can successfully protect your assets. The Asset Protection Consulting Group, http://www.apcg.com/, writes about asset protection and uses the O.J. Simpson case as an example:
“Essentially asset protection is a legal way to put your assets beyond the reach of those who would like to take them from you by filing a lawsuit. Here is an example you are likely familiar with that demonstrates its effectiveness and legality.
Remember the O.J. Simpson case? O.J. went to trial in 1995 and was acquitted of murder charges. His story is a perfect example of how and why asset protection works. Now there’s a whole criminal side to O.J.’s case. So let’s put aside the moral issues surrounding O.J. We’re just talking about asset protection here. The point here is that the nation was able to see for the first time how an alleged murderer was able to have a judgment entered against him and no one was able to collect any money. So let’s outline what happened here. By the way, do you know how O.J.’s doing now? Do you have any doubts he’s living all right?
What happened after he was acquitted from the criminal charges? The Goldmans sued him on a wrongful death case in civil court and obtained a judgment for $33.5 million. Yet have they collected anything? All they got was his Heisman trophy. The piano he said belonged to his mother. But what happened to his money? Well he was lucky. O.J. had pensions, or retirement plans through the NFL and the Screen Actor’s Guild (SAG), and both pensions were exempt from judgments by law in California.
What about his house? He had a nice home near Beverly Hills. What happened there? The house was worth $3.5 million. He had a first mortgage for $1.5 million. The question everyone asked was what happened to the rest of the equity? Why didn’t they take it? Well, he had what are called equity stripping mortgage liens placed on it. By the time they got to the house all the equity was encumbered in favor of his attorneys. His home was leveraged to the hilt so by the time the Goldmans got to it there was nothing left for them to take.
Other groups ward against these techniques and quote various court cases and legal decisions that demonstrate their point. Almost all reported cases are those whereby the debtors had transferred or attempted to transfer their assets into an asset protection structure once litigation or potential litigation is on the horizon. Of course, the logical course of events are such that with arrangements that work, litigants will settle and often for pennies on the dollar.
This article is about creating structures that add “layers” to your assets, making it more difficult and costly for litigants and creditors to attach them with a judgment from a court of competent jurisdiction. By creating entities such as corporations and limited liability companies in different states and even foreign jurisdictions, it becomes difficult for a judgment creditor to attach assets since judgments cannot be obtained and enforced within statute of limitation time limits. Also, suing and enforcing judgments in multiple jurisdictions becomes very costly to do so. Remember however, your “structure” must have a legitimate business purpose beyond just that of avoiding creditors.
Here’s an example:
Dr. J establishes a Delaware “Series” Limited Liability Company. This type of entity allows you to segregate assets, for liability purposes, from each other within the same entity. The sole member of the LLC is a Nevada Corporation which is filed blindly as allowed under Nevada law using a nominee appointed for such purpose. Therefore, Dr. J’s information remains out of the public record. All stock in the Nevada Corporation (which can be issued as “bearer” certificates) is owned by another limited liability company created in the jurisdiction of Nevis, in the British Virgin Islands. Created in 1995, Nevis past legislation that allows for the creation of an LLC without public filings and a statute of limitations on judgments of only six months. The Nevis LLC could be owned by an asset protection trust in the Cook Islands located in the Pacific Ocean enroute to Australia.
Now, this is an extreme example and probably includes more “layers” than would be necessary in most situations. Probably a Delaware Series LLC would suffice or a Nevada entity could be used if the professional wishes to file blindly. As an alternate, off-shore jurisdictions could be used where it is suspect as to whether a foreign court would even enforce a US-obtained judgment.
The point in these examples are this: given a complex and costly structure, most litigants will think twice about instituting suit. Generally, a good litigation attorney would first conduct an asset search to determine if the prospective defendant had anything worth pursuing and the suit might end there or insurance settlement offers may be accepted.
There is one important key to creating an effective structure: putting it in place well before any problems arise. So called “rainy day” planning should be completed as soon as possible. Whenever working with new clients, we seek to create an asset protection strategy, as part of the doctor’s estate plan, that contemplates the accumulation of assets over time. In almost all cases where defendants have lost and forfeited assets that they were trying to protect, the persons had transferred assets at a time when the potential litigation had already reared its ugly head. Fraud and fraudulent transfers never work, no matter how complex the structure.
Also, remember this: never use a structure, especially off-shore arrangements, to avoid the payment of federal income taxes. The IRS can always access assets and you can be liable for criminal charges as well."
August 10, 2008
Your New Car - Buy or Lease? How Do You Decide?
As an attorney, I often find myself advising clients on many things: real estate, borrowing money, business issues, wills, and even advice about buying a new car. I have a background in economics and finance and clients ask me to help them analyze their car lease and direct them towards making a more informed decision. Since both leases on our cars are coming due, I thought it a good time to share how I do these analyses.
First of all, you should know that the automotive industry uses their own math when it comes to money. This seems somewhat obvious since we all know that the car companies make more money financing cars than they do selling them. Here is a very simple example: when calculating interest on a car loan, dealerships use a method called "add-on interest." Simply put, they add on the interest to the price of the car and divide by the term of the loan. So, if you are buying a $35,000 car and taking a 60-month loan from the dealership at 4% interest, they simply calculated the annual interest (35,000 x .04 = 1,400). Then they multiply the annual interest payment by 5 years (1,400 x 5 = 7,000) and add it to the price of the car (35,000 + 7,000 = 42,000). To determine the monthly payment, the final figure is then divided by the term of the loan (42,000 / 60 = 700.00). Now you know why leasing became so popular! So, why is this "add-on interest" method incorrect? Because you are paying interest on the loan as if the entire balance was outstanding for the entire duration of the loan. If you obtained a loan from your local bank, the loan would be "amortized" meaning you would only pay interest on the then outstanding balance. That is the case with an amortized mortgage loan and if you make extra payments, you will save interest as the loan balance decreases.
This "add-on" method is not just loan calculation for dummies so the dealership can easily calculate your payment (we know all those dealership finance guys are a lot smarter than that!!). It allows the car companies and dealerships to quote a lower rate of interest. Let's take the 4% example from above. If we use a loan amortizing calculator, we can determine the actual interest rate on a $35,000 loan repaid over a 60 month period. It's 6.2% which is probably closer to a local bank rate and is 55% higher than the rate quoted!
Another "game" the car companies have been playing is "zero interest" financing. When this first came out, I had to ask myself: how can the manufacturers sell these cars for 0% especially given the fact that we know they make more money financing cars then selling them? Then I started to notice a common thread. Almost all offers I have seen give you an alternative: zero percent financing or cash back on the purchase. In other words, if you choose to buy the car for cash (or finance through another independent source), the manufacturer is willing to forego a certain amount of cash. Therefore, the cash back incentive is really just added on interest! To illustrate, let's assume for our $35,000 new car, our choice is zero percent financing for 60 months or $3,000 cash back. Calculating the monthly payment is easy (even easier than add on interest!). You just divide the purchase price by the term of the loan (35,000 / 60 = 583.33). To calculate the "true" interest rate, you use your amortizing calculator with a present value sum of $32,000 (35,000 purchase price less the cash back amount of 3,000). The true interest rate is 3%. Still not bad, but not zero percent. (Note: there are some "true" zero deals out there, but they are very hard to come by).
So now you know a little bit about buying which hopefully will help you with your next purchase. Now, what about leasing? Leasing is actually the process of "renting" the car from a third party purchaser. Even if you lease through the manufacturer, their leasing division is actually buying the car from the dealership and then rents or leases it back to you. Calculating lease payments are complicated and you need a few factors to make your own analysis: total capital cost, residual value (or percentage) and money rate. If you'd like to figure it out for yourself, there are plenty of lease calculators floating around the net. But that won't help you much because you are using their math, not your own. Let me show you how I calculate payments and analyze lease deals using my math.
First, one rule I try to follow: avoid putting money down on a lease. If possible, roll taxes, inception fees, dmv charges, etc. . . into the payment. And NEVER put additional money down to reduce your monthly payment. What you are doing is giving money upfront to the leasing company to reduce your rental payment. If you drive off the lot and a tractor trailer totals your vehicle (assuming you are completely unharmed - always a good starting point when using accident examples!), you will not get your down payment refunded, nor taxes returned, etc... You'd be much better off taking the down payment, putting it in a bank account and using it to offset your monthly payment. For downpayments, rule of thumb is that the payment will decrease by about $25 per month for every $1,000 you put down to reduce the cost of the car.
So, how to analyze the lease payment. Look at it this way: you are actually renting part of the car (the residual amount) and purchasing the balance. Meaning you are (in the leasing company's eyes) using up a certain amount of the car. This is their biggest gamble. If they charge you for using up 45% of the car and it turns out that the fair market value of the residual is actually much lower than 55% at the end of the lease, they lose money on the deal. That is why you might have heard that many of the American manufacturers are leaving the leasing business when it comes to the large SUVs. Due to the economy and gas prices, they just are not holding their value as the leasing companies had expected.
Back to payment analysis...
So you need to make two payment calcs and add them together. First, take the residual value and calculate an interest-only payment. Using our above residual factor of 55%, the residual value is determined by multiplying the total capital cost of the vehicle by the residual factor ($35,000 x .55 = 19,250). Here's where you can get a little creative. You choose the interest rate - yes you heard me - you choose the rate. Meaning, you decide at a given interest rate what you are willing to pay and can play around with the formula from there. Let's use 4%, so the interest-only portion of the monthly payment is calculated by multiplying the residual value by the chosen interest rate then dividing by twelve to obtaining a monthly figure (19,205 x .04 = 770 / 12 = 64.17). The theory behind this is you only need to pay interest because this "portion" of the car you are actually giving back to the leasing company at the end of the lease. Therefore, they should only be looking for interest on their money. Second, you need to calculate an amortized payment on the amount of the car you are "using up." This figure is determined by subtracting the residual value from the total capital cost of the car including all fees, charges, taxes, etc... (35,000 - 19,250 = 15,750). Using your amortizing calculator, you can amortize the payments of a loan for 15,750 at 4% over a 60-month period. The resulting figure is 262.77. Add your two monthly figures together to determine the monthly lease payment (64.17 + 262.77 = 326.94). You can also use this logic to analyze whether a proposed lease payment is reasonable. Just ask the dealer for the total capital cost of the car and the residual value or percentage. You should be able to back into the rest.
I welcome comments and questions.
First of all, you should know that the automotive industry uses their own math when it comes to money. This seems somewhat obvious since we all know that the car companies make more money financing cars than they do selling them. Here is a very simple example: when calculating interest on a car loan, dealerships use a method called "add-on interest." Simply put, they add on the interest to the price of the car and divide by the term of the loan. So, if you are buying a $35,000 car and taking a 60-month loan from the dealership at 4% interest, they simply calculated the annual interest (35,000 x .04 = 1,400). Then they multiply the annual interest payment by 5 years (1,400 x 5 = 7,000) and add it to the price of the car (35,000 + 7,000 = 42,000). To determine the monthly payment, the final figure is then divided by the term of the loan (42,000 / 60 = 700.00). Now you know why leasing became so popular! So, why is this "add-on interest" method incorrect? Because you are paying interest on the loan as if the entire balance was outstanding for the entire duration of the loan. If you obtained a loan from your local bank, the loan would be "amortized" meaning you would only pay interest on the then outstanding balance. That is the case with an amortized mortgage loan and if you make extra payments, you will save interest as the loan balance decreases.
This "add-on" method is not just loan calculation for dummies so the dealership can easily calculate your payment (we know all those dealership finance guys are a lot smarter than that!!). It allows the car companies and dealerships to quote a lower rate of interest. Let's take the 4% example from above. If we use a loan amortizing calculator, we can determine the actual interest rate on a $35,000 loan repaid over a 60 month period. It's 6.2% which is probably closer to a local bank rate and is 55% higher than the rate quoted!
Another "game" the car companies have been playing is "zero interest" financing. When this first came out, I had to ask myself: how can the manufacturers sell these cars for 0% especially given the fact that we know they make more money financing cars then selling them? Then I started to notice a common thread. Almost all offers I have seen give you an alternative: zero percent financing or cash back on the purchase. In other words, if you choose to buy the car for cash (or finance through another independent source), the manufacturer is willing to forego a certain amount of cash. Therefore, the cash back incentive is really just added on interest! To illustrate, let's assume for our $35,000 new car, our choice is zero percent financing for 60 months or $3,000 cash back. Calculating the monthly payment is easy (even easier than add on interest!). You just divide the purchase price by the term of the loan (35,000 / 60 = 583.33). To calculate the "true" interest rate, you use your amortizing calculator with a present value sum of $32,000 (35,000 purchase price less the cash back amount of 3,000). The true interest rate is 3%. Still not bad, but not zero percent. (Note: there are some "true" zero deals out there, but they are very hard to come by).
So now you know a little bit about buying which hopefully will help you with your next purchase. Now, what about leasing? Leasing is actually the process of "renting" the car from a third party purchaser. Even if you lease through the manufacturer, their leasing division is actually buying the car from the dealership and then rents or leases it back to you. Calculating lease payments are complicated and you need a few factors to make your own analysis: total capital cost, residual value (or percentage) and money rate. If you'd like to figure it out for yourself, there are plenty of lease calculators floating around the net. But that won't help you much because you are using their math, not your own. Let me show you how I calculate payments and analyze lease deals using my math.
First, one rule I try to follow: avoid putting money down on a lease. If possible, roll taxes, inception fees, dmv charges, etc. . . into the payment. And NEVER put additional money down to reduce your monthly payment. What you are doing is giving money upfront to the leasing company to reduce your rental payment. If you drive off the lot and a tractor trailer totals your vehicle (assuming you are completely unharmed - always a good starting point when using accident examples!), you will not get your down payment refunded, nor taxes returned, etc... You'd be much better off taking the down payment, putting it in a bank account and using it to offset your monthly payment. For downpayments, rule of thumb is that the payment will decrease by about $25 per month for every $1,000 you put down to reduce the cost of the car.
So, how to analyze the lease payment. Look at it this way: you are actually renting part of the car (the residual amount) and purchasing the balance. Meaning you are (in the leasing company's eyes) using up a certain amount of the car. This is their biggest gamble. If they charge you for using up 45% of the car and it turns out that the fair market value of the residual is actually much lower than 55% at the end of the lease, they lose money on the deal. That is why you might have heard that many of the American manufacturers are leaving the leasing business when it comes to the large SUVs. Due to the economy and gas prices, they just are not holding their value as the leasing companies had expected.
Back to payment analysis...
So you need to make two payment calcs and add them together. First, take the residual value and calculate an interest-only payment. Using our above residual factor of 55%, the residual value is determined by multiplying the total capital cost of the vehicle by the residual factor ($35,000 x .55 = 19,250). Here's where you can get a little creative. You choose the interest rate - yes you heard me - you choose the rate. Meaning, you decide at a given interest rate what you are willing to pay and can play around with the formula from there. Let's use 4%, so the interest-only portion of the monthly payment is calculated by multiplying the residual value by the chosen interest rate then dividing by twelve to obtaining a monthly figure (19,205 x .04 = 770 / 12 = 64.17). The theory behind this is you only need to pay interest because this "portion" of the car you are actually giving back to the leasing company at the end of the lease. Therefore, they should only be looking for interest on their money. Second, you need to calculate an amortized payment on the amount of the car you are "using up." This figure is determined by subtracting the residual value from the total capital cost of the car including all fees, charges, taxes, etc... (35,000 - 19,250 = 15,750). Using your amortizing calculator, you can amortize the payments of a loan for 15,750 at 4% over a 60-month period. The resulting figure is 262.77. Add your two monthly figures together to determine the monthly lease payment (64.17 + 262.77 = 326.94). You can also use this logic to analyze whether a proposed lease payment is reasonable. Just ask the dealer for the total capital cost of the car and the residual value or percentage. You should be able to back into the rest.
I welcome comments and questions.
June 24, 2008
Difficult Economic Times
We are living in very difficult times. Real estate values have dropped, many people have lost their jobs or are making less than before and the cost of living just keeps going up. I see it a lot through my real estate practice since I do a lot of loan works and short sales for clients.
With the pending election and the unprecedented things we have been seeing: gas prices in excess of $4 per gallon, a very weak overseas dollar, a black man and a woman running for President, it got me thinking about where we are as a country and where we might or might not be going.
Recently, I visited a recycling center with my son's cub scout troup. I was fascinated and impressed with what this little town in my area was doing as a community to recycle. I was embrassed that, as an afluent community, my town was doing very little besides having us leave paper and bottles on the curb every two weeks. The recyclers were not only recycling 80 to 90 percent of their garbage, but they were doing it in a manner that raised upwards of $200,000 for a series of 25 charitable organizations and groups.
I think when it comes to recycling and conservation, we are mostly in the clouds and doing community imposed things that we accept on face value. I learned something (or realized something I guess I already new) that day. Our dependence on oil (more particularly foreign oil) goes way beyond automobiles and other gas powered machinery. It goes to the production of plastic, plasma tvs, etc... The gentleman who was giving the kids their tour was a vet - former military man. And he was more than vocal with his thoughts about how we give away jobs and other things to other countries. He grew up in a pro-American, anti-foreign era. But things are different today. In the words of syndicated columnist Thomas Friedman, we live in a flat world, one where we participate globally rather than compete. The sooner we realize this, the easier it will be for all of us and the easier we will be able to help our children prepare for a different world ahead. Our military tour guide was trapped by a belief in xenophobia that has less applicability in today's world.
We must, along with future generations to come, change our use and dependence on oil. Period. It's not a political issue, it's a survival issue. We need to start treating capital resources as precious - you preserve capital; and put income resources that are replenishable to better use. I don't know if plastic is going anywhere, so we have to learn to better recycle it.
I am rambling and getting a little tired as I write and think. I highly recommend you read Thomas Friedman's book, The World is Flat and others like it. It will change the way you see things. Next time: Geocaching!
With the pending election and the unprecedented things we have been seeing: gas prices in excess of $4 per gallon, a very weak overseas dollar, a black man and a woman running for President, it got me thinking about where we are as a country and where we might or might not be going.
Recently, I visited a recycling center with my son's cub scout troup. I was fascinated and impressed with what this little town in my area was doing as a community to recycle. I was embrassed that, as an afluent community, my town was doing very little besides having us leave paper and bottles on the curb every two weeks. The recyclers were not only recycling 80 to 90 percent of their garbage, but they were doing it in a manner that raised upwards of $200,000 for a series of 25 charitable organizations and groups.
I think when it comes to recycling and conservation, we are mostly in the clouds and doing community imposed things that we accept on face value. I learned something (or realized something I guess I already new) that day. Our dependence on oil (more particularly foreign oil) goes way beyond automobiles and other gas powered machinery. It goes to the production of plastic, plasma tvs, etc... The gentleman who was giving the kids their tour was a vet - former military man. And he was more than vocal with his thoughts about how we give away jobs and other things to other countries. He grew up in a pro-American, anti-foreign era. But things are different today. In the words of syndicated columnist Thomas Friedman, we live in a flat world, one where we participate globally rather than compete. The sooner we realize this, the easier it will be for all of us and the easier we will be able to help our children prepare for a different world ahead. Our military tour guide was trapped by a belief in xenophobia that has less applicability in today's world.
We must, along with future generations to come, change our use and dependence on oil. Period. It's not a political issue, it's a survival issue. We need to start treating capital resources as precious - you preserve capital; and put income resources that are replenishable to better use. I don't know if plastic is going anywhere, so we have to learn to better recycle it.
I am rambling and getting a little tired as I write and think. I highly recommend you read Thomas Friedman's book, The World is Flat and others like it. It will change the way you see things. Next time: Geocaching!
April 16, 2008
Why You Need A Will (and When)
Many people are confused as to when and why they should put a will together. I am writing this blog to hopefully give some people more direction toward making the right decision (at least before all their kids are grown!).
When Do You Need a Will?
First of all, let's address the obvious. If you are married and have minor children, you definitely need a will. You should also have living wills and powers of attorney (discussed further below).
Second, if you are single, have very few assets, have no dependents and do not care what happens to your property when you die, you don't need a will. You should however, consider a living will.
If you are married without kids, you probably should have a will especially if you intend to have kids in the not so distant future. Also, include living wills and powers of attorney. Even if you don't have a lot of assets yet, dying without a will makes things real difficult on survivors you leave behind.
If you have a large estate, as well as loved ones (or charities) you care about, you need a complex will with advanced tax provisions drafted by a competent and experienced estate planning attorney. This plan might include revocable and/or irrevocable trusts, living wills, powers of attorney, and other complex documents such as GRATs, CRATs, QPRTs, QDOTs, amongst others. (If you have been through this process already, you may recognize a lot of these acronyms even though you may not be completely clear as to what purpose they serve).
So, Why Do You Need a Will and Other Documents?
When you die without a will (called dying "intestate"), your property and minor children get subjected to the rules created in the particular state in which resided at your death. Although courts are always concerned about the best interests of your surviving minor children, the disposition of your property is often another story. The intestate rules which apply to property distribution generally favor the state and the general public, not the individual and their family. Tax rules are written as such to take the largest amount of tax unless some prior planning has been done. In addition, many states have a costly probate process - the process of submitting your will to court and disposing of your assets. Planning can be done to minimize the costs of probate. In addition, regarding minor children it is important that you and your spouse choose guardians for them - do not leave surviving family members to battle it out and argue over what they think your wishes are.
Also, between surviving spouses and surviving children, every state has different rules as to how much of the estate your spouse is entitled to. Dying without a will can make financial survival very difficult for your survivor.
With situations of divorced parents, second marriages, same-sex couples, having a written document is a must. In most situations, your property will not pass as you intend.
You should have a living will if you wish to avoid being kept alive by artificial means. Take the Terry Schiavo case out of Florida. She did not have a living will or advanced healthcare directive (sometimes called a medical power of attorney). Her husband applied to the court for permission to remove her from life support. Her parents opposed the position of her husband and it became a national and political issue.
Powers of attorney are often valuable between spouses and business partners to act on each others behalf in situations of abscence and disability. They are various types of powers of attorneys including durable powers, nondurable powers, and springing powers.
Life is a random walk. There is no better time than the present to get just the basics of your affairs in order. I often find people shy away from completing wills because of the price (I charge from $1,800 and up for wills, living wills and powers for both spouses in New Jersey - obviously price will vary from firm to firm and from area to area). People can often be penny-wise and pound-foolish. Don't put such a small price on your family's safety and financial security.
Beyond the appropriate documents, take the time to organize your affairs to make the process after your death easier on survivors. We are publishing a book - "For My Heirs: A Journal of Guidance and Last Instructions" just for this purpose. If you'd like more info, please contact our office.
I welcome comments and questions, so feel free to post them.
When Do You Need a Will?
First of all, let's address the obvious. If you are married and have minor children, you definitely need a will. You should also have living wills and powers of attorney (discussed further below).
Second, if you are single, have very few assets, have no dependents and do not care what happens to your property when you die, you don't need a will. You should however, consider a living will.
If you are married without kids, you probably should have a will especially if you intend to have kids in the not so distant future. Also, include living wills and powers of attorney. Even if you don't have a lot of assets yet, dying without a will makes things real difficult on survivors you leave behind.
If you have a large estate, as well as loved ones (or charities) you care about, you need a complex will with advanced tax provisions drafted by a competent and experienced estate planning attorney. This plan might include revocable and/or irrevocable trusts, living wills, powers of attorney, and other complex documents such as GRATs, CRATs, QPRTs, QDOTs, amongst others. (If you have been through this process already, you may recognize a lot of these acronyms even though you may not be completely clear as to what purpose they serve).
So, Why Do You Need a Will and Other Documents?
When you die without a will (called dying "intestate"), your property and minor children get subjected to the rules created in the particular state in which resided at your death. Although courts are always concerned about the best interests of your surviving minor children, the disposition of your property is often another story. The intestate rules which apply to property distribution generally favor the state and the general public, not the individual and their family. Tax rules are written as such to take the largest amount of tax unless some prior planning has been done. In addition, many states have a costly probate process - the process of submitting your will to court and disposing of your assets. Planning can be done to minimize the costs of probate. In addition, regarding minor children it is important that you and your spouse choose guardians for them - do not leave surviving family members to battle it out and argue over what they think your wishes are.
Also, between surviving spouses and surviving children, every state has different rules as to how much of the estate your spouse is entitled to. Dying without a will can make financial survival very difficult for your survivor.
With situations of divorced parents, second marriages, same-sex couples, having a written document is a must. In most situations, your property will not pass as you intend.
You should have a living will if you wish to avoid being kept alive by artificial means. Take the Terry Schiavo case out of Florida. She did not have a living will or advanced healthcare directive (sometimes called a medical power of attorney). Her husband applied to the court for permission to remove her from life support. Her parents opposed the position of her husband and it became a national and political issue.
Powers of attorney are often valuable between spouses and business partners to act on each others behalf in situations of abscence and disability. They are various types of powers of attorneys including durable powers, nondurable powers, and springing powers.
Life is a random walk. There is no better time than the present to get just the basics of your affairs in order. I often find people shy away from completing wills because of the price (I charge from $1,800 and up for wills, living wills and powers for both spouses in New Jersey - obviously price will vary from firm to firm and from area to area). People can often be penny-wise and pound-foolish. Don't put such a small price on your family's safety and financial security.
Beyond the appropriate documents, take the time to organize your affairs to make the process after your death easier on survivors. We are publishing a book - "For My Heirs: A Journal of Guidance and Last Instructions" just for this purpose. If you'd like more info, please contact our office.
I welcome comments and questions, so feel free to post them.
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