Magazine article The CPA Journal

Help Your Clients Prepare for Opportunity

Magazine article The CPA Journal

Help Your Clients Prepare for Opportunity

Article excerpt

Some days, as I sit and watch my children and grandchildren, I can't help but wonder what the future holds for them. My daughters are among the fortunate few to have completed their college education without accumulating the crippling debt of massive student loans. Although my husband and I don't consider ourselves financially "rich," after many years of hard work and good investment decisions, we have managed to achieve a sense of financial security. Some of our investment decisions were sheer luck-being in the right place at the right time. However, there's much truth to the adage, "Luck is what happens when preparation meets opportunity." Any financial planner worth her salt will tell you that financial planning and investing work best with a long-term horizon.

Real Estate as an Investment

Traditionally, real estate has been the investment of choice, especially for middle-class families. The family home usually represents the single biggest asset and largest purchase most people will make in their lifetime. It provides shelter while appreciating in market value, and in some cases it provides rental income as well. During the past few decades, real estate has posted impressive gains while experiencing less volatility than the stock market. Increasing home values have allowed many homeowners with sufficient equity to finance other purchases, such as home improvements, cars, vacations, and various other large-ticket items. Rising prices have been offset the past several years by easy credit, which has allowed many people to become homeowners with little or no down payment.

Recent newspaper headlines indicate that the easy money once available to home-buyers is coming to an end. A rise in defaults of subprime mortgages, which provided credit to borrowers with lower incomes or poor credit histories, began this current crisis. These mortgages were packaged into collateralized debt obligations (CDO) that created an even bigger supply of funds for lending. The CDOs provided financing for mortgages, and the cash flow from homeowners' monthly payments was used to pay investors. This worked well as long as the payments kept coming. The risk factor became all too real, however, when significant numbers of loans went into default, and CDO investors began withdrawing from the market. …

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