[Friend],

If you guys want to buy a house, by all means, go buy a house.  I merely want to share the wisdom I’ve accumulated from my own misadventures in home ownership and the mistakes I’ve made.

So a few random thoughts, in no particular order.

Why?

Why do you want to buy a house?  Is it because you want to live in a house?  Is it because you want to be able to paint the walls?  Is it because all your friends have a house?  Is it because you think it’s a good investment?  Nail down the answer, and it will help you think creatively about whether buying a house really is the best way to achieve those goals.

Houses are Great

It’s fun to own a house.  I personally have gotten great fulfillment out of having some extra space to spread my stuff out, learning how to fix things, taking creative control over things like paint color and light fixtures, etc.  I have loved every Saturday spent learning how to wire up a new outlet in a room.  [My wife] has loved choosing paint colors and picking out furniture for all the extra rooms.  It’s a tremendous luxury to go to the taxidermy store on Mississippi and decide not to buy the lion head because I don’t want to spend the money, not because I don’t have the space for it.  It’s fun to be able to throw parties and invite 40 people.  I’ve really enjoyed the experience of owning a house, on balance.

Details

You want to live in a house together.  That’s all fine and good.  But the devil is in the details.  Both times that I bought a house, I was in a relationship.  Neither time did I attempt to “co-buy” a house with the other person.  If, heaven forbid, you two were to break up at some point, it is much easier if one person owns the house and the other is a tenant.  You can always change that later and add someone to the title.  We know a couple who own a house together, got divorced, and now live in it together while their separate girlfriends and boyfriends come and go, because they are so underwater on the house that they cannot sell it.  At the very least, make a plan if you co-buy about how you extricate yourself from this huge, illiquid liability should your lives take different paths.

A House Will Close Doors and Kill Your Life as You Know It

A house is a huge and illiquid asset, and a huge liability.  If you own a house, you don’t really open many doors, but you close many doors.  Doors like moving to a different city to find a better job.  Or even taking the opportunity to find a different job locally — imagine a case where you find your dream job but it pays $30k less than your current one.  The decision of whether to take it is a very different one with a $700 rent payment versus an $1800 mortgage payment.  So, owning a house not only commits you to Portland, but it also commits you to a certain income.  Which means that you have many fewer options professionally.

In many ways, life offers you a tradeoff between an optimal dwelling and an optimal work life — because one is a significant drain on your cash flow, and the other produces all your cash flow.  Since a house is optional but a job is not, I’d recommend levering up to buy a house only if you are completely satisfied with your job.  If you are not, then get a job that completely satisfies you, then affix yourself to the permanent negative cash flow associated with a house.

A house is like reverse golden handcuffs, and owning one actually benefits your employer more than it benefits you.  Imagine that if you ever wanted to leave your job for one in a different city, you had to write a check for $40,000 to a bank.  Lots of people are in that boat right now because their houses are worth less than their mortgages.

On a smaller scale, think about what owning a house will do to your lifestyle.  When I owned my last house [when I was aged 23-26 or so], I remember many Saturdays when I wanted to join you and [our good friend] for Saturday day-drinking on bikes, but I couldn’t, because I had to mow the lawn.  I had to do it because if I waited another week to do it, the grass might be wet, or too long to mow.  I remember when I was selling the house I had to be home every night to water the plants, because if I didn’t, they would die, and the several hundred dollars I spent on them would have been wasted.  That meant no happy hours, shopping, etc.  Heck, just yesterday I spent all morning and part of the afternoon up on a ladder fixing leaky gutters.  Why did I have to do this?  Because the weather was nice.  Yes — the weather was so nice that I had to fix gutters, while they were temporarily dry.  A house affords me plenty of storage space for my stuff.  Plenty of space for my bike to sit on nice days.

Consider also your commute.  Odds are, it will increase if you buy a house.  Think about what this means for spontaneous fun things like meeting friends for a beer after work.  I could never do that with my last house, because it was a one-hour round-trip if I needed to go home first, between work and socializing.

Houses Are Incredibly Expensive

It is incredibly expensive to buy, own, and sell a house.  I did not fully appreciate this until I went through the first round-trip on the last house.

Buying a house means filling it with furniture, taking time off work to meet with all sorts of service providers, spending all your free time fixing things up.  It’s all exciting and women like it because they get to shop for everything.  But it is expensive.

Owning a house means you get to deal with property taxes (mine are $3,500 a year), homeowners insurance, various repairs, etc.  When I moved into my current house, one part of the roof was leaking.  I got to spend $1,250 to fix that.  Wasn’t expecting that expense upon moving in.

And now we come to the very most expensive part of home ownership, the selling of the house.  Realtors will take 6% of the value.  If you sell a house for $300k, that’s $18,000.  Then, on top of that, budget at least $10k+ to get the house in shape to sell.  When I sold the last house, as a condition of sale I had to agree to repair the chimney ($12k) and replace the sewer line ($8k).  In a strong housing market, these things don’t matter.  In a weaker market, the buyers have all the power and in order to sell, you have to pay all these bills.

I owned my last house from 2005 to 2007, during the greatest bull market for houses that has ever existed.  After accounting for opportunity costs, I did not make a dime.  The math went roughly like this:

• Bought house for $225k; sold it for $325k.  Gross profit = $100k.
• Had to dig a new sewer line.  Subtract $8k.
• Had to repair chimney.  Subtract $12k.
• Had to pay buyer’s & seller’s realtors.  Subtract $20k.
• Lived in it for about 4 years, at a total monthly cost, including mortgage, taxes, and net of mortgage interest tax deduction, of about $1600.  Prior to buying the house, I was renting an apartment for $600.  Had I stayed in the apartment, I could have saved $48,000 over that time period.
• The heating bill for the house was $200 a month (total $10,000 over four years)
• My net profit is now down to $10,000.  I’m certain that I spent at least $2,500 a year on the incidentals associated with owning a house.  Things like gas & a higher car insurance bill for my longer commute, lawnmowers, plants, various repair items, etc.

So, to recap, I owned a house during the greatest housing bull market in history.  My “headline” investment return was nearly 50%!  But after considering all the real costs, I made no money.  I would have been at least neutral, from an investment perspective, staying in the apartment and saving the rest of the cash flow I wasn’t spending.  Do you see housing prices appreciating by 50% in the next four years?  That’s what it takes to break even, based on my experience.

What really killed me was moving out four years after moving in.  If you buy a house and live in it forever, it might make financial sense.  If you move to a different house every 3-5 years, the transaction costs will wipe you out.  I spent about $30k just to sell that last house, including realtor fees, the chimney, and to disband the party in my sewer.  If you buy and sell two houses within ten years, that’s $60k down the drain.  Buy and sell a house every three years, and in ten years you’ve thrown away a Ferrari.

House Prices Aren’t Low Enough

Now is certainly a better time than 2007 to buy a house, but houses are by no means “cheap.”  Owning a house exposes you to all manner of financial risks.  I mentioned my sewer, that I had to replace before selling my last house.  The City, in its infinite wisdom, declared while I owned a house that houses could no longer be sold with a certain type of sewer connection (a “party sewer”).  So had to pay $8k to replace it.  This is not something that I could have uncovered with an inspection.  There was nothing wrong with the sewer; it didn’t break (though that too was a risk).  What happened was that a completely political decision, out of my hands and completely unforeseen and unforeseeable, ended up costing me $8k.

Lest you think this was a one-time thing, yet again a regulatory decision is costing me money because I am a homeowner, this time in the form of a zoning judgment that happened in 2006 and was renewed without public comment in 2009, which permitted my neighbor to tear down four historic buildings to build a glass-walled monstrosity right next door to my current house, with the trash receptacle for 72 apartment units right outside my living room.  This probably will turn my $400k house into a $300k house.  I have no recourse for it.  I had no way to anticipate it.  It doesn’t make sense except through the lens of politics.  It’s a huge risk — a huge risk that I’m not being paid to take, because house prices just aren’t that low.

What happens if Congress decides that a good way to close the national budget gap is to eliminate the mortgage interest deduction?  House prices probably drop 20%.  Another risk — purely political.  You can’t plan for these things.

Investment Return = Risk Compensation

My point is that the investment return that people cite when they talk about homeownership is nothing more than compensation for taking risk.  The question is whether you and [your girlfriend] are equipped to take that risk.  Think hard about this question — in investment terms, this is the critical question.  One way to think about it might be to have a conversation together and make sure you have good, comfortable answers to these questions:

• What happens if we own a house together and break up?
• What happens if we buy a house and its value immediately declines by 20%?
• How long are we realistically going to live in this house?
• Why do we want to own a house, and could those goals be met by other means (ie, by renting a house)?
• If one of us really wants to buy a house, would it make more sense for that person to buy the house and have the other pay rent to the other person? (this is exactly, by the way, the arrangement that [my wife] and I have).
• Is now the right time?  What’s the rush?  Would it make more sense to save money for a year so you have a financial cushion to better enable us to bear these risks? (If you each save $1k a month — which is reasonable given the cost of a house you wouldn’t be paying, you’d save $24k in a year.)

Consider also that the maxim that “houses are a good investment” came about in post-WWII America, a period when:

• The economy was good, generally speaking, for 50+ years
• People tended to make a career at one company, in one city
• People went to church and got married and stayed married more often than they do now.

None of these things is true of modern America.  I submit that if they aren’t true, then history provides no guide to the question of whether houses make good investments.

In Summary

In summary, I love owning a house.  But I love it because my eyes are wide open to the risks I am taking in service of that goal.  I have come to terms, for example, with the fact that if my job ever got bad, I couldn’t just quit it and take some time to find a new one — because I’ve got a huge bill that comes every month to pay for this enormous liability.  Neither could I move to a different city, to find a job that I’d potentially like more than my current one, without writing a check to my mortgage banker.  That feeling of “stuck” is a potentially devastating one.  I think it’s important to all of us that we enjoy our jobs.  Lots of people have had to compromise on that principle to own a house.

Still, there are lots of (good) reasons to want to buy a house.  If you do decide to get one, consider me your strongest backer and I’ll help in whatever way I can.  I do strongly suggest that if you are going to do all the house shopping yourself, that you not pay for a full-service Realtor.  Get a discount one like you can find at redfin.com.  Don’t believe the lie that “realtors are free to the buyer”; it’s just not true.  This decision can literally save you $10k.

I hope that’s all helpful.  Good luck with whatever you decide.

• FCFF uses Interest(1-t) and FCFE uses net borrowing.
• From EBIT or EBITDA, you can only get FCFF.  Thus, those formulas use Interest(1-t) and do not have net borrowing.

From Net Income:

• FCFF = NI + NCC + Int(1-t) – WCinv – FCinv
• FCFE = NI + NCC + net borrowing – WCinv – FCinv
• CFO = NI + NCC – WCinv

From EBIT or EBITDA:

• FCFF = EBIT(1-t) + NCC – WCinv – FCinv
• FCFF = EBITDA(1-t) + NCC(t) -WCinv – FCinv

From CFO:

• FCFF = CFO + Int(1-t) – FCinv
• FCFE = CFO + net borrowing – FCinv
• (these are the exact same formulas as above for NI, just with the CFO formula condensed)

From FCFF:

• FCFE = FCFF – Int(1-t) + net borrowing
• (for all the formulas above, the translation you made to convert from FCFF to FCFE was to take out Int(1-t) and replace it with net borrowing, right?  So do the same here.)

With Target Debt Ratio:

• FCFE = NI – (1 – DR)(FCinv – dep) – (1 – DR)(WCinv)

I spent a couple hours today fighting with Linux update clients for OpenDNS and DNS-o-matic (dnsomatic.com). I tried three update clients: inadyn, ddclient, and finally update-dnsomatic.

I couldn’t figure out why I kept getting authentication errors like “401 Unauthorized” and “skipping update” and “badauth” from either OpenDNS or DNS-o-matic.

As it turns out, when the update client asks for your username, what it really wants is your email address. And when it asks for your password, it wants you to have a relatively simple (numbers and letters only) password, not one with any special characters.

After changing my password to a simpler one, and using my email address to login, I was set.

As an aside, if you’re new to this, the easiest client to handle, in my opinion, is update-dnsomatic.

And I only stumbled upon this, but if you use both DynDNS and OpenDNS, the simplest way to update both is to use DNS-o-Matic (with the update-dnsomatic client).  It’s a service put out by OpenDNS that will detect changes to your IP and make changes to several services for you — so all you need is one update client (and configuration) on your end rather than several.

I couldn’t find a concise explanation anywhere on how the AT&T data pricing plans for iPad work when you run out of data. Two phone calls to AT&T have cleared it up for me. So here goes:

You sign up for a plan (e.g., $15 a month for 250 MB of data). You can purchase it for a single month or set to auto-renew.

That one-month, 250 MB plan is good until the month expires, or the 250 MB run out, whichever comes first. Examples:

* You purchase the plan on September 1. You use 210 MB by September 30. On October 1, you are charged another $15 and have a fresh 250 MB. Those new 250 MB are good until you use them all, or November 1, whichever comes first.

* You purchase the plan on September 1. On September 17, you use your 250th MB. On September 17, you are charged $15 and have a fresh 250 MB. Those 250 MB are good until you use them all or October 17, whichever comes first.

Effectively, if you run out of data, the monthly calendar resets itself for the purpose of auto-renew.

Whatever you do, do not go into the iPad in the middle of the month, when you still have data left, and “Add data or change plan.” The software will tell you that “the selected plan will start when the current plan expires.” This is correct — but you will be CHARGED for the selected plan immediately and have one month from the date of PURCHASE to use it. Another example:

* You buy a plan September 1, are low on data September 10 so add a new 250 MB plan for $15 on that date, and you actually run out of data September 17. You are charged $15 on September 10, can start using that data on September 17, and the data runs out on October 10.

If you are on auto-renew, AT&T will charge you for a new plan when you actually do run out of data. This is the preferred method:

* September 1 you purchase the plan. You run out of data September 17 and the plan renews itself. You have until October 17 to use your 250 MB.

Another thing to avoid is the “Change Plan” button in the iPad. This does not change your plan. It adds another plan on top of your current one. If you mistakenly try to “change your plan” several times, you will “stack” several data plans on top of one another. Example:

* You buy a plan September 1. On September 10, anticipating you are running out of data, you “add a plan” for 2 GB. Realizing your mistake, you “change plan” to 250 MB. You actually run out of data on September 17. What just happened is that you got charged $40 on September 10 ($25 for 2 GB plus $15 for 250 MB), and you have until October 10 to use all that data — except you can’t start using it until after you have already gone through your original 250 MB, on September 17.

I hope this is helpful. It’s a system that makes sense, albeit with some very confusing terminology on the iPad device itself. I suppose the ability to “stack” data plans exists for people who want to use more than 2 GB of data, but if you are a casual user, I’d highly recommend simply letting auto-renew take its course.

First, note that as of this writing (August 2010), the largest-capacity hard drive that you can put into a 2010 Mac Mini is the 750 GB Western Digital drive.   Do not be tempted to buy the 1 TB version of the drive; unfortunately, the physical size of the drive (3 mm thicker) is too large to be accommodated by the 2010 Mac Mini case.

Here is how I removed the 320 GB factory drive and installed the 750 GB drive:

You need two Torx screwdrivers, size T6 and size T8.  If you don’t already own these, your cheapest option is to buy a set of mini Torx screwdrivers.

Having the size 6 and size 8 Torx screwdrivers in hand, your next step is to open up the Mac mini.  If you have never taken a computer apart, this will seem a bit intimidating, but if you follow the instructions carefully you should be fine.

I followed these two guides.  Most helpful was this video on Youtube.  In addition, I found that keeping the pictures located on this site open during the process was also a helpful one.

A couple tips that I had to learn myself, despite following the instructions in the video:

• All of the screws inside the computer are different.  As you take the computer apart, start with a system of where you set the pieces.  Do as the guy in the video does and set all the screws on a mat, in the order in which you removed them.  Use a mat that won’t allow the screws to roll around (I used a kitchen towel).  The point is that when you put the computer back together, you can follow the reverse order and use the same screws.
• You will get to a step where you have to take five screws out of the logic board itself.  Make sure that you remember where these came from, because they are all different.  The way I did it was to arrange them on a mat, literally spatially oriented as laid out to correspond to the shape of their arrangement on the logic board.
• One of the final steps, which is inserting the wifi antenna back into the computer, tripped me up.  Note that you are going to be screwing the wifi antenna directly into the hard drive that you just installed.  If the holes in the wifi antenna do not line up with the screw holes in the hard drive, do not attempt to insert the screws sideways.  Instead, take the wifi antenna back out and reposition the hard drive to better align the screw holes.  I also found that I was able to use my screwdriver tip to nudge the hard drive a bit after the wifi antenna was installed, by poking on the far right side , behind the vertical part of the wifi antenna.  Be patient and keep nudging; eventually you will be able to get the holes lined up and the wifi antenna situated so that it sits comfortably in the grooves in the casing.
• If at any point you find that you are muscling a screw into a hole, stop and start over.  I messed up a screw hole in the hard drive, trying to insert a screw sideways to attach the wifi antenna to the hard drive.  I should have stopped and repositioned the hard drive to get the holes to line up.  Now that they are lined up, the screw still only goes in sideways.

The final step is to install the operating system.  When I first put the CD in, the computer did not recognize it.  My setup has a wireless keyboard and mouse, which of course were not yet paired to the operating system, so I wasn’t able to hold “C” on the keyboard to tell the computer to boot from the disk.  This is easily solved if you have a USB keyboard, but in my case, I simply turned the computer off and on again, and the second time it booted from the CD.

The total process took me about an hour.  Let me know if you have additional tips in the comments.

Hat tip to Casual Businessman for this one.

* Create a new Jabber account. Go to iChat menu, then Preferences, then the plus sign. The “Account Setup” window will appear.

* Select “Jabber” as the account type.

* Fill these things in:
Your screen name is: your_facebook_ID@chat.facebook.com
Password is: your_facebook_password
Server: chat.facebook.com
Port: 5222
Make sure that there are no checkmarks next to “Use SSL” and “Automatically find server and port.”

(If you don’t know your facebook screen name, login to Facebook and go to the top right corner: “account,” then “account settings.” The second section contains your account name.)

iChat will show your Facebook buddies in a separate list from your other buddies from other chat accounts.  If you want to consolidate multiple buddy lists — for example, see as a single list all of your AIM, Gmail chat, and Facebook chat buddies, then download chax, a free iChat plugin.

I called my “regular” doctor, waited on hold for 20 minutes, explained my predicament, and was told that I could be seen tomorrow afternoon.

I was explaining this frustrating delay to my girlfriend when she suggested I call Zoomcare, a relatively new urgent-care style doctor shop in Portland. I went on their website and made myself an appointment this afternoon (although I should note that I could have scheduled myself for a visit as soon as 30 minutes later).

I provided my name, insurance information, email address, and a brief description of my symptoms. Zoomcare followed up five minutes later with an e-mailed confirmation of my appointment, complete with driving directions to their location.

My appointment was at 3:00, but I arrived at 2:45, expecting to be handed the customary clipboard with loads of redundant forms to fill out by hand. Instead, the receptionist smiled, asked me for my ID, and asked me to take a seat while I waited for the doctor.

About two minutes later, the Doc came out and ushered me into an exam room. She interviewed me and checked me out. There were no handwritten records anywhere — she typed everything about the visit onto a laptop, which was hooked up to an external monitor so I could review her notes on the fly. I ended up with a diagnosis of a slight ear infection.

No more than ten minutes later, I was checking out with the receptionist, antibiotic prescription in hand, and walking out the door. With the prescription came some automatically printed helpful directions for its use for me to take with me.  Those directions also included a link to an online video about my ear infection if I wanted to learn more.

Total visit time: about 10 minutes.  I was literally back in my car driving home before 3:00, when my appointment was scheduled to begin.

I can’t help but marvel at how well Zoomcare has improved the process of the doctor visit, relative to every other doctor’s office I have been to.  No clipboards, no forms, no waiting, no shuffling between nurses and doctors, no time even to read two-month-old magazines in the exam room! I was thoroughly impressed.

Is Zoomcare the future of health care? If you’ll permit me to editorialize for a moment, I certainly hope so. It was, after all, private capitalists who thought this up and delivered it. One can only hope there remains room for them in our country’s future health care system.

We have all known for a long time that Tiger Woods shares many signature characteristics with hedge fund managers.  He is good looking, and he has an exceptionally good looking wife.  He’s really rich.  He excels at a snobby sport.  He has a big yacht.

But one similarity to a typical hedge fund manager that we might not have appreciated until recently is the nature of each’s portfolio risk.

For years, Tiger Woods carried along, nurturing his squeaky-clean public image while cavorting with a portfolio what are reported to be dozens of floozies in secret.  From the outside, this arrangement was a very low-risk one — so low-risk, in fact, that his corporate sponsors were willing to pay him a reported $90 million a year in sponsorship deals because his track record as an investment had such low volatility.  We might say that Tiger Woods’s investment strategy was to pursue monetary return and personal return with this dual lifestyle.

It probably occurred to Tiger that each of these dozens of dalliances introduced an isolated risk to his career and marriage.  If one of them were discovered, it would be a problem, but it probably wouldn’t spell disaster for him.  After all, they were uncorrelated risks, right?  Presumably, none of the floozies knew of one another’s existence, and each had just as much to lose as him if those relationships became public.

All it took was a single, seemingly innocuous event for all of these seemingly uncorrelated risks to suddenly become highly correlated (in the investment world, an adage holds that “the only thing that rises in a market crisis is correlations”).  A single text message, apparently, set of a cascade of revelations that threaten to ruin Tiger’s career, not to mention his marriage.

Hedge fund investors should heed this lesson.  Simple evaluation of a historical return series can’t hope to capture the embedded risks in a portfolio management strategy.  Many risks lurk in a seemingly stable portfolio.  And all it takes is a seemingly remote event to blow up an entire strategy.

Might we surmise that Tiger Woods, in late 2009,  is the last victim of the 2008 credit crisis?  If not literally so, the broad principle applies.

But all is not lost for Tiger.   He may still have a future as a hedge fund manager.  Heck, it worked for John Meriwether.

2. Unpopular war

3. Runaway inflation

4. Bell-bottom pants (today, they are called “boot cut”)

5. General mistrust of politicians, especially the President

6. Dance competitions

7. Fondue

8. “Modern” Decorative Style

9. Climate Change Concerns

10. The color brown