Notes from the trenches

I'm now midstream on the buying-real-estate process. Almost every email I've sent in the past week begins with "EEK!"

The status: We made an offer. We haggled. The seller counter-offered not just a different dollar figure but an entirely different apartment. (It's a big building, about 250 units, of which a bit more than half are sold.) We liked the new (cheaper!) apartment much better and asked why we hadn't been shown it before. Answer: Because the asking price was vastly higher than the one on our original target. But since the square footage is a tad lower, the developer will take a lower price on it -- despite it having various other advantages that made it, to us at least, more attractive.

NYC real estate is insane.

Someday I will have a proper blow-by-blow, but here's what I've learned so far:

-NYC real estate is insane but the closing costs are off the planet. My whole real-estate quest started because I got envious of my friend's story of buying a Baltimore townhouse with an FHA loan and total cash costs of $4,500. My cash costs? We will be damn lucky to get out for $40,000. That includes 3.5% down and -- the really ouchie part -- NYC's smorgasboard of closing costs. Corcoran has a breakdown that seems accurate in my limited experience so far.

-If you're buying NYC real estate, do anything you can to get a CEMA (Consolidation, Extension and Modification) from the seller. I'm told they're more work for the banks and the lawyers, but they also save you vastly on the tax costs. Originating a new mortgage costs you almost 2% of the sale price in New York taxes. A CEMA transfers the seller's existing mortgage to you -- you only own taxes on the difference between their mortgage and your new one. We got a CEMA, and it's saving us a five-digit sum.

-On other hand, even with a CEMA you'll still get hit in New York with property transfer taxes. In our case, that also equals just under 2%, which has to be paid at close. Did I mention how much NYC real estate bites?

-If you're planning to tap investment or retirement accounts, start setting things up as early as you can. I'm pulling money from my IRA (Fidelity) and David's IRA (Vanguard).

When we went to transfer funds to cash in his IRA, we found that Vanguard didn't have proof of his taxpayer ID. That required sending in a W9. We're now waiting for it to process.

In my IRA, direct deposit of funds you're withdrawing requires activating a connection with your checking account. Fidelity claims that takes seven days, but I activated last Wednesday and my account says it won't be ready for transferring until this Friday. Then the actual transfer can take up to five days to process. I imagine I'll be paying the $15 fee to wire cash, which I could have saved if I'd set up the electronic account connection sooner.

Selling investments to move the money to cash also takes time. I did that too last Wednesday and am still waiting for my VWO trade to settle.

-If you can avoid an FHA loan, do it. It's pricey, costing 1.75% of the loan amount upfront (you can fold the cost into your loan, but you still have to pay it) and a monthly premium of up to 0.55% of the loan amount (calculated annually, paid monthly). It takes the place of PMI, which you don't pay on FHA loans. In our case, the premium adds $260 a month to our payments. If you have the money for a more substantial downpayment (we don't), you can avoid all this.

-EEK!

My first foray into ETFs

I finally managed to move my Fidelity IRA money out of cash reserves and into funds -- just in time for the market's first down week in a month. So much for market timing.

Anyway, back to our saga of my IRA allocation. Having picked Fidelity Spartan Total Market Index (FSTMX) for my U.S. stock market index, I next needed an international index fund. Turing again to my trusty Money magazine list, I saw a few Fidelity and Vanguard recommendations.

But I also saw this thing called "ETFs" -- with lower expense fees! I'd heard of ETFs (exchange-traded funds) before but had no real idea what they were, so I started Googling, and found a nice primer.

Basically, for my purposes, it seemed to boil down to this: An ETF would have a lower expense fee than a fund. However, an ETF trades like a stock, which means buying one incurs a commission. At Fidelity, for my IRA, that would be $19.99. This made me leery, so I went back to looking at regular-old index mutual funds.

Usually, for my international fund, I buy something that tracks a total international stock index. But this time, I decided to be a little adventurous. It seems reasonable to speculate that emerging markets will do better over the next decade or two than developed ones -- there's a whole lot of room for growth there. So I decided that I wanted the Vanguard Emerging Markets Stock Index (VEIEX). It seemed like buying that, since it's a non-Fidelity fund, would probably incur the $75 fee that so annoyed me earlier, but I decided to suck it up and buy it.

... except when I tried, I got a notice that the fund was closed to new investors. Er? I don't know if that's actually true, or if for some reason it wasn't compatible with my Fidelity IRA -- remember, Fidelity's whole interface has been confusing the hell out of me -- but it seemed like this wasn't going to happen.

But having gotten it into my head that VEIEX was the fund I wanted, it was now the fund I really, really wanted. And lo, Vanguard's Emerging Markets ETF (VWO) tracked the same thing. And I could definitely buy that ... so I did. Commission be damned.

Buying a mutual fund, I could specify how much I wanted to invest. For a stock, or in this case the ETF, I had to put in an order for a number of shares, and take my chances with precisely how much that would cost at open. So I worked out what half the remaining money in my IRA would be, divided by Friday's closing price (I was doing this on a weekend), and put in an order for a batch of shares.

Happily, at work the next day I spotted an article on the upcoming story budget about ETFs. It's posted here: "ETF investing done right." It backs up what I'd hazily worked out for myself: Because you pay a commission on each trade, ETFs don't make sense for things like active 401(k)s, where each week you're putting in money money and immediately investing it. But my IRA is basically a one-shot deal -- I'm sinking in this chunk of cash once, investing it once, and then basically leaving things alone. If I do add more to this IRA, it'll only happen once a year or so. For that kind of investment, an ETF can be a little bit better than a mutual fund -- though really, it strikes me as pretty close to being just 'half a dozen of one or six of the other.'

Tackling the IRA

I finally sat down to allocate my Fidelity IRA balance. What a headache.

I knew I wanted to mimic my 401(k) allocation, which is pretty basic: 40% U.S. stock market index, 30% international stock index, 30% bond index.

In my 401(k) accounts, this has always been very easy to create. The provider generally only offers one or two choices available in each category, so I grab the one with the lowest fees (hence my allegiance to index funds). But with my IRA, I apparently had the whole universe of stocks, funds and exotic investment critters available to choose from. Aiee! Decision paralysis!

As a starting point, I typed "best index funds" into Google -- and the first result was a link back to my own company's site, for a list Money magazine apparently compiles annually of recommended mutual funds. Which is exactly the kind of thing I was after, hooray!

First step: Try to figure out what fees Fidelity is going to charge me for my purchases. Digging around in the "help" section on their "trade mutual funds" page, I found this in the FAQ:

Fidelity will charge a short-term redemption fee if you buy a non–Fidelity fund and sell it within 180 days. This would be in addition to any fees charged by the fund itself.

That was the only thing listed in their "fees" section aside from some boilerplate about purchase, expense and redemption fees, so I figured I was pretty much in the clear. I typed in a purchase order for a batch of VTSMX, Vanguard Total Stock Market Index.

.... and then hit a warning that this purchase would incur a $75 fee. Grump. Fidelity offered an alternative: check out their list of no-fee "similar" investments. I clicked to see that, and got a screenfull of 100+ funds that aren't at all the same as what I wanted. No index funds, many with higher management fees -- I bailed.

Back to the list. Also recommended by Money was FSTMX, Fidelity Spartan Total Market Index. That had a $10,000 minimum investment, which was a few hundred dollars more than investing exactly 40% of my portfolio would call for.

Still, I figured Fidelity probably wouldn't charge me fees for investing in their own funds and decided to take the plunge. So I filled out the clickieboxes and successfully put in my order. One purchase down, two to go.

Next, for my international index-fund order, we come to the story of "Stacy learns what the hell an ETF is." Tune in tomorrow ...

I want a new acronym (or, Goodbye 401k, Hello IRA)

Two days before last month's cat trauma hit and most of my organizational planning ground to a temporary halt, I did manage to do what I'd promised to: Convert two abandoned 401(k) accounts (one each for me and David) into IRAs. Total elapsed workflow time: two weeks.

I could have left the accounts alone, or rolled my old 401(k) into my new one, but I wanted IRAs because I'd learned that you can withdraw up to $10,000 from them penalty-free (you'll still owe taxes) for a first-time real-estate purchase, which we may want to do at some point.

Initially, I'd planned to pick a financial provider and consolidate as many accounts as possible in one place. Technically there's no reason I shouldn't do that -- each of our accounts is well under FDIC insurance limits, and they're all housed at big financial services companies that are pretty unlikely to fail or seriously screw up. Plus, most of the money in the accounts is invested in mutual funds, which ought to tangibly own the underlying securities. If the brokerage makes a mistake or rips off the money, there's SPIC protection. That's a lot of backup.

And yet, still. With everything that's gone on in recent months with financal debacles, it felt like diversification would be a good idea. On the unlikely chance something goes wrong, not having all our retirement money parked at one company feels like a wise move. Besides, with my financial-services track record, my provider collapsing or my money being sucked out by hacker thieves doesn't seem so farfetched.

So I opted to set up an IRA for David at Vanguard, where his 401(k) already was, and I moved my old JPMorgan 401(k) to an IRA at Fidelity, the company that houses my current 401(k).

Doing David's was super-straightforward. He'd never registered with Vanguard's website, so I signed up and created his account there. After you do that for the first time, the site won't let you move money for seven days. I waited out the week, then went through the site's wizard-like steps for rolling a 401(k) to an IRA and reallocating the balance. If you want to keep your allocations exactly as they were for your 401(k), you can do that with one click. In total, the whole thing took me about 20 minutes (plus the one-week wait).

Because I was doing a transfer, mine was trickier. Fidelity let me open a rollover IRA online. But to get the cash into the account, I had to call JPMorgan to arrange a termination and transfer.

Calling JPMorgan revealed the sad truth behind the phantom vesting I'd been accumulating each year. Sure enough, it happened because my old company never actually told JPMorgan I'd left. To move my 401(k), they had to go back to the company and confirm my termination date -- and once they'd done that, poof went my two years of extra vesting. Drat.

JPMorgan took a week to sort that out, and then my account was free for transfer. To clean out my balance, JPMorgan sent me a check, payable to Fidelity Management Trust Company. Because the check was made out to Fidelity, not me, it was for my full balance -- no tax withholding that I'd later have to try to claw back.

It was extremely weird getting a check in the mail totaling about six months of my after-tax pay. It's definitely the largest check of "mine" I've ever held. Even though the check was bank-paper and not cash, walking around with it for a day was disconcerting. Reluctant to drop it back in the mail, I took advantage of Fidelity's Investor Centers to deposit it in person -- Fidelity has a branch right in the building I occasionally work out of.

Setting up David's IRA investment choices was easy; Vanguard's allocation options looked just like those I was used to from funding and allocating 401(k) contributions. Fidelity's, not so much. The interface looks more like what I'd imagine a traditional brokerage interface looks like. Instead of picking from a small batch of preselected mutual-fund options, I need to tell it what stocks or funds I want my IRA money invested in.

In the face of all these choices, I keep freezing up. I haven't yet summoned the willpower to work out what to do next, so for the moment, I am being an extremely bad long-term investor and leaving the giant lump sum parked in a "Fidelity Cash Reserves" account.

Oh well, it's not like stocks have done anything dramatic in recent weeks, right?