Investing 102

[chichirone]

The key issue is people/buyers do not ask enough questions and take responsibility to seek to understand. Too many people buy with emotion and then realize the math does not work until AFTER they sign on the dotted line. 60%'er in my opinion. We have all done it...cars, homes, beverages, watches, stocks, <insert material item name here>

The scariest statistic resonating with me is the average American watches 8-10hrs of TV per week but spends less than 2hrs per month on finances. (The Millionaire Next Door or Automatic Millionaire) I spend at least 2hrs per week in this Investing 102 thread and since joining the Weld Financial Forums, more time researching on Google Finance and Charles Schwa than I care to admit. Ha! And we wonder why we have crisis or market fluctuations.

[captainofiron]

Originally Posted by chichirone

The key issue is people/buyers do not ask enough questions and take responsibility to seek to understand. Too many people buy with emotion and then realize the math does not work until AFTER they sign on the dotted line. 60%'er in my opinion. We have all done it...cars, homes, beverages, watches, stocks, <insert material item name here>

The scariest statistic resonating with me is the average American watches 8-10hrs of TV per week but spends less than 2hrs per month on finances. (The Millionaire Next Door or Automatic Millionaire) I spend at least 2hrs per week in this Investing 102 thread and since joining the Weld Financial Forums, more time researching on Google Finance and Charles Schwa than I care to admit. Ha! And we wonder why we have crisis or market fluctuations.

Weld Financial Partners Inc. haha

Originally Posted by GregWeld

A rate hike appears to be coming.... and the market will have to adjust to that. I would expect more "dips" as people ready themselves for a rising interest rate environment.

While the rate hike has been "expected" for a very long time... the sooner we get it done - the better the market will like it. In the meantime people will be taking gains and locking them in. That's a pretty short sighted view of the market - but it is what takes place. There's no denying that all of us are just along for the ride.

Originally Posted by SSLance

I did some buying today...sparingly...

I'm thinking I'll get chance to buy more stuff on sale too.

Im thinking to let my dividends accumulate until later in the year to buy more and reinforce a few of my positions

To be honest I am scared to buy more oil even though everyone keeps saying its at the bottom or near it

I have been thinking hard about buying media content providers like I posted not too long ago instead

[68Cuda]

Originally Posted by captainofiron

Weld Financial Partners Inc. haha

You could also say that your investor's club has a racing problem...

[chichirone]

Originally Posted by 68Cuda

You could also say that your investor's club has a racing problem...

Good one Mike!

I too am skeptical of oil BUT it is so hard to sift through all the noise. Just sitting tight and not listening to the conjecture. Long term, hold on for the ride and look for buying opportunities.

Something Amy and I have been talking about recently is "if you had $400-500k to invest, how would you do it?"

Would you:
-Buy a franchise
-Invest in commercial real estate
-invest in a business
-pile it into more dividend positions
-buy into an MLP or REIT

...the list could be way longer than the above. Just a few ideas.

Curious what you guys think. We have always pushed ourselves to think beyond our current scenario and better understand differing ways to educate ourselves on how to optimize our "employees".

[GregWeld]

Originally Posted by chichirone

Good one Mike!

I too am skeptical of oil BUT it is so hard to sift through all the noise. Just sitting tight and not listening to the conjecture. Long term, hold on for the ride and look for buying opportunities.

Something Amy and I have been talking about recently is "if you had $400-500k to invest, how would you do it?"

Would you:
-Buy a franchise
-Invest in commercial real estate
-invest in a business
-pile it into more dividend positions
-buy into an MLP or REIT

...the list could be way longer than the above. Just a few ideas.

Curious what you guys think. We have always pushed ourselves to think beyond our current scenario and better understand differing ways to educate ourselves on how to optimize our "employees".

The hard part of answering the "what would you do with X scenario" is that it all depends.

For me - being retired - I don't want anything to do with ANYTHING that looks like I'd have to work at "it" or spend time managing "it". So more dividend paying stocks or apartment/commercial real estate LLC's would be my choice.

If a guy is young - still has younger kids at home etc - then maybe something that takes a more active involvement might be the right answer.

If a person is nearing retirement age -- I wouldn't want to see them investing in a business or franchise that is too much "risk" - and if they lost that - wouldn't be able to recoup perhaps.

[glassman]

So given that scenerio, "if" someone was to buy a small apartment complex for cash, besides the fact you have to constantly babysit and maintain, it keeps up with inflation. What is the national average of % of property management fees?

[GregWeld]

Originally Posted by glassman

So given that scenerio, "if" someone was to buy a small apartment complex for cash, besides the fact you have to constantly babysit and maintain, it keeps up with inflation. What is the national average of % of property management fees?

First of all -- it doesn't pay to buy REAL ESTATE - especially commercial real estate with "cash" -- it pays to put a healthy down payment (the LLC's I invest in use 40% down). The key to making money on rental real estate is to be able to leverage up. Let the tenant(s) make your payments --- and be able to utilize the depreciation to shelter the income. I say SHELTER because when the building is sold -- you're going to recapture all that depreciation. Now we're getting way over Investing 102.... but in a nutshell --- you'll want to use the cash for the down -- leverage for growth -- and the depreciation to minimize taxes during ownership.


Pro management fees vary -- but normal is 5% or so.


There's LOTS to learn about buying rental real estate. Which is why I invest with professionals that only do this sort of work. We typically like to buy a property that is "under market" in rent... for some reason or another - maybe bad previous management -- maybe because the building is aging - maybe they aren't competitive with amenities... But what we want is the potential to come in and re-position the property to be able to charge the market rates going forward. That can mean MAJOR remodeling of the units -- adding amenities - or redoing parking and pools and landscaping and paint and roof etc. That takes CASH... so you'd better have that all planned for in advance.


The last property I invested in - we completely remodeled every unit as they became vacant... the rents on those units are now UP 50% from when we bought and the property brings in $25,000 more per month than it did when we bought it. Doing all the remodeling reduced the cash flow from the property to ZERO for about 2 years... (that's called INVESTING).

Commercial properties are priced based on their revenues etc. They're not priced like your house. In order for an investor to make "X" return based on the current revenue - an investor can only pay "X" for the property. You have to factor the returns based on the prevailing financing... upgrades... future potential of the rents in the surrounding area etc.

You also NEED to know who your competition is! What is the market for X square feet with similar amenities... is there any new properties planned for your area? Is the area a bunch of generation Y's -- single -- no kids and your building is mostly set up for families?? Or vice versa?

There's a lot to it - like most things - if you want to put the chance of success on your side.

This is the one I own a quarter of in Seattle... it was a dump when we bought it -- didn't have washer and dryers... and was ugly colored and outdated.


http://sierraongreenwood.com

[ErikLS2]

Greg has a lot more experience in rental property than I do and I'm not trying to steal your thunder Greg but I will share my experiences to hopefully contribute to the discussion here. I bought my first one here in Phoenix, a 20 unit place, in 2002. I sold it at about it's peak for a 133% profit, plus the monthly income, tax benefit etc. BUT, I was over there every weekend just about (just like when I was a kid at the building my dad owned) after working 10 hours days all week long at my job. I exchanged that one into one twice it's size in San Antonio (a rapidly growing market at the time) and a lower class but higher CAP rate. Biggest investing mistake I ever made. Why? The reason I bought it, so I COULDN'T go over there all the time, was also the biggest reason I SHOULDN'T have bought it. Management wasn't near what it was represented to me it would be. By the time I found the right guy 3-4 years later, the property had sucked up so much money that it couldn't recover. I sold it last year at a considerable loss, and valuable lesson learned which has made me a much better investor going forward.

Now my brother and I have a Walgreen's store that we inherited from our father who passed away about a year ago. He bought it to get him to the end of his life. It's a NNN lease with good cash flow and he didn't have to do anything. The loan is at 6.2% and has tremendous pre-payment penalties, called "defeasance", which basically in our case amounts to 20% of the current loan balance additional if we want to sell it or even re-finance it early. The reason is these loans are sold as CMBS or commercial mortgage backed securities so if you want to get out early the investor wants all the return he originally signed up for, so you have to pay it. It's not a bad deal though, we'll just keep it until it matures in 2019 and collect the income for doing nothing in the meantime. We could just probably do better with it somewhere else, MAYBE!

I think rental property is a great investment but big mistakes or mishaps can happen too. The loans are much different than home mortgages so you have to know what you're signing and getting into and commercial property loans are even more complicated and often harder to get out of early.

BTW, going through some of my fathers things recently turned up a savings account passbook from the early 80's that paid 15% interest, for a REGULAR savings account, so it's all kind of relative in most cases. I'm gonna go out on a limb here and predict we aren't going to see that any time again in the near future.

[glassman]

So some great info I hadn't known before, thanx Greg and Erik. Much to chew on.

[68Cuda]

Commercial real estate scares me - maybe mostly because I do not know enough about it. But, what I observe here locally: New properties that are super hot and fully leased. New properties that look like they are in the 50% leased category, I can't imagine how the owners are making money. And older properties that are in decline and slowly loosing tenants. It seems very fickle. It also seems like the local market is somewhat saturated. I see too many properties with vacancies, that can't be good. And this is an area where the economy seems to be doing well.

Apartments would seem to be a sure thing, especially with house loan requirements being stricter. I remember occupancy rates in Austin in the mid 90's being north of 95% - super tight. Every time we renewed our lease the rate went up, not good for college students. But the local government had put a freeze on building permits for apartments in the 80's because too many people with oil money were building real estate to shelter their profits, even if it meant they lost some money short term. The market was overbuilt, but it caught up and the city was still hesitant to release new permits. But, when they did it was an explosion of growth. It reminds me that these markets are also influenced greatly by the municipalities and the taxing entities. They can change rules on you in a heartbeat and kill what you thought was a sweetheart deal that you are now locked into. So - yes, scary to me.