Real Estate Investor Question: Rehab and Sell, or Rehab and Keep?

Here’s another awesome question I received from my discussion board. The question; Why bother keeping property after it’s rehabbed? Why not sell it after the rehab and GET PAID!

Of course, the first questions that you must answer is how emergent is your need for quick cash? You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.

If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long-term financing (at 85% or 90% loan to value).

The short answer is an investor is going to make considerably more money by hanging onto a property after it’s rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don’t think it’s too bad as long the landlord is done correctly.

Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example;

Let’s say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhood's investors buy in is $100,000. Let’s also say there are Bill and Fred.

Bill sells his properties after rehabbing and makes $15-18,000 per house. Good boy Bill!

Fred keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Fred trades his 70% loan-to-value (LTV) ratio hard money for long-term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio. He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)

Bill (rehab and sell) makes a great living. Ten houses per year are $150,000-$180,000 per year…nice jingle! The downside is that Bill has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.

Fred (the rehabber) also makes a great living. Ten houses per year make him $100,000 or so in tax-free, spendable cash. But, Fred controls a million dollars in real estate and it’s going up in value year after year. Also, Fred pays no taxes on that money he gets from the cash-out refinances. It’s part of a mortgage, so must be paid back, therefore is not income! I love that part!

Let’s look at what Fred’s doing more closely.

Let’s say Fred bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate…which is pretty conservative):

Purchase year – 10 houses x $100,000 = $1,000,000
Year 1 – Same 10 houses X $105,000 = $1,050,000
Year 2 – Same 10 houses X $110,250 = $1,102,500
Year 3 – Same 10 houses X $115,762 = $1,157,620
Year 4 – Same 10 houses X $121,550 = $1,215,500
Year 5 – Same 10 houses X $127,627 = $1,276,270

Essentially, Fred makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.

Remember

– Some parts of the country will appreciate much faster than 5%. Heck, some places properties will double in value in 5 years.
– No tax benefits of keeping the property are included here. That equates to thousands of dollars in real income.
– This is ONE ten-house year. Let’s say you want to “top out” at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you’ll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life?
– What if you hold these houses 10 years? The numbers get pretty exciting.

If you’re like me and you don’t want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don’t have much personal money invested in them.

So what of poor old Bill? Chances are, Bill will satisfy his need for short-term cash, then start holding property. What do you think?

Accepting Losses With Grace

The lack of a proper trading plan which includes precise rules for entering and exiting a trade will most certainly guarantee failure over the long term. Beginners usually suffer from the same common ailments. They abandon trading plans purely on impulse because things are not going exactly as how they had envisioned. Repeatedly they use unreliable methods that fail to produce a profit. Many traders hold on to losing positions telling themselves “it is going to turn” when every indicator says otherwise because they cannot bear the thought of a loss.

Why do they torture themselves? Why don’t they just identify what’s going wrong and make a change? For some people recognizing that a trade or even a trading method is not working and making a change is easy, but for others, it’s very difficult. They have to look at their limitations admit that they have made a mistake and that’s hard because it hurts our ego. Psychologically it’s risky, it’s often easier to fool ourselves. Just keep going, living in a state of denial until your account is depleted. If you recognize any of these traits in yourself you must stop trading immediately.

Take a good look at what has been happening, try and identify the problem. If you look close enough you may see a pattern. This is why it is vital to record every trade and as much information about it as possible. You have to break out of old patterns and see things in a new light.

You will never be a successful trader if you continue to live in a state of denial. What can be done to return to reality? There is a lot you can do. First of all, make sure you are not trading under stress. When stressed out you can’t see clearly, you become rigid and unable to see alternative views. One of the easiest solutions is to trade smaller. The smaller the trade the less the stress, especially for the beginner. If you are experienced and in a losing streak reduce your contracts until you get your confidence returns. Some people need to take a break altogether. Get away from it all. Take your mind off the trading.

The second thing you can do is to make sure you have a life. Trading can be addictive especially when you are winning. Do not put all your emotional eggs in the trading basket. You need to have other roles that give your life meaning and purpose. By defining your identity in a variety of ways, you will not place unnatural importance on trading events. Therefore, you will be able to take losses in stride and look at your trading more objectively.

Finally, radical acceptance is a key mental strategy for coping with market uncertainty. Many traders make the mistake of thinking they can control the markets. Nobody can control the markets. We must learn to accept anything that comes our way and to trade accordingly. Adopt the attitude that trading is a journey and that all we can do is go where the markets take us.

To succeed on this journey you cannot afford to lose too much. Manage risk and just accept what you get and enjoy the ride. This way you will trade more freely and creatively. Don’t live your life in denial. Accept your limitations, work with them, and become a winning trader. Write out your trading plan with precise entry and exit points. Most important set your stops and mentally decide you will not break them. Test your system on paper and when the confident test in real time with the minimum contract size. You will have losing trades, accept them with grace and go on to the next trade.

7 Tips For Choosing Forex Brokers

The more we live the more we find out that we are dependent on many things besides our wits. Smartness will only get us so far, but unless we make use of systems set up for our convenience we are apt to fail. This is so with the Forex market. The way how the market works means we have to work through a broker or a market maker to get our trades started and completed. You can find Forex brokers in every part of the world just as you will find currencies traded in almost every corner of the globe. However, you should consider a few points when you go out shopping for the right broker to help you with your trades.

1.  Qualifications. Probably the most important thing of all is ensuring the Forex broker you use has the correct qualifications. Therefore, choose a broker registered with the Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant (FCM). This means that you have legal protection against any abusive trading practices and scams that may arise.

2.  Is the broker regulated?  This means that when you sign up to use their services you will have protection and insurance against any internal fraud. Also, your funds will remain separate from the broker's operating funds.

3.  What business model does the broker use?  Some brokers are market makers while others are ECN brokers, providing a dealing desks for many traders.

4.  Look at the types of spreads they offer.  The spread is the difference between the bid and asks prices of the currencies you trade. Brokers do not make a commission on your trade, instead, they take the spread as compensation.  Your broker may also offer fixed or variable spreads, and they can be different for large accounts and mini accounts.

5.  Slippage.  Can they provide you with details of just what slippage they would expect to occur during normal and fast moving markets?

6.  Margin requirements.  What is their margin requirement? That is,  what percentage of the investment in your trades do they expect you to pay to open a trade. You also want to know about their margin calls, and the time you need to respond to such calls.

7.  What is their Rollover Policy?  Do they have any minimum margin requirements which they use to earn interest on any overnight positions?  Plus, do they have any other requirements or conditions about you earning interest on any rollovers. 

Once you have done your research and have selected one or more Forex brokers, then it is time to set up your trading account. When your funds clear you can begin trading. Remember to read
carefully the trading instructions to know how the broker can help you manage your trades. If you overlook some relevant details, you can lose money on your first trade. So take the time to read the details and ask the brokers or their support staff any questions you may have before you open your first trade.

Why You Must Invest In Gold Today

Gold. Rare, beautiful, and unique. Treasured as a store of value for thousands of years, it is an important and secure asset. It has maintained its long term value, is not directly affected by the economic policies of individual countries and doesn’t depend on a ‘promise to pay’.

Completely free of credit risk, although it bears a market risk gold has always been a secure refuge in unsettled times. Its safe haven attributes attract wise investors. Gold has proved itself to be an effective way to manage wealth.

For at least 200 years the price of gold has kept pace with inflation. Another important reason to invest in gold is its consistent delivery within a portfolio of assets. Its performance tends to move independently of other investments and of key economic indicators. Even a small weighting of gold in an investment portfolio can help reduce overall risk.

Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class.

Portfolios that contain gold are generally more robust and better able to cope with market ncertainties than those that don’t. Adding gold to a portfolio introduces an entirely different class of asset.

Gold is unusual because it is both a commodity and a monetary asset. It is an ‘effective diversifier’ because its performance tends to move independently of other investments and key economic indicators.

Studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.

Gold improves the stability and predictability of returns. It is not correlated with other assets because the gold price is not driven by the same factors that drive the performance of other assets. Gold is also significantly less volatile than practically all equity indices.

The value of gold, in terms of real goods and services that it can buy,has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined.

Traditionally, access to the gold market has been through: investment in physical gold, usually as gold coins or small bars,or, for larger quantities, by way of the over the counter market; gold futures and options; gold mining equities, often packaged in gold-oriented mutual funds.

When To Buy And Sell

The mechanism of buying and selling is quite easy. It is as easy as pressing a button in front of your computer screen. The question of when investors should buy and sell warrant a more detailed analysis.

When to sell: Ideally, we should sell when a stock reaches its fair value. There are 9 other reasons to sell but I won’t cover it here. So, what is a stock’s fair value? I have covered this plenty of time. But, in general, a stock reaches its fair value when it is yielding 3% above the current free risk interest rate. I am using 10-year treasury bond as a proxy for the free risk interest rate. Currently, the 10-year bond is yielding 4.46%. The fair value of a stock is therefore when it is yielding 7.46%. Inverting yield, we then got the widely used Price Earning Ratio. Yield of 7.46% corresponds to P/E ratio of 13.4

When to buy: This is an easier question to answer. We, of course, should buy stock lower than we sell. If we sell the stock at a P/E ratio of 13.4, then we should buy it when the P/E ratio is less than 13.4. How much lower ? It depends on how much return you aim for. If, say, you are aiming for 50% return, then your buying price is when the stock is trading at a P/E of 8.93. If you are aiming for a 34% return, then your buying price is at a P/E of 10.

In short, we should buy at a P/E of 8.93 and then sell at a P/E of 13.4, correct? Yes, but with a lot of caveats. I’ve covered those caveats in 5 common misuses of P/E ratio. To emphasize, the P/E ratio used here is not trailing P/E ratio, does not ignore the value of cash in the balance sheet, does not ignore the one-time event and does not ignore the change in interest rate. At this point, I am ignoring earning growth simply because the fair value calculation is a company with 0% growth.

You might be wondering where you might find stocks that are trading at a P/E of 13, let alone 8.93. Here are a few candidates to help you getting started. Seagate Technology (STX) has a forward P/E of 7.5 and $ 2.30 per share of net cash on the balance sheet. Western Digital Corporation (WDC) has a forward P/E of 9.75 with $ 2.65 per share of net cash. OmniVision Technologies Inc. (OVTI) is trading at a forward P/E of 10.3 with $ 5.30 per share of net cash. Magna International (MGA) is trading at a forward P/E of 9.72 with $ 4.58 per share of net cash.

Please note that this is not a buy/sell recommendation. You would do very well if you do your own homework.

4 Tips to Build a Successful Portfolio

Walking through the financial maze of stocks, bonds, and mutual funds can be quite a challenge. American Century Investments offers the following tips to give you the know-how on building a profitable portfolio.

* Know your goals. Consider how much money you’ll need for your children’s education or your retirement. Whatever your vision for the future might be, set your goals and develop a concrete plan for meeting them.

* Define your investment time horizon. If you’re not planning on retiring anytime soon, you might want to have a portfolio that includes more long-term investments. If retirement is just around the corner, consider a more conservative approach.

* Determine your risk tolerance. Figure out your risk comfort level and compare that with what you can afford. In general, the longer you have to invest, the bigger risk you can take.

* Consult a professional. In order to avoid financial pitfalls, later on, it is often wise to seek professional guidance when putting together a portfolio.

“Recent research shows that investors continue to grapple with some of the most basic investment concepts, suggesting a greater need for financial advice and guidance,” said Doug Lockwood, a certified financial planner.

To help investors meet their financial goals, American Century Investments has developed On Plan Investing, a program designed to help investors build and maintain diversified investment portfolios – at no additional cost.

Combining educational tools, advice, market insight and investment products, On Plan Investing helps investors develop a personal investment strategy, whether they are new to investing, seeking guidance but still want control over their investment mix, need help positioning their portfolios with a long-term perspective or need help understanding how the markets work.

Investing in Gold

 

It may seem old-fashioned, but it is still possible to place some of your wealth and prospects into the ancient practice of hoarding gold. Gold has been the standard of wealth for centuries, in almost every culture that requires some system of barter, from Europe to Asia to South America. The metal has been known to launch expeditions for new lands, start wars, and to be the cause of the annihilation of entire cultures.

The reasons for the world's fascination with gold have been the same from the first item that a person exchanged one good for another until the present day. Gold is rare, easy to move, does not go bad or decay in any way, and it can be broken down into smaller parts. All cultures have recognized the value of gold, and as a result, it is still a hot commodity on the markets in countries throughout the world today.

Many people who chose to invest in gold are somewhat skeptical about the state of the world. Gold, they figure, has always been and will always be in demand, so if the worst happens and an economy goes into the toilet, investments in gold will remain safe and secure (provided, of course, that it is not stolen, another common historical occurrence with the precious metal). Whenever a large scale war breaks out, gold prices always go up, as it is proof against an inflated and devalued the dollar and other economic downturns.

Gold allows the investor a number of opportunities in their options. Many of us would not think of it in this way, but gold is easily stored in our houses and even in our persons in the form of decorations or jewelry, which means that gold is a kind of portable wealth. Someone who buys a lot of jewelry can, therefore, be thought of as a kind of investor in gold.

More serious investors might consider buying gold in the form of bullion or coins issued by stable, reputable governments through brokerage firms or well-known dealers. Again, this gold is transportable, easily liquidated wealth and the investor must undertake for its safety herself. If you choose this method of investment and storing, you will have to get your gold tested before you can sell it on your own.

In order to avoid the expense and the hassle of testing your gold, you could instead choose to purchase the metal through a mutual fund that specializes in precious metals. Not only will this eliminate the need to have the gold tested before sale, it will also earn you some interest over time, which hard sales of gold will not. You will also avoid the costs of insurance and the anxiety of storage.

Investing in gold is a time proven way of retaining wealth even in the most trying of circumstances. The risks of gold also remain, however, as it remains a highly mobile commodity that can be taken away as easily as it is stored, and the proper precautions must be taken.

WHY THE FINANCIAL NEWS MEDIA CAN COST YOU MONEY !

The communication innovations we have around us today like the internet, financial newspapers and special interest television channels focused on investing like CNBC are a high-speed pipeline of nonsensical chatter. All these sources of information mean that there is no shortage of media people trying to answer our questions about the stock market and specific stocks. You have to remember that the news media are constantly competing to survive against other stuff you can watch. If they don't always sound like they know exactly what is going on then you won't watch their presentations. If you don't tune into their show then their ratings go down. If their ratings go down they get fired and their show gets canceled.

This means that financial journalists are in the business of finding great stories and sounding like authorities no matter what. A stock market is a great place for them to dig up news scoops to feed to the public. They don't really check their facts very well and sometimes not at all. This means that if some insider wants to feed you a line of bull manure then all they have to do is maintain good connections with financial journalists, sponsor an investment show, or outright buy an investing TV channel like Jack Welch the CEO of GE did when he set up CNBC. What a great way for inside executives to control the flow of news information to the public then to actually own one of the only financial news channels but not so great for you!

These journalists also kick up the fire by bringing in so-called experts to talk about each side of some topic that real experts would not consider important.

This just makes it all the more confusing for the public to understand what is important when buying or selling a stock. Shows on CNBC like Closing Bell, Kudlow & Company, and Mad Money do nothing but confuse and misdirect the attention of most individual investors in the public. Even worse this means that the financial news media allows overpriced stocks to be recommended through analysts in the inside web that inside executives are dumping on the public because they are trying to get out. This actually happened at the top of the bull market in 1999. For a great historical description of what happened read Maggie Mahar's book entitled Bull.

The famous Yale University Economist, Prof. Bob Shiller, Ph.D. is particularly harsh on the media in his book Irrational Exuberance. Dr. Shiller is one the economists that Alan Greenspan respects most and where he got the term Irrational Exuberance. He portrays the media as sound-bite-driven where superficial opinions are preferred over in-depth analyses. I agree wholeheartedly with him and contend that it is also done just because the industry would rather have the retail investor confused and emotionally pliable to get you to buy and sell when they want with total disregard for your best interests!

People who had invested their life savings in the stock market were ripped off in the stock market because the financial news media and analysts were hyping up what a great buy stocks were at the very top of the market in 1999 and 2000. At the same time inside corporate executives were selling out everything they had. What is amazing is that our federal government in the form of the Security Exchange Commission never did a thing about it. There was never a blanket case taken or an outcry that almost all of the inside executives had somehow magically sold out of the market six months before the market crashed.

Here is the valuable tip I want you to consider: when you are a beginner investor it is important that you DO NOT WATCH THE FINANCIAL NEWS OR READ THE FINANCIAL NEWSPAPERS! Don't let the stock market industry lead you around by the nose like livestock to the slaughterhouse. Don't listen to what they want you to listen to. You should focus on learning what is important in the stock market and the mass media will only confuse you until you have educated yourself.

Recommended reading:

1. Mahar, M. Bull! A History of the Boom, 1929-1999 (New York, HarperBusiness , 2003)

2. Shiller, R., Irrational Exhuberance, (New York, Broadway Books, 2000)

Do You Have A Backup Plan?

I know a woman in her sixties. She worked for a company for a little more than a decade as an administration and office assistant for a staff of one hundred sales people, who loved her dearly. She always made sure all the faxes got to their desks; the stationery stock was full and each staff member had what he needed.

Beyond her job description, she was like a mother to all of them: making sure the toilets got cleaned, old food was removed from the fridge and decorating the entire floor which the department occupied. She worked hard and never complained. She was always smiling, friendly and polite.

She felt good about being a ‘mother’ to all the people who entered and left that department. She was comfortable with her position. No-one else could do the things she did. And she did them better than anyone else in the building.

One day, she went to work as usual. After doing her morning chores, she was invited to the office, where she was told her services were no longer needed. The company was undergoing certain cost-cutting measures in every department and unfortunately, her role would have to be sacrificed. She was then asked to leave the building as soon as possible. She was assured, however, that before having made the decision, every attempt had been made to find a position for her somewhere within the company.

She has financial obligations to fulfil and she still hasn’t saved enough for her retirement. She still has credit to pay off and she was saving for a trip overseas, something she never got around to doing in her younger years. She wanted to save up to establish a book-selling business. Suddenly, she would have to re-evaluate her plans. Losing a job and nearing retirement age, she will have to relinquish some of the things she had dreamt for herself.

I am sure you have heard hundreds of similar stories like these. Just five months before writing this article, I had already read about companies cutting costs by laying off jobs. Their main reason is to remain competitive so they would not have to raise the prices they charge to their customers. Companies are outsourcing jobs overseas because the labour costs in other countries are relatively cheap compared to the local currency and sometimes because of significant skills or technological advantages. Other businesses lessen staff when sales drop and they can no longer sustain to pay the same number of people they have on their payroll. No organisation – not even a big, established business – is immune from the need to become leaner in an ever-increasingly competitive market environment.

In the past, most people believed the companies or the governments – whom they work for – could guarantee them a job for life. Nowadays, I think more and more people are becoming increasingly aware that expecting to have a job-for-life is unrealistic. It is a dire predicament to be working every day, taking care of someone else’s business and realising that at the end of one’s career, years of service do not guarantee one’s well-being. Because of this, I believe that people are now looking to improve their chances of having enough funds to meet their needs and wants after retirement.

I think there is a dawning awareness that the ultimate responsibility for one’s own well-being lies within each individual. People are beginning to understand that their boss or the company they work for does not have an obligation nor the ability to ensure that they are taken care of when they finish working for them.

According to an article written by John Roskam*, based on a forthcoming Institute of Public Affairs (IPA) Backgrounder on self-employment and the self-reliant society, the trend to self-employment will speed up in coming decades. Five reasons explain this change:

1. Our societies will continue to develop knowledge-intensive and service industries.
2. Jobs of the future need more education; however, better-educated workers might opt to work for themselves instead.
3. Older workers are more comfortable with being self-employed than the younger workers, which might indicate individuals would prefer to work for themselves as they grow older.
4. Individuals want more control and flexibility over their working arrangements and self-employment allows for this.
5. Individuals are more willing to assume responsibility for the decisions that affect their lives and their families.

In addition to this trend, more and more people are now seeking to gain greater control over their financial assets.

What we can all learn from this article is the idea that we do not have to rely on our employers to be there for us when we desperately need them to pay us our periodic paycheques at the end of our working days. There are alternatives and, while we still can, I believe we owe it to ourselves and our families to have a backup plan and look at every single opportunity available. The question for you is this: Do you have a backup plan?

------------

Footnotes:

* “Self-Reliance and the Self-Employment Revolution” http://www.ipa.org.au/files/news_953.html (21st March 2005).

What Moves The Forex Markets?

 

Investors in any market, be it securities or currencies, wants to know what causes price fluctuations so they can predict them and make a profit.  While stock investors research publicly traded corporations in order to make trading decisions, those on the Forex must consider what influences the currency exchange rates between nations.  Because it is so volatile with significant fluctuations in short-term prices, it is especially important for the Forex trader to understand what moves the markets in order to be successful and make a profit.

Partly because trades occur 24 hours a day between Sunday and Friday afternoon, the Forex is a very volatile market.  Just as with equities, pricing on the Forex is influenced by economic and political factors facing the nations involved in the currency pair.  Because the U.S. dollar is used to back 90% of all the transactions in the Forex and its economy plays such a significant role in the world economy, economic data released by the government will affect market prices—temporarily.  Here are some of the prime releases that Forex scalpers or day traders tend to look at when determining whether or not to enter a position:

1.  Interest Rate Decisions
2.  GDP rate increase/decrease
3.  Unemployment data
4.  Inflation:  Consumer/Produce price
5.  Retail Sales
6.  Consumer Confidence Surveys
7.  Business Confidence Surveys
8.  Trade Balance
9.  Manufacturing Confidence Surveys

However, while all of these forces no doubt play a short term role in price movements on the Forex and other financial markets, their influence is very temporary and the prices soon reflect them.  It is not common for Forex scalpers or day traders to enjoy long-term success because the volatile nature of the market makes losses more likely with more trading. 

There is another force that does play a role in the movements of all financial markets:  human behavior.  Indeed, Psychology is a very big factor in any investment decision and its effects can be studied in financial charts.  Four human emotions play very big roles in the price movements on the Forex:
·    Greed
·    Fear
·    Faith
·    Hope
Greed compels even technical traders to ignore stopping points and chase a trend too far—to the point of loss or losing a significant portion of profits.  Once an exit point has been reached—cash out.

Fear of loss is a very common human emotion and it definitely causes many investors to take a loss too hard and quit investing.  However, simply setting acceptable stop/loss orders will prevent you from losing more than you are comfortable with.

Even faith and hope can cause us to chase profits too far or not get out when losses start to mount.  Technical analysis, continuous back testing, and sticking with an investment strategy while being open to adjustment—these are all common traits in the most successful traders.  Although the economic indicators and news releases do play a short term role in prices, it is ultimately human Psychology that moves the Forex.