Adventures in Money Making

Business week had this excellent article on How to create your own Hedgefund.

Since I'm leaving for vacation shortly I don't have time to write an analysis of the article but I strongly recommend everyone read it. Merry Christmas and happy holidays everyone!

As a follow up to my previous posts on risks in investing in oil to a dismaying report about the end of peak oil production I thought I'd tell everyone about the current deal I'm working on.

I'm helping put together a deal to uncap an old well that was capped in the eighties when oil was trading at under $10 per barrel. At its current value of $60/barrel its now highly profitable to ucap it. I had a meeting today with my partners in the deal and an attorney who represents an inventor. The inventor put together something called an Atomic Resonance Frequency Device[or something similar] that gives you a 3D image of the amount and depth of oil in the ground. Apparently its 99% accurate. Well, they're flying out to the oil fields in Texas next week to try and see if our well is any good.

One thing that worries me is the amount of personal liability if we run into environmental issues. There's no hiding from the EPA. But the potential rewards in this deal make the investment definitely a risk worth taking. Anyway, we'll find out more info on it late next week. But so far I'm pretty excited about it and think oil is definitely worth exploring [yes the pun's intended].

I'm also leaving for India this weekend and I'll be checking out the investment scenario there too. Apparently the Indian Stock Market and also real estate market are BOOMING. I had to put that in caps to emphasize the amount of booming taking place!

While reading Boston Gal's Open Wallet Blog, I came across a post about an article in the Boston Globe titled
"To feed a lifestyle, some are taking second jobs".

It mentioned stories about several well-educated people having decent jobs that were taking on minimum wage jobs to help pay for christmas gifts. The people in the story weren't those faced with hardship and had trouble paying for the necessities of life, but middle-class families whose incomes weren't probably enough to cover they're consumer spending. There was a young software engineer making $75,000/yr who took a job paying $800/month[probably more like $500 after taxes] so she could buy gifts and an expensive wedding dress. While its commendable that people take 2nd jobs rather than additional debt, if you need an extra few thousand a year after making 75 grand there's something wrong with the picture.

The people in the article are probably the same kind of people who refuse to spend 6 hrs/month learning about finances/investing or planning for their future. Instead of working minimum wage jobs for which they're vastly overqualified, if they spent more time at the library and gym instead of the malls and restaurants, they'd be smarter and healthier!

I got a speeding ticket a few months back. I was going to fast for the judge to let me go to traffic school, which seems kind of strange. He should've made in mandatory at that speed but anyway my car insurance premiums with Century 21 have jumped $320/year which really sucks.[The 6 month polciy jumped from $748 to $907] Considering its the only ticket to show up on my license I think its quite a hike! Also considering the fact that my cars have aged significantly in the past few years, its also quite mysterious as to why my premiums haven't dropped at all. I called a few different companies like Liberty Mutual and Allstate and their quotes were even higher!

I tried to see if there was any way I could reduce my premiums. It seems the consensus is for a set of common sense principles.

• Shop around
  
• Increase you deductible
  
• Drive less
  
• Don't use your car for business
  
• Buy a low-risk[read boring] car
  
• Move to a rural area
  
• Garage your car
  
• Get multi-policy discounts
  
• Get student/professional discounts
  
• Get an anti-theft device installed
  
• Keep your credit clean
  

So I decided to call up the insurance company and talk to them directly. I changed myself as the driver of the Accord to the Altima.[its the old version thats the size of the Civic]. Since I get a Professional Discount and my wife doesn't we saved a whooping $2. Then I dropped the annual milages by 2,500 miles on the Accord and 1,500 on the Altima and raised the deductible to $1000 from $500. The premium dropped from $905 to $824. Then for another $14/6months I raised the liability coverage from $100/$300 to $250/$500 which I thought was a sweet deal. So I now have better coverage for $838, saving myself $138/year.

Two of my investor friends told me they were going to ask me about 1031 exchanges pretty. Rather than give them the same spiel, its just easier I wrote my own opinions here so I never have to repeat myself! Since its a long topic I'll break it down into a few different posts.

What is a 1031 exchange?
Its a means by which you can sell or exchange property and defer paying taxes. Deferring your taxes is a good thing. It allows you to grow you money at a faster rate.

What sort of property qualifies for a 1031?
Any property held as an investment is eligible. Most CPAs will tell you that you need to demonstrate an intent to hold the property as an investment and ideally you want to hold it for atleast 12 months.[some even say 18 months]. Short term flips do not qualify. Apparently the IRS doesn't equate speculation with investment.

What can I exchange my property for?
You can exchange your property for like-kind property. If you own property you can exchange it for any other kind of property and oil royalties too. However livestock and vehicles are covered under this rule too and you can't exchange your cows for an airplane or a tractor for land. However within the scope of real estate, land for apartment buildings, SFHs for oil wells and even lease-hold property for fee-simple property is allowed. A lot of investors are cashing out there investments and are investing in tenants-in-common commerical buildings. They 1031 into larger investments with a bunch of other investors and get a fixed rate of return[usually 6-11%]. They essentially exchange management headaches for a fixed rate of return.[More info on that in another post].

What are the steps involved in setting up a 1031 exchange?

• You need a qualified intermidary, also called an accomodator. You must not receive any money from the sale of the property. It has to be held by the accomodator. He takes possession of the proceeds from the sale of your property, uses the funds to purchase the new property, then transfers title of the property to you.
  
• You have 45 days from close of escrow to identify the replacement property. You should start looking much earlier than that but you need to give written proof to your accomodator of your selections.
  
• Close on the purchases within 180 days from the sale of the original property, or before you file your tax return. If you sell you original property on december 31st, you have until April 15th to close on the replacement, unless you file an extension.
  

It gets a lot more complicated than these simple steps. There are rules for mortgage amounts and total property amounts, partial exchanges and taxes owed on boot[the amount that you've withdrawn].

One of the funny things is that any equity you put down during the original purchase of the house is locked into the exchange. If you pull that out during the exchange it will be considered boot and you will have to pay tax on that money. One way to get around this is to refinance the house a year before you plan on doing a 1031 and pulling your equity out. Alternatively, you could complete your exchange and then refinance the property to pull your equity out.

Its getting late, more on 1031 exchanges later.

I spoke to a friend yesterday who was smart enough to get a pharmacy degree that pays awfully well. However, she's racked up a ton of student loans and it seems like she'll be paying them for quite a while.[Not because she doesn't make enough, but because buying a new luxury car and travelling to exotic locations takes preference!]. I was lucky enough not to have any student loans. I graduated with about $3500 in credit card debt and that was it. My parents paid for some of it and Northern Telecomm paid for the rest. As usual I was deemed the financial expert to ask about consolidation and funnily enough I knew more about it than my friend did.

• You can only consolidate your loans once, and thats it


• If interest rates are going down, wait to consolidate


• They calculate the weighted average of all the loans and add a margin on to it


• You can consolidate at any bank or credit union and the terms are usually all the same, regardless of where you go


• Many lenders will lower the interest rate after you've made on-time payments for 3 or 4 years, so it helps to be regular


• As they say, "A penny saved is a penny earned!".

What does this have to do with making money??? Until you get out of consumer/student debt, you're not in a good position to build wealth. So thats the first step in making money!

I logged into my Ameritrade account to check out how much money I have there and I saw an ad on the front page offering 35 free trades plus $100 bonus. Sadly it only applies to new customers who have decent amounts to play with so I'm out of luck on that deal. But its a sweet deal, considering 35 trades is worth about $385 at $11/trade.

On the other hand, Scott Trade offers $7/trade with no inactivity fees, but no sign-on bonus.

Charles Schwab charges $12.99 if I remember correctly. TD Waterhouse used to charge me $14 but
they're merging with Ameritrade so they'll probably be around the same $11 pricing.

If you planning on buying shares everymonth like clockwork, ShareBuilder has a good program at $4/trade, although I'm not a fan of dollar cost averaging. [I believe in market cycles and so does reknowned economist and actor Ben Stein. Read his good book Yes, You Can Time The Market!].

UPDATE: I also found about a new brokerage called Firstrade. They offer $6.95 trades which is a pretty good price.

One of my lenders sent me a notice yesterday. Apparently on the loan docs that funded 1 year and 5 weeks ago, I had forgotten to sign the document that alerted me to the fact that my loan had a soft prepay penalty. This is the 2nd time this company has sent me this very document. The first time was about a week after I closed on my first house in SLC last year, which I duly signed and sent back. Now this is on the 2nd house. Not only did they want me to sign it, they wanted me to get it notarized as well.

As a matter of principle, I'm not going to sign it unless they threaten to call the loan due [in which case I'll ask for $100 for my troubles]. Its only a 2 yr soft prepay penalty so I'm definitely sure there's no difference to me whether I sign it or not. But life is unfair so they should just suck it up and cut their losses.

Insurance companies have taken a beating with all the damage caused by all these hurricanes. Maybe its time to start investing in their stock. We know that a lot of damage has already been done and in New Orleans it won't happen again. [Mainly because nothings being rebuilt!]. Also historically insurance companies have raised premiums and deductibles and are going to do the same thing again. Also historically, people are more likely to get extra coverage right after a major catastrophe, which means their income is likely to go up in the near future.

Doesn't mean I'm going to rush out and start buying insurance company stocks, but its a thought. If anyone can do the research and would like to post a follow up article, please let me know.

On my previous blog entry about HELOCs I forgot to mention a pretty important point.

You use a HELOC as an Asset Protection Strategy. Suppose someone decides they want to sue you. The first thing that happens when they go to a lawyer is the lawyer runs an asset check against you. He finds you own several properties. If you have 20% equity on each property, the lawyer is much more likely to take on the case for free without a retainer. However, if you've mortgaged them to the hilt, he's going to ask for a big retainer and the likelyhood of a frivilous lawsuit drops dramatically.

Thats where a HELOC comes in. If you've put 20% down on a property, you atleast want to put a HELOC on it so that it APPEARS as if you have a 2nd loan. You may not have drawn a penny out of it but on paper it looks as if you've taken that money out.

Besides, if you do get sued, you can use the HELOC to pay for your attorney's fees!

Ouch! Just tallied last months expenses. Apart from the rent,food, $600 for new tires/brakdes and $900 insurance premium, I had quite a lot of expenses.

$6k landscaping
$16k unexpected request for a downpayment on a house [1031 shortfall that the loan officer should've caught, but she was in the hospital for 3 weeks]
$9.8K 10% downpayment on a house in indiana
$4.4k 5% downpayment on another house in indiana
$4k in plane tickets
$2k lawyer fees for misc stuff.

Out of these, i was expecting only $20k in expenses so i'm over by $24k, which leaves me without sufficient reserves in case I have a few properties vacant for more than a few months. Time to get a HELOC out on my investment properties and pull some cash out!

You always want to do this before you need money. When you do need, the bank won't lend it to you.

I was browsing the Internet and I came upon Harry Newton's "In search of the perfect investment" site. Harry's an accredited investor with advanced trading tips and stock charts on his blog. However, there were some silly thoughts that I thought I'd share with you.

Harry's Silly Thoughts to Ponder:
Number 9 - Life is sexually transmitted.
Number 8- Good health is merely the slowest possible rate at which one can die.
Number 7- Men have two emotions: Hungry and Horny. If you see him without an erection, make him a sandwich.
Number 6- Give a person a fish and you feed them for a day; teach a person to use the Internet and they won't bother you for weeks.
Number 5- Some people are like a Slinky.....not really good for anything, but you still can't help but smile when you see one tumble down the stairs.
Number 4- Health nuts are going to feel stupid someday, lying in hospitals dying of nothing.
Number 3- All of us could take a lesson from the weather. It pays no attention to criticism .
Number 2- Why does a slight tax increase cost you two hundred dollars and a substantial tax cut saves you thirty cents?
Number 1- In the 60's, people took acid to make the world weird. Now the world is weird and people take Prozac to make it normal.

Saw a billboard today at a major intersection and got a flyer in the mail today. It proudly proclaimed "Buy a Condo and Get a Car Free".

Whats wrong with this picture? Maybe the builders are just generous enough to be giving away free cars to new home buyers. I think not!

These condos were already extremely highly upgraded - granite counter tops, stainless steel appliances, 3-tone paint, expensive carpeting, washer-dryer. However this wasn't enough to overcome the recent slowdown in the San Diego housing market. So some communities started offering plasma TVs as part of their already luxury-level "standard" package. The problem is once one community does it, everybody copies them and the product no longer has any differentiation. So these smart sellers decided to throw in a free car. I can see that making a lot of fresh-out-of-college kids real happy.[and broke in a few years.]

Of course, people don't realize that the condos that sold for $350,000 last year, which sold for about $340,000 this summer after all the phenomenal upgrades thrown in free, now cost $335,000 with an additional $15,000 free car added into the mix. If that isn't a significant price drop, I don't what is. But of course agents will look at comps and say its just a minor seasonal price decrease.

Well good luck to all the investors who think San Diego is still a good place to invest. If you're one of them, let me know. I have a friend who wants to sell his multiplex. He's selling it at a very generous-for-san-deigo 6.5% CAP rate.

As you all know I've started researching about oil and how to profit from the idea that the price is just going to keep on rising.

Today I spent several hours reading what seems to be a 5 million word essay on how we're running out of oil. There were links to probably 75 other articles supporting this claim. The site called Life After the Oil Crash paints a very dismal picture for the future. For the few of you that have better things to do on a Saturday evening, here are a few salient points.

1. We took 125 years to consume the first 1 trillion barrels of oil and 30 years for the next trillion.
   
2. We've peaked in oil production.
   Demand is increasing by 2%/year while output is decreasing 3%/year.
   
3. Renewal sources of energy aren't as good at producing energy as oil is, and will
   barely dent the dependancy on oil over the next several decades
   
4. "Big Oil" already know about this and are trying to do something about it. In fact a lot of them own alternative sources of energy companies.
   
5. Oil will hit $200 per barrel and gas prices $10/gallon at the pump in the near future.
   
6. The so-called war on terror will last 50 years because thats as long as the major oil-producing countries have to produce most of their oil.
   
7. Once we run out, it'll end civilization as we know it.
   Thats what the site says anyway. The incredibily high fuel prices will affect all major aspects of our society and might cause a global economic meltdown.

I though it was an exceedingly well-researched report and after going through countless of supporting articles I can't really find a whole lot to dispute. Of course I'm optimistic in my belief that we'll discover an alternative to oil and life will be peachy. However I'm still going to hedge my bets and continue my efforts to find a way to invest in oil. [Kind of like the profound "Trust in God, but lock your car!" phrase]

If you're interested in learning more without spending your whole weekend, I recommend watching this DVD - The End of Suburbia: Oil Depletion and the Collapse of the American Dream

I made it to the Carnival of Personal Finance - 25 hosted by Frugal Underground. Woohoo!

The same post was featured on BusinessPundit.com way back in October.

As I've mentioned before I think the US is going to enter a period of inflation and recession brought on by the trade & budget deficit and precipitated by the devaluing dollar.

Both Oil and Gold have been in a slow and quiet bull market for the past few years. Historically both of them have been rising & falling in tandem and I believe that both of them have quite a bit further to go. I know that people [Iran's oil minister, a few economists and the all-knowing Steve Forbes] have been bearish on the price of oil for the past year now but it keeps going up. I think both oil and gold have a lot of room for further appreciation especially if the US Dollar devalues. It may be showing current strength, but I think thats just a short-term spike.

Compared to historic prices, both commodities are still quite low. On top of that, there's a renewed demand from both India and China. In the last quarter, India consumed 30% of the global gold supply, up 47% from a year before. Plus the booming economies of the world's most populous countries will just "fuel" the demand for oil.

So how to play these two markets? One way is to buy an oil well, the feasibility of which I'm currently looking into. I'd recommend buying a gold mine, but thats probably not going to happen. Gold mining companies are thinly capitalized and never seem to make any decent amount of money. But their shares seem to be doing well. So either buy gold shares or buy gold bullion. Stay away from rare numismatic gold coins unless you really know what you're doing.

In many parts of the world holding gold is considered auspicious and brings good luck, so I think I'll buy some gold coins. I've settled on the Perth Mint Lunar gold coin series. The mint brings out a new Chinese Lunar coin every year. Its considered bullion grade and the Snake 1 ounce gold coins sell for near their intrinsic value, which is currently around $547.[the spot price of gold is around $510 and there's always a bit of slippage involved.] As a comparison, the bullion grade American Eagle sells for the same price. The horse, goat and other coins in the series sell for about $557. These coins are a good alternative to the Canadian Maple leaf coins that have the same amount of gold at the same quality but are not protected in individual plastic cases.
There is a limited production of 30,000 1 ounce gold coins of each animal in the Lunar series. Since the Dragon coin in the lunar series has become a collectors item and is now begin sold for nearly $900, there is a possibility that the other coins will also rise in value over their intrisic value.

You usually have to wire funds into the dealers account, which costs $30 and there's a $15-25 dollar shipping charge per order, so there's some considerable cost over the spot price gold per ounce. [ $510 versus $547+ $30 + $20 ]. Although if you buy atleast 5 coins the dealers normally give you a slight $8 discount per coin and over 10 coins, the shipping is free too.

But be careful with whom you deal with. I spoke to 3 dealers. 1 of them was very nice. another was very expensive, $609 for the Snake coin, and a 3rd told me they were completely useless and I should buy some weird gold coin that was a third of an ounce. Stay away from all coins that are not 1, 1/2, 1/4, 1/10 or 1/20 ounce. Selling them is always a hassle.

Incidentally I bought a 1/4 ounce Dragon coin on ebay over the weekend. Its probably not going to appreciate like the 1 ounce Dragon because there are twice as many minted, but its a cool looking coin and it only cost $142.50.

I called to ask my Mom what she thought about the whole and she thought it was a great idea. She strongly encouraged me to buy 5 1 ounce coins. Funny how everyone suddenly thinks you're loaded just because the bank was stupid enough to lend you a million dollars!!!

Labels: Coins, Gold/Silver