Adventures in Money Making

One of the lessons of history is that nothing is often a good thing to
do and always a clever thing to say.

Will Durant

Warren Buffett has been touted as the world's foremost 'Buy and Hold' Investor. He's been quoted as saying he likes to hold stocks "forever".

He's also a value investor. So most people could draw the conclusion that value investing means buying for the long term. I disagree strongly. Buying when something is undervalued and selling when its overvalued is essentially market timing. You time your entry and exit points based on the fundamental underlying value of the asset. So Buffett really is a market timer!

Warren Buffett recently sold his Laguna Hills house because "it was overvalued". Its not like he needed any extra money or couldn't make his mortgage payments!!!

I feel sorry for all those people who are still buying real estate in Southern California because "its a lifestyle choice and people always want to live here", or "in the long run, it will always go up", or "its currently a buyers market so now is the time to buy" or some stupid excuse that ignores the underlying value of the property.

When a property rents out for $1450/mo and your mortgage is $2300 on an interst-only loan 3 year ARM, its way overpriced!!! Which is why I sold my condo and pocketed the cash!

You may have heard today that Warren Buffett is giving away his billions to Bill Gates's Foundation to give away. It amounts to about 3 billion a year at the current stock price which is pretty impressive. It looks like charitable giving is now back in style!

What I thought was truly impressive is that Buffett only draws a salary of $100,000 which is probably amongst the least of all publicly traded companies in the US. His wealth comes from his 38% ownership in Berkshire Hathaway and the money he's been investing on his own which has probably done better than the approx 30% return that Berkshire has seen. So essentially he gets a performance incentive for managing the companies money!

One of the more popular real estate clubs in San Diego is the SDCIA. It attracts a lot of newbie investors and is quite large. It has a really good message board which has posters from all across the nation.

One unfortunate investor turned to the message board to see if he could salvage his bad investment in Tucson. He basically bought a house through Chris Szabo in Tucson and was losing his shirt on it.

Chris Szabo is an "investors realtor" and was promoting preconstruction investment opportunities in Tucson. I spoke to him in the fall of last year and he seemed pretty smart. However nothing he said about Tucson seemed to attractive to me. Tucson just didn't have the things I like when it comes to investing. Its too small population-wise, not enough job/population growth, there's ample land and its full of spill-over speculators from Phoenix and California. Chris was just trying to pump it up to drum up some business for himself. Can't blame him for that, thats what agents do!

Anyway, back to the investor. He probably didn't know how to analyse the deal and made the fatal mistake on relying on his realtor for advice. Real estate agents work for you. You tell them what to do and you dictate what they are to look for. Never the other way around!

Next mistake, he put down a $27,000 deposit. You never put down a deposit that is so big that you can't walk away from it! [I put down several $2,000 deposits in Boise and ended up walking away from half of them.]

After that, even though the market sucked and he knew he couldn't close and make a profit, he still bought it! You always take your losses early. If you think its going to be a dog, you just walk away from it. Better to lose $27,000 early on and be done with it! Rather than face the prospect of losing even more and go through a ton of heartburn. If he had a smaller deposit he could've easily walked away from it.

Now he's stuck with $2500/mo in payments that he can't afford! Why would you buy a house with payments that you can't afford? Always stick to entry-level houses because they're easier to sell, easier to rent out[without being too negative] and they're easier to hold if vacant! Don't go for the fancy homes in the fancy neighborhoods. You're better off buying 2-3 starter homes instead of 1 luxury home.

I've made mistakes too in the past. But you mitigate your risk by keeping your deals as big as you can afford, having 6 months mortgage in the bank [over and above 6 months living expenses for yourself], sharing the risk [and reward] with partners, doing your own due diligence and not relying on information from people who have a conflict of interest.

Any one deal shouldn't be big enough to bankrupt you. You keep your losses small enough to invest another day. After all, FAILURE IS PART OF WINNING! You can't try something and not have failure now and then. How you deal with them determines how far you succeed.

Some of the regular readers may have realized that I haven't been posting as much in the past few weeks. Thats because I've been busy trying to raise some cash!

As I mentioned in previous post, I've been trying to raise $200,000 for a 17 oil well project. We've gotten commitments for just over 82% so it looks like we should be able to hit our target of raising the money.

We had a conference call with the operators of the rig that went pretty well. We covered the basics of the project and the risk factors involved.

It should be a sweet deal if it works out the way I envision it. Hopefully after I raise the money and get all the paperwork sorted out I should be able to focus on posting to the blog.

Hey its almost the weekend!!!

The same report that I mentioned in the previous post also has a list of over-priced markets. Here's an excerpt from an article about overvalued markets in the Rockies.

Of the cities surveyed in the Rocky Mountain West, St. George, Utah led with a median home price that is 52.5 percent above a reasonable market value. In the same quarter just two years ago it was 1.1 percent overvalued. The study determined that base market value by looking at house prices, interest rates, population densities and historical premiums and discounts.

Boise came in second at 28.6 percent more than market value. Two years ago, the overvaluation was at 1.4 percent. Grand Junction, Colo. came in third at 27.8 percent above and Farmington in New Mexico was next at 22.5 percent.

Elsewhere in the Rockies, the overvaluation numbers look like this:
Greeley: 20.8 percent (down from 24 percent two years ago)
Boulder: 15.6 percent (down from 24.8 percent two years ago)
Provo: 11.9 percent (up from 10.6 percent two years ago)
Fort Collins: 9.6 percent (down from 15.5 percent two years ago)
Billings: 8.3 percent (up from 22.7 percent two years ago)
Salt Lake City: 8 percent (up from 10.6 percent below market value in 2004)
Albuquerque: 8 percent (up from 5.7 percent below market value two years ago)
Colorado Springs: 6.4 percent (down from 9.1 percent above in 2004)
Denver: 5.9 percent (down from 13 percent two years ago)

And, some big ones near the region:
Bend, Oregon: 76.4 percent (up from 22.7 percent two years ago)
Medford, Oregon: 66.4 percent (up from 25.7 percent in 2004)
Spokane: 23.2 percent (up from .2 percent in 2004)

Prices can swing from being grossly undervalued to highly overvalued, so there's
no need to panic if you're investments are listed. You want to look at population and job growth[yet again] and other factors. But its time to start looking for the exit strategy. Places like Bend and Medford should definitely be avoided. St. George and Boise warrant further inspection.

City National Bank has a great annual report that indicates the home price over or under-valuation in various cities through the country. I used this as a basis for my research into investing in states like Texas and Utah 2 years ago.

However, its not the last word when it comes to investing. You want to check other values like job growth, population growth and very importantly historic market trends in that area. I found that Utah had a historically inverse cycle to that of California.

I decided against Texas for a variety of reasons and chose Utah instead. Make sure you do your own research and never solely rely on someone else's judgement.

You can read the complete 27 report here.
http://snipurl.com/home_prices_in_2006

Its become very popular for people to critise companies for making a profit. Stacy at the Birds and Bills has a post on Socially Conscious Investing.She's proudly willing to sacrifice her retirement so long as Oil companies don't make too much money.

Please snatch money from my retirement plan. I have no idea what stocks are in the mutual-fund mix in my 401k, but personally, I'm perfectly ok with taking a hit there in return for tighter controls on the petroleum companies that are currently reporting annual profits surpassing the GDPs of most developing nations.

Why are people upset that Exxon is making a profit?

When the demand for oil has been the highest in human history, don't you think the companies providing it should be making more money than ever before? This is their golden period. If they weren't reporting record profits and distributing dividends[which incidentally get taxed twice anyway], it would mean they're clearly mis-managed and the Execs needed to get fired. They're making money because supply is limited and global demand keeps on increasing. Because people are unwilling to stop driving their 9-mpg hummers to pick-up they're 2 year from day care. Not because they're scamming poor people or doing anything illegal!

Why are a lot of people so anti-business? Would we rather have the Oil companies report lousy returns like the car companies? Would we prefer they lay people off and ruin local economies like Houston? Isn't that like being unAmerican?






I think that America has become greatly anti-business in the past 2-3 years. If the trend continues we'll be just like most of Europe and we'll no longer be amongst the best places on earth to start a business and become wealthy!

Thank God the week is over! I had to rush to raise $100k for an oil deal in TX that I'm working on. I thought I had more time, but it turns out we had a competing bid for a LOT more than our bid on the same project, so basically we only had 7 days. Well, I got the money in 3 days!!! Quite hectic though.

Readers will probably ask me what the deal is so I'll tell you. We're uncapping on old well that should produce about 10-12 bopd[barrels of oil per day] and then use that as collateral to borrow $250k from the bank to drill a brand new one, which should generate 125 bopd. If all goes well the investors will make a 20 fold return and I'll get a small cut of the action too!

Also of note is that I turned in my resignation today. Quite a surprise to my co-workers, but I have a position at a friend's company which has more flexible hours so I can do more of my investment stuff! Definitely a step in the right direction. It was such a rush! Can't wait for the day when I can quit for good and focus on my investments 100%.

Anyway, there's no rest for the wicked. I now have 2 weeks to raise another $200k for another oil deal I'm working on in another state.

I had recently signed up for ATT-Yahoo DSL. They had promised me a risk-free 30 day trial. About 2 days after I got the kit I found out I had to go visit my mom as she was having heart surgery. I called them up telling them I was going to be gone for a month and I just wanted to cancel. Apparently the customer rep, Cookie that I was talking to convinced me not to cancel and that she'd give me another 90 days to try out the service. I bought it.

After I came back, with the work-load of a new job and a ton of investments I decided I couldn't be bothered installing the DSL stuff and called them up to cancel. I was told that the 30 day period had passed and I was out of luck. Apparently Cookie didn't have the authority to make those kind of decisions [so basically I'm just a liar], and they billed me for the 2 months and a $99 cancellation fee. Basically I stuck with a bill for $136 for a service I never used or installed.

ATT-Yahoo DSL sucks!

My phone bill is usually around $1500-$1800 per year. I'm thinking of just cancelling my ATT account[or SBC whatever they are now] and going fully VOIP. I've already explained a cheaper alternative to even Vonage, might as well implement it.

Does it make sense to buy a house for the tax advantages? Apparently quite a lot of people think so. check out the comments on Renting is for suckers". There are over a hundred comments. Quite a few of them say you should buy even if the housing market is heading down because "in the long run, its a good investment". Funny, thats exactly what I heard today in the office. One of my co-workers wants to buy a house right now. So what if its going down. It can only go down a little bit and in the long run, it can only go up. Of course, in the long run we're all dead and some people are always broke!

Not wanting to figure out how investing works and what rich people do to become rich and stay rich is a trait that most of my friends share. They also believe that buying a house for the tax write-offs is a good idea. Since when is spending a dollar to save 30 cents a good idea? If you can rent an apartment for half of what the mortgage is, why would you buy it? You're better off buying a house in an appreciating area even if its out of state and holding that for a few years. With the depreciation, you'll probably save the same if not more on taxes. And once the local market settles, you can sell the out of state property and buy a bigger house for less.

Financial Fruition is hosting the 52nd Carnival of Personal Finance and I get a mention! Check out How to Save Money on Shoes if you haven't already read it. Or better still, to save time I'll just tell you - run barefoot!


Paul's tips on negotiating are pretty good.

I made the 26th Carnival of Investing. Check it out. It has several good posts.

The first post is about buying properties to become a millionaire. Quite a stellar approach! He's going to buy 5 properties at 200k each. He thinks he'll get an 8% yield on 4 of them which will net him $64k/yr. [This is of course after the houses are paid off].

The good thing about this approach is that rents are indexed for inflation, so if things become more expensive he'll get to raise the rents. The bad thing is that as time goes by, your return on equity decreases. Earning 8% on your 10 million dollars is fine, however if you have a lot less, you should strive to earn a lot more.

In some of my investments I've made 1500% in 6 months, others have yielded 1000% return in 18 months. Quite a lot have made 100% in less than a year. This is your cash on cash yield [which is what concerns you] and not the total yield of the investment. For example, assuming you buy a $200k house with $5k down and you sell it after 12 months and profit $40k, your yield is 800%. This beats the stock market anyday!

Of course when dealing with leverage, one must remember it cuts both ways. In a down market, you can be reduced from a millionaire to a pauper in a few years. Donald Trump is reported to have once said the difference between himself and a homeless person was that the homeless person's networth was higher by several hundred million dollars.[Of course, if you owe the bank several hundred million dollars, its the banks problem, not yours!]

Got back from Salt Lake City late last night. Had a great time. Met several investors I know who invest in that market but live in Southern California. I went to check out one of my houses that is currently being built. The house next door is being resold for $295,000. Don't know if it'll sell for that price, but based on that price, my home should list for $275,000. I have it tied up at $205,000 so I'm really happy!.[Just because I theorectically have $70k equity in it doesn't mean I'll make $70k on it. There are closing costs and holding costs that eat into the profit].

Sunday I went to Rockport National Reserve which is about an hour from downtown Salt Lake City and tried my hand at driving a speed boat. It was a lot of fun. Also tried "the tube", which is a tiny dingy with handles that is tied to the boat. The was fun until it overturned and I got dunked in freezing cold water!

Don't you love tax deductible business trips!

Going to Salt Lake City tomorrow for the weekend. I have several investment properties out there and I've convinced some of my friends to buy there too. So we're going to hang out and make it a good tax-deductible trip! Ever since I read Robert Kiyosaki's Rich Dad series of books, I've been dreaming of taking legitimate business deductions and trips.

I have several real estate, oil and a VOIP business going on in addition to my regular job, so I have quite a few business and investment related deductions that were not open to me a few years ago as a regular employee.

As a real estate investor, you also get to depreciate your houses to a cap of $25,000 against your regular W-2 income. If you invest in oil, there is no cap. If you invest $50,000 on december 31st in an oil well, you can write off 80-90% of it against your income in that year itself. Its a great legitimate tax shelter!

I love passive investments!

Went to the local real estate seminar last night. The speaker was Kendra Todd, winner of the 3rd "Apprentice" TV show hosted by Donald Trump. She was there to promote her new book Risk And Grow Rich. Bob Bruss calls it a 10 out of 10 so it should be pretty good, however her seminar wasn't all that exciting. It was basically a sales pitch for her over-priced condo conversion in Pheonix,Arizona. She a 360 unit apartment complex for sale, with about 120 units going to investors at around 250k/unit. The rents were around 1000/mo. That market is pretty much done. Its on its last legs.

She quoted some statistics saying that 36% of all home sales were 2nd homes. She touted that as a good thing, however I see that as a negative. With raising interest rates, the number of buyers might dry up leaving a lot of people holding houses that they can't afford and can't sell either.

She was also promoting plane tours. Some of you may have heard of bus tours. Well she was taking groups of 30 investors on a plane tour. For $299, you fly from LAX to Pheonix and she shows you exclusive properties for investing in. By exclusive I think she means those 120 units in a 360 unit complex where the builder was throwing in 6 months with no mortgage payments.

She may be a really good sales person and much richer than me, but I don't think the stuff she was promoting was investment grade. I can find much better stuff on my own.

Bank of America has joined Google in offering a cash incentive to employees who purchase hybrid cars. I wonder why?

I also wonder what the tax implications of this are. Is it counted as regular income? The government already offers a tax credit if you buy one of these things. So thats a double bonus for some lucky foik.