The Investment Thread

[LouisEly]

An idea...

If you're in STTEM (the extra "T" is for teaching... or maybe it's STEEM with an "E" for education), the government takes over the loans and converts them to zero interest.  Maybe a % forgiveness for every year spent teaching because of lack of supply and relatively low pay.

Everyone else... pay it back.

[Fear The Chorizo]

37 minutes ago, LouisEly said:

An idea...

If you're in STTEM (the extra "T" is for teaching... or maybe it's STEEM with an "E" for education), the government takes over the loans and converts them to zero interest.  Maybe a % forgiveness for every year spent teaching because of lack of supply and relatively low pay.

Everyone else... pay it back.

Or, how about just everyone pay it back?  Teachers are far from the only positions with high demand/low supply, so I don't think they should get preferential treatment for loans they may need to take out to get a 4-yr degree.  I grew up in a rural part of WI where teacher salaries weren't great - but even then their benefits were what incentivized that position in a community they could still comfortably live in on those salaries if they stayed within their financial means.  I've also lived around Chicago and Minneapolis, and the teachers I knew at various public school districts all made more than me plus had insanely good benefits and time off compared to my position in an engineering consulting firm as a licensed P.E.  

I know there are parts of the country and districts where it's damn hard to be a teacher - both mentally and financially.  Hell, I know I'm not cut out for that type of job and I'd be a terrible teacher.  But, the same can be said for jobs across all fields, public and private sector.

I'd also argue a big part of the current student loan problem isn't a glut of elementary school teachers somewhere in the panhandle making $35K a year with $100K in student loan debt - it has alot more to do with students taking out years' worth of pricey loans to attain advanced degrees in universities beyond a bachelors program that accumulate to balances over what their financial means will be in the career path and the geographic location they've chosen to live and work in. 

Finally, from 2002-2022, the total consumer price index increased 65%, while average tuition increased between 134% (private) and 175% (public in-state) on average over that same time period.  There needs to be reform at the university level to restructure costs to solve this problem, or frankly the higher education system we currently know will collapse - it's already pricing out a huge chunk of the country, and eventually there will be a tipping point.  One may be structuring tuition amounts at universities based on earning potential of undergraduate degree fields.  For example, if a liberal arts major or social worker with a 4 year degree isn't expected to make as much as a computer engineer right out of school, their tuition costs to obtain that degree shouldn't be as high upfront.  

[homer]

I think we are veering off-topic. Let's get back to investing. Thanks.

[nate82]

Another 25BP raise is rumored to occur.  It is supposed to be today but haven’t seen anything yet from the FED. 

[nate82]

So the Fed did raise the rates yesterday and they are looking to do more. 

https://www.bloomberg.com/news/articles/2023-07-26/fed-raises-rates-to-22-year-high-leaves-door-open-for-more#xj4y7vzkg

Probably another 25BP raise at some point between Oct-Dec.  I think it would be a bad idea to raise the rates again in Q4 but I think that is when the Fed is targeting another raise.  I don't expect a rate reduction until 2025 at the earliest and we will probably see at least one or two more rate hikes in 2024.  This will all depend on inflation and how the economy is performing overall. 

[PlayerHader]

Fitch downgrading US debt from AAA to AA+ impacting the markets today.

[GAME05]

Ah, when you think about selling a company you own and decide "Well, I do it when I get back to work in a couple days" and show up to find it crashed 68% overnight. Whoops.

 

 

[LouisEly]

FFRHX

https://money.usnews.com/funds/mutual-funds/bank-loan/fidelity-advisor-floating-rt-hi-inc-fd/ffrhx

Someone who knows more about bonds than I do tell me why this would be a bad investment while interest rates are high.

 

[BrewerFan]

I'd really appreciate a little advice from someone a bit more financially literate than me. 

 

I purchased a rental property in 2009. I'd inhereited some money(not a ton, but enough to put 12.5% down with my Father putting 12.5% down) I put my life savings into it. I'd planned to keep for a long time as a retirement investment, but I was made a good offer, and I invested in this with my Father and I'd like him to be able to go and I don't know, just buy a stupid new truck, whatever. 

 

Here's the issue. They came in with a cash offer, meeting my asking price(which I threw out there without thinking it'd be met).

During the walk through(all offers were made over the phone before they saw it), they determined they wanted to replace the AC units, completely renovate the "suites," which...is a generous terms, but whatever. Something about the Garages(glorified storage spaces). Point is, they wanted to put quite a bit of money into it.

So the offer has now become 50% up front, 3 year period with 6.75% interest payments, and then the final the other 50% in 3 years(or a significantly lower price in cash). If they fail to make any payments, it reverts back to us. It's a small private equity start up, so I don't really understand why they want to purchase this property to invest. It's in a good location. 4 miles from a Hospital, 5 from a College, 4 from the Freeway.

 

Neither my Banker nor my Realtor believe this is the right way to go, that I should take the cash offer, but I'm thinking if they need seller financing...they MAY not be able to repay the 2nd half of the loan in 3 years. In the meantime, if they can or can't, I'm going to be making a decent amount on interest payments.

In total, doing it this way, I end up coming out enough ahead that I feel like it's worth it. 

 

So can someone explain why my Banker and Realtor would be advising against it? It feels like it's because the Realtor makes less up front from the sale(and with a case sale, I'm not going to immediately reinvest into another property as I'd initially planned). 

 

My second, I have no plans of spending any of this. I'm gonna keep my 2015 Impala. So I keep hearing "Water is the next oil."

I don't love the idea of investing in water rights in principle, but if people are going to, they're going to.

I'm entirely ignorant about crypto and I don't really trust the volatility. 

 

 

I'd appreciate any thoughts on both. I have 2 weeks to officially accept or back out and if someone understands water rights and what companies to invest in, it'd be great to hear from you!

[zurch1818]

First off...congrats on getting an offer you are considering accepting. That's not always easy.

Let me preface this by saying that I'm not a real estate expert. I'm only speaking from my experience on paying off my house in 3.5 years. I also have no interest in ever owning rental property (though I could probably start this in a few years and buy my first property with cash...being a landlord is just too much work for me with having 3 kids under 3).

I'd take the cash offer and here's why. If they are going to do significant work on it and they go under, you are going to be stuck with a house that may be difficult to sell as not many people are interested in buying a house halfway through a renovation (unless they get it at a good discounted price). Nope...it's just not worth the headache in my opinion. I don't want my money tied up in something I don't have control of...plus you may struggle to find renters to live in halfway renovated space. Stay liquid (that's the new water 😀).

Real estate itself is actually not a great investment. It does help diversify your assets and isn't volatile, but only goes up in value a few percentage points above inflation (LINK). It only becomes lucrative when you have no payments and you can get rental income on top of the increase in value.

I'm going to guess that the 6.75% interest payment is going to be way less than what your current rental income is at this. Sure 6.75% is a good interest rate, but when you consider that the S&P has gone up 17% this year, it doesn't look as great. Granted, not every year will do that, but on average, the yearly return of the S&P has been 10.5% over the last 100 years.

The bottom line is the track record of the stock market will likely have a better rate of return (without the rental income). I'm not a bond expert either, but Louis's bond above gets more interest. Heck, we have a HYSA that is getting 4.25% now, which I know we can get more but it's not as convenient. It's an emergency fund. For the volume of money we are keeping in the account, it's only 100s of dollars different a year and the interest won't make us wealthy. That's a job for the brokerage bridge retirement account and Roth 401k/IRA accounts. Set it and forget it.

[GAME05]

My question out of ignorance, if the firm made it halfway through renovations and went belly-up, couldn't the 50% downpayment be used to complete the renovations and now you're trying to sell a renovated house?

[homer]

The whole thing seems kind of risky. Unless your dad really needs or wants the money, I'd just hold onto it and see if someone comes along with a similar offer but without the strings attached.

[LouisEly]

Given that you purchased in 2009 (I bought my rental properties in 2011) I assume there has been significant appreciation.  Given that it's a rental property, I assume you have not lived in it 2 of the last 5 years and thus will need to pay capital gains taxes on the appreciation of the value.  Something to consider.

Have you had an attorney review their offer?  I wouldn't necessarily trust the bank or your realtor.

My gut feeling - don't take the offer.  If they stop paying, you'll have to sue them and they likely have deeper pockets and can afford better attorneys than you.

 

9 hours ago, zurch1818 said:

Real estate itself is actually not a great investment. It does help diversify your assets and isn't volatile, but only goes up in value a few percentage points above inflation (LINK). It only becomes lucrative when you have no payments and you can get rental income on top of the increase in value.

Not exactly true.  It's true that real estate only goes up slightly more than inflation.  But it is appreciating on the value of the property, not what you've put into it.

Consider a property worth $500K.  You place 20% down, or $100k.  Real estate appreciates on average at 2-3% per year (my rental property is 5% compounded from when I purchased it).  Let's assume 3% per year.  That 3% is on $500K, so it goes up in value by $15K.  But you've only invested $100K, so your rate of return is $15K/$100K = 15%.

Now, 12 years after I purchased my rental properties, they are worth ~$500K.  If they appreciate at just 2% this year, that's $10K in value increase.  But I only put ~$70K down, so my ROI on my initial investment is $10K/$70K or 14% (excluding rental income or repairs I have put in to them).  If they appreciate 5%, my ROI on my initial investment is $25K/$70K or 35%.

Let's say I was living in them and not collecting rental income.  I've put about $30K in repairs into them (had I lived in them this would be a lot lower as most of that is flooring/paint from tenant damage).  On 2% appreciation this year my ROI would be 10% for this year ($10K/$100K).  On 5% appreciation, my ROI would be 25% ($25K/$100K).

[owbc]

Personally I wouldn't touch that financing thing with a 10 ft pole. It feels like a scam or a bait and switch. Why would they make a verbal offer if they hadn't done a walk through yet? As far as I'm concerned, whatever they put on paper is their first initial offer and everything else doesn't exist. 

[BrewerFan]

 

11 hours ago, zurch1818 said:

I'd take the cash offer and here's why. If they are going to do significant work on it and they go under, you are going to be stuck with a house that may be difficult to sell as not many people are interested in buying a house halfway through a renovation (unless they get it at a good discounted price). Nope...it's just not worth the headache in my opinion. I don't want my money tied up in something I don't have control of...plus you may struggle to find renters to live in halfway renovated space. Stay liquid (that's the new water 😀).

That's kinda the sweet spot for me. If they start renovations and they can't afford to continue them, I'd gladly take that property back. They're not going to tear down the building down, so even if they've done 15 units and haven't completed the rest, I'm fine with that. I'll still be able to finish up and then sell on my own.

And the location really works out well because it's near so many things, the College, Hospital, we won't have trouble with people living there through construction.

[BrewerFan]

2 hours ago, LouisEly said:

Have you had an attorney review their offer?  I wouldn't necessarily trust the bank or your realtor.

My gut feeling - don't take the offer.  If they stop paying, you'll have to sue them and they likely have deeper pockets and can afford better attorneys than you.

Yes, I have. I'm having my Attorney write up the contract and it's going to be pretty tight. 

My Title Company holds the Title. They have to stay up to date on Property Taxes, I can hold an insurance policy on it in the event there's any problems with renovations. I don't trust the bank-at all. Obviously they don't like seller financing. The realtor I've got a good relationship with(he's also a property manager and manages a couple other properties).

 
That IS my concern though. Getting bogged down in BS if they just stop paying the property taxes and then I've gotta to to court. That's the type of headache I don't want.

 

47 minutes ago, owbc said:

Personally I wouldn't touch that financing thing with a 10 ft pole. It feels like a scam or a bait and switch. Why would they make a verbal offer if they hadn't done a walk through yet? As far as I'm concerned, whatever they put on paper is their first initial offer and everything else doesn't exist. 

Well, we have gotten quite a few offers on the property sight unseen.

There are two offers. There is a cash offer that's below the original and then the financing offer that I'm definitely charging them for(other than just the interest payments). The price went up with the 2 financing offers. A 2 year and the final sales price was over 10% original asking and 3 years it's up about 12.5%.

 

I'm not concerned with regaining ownership of the property or with having to sue them.

 

My concerns are more;

-Can I make more by investing now rather than waiting

-If they run out of financing...I don't want to be cold, but that's the best case for me. I get it back after they've renovated at least part of the property and they've already paid for half. 

-It eliminates the option for me to re-invest in another property and avoid the capital gains(for right now). 

 

[BrewerFan]

2 hours ago, LouisEly said:

Not exactly true.  It's true that real estate only goes up slightly more than inflation.  But it is appreciating on the value of the property, not what you've put into it.

Consider a property worth $500K.  You place 20% down, or $100k.  Real estate appreciates on average at 2-3% per year (my rental property is 5% compounded from when I purchased it).  Let's assume 3% per year.  That 3% is on $500K, so it goes up in value by $15K.  But you've only invested $100K, so your rate of return is $15K/$100K = 15%.

Now, 12 years after I purchased my rental properties, they are worth ~$500K.  If they appreciate at just 2% this year, that's $10K in value increase.  But I only put ~$70K down, so my ROI on my initial investment is $10K/$70K or 14% (excluding rental income or repairs I have put in to them).  If they appreciate 5%, my ROI on my initial investment is $25K/$70K or 35%.

Let's say I was living in them and not collecting rental income.  I've put about $30K in repairs into them (had I lived in them this would be a lot lower as most of that is flooring/paint from tenant damage).  On 2% appreciation this year my ROI would be 10% for this year ($10K/$100K).  On 5% appreciation, my ROI would be 25% ($25K/$100K).

That was the main motivation behind investing at the time. Also, the market wasn't exactly something I trusted at that point(though in retrospect putting the money in a simple indext fund would have been much better, but investing is easy 10+ years later).

I think I'm just getting a bit neurotic about it now and thinking what to do next. I've seen people suggest that people are overdeveloping, and commercial real estate is in another bubble(much smaller bubble). That seems counter-intuitive though with interest rates going up making home-buying much more difficult for many at the moment.

 

I think I'll probably sit down and talk to my lawyer and then a financial advisor again and just try and make sure this contract is nice and tight. I'm of the impression that the title being held by a title company is kinda my safeguard, but I guess the whole point of a scam is there are points you overlook.

 

I appreciate the replies though.

[zurch1818]

Is there a way for you to retain ownership until they completely pay you? It's essentially what is happening. You can let them do the reno while still being the official owner. It's just if they default, you won't have to sue since you are still the property owner.

I'm guessing your lawyer can come up with a way to make this happen in the contract.

[zurch1818]

13 hours ago, LouisEly said:

Given that you purchased in 2009 (I bought my rental properties in 2011) I assume there has been significant appreciation.  Given that it's a rental property, I assume you have not lived in it 2 of the last 5 years and thus will need to pay capital gains taxes on the appreciation of the value.  Something to consider.

Have you had an attorney review their offer?  I wouldn't necessarily trust the bank or your realtor.

My gut feeling - don't take the offer.  If they stop paying, you'll have to sue them and they likely have deeper pockets and can afford better attorneys than you.

 

Not exactly true.  It's true that real estate only goes up slightly more than inflation.  But it is appreciating on the value of the property, not what you've put into it.

Consider a property worth $500K.  You place 20% down, or $100k.  Real estate appreciates on average at 2-3% per year (my rental property is 5% compounded from when I purchased it).  Let's assume 3% per year.  That 3% is on $500K, so it goes up in value by $15K.  But you've only invested $100K, so your rate of return is $15K/$100K = 15%.

Now, 12 years after I purchased my rental properties, they are worth ~$500K.  If they appreciate at just 2% this year, that's $10K in value increase.  But I only put ~$70K down, so my ROI on my initial investment is $10K/$70K or 14% (excluding rental income or repairs I have put in to them).  If they appreciate 5%, my ROI on my initial investment is $25K/$70K or 35%.

Let's say I was living in them and not collecting rental income.  I've put about $30K in repairs into them (had I lived in them this would be a lot lower as most of that is flooring/paint from tenant damage).  On 2% appreciation this year my ROI would be 10% for this year ($10K/$100K).  On 5% appreciation, my ROI would be 25% ($25K/$100K).

Yes...I'm not going to deny that leveraging the value isn't a way to get more value out of it. You are also paying property taxes on the assessed value each year. My property taxes last year on my $500k house in a suburb of Madison were $8.5k, so the net gain in your 2% scenario for me (since my house is paid for) would only be $1.5k.

Additionally, with how mortgages are set up, you pay the interest up front, so that also should get accounted for to in your scenario. On my mortgage that got paid off in under 3.5 years, I paid 20k in interest (roughly a third of the interest on the minimum payment amortization schedule). I feel like the lender's get a pretty sweet gig. They get this return with no property taxes or other expenses.

Furthermore, that gain in value is now tied up into something you can't easily access unless you get another mortgage (HELOC) and pay more interest. I like being liquid. This is toobimportant to me.

You could have instead invested that $70k you put down in the market and with the rule of 72, it will double in value every 7 years (assuming a a 10% interest rate). It will be worth roughly 230k after 12 years. But you have to pay cap gains on the gains, so total gain is (230 - 70)*(1-0.15) = 136k, not bad for only 12 years...but let's say you let it go 28 years (4 doubling periods). 70*2*2*2*2=1.12 million (890k net gain after cap gains). As Einstein says...

The bottom line is, yes, I agree with you that what I said was not quite right, but the ROI isn't nearly as great when considering other expenses. This is why I said the increase is basically a few percentage points above inflation. You can make money on it no doubt, but it may not make you wealthy. Now paid for rental properties = cash flow!!! Especially if you know how to buy properties under market value. Also, diversifying assets between real estate and the market is also smart. There's also an aspect of real estate that takes time. It's something not required with stocks. Hopefully it won't come back to bite me.

[BrewerFan]

4 hours ago, zurch1818 said:

Is there a way for you to retain ownership until they completely pay you? It's essentially what is happening. You can let them do the reno while still being the official owner. It's just if they default, you won't have to sue since you are still the property owner.

I'm guessing your lawyer can come up with a way to make this happen in the contract.

Well it's so no so much retaining the title as the Title company will hold it until they finish the sale.

 

They'd pushed back a big on us being able to take the property back in the event they didn't make the property tax payments. 2 years of them not making the payments and now I owe...well over six figures in property taxes, interests and penalties...and that's at the current valuation and without the increase coming this year as they're going up in the City I'm in, they'll obviously be going up after the sale, plus interest and penalties and I could have to pay 200K or more.

So both of those things were important. I'm gonna need him to walk me through it and reassure me that it would be an easily enforceable contract.

I'll just use hypothetical round numbers.

Would you rather take 1.7M in cash right now, capital gains on purchase price of...~750K
Or take a sales price of 2M split in two payments, half now, half in 3 years with that interest rate?

And right now I'm thinking if I just took the cash now, half to my old man, the other half to me, put say half of THAT in a Vanguard 500 Index Fund or even split that up into Vanguard, the other half into Bonds(Whatever, something relatively safe and then re-assess or even use it to pay off the mortgage I currently have that I haven't paid off because I've been more interested in paying off the investment properties with 5 year adjustable rates vs my home which is at a very low price) and then the other half...I'm pretty interested in the water rights again, so divide that up between American Water rights and a couple other companies that invest in Water Rights. California Water Works maybe?

 

 

Also...what about the principle of investing in water rights? Does anyone have issue with that? It feels slimy to me. It ALSO feels like a place where...I could see in 15 years if it's going the way some are predicting, the Gov't stepping in and almost nationalizing those. Especially if it really is the new oil and people start price gouging.

I don't know, it seems like a good investment from a purely financial point of view, but again, it feels strange you could take the most important thing to life and then potentially gouge people on that.

 

Anyway, I'm just getting ready to drive up to Minneapolis for the next couple days, so I won't be on here probably, but I'm definitely interested to hear any feed back on that meandering post where I kinda go in and out of lucidity! I've already had a Twain like stream of consciousness way of writing...sans the wit and...ability. 

 

[LouisEly]

4 hours ago, zurch1818 said:

You are also paying property taxes on the assessed value each year. My property taxes last year on my $500k house in a suburb of Madison were $8.5k, so the net gain in your 2% scenario for me (since my house is paid for) would only be $1.5k

This isn't exactly true either.  Property taxes have no bearing on your real estate ROI.  You always pay property taxes; if you're not paying them directly, you're paying rent which has property taxes baked in.  If it's rental property, your tenants are paying the property taxes with their rent.  My rental property outside of Madison had $6.5K in property taxes last year.  My tenants paid $40K in rent.  I still earned between 14% and 35% on my initial investment, not including free cash flow on rent.

The extra money that you put into your mortgage payment to pay it off early has an opportunity cost of being invested elsewhere and earning compound interest.  Every investment advisor will tell you to put your money towards the highest interest rate.  It's better financially to invest in the market and earn, on average, 10%, than pay off a 5% mortgage early.  Paying off a mortgage early is a psychological benefit, not a financial one.

In your scenario, if you purchased a $500K home with 10% down ($100K) at 5% interest, in order to pay it off in 3.5 years you would have to pay an extra $8.2K/month towards that loan.  If you invested $8.2K/month at 10% interest, you would have $414K in 42 months.  That's $14K more than the $400K loan you paid off.  More importantly, that $414K is growing almost $3.5K/mo at 10% interest, more than enough to pay the $2.1K monthly payment on the loan if you paid it off over 360 months instead. 

[BrewerFan]

5 minutes ago, LouisEly said:

This isn't exactly true either.  Property taxes have no bearing on your real estate ROI.  You always pay property taxes; if you're not paying them directly, you're paying rent which has property taxes baked in.  If it's rental property, your tenants are paying the property taxes with their rent.  My rental property outside of Madison had $6.5K in property taxes last year.  My tenants paid $40K in rent.  I still earned between 14% and 35% on my initial investment, not including free cash flow on rent.

The extra money that you put into your mortgage payment to pay it off early has an opportunity cost of being invested elsewhere and earning compound interest.  Every investment advisor will tell you to put your money towards the highest interest rate.  It's better financially to invest in the market and earn, on average, 10%, than pay off a 5% mortgage early.  Paying off a mortgage early is a psychological benefit, not a financial one.

In your scenario, if you purchased a $500K home with 10% down ($100K) at 5% interest, in order to pay it off in 3.5 years you would have to pay $10K/month towards that loan.  If you invested $10K/month at 10% interest, you would have $500K in 42 months.  That's $100K more than the $400K loan you paid off.

This is true. I am kicking myself for how I handled this investment early on. I took all the income from the property for majority of the time I owned it into paying off the mortgage when I'd have done SO much better putting that into almost any other investment. 

[zurch1818]

There's a risk factor that I just don't have to deal with. That's why I paid it off early. Now if I don't have a tenant or I lose my job, I don't have to worry about losing my house. Now my $1500 mortgage payment gave me an $18000 (since I was already paying taxes on it). I also don't have be a landlord to get this extra income and I don't have to pay interest (which I'm still not really seeing in your math). I'm not denying that I couldn't have made more money, but to take 3 steps forward and take 2 steps backwards on payments just wasn't worth the risk to me. It's not life changing money. Let me do the math.

My roughly average 100k mortgage balance (round numbers average over the years) lost out on net 6% of gain over the time period (market rate - interest rate). That's 6k for 3.5 years...so about 20k. That's not life changing money.  I just don't believe that borrowing huge amounts amounts of money is required to be wealthy...it's your income from your job that has a much larger ROI.

I had money invested in a brokerage account until it was time to buy. I lived super cheaply and saved just about every bonus I got. Sure I was paying property taxes baked in, but I didn't pay a mortgage on top of it, so may rent payment was half of my mortgage + taxes. Renting long-term is not smart because the cost goes. A mortgage will lock in your price until you pay it off.

I put 70% down which made paying it off quickly easier. Also, every year since buying my house, I've maxed out my Roth IRA, my wife's Roth IRA, and my Roth 401k before making extra payments...so I didn't completely lose out on investing.

I'm 36 with a paid for house. Sure the house is half my net worth, but my investments should significantly outpace it in 10 years.

[zurch1818]

On 9/9/2023 at 9:04 AM, BrewerFan said:

Would you rather take 1.7M in cash right now, capital gains on purchase price of...~750K
Or take a sales price of 2M split in two payments, half now, half in 3 years with that interest rate?

That sounds like a NPV question from my college days. The numbers don't seem that different from each other. Knowing the property will go up in value in 3 years...and not knowing what the rental cash flow is like makes it hard to answer. My guy says take the cash and run. Now if it were 50% more at year 3, that might change my opinion.

[LouisEly]

22 hours ago, zurch1818 said:

I put 70% down which made paying it off quickly easier. Also, every year since buying my house, I've maxed out my Roth IRA, my wife's Roth IRA, and my Roth 401k before making extra payments...so I didn't completely lose out on investing.

I'd have to say that the list of people who are able to put 70% down on a $500K home is a pretty short list, especially for a 36-year-old.  My calculations were based on the standard 20%.

Consider yourself fortunate to have that much to put down at that young of an age.  You essentially paid cash.