After finishing the article “Dressed to Trade”, I thought “ that should give you a shot of reality”, and “uhhmmm I might be losing readers after that one”,,,hehehe,,,, but you’re still here! Wow! May the FIERCE be with you! 🙂
My First Love
Most of my friends interested to Trade always mention interest in Real Estate so I thought I’d also share what I know about it side by side with Trading. You can say Real Estate is my first love in investing. For a few years, even without cash to buy, I’d go inspecting properties for sale every week, we’d travel up along the North Shore and check out what are usually family homes in tree lined streets or go see new developments. When we spot a new development on the way to a party or picnic somewhere, we’d stop and check out their Display. I would knock on walls to determine materials satisfy soundproofing, look at color palettes, tiles or carpet or fixtures to be used, floor plans, facilities, check out the surrounding area including transport options and shops. It is quite enjoyable and educational. I’d also look at prices of comparable properties in the area, and development plans / regulations by the local government. The “tipping point” comes after I’ve crunched the numbers in a spreadsheet and income or equity value allows me to see if it’s an “attractive risk”. Was that a weird term? It’s like the stilettos I was looking at the other day, that had 5 inches heels – it would cause some pain but is sure to make you look glamorous,,,so you would still wear it…ohhh what we sacrifice for beauty! 🙂
A Reason for Every Season
There was a time that I was going to buy a 1 bedroom apartment and exchanged contracts (meaning two parties signed the contract / agreement – I am buying the property and the developer / vendor is selling the property to me) and I’ve put the clause “Subject to Finance” (means I only complete the purchase when I get approved for a loan) — about a year from completion. Towards the completion of the project, the marketing people who is also arranging the loan said the bank was lowering its Loan-to-Value Ratio (LVR) on the property – just means they are not willing to lend as much as before, say they were willing to lend me 90% of the price then they changed to only lending 80%, so I need to fork out a bigger downpayment (20%). This is when I sniffed that there is a tightening in credit situation and when I went back to my calculations, the investment is just not attractive anymore. I got out. (Email me if you want to find out more).
So I focused on investing / trading in the financial markets or “paper assets” like Stocks that does not require me to get a loan. Also around that time my life situation was changing. I was going to have my first child and plan to have the second short time after and will be taking time away from work for the next few years. I think it is very important to bear in mind that having children is a big adjustment and one you should consider in financial strategy that you do. You don’t want to be overcommitted, for example, needing to fork-out loan payment if there is a vacancy in a rental property or any sort of big expense (like those fees to maintain common property e.g. the elevator or swimming pool maintenance). Looking after babies is a big responsibility, try not to add financial worries to a situation where post-partum depression can happen (this type of depression affects mothers who have a new baby, usually overwhelmed by the responsibilities).
When babies are growing up, it is a special time, enjoy it.
Investing is a Many Splendoured Thing
What I gather from my friends is that they think that Real Estate is easier than Trading, so they’d invest in Real Estate first. Hmmmm I am not convinced that’s the right approach to investing. If everything that we would do is only the easy one, we’d probably be extinct as dinosaurs now hehehe
Anyway, I thought the important consideration is to invest in something that would perform given the conditions and fits in your overall life plan. Real Estate is not as simple as it appears to be. Of course Trading is also not simple, but the key is being educated in both areas so you would know when they would work best.
Here’s a list of considerations when investing :
(I will present 20 or so but know that that is no means all of what you need to consider!)
1. Market Type – we’ve discussed that the prevailing Market Type would set the scene for performance of your investment. Will it perform in Up, Down or Sideways market?
a. Real Estate – will perform when market is going Up and Sideways provided you can create value in Sideways market
b. Trading – can execute strategies when market is going Up, Down and Sideways
There is a very good book by Dr. Van Tharp “Safe Strategies for Financial Freedom” that discusses what factors drive markets to go Up, Down, Sideways… things like Inflation, Interest Rates, Value of the US Dollar. He has a free newsletter you can sign up to get where he discusses the Market Type. Even if you haven’t read the book / newsletter — get a feel for when things are going great in investments, usually this would be a good economy, like when people are not worried about their jobs, if so, they are more likely to spend on houses or take on more risk.
2. Fundamental Analysis – is there value or growth in the investment, also note the risks it pose such as environment (for Real Estate) and Management (for Stocks). The most important consideration for an investment is growth and this is usually due to Demand factors.
a. Real Estate – rate it against criteria which makes it good investment and attract quality tenants – things like accessibility to transport, work and amenities like shopping centers and recreational facilities e.g. beach, park, schools. It should also be structurally sound (no use buying a decaying property if you don’t plan to rebuild on it).
b. Trading – is the company profitable and achieving its profit forecasts? Does it have a growth strategy and product pipeline that would ensure its continued growth? Is it a startup company with products / service that would achieve exponential growth e.g. Facebook with 500 million users is a startup with a lot of promise given its advertising edge to its users. Would its users continue to use its services?
Fundamental Analysis will give you an indication of the soundness of your investment. For Stocks – Warren Buffett has a business model for evaluating companies to invest on, you can also check out William O’Neill’s CANSLIM model.
3. Will it require Financing / Leverage – I said earlier that I didn’t want to get a loan given that I was going to have a baby and I thought it is an important consideration – When you get a loan, the financial risks will always change, our economic situation can entail lowering the rates or increasing rates, you have to know that you can sufficiently service the loan, otherwise you could lose your investment.
a. Real Estate — just think about the housing crisis in the US which started the Global Financial Crisis — people have committed to mortgages that started low and jumped to as much as 3x their original rate, that is just insane amount of debt burden to shoulder at once. Not surprisingly, many people were unable to service their loans and chose to foreclose. The loans that the bank will be willing to extend to you can also change during the course of your loan, say during an economic recession, a commercial property can only be lent as much as 50% down from 60% , meaning you need to put in more money and if you are unable to put in the required amount, the bank can choose to foreclose.
If you still want to invest in property without taking out a loan yourself, look at Real Estate Investment Trusts (REITs) or Property Syndication in your area.
b. Trading — in stocks, the simplest way to invest is with your own money, ie. not requiring a loan. You can just buy as many shares as you want and then let it be. If you want and gotten a bit more sophisticated, you can take out a loan (this is called Margin Lending), using your stockholding as collateral cover (or security, in the same way that a house you bought is security for the loan you took for it). They will normally lend from 40% to 70% – depends on the quality of the company which is assessed by your bank / broker.
IF THINGS GO WRONG like when the value of your investment go down or you are unable to pay your loan interest: In Trading, you also just surrender your shares and pay additional cash if there is a shortfall in the sale of the shares. In Real Estate, they will get hold of your property, and if the equity on a second/investment property is secured by another property, the 2 properties will be in trouble. Understand your financing terms and conditions thoroughly.
More on my “2 Loves” on the next post…
(Thanks to Via Uno management in Australia for allowing use of images of their dreamy shoes).