Sez Me — Random Thoughts For the Weekend — Food For Thought

A new strategy, based firmly in contrarianism, (a new word I just coined) is being seriously considered by a few pretty savvy Wall Street hedge funds. They are pondering the purchase of sub prime loans, at significant discounts of course. What one might infer from this strategy, is they think sub prime may not be the albatross it’s been made out to be. Not offering up an opinion here, but it looks like a gutsy move that could produce amazing returns — or not. Either way, we can all watch.

Since Bernanke has cut the Fed Funds Rate twice in a row, the movers and shakers are now arguing amongst themselves about December’s action. Will Uncle Ben cut again? Or will he decide real estate isn’t in danger of collapsing, and therefore hold off awhile? Remember, he’s written books, and man treatises saying outright that it was the 1927 real estate collapse that was the initial falling domino which ultimately resulted in the crash of ’29. He believes that in his DNA. If, even for a nano second, he thinks the country is in danger of that happening again, he’ll cut the Fed Funds Rate ’till it bleeds.

On the other hand, he has almost no sympathy for those on Wall Street who conspired to create the current problems. He’s said many times, it isn’t his job as Fed Chairman to bail them out of the consequences of their bad decisions — and so far he’s been good to his word. It’s about time those crybabies had to pay the piper. They’re free market advocates until it’s their bull being gored.

How many times have you driven a few blocks out of your way to save 4¢ a gallon? We’ve all done it, but once you figure out the savings, you stop. At least rational folks do. The average driver probably drives 15,000 miles a year or less, (at least according to insurance & lease rates) gets 20 mpg, and buys around 750 gallons of gas a year. His/her driving around saves them a grand total of $30 a year — or less than 10 of the dozens of Starbucks Venti cappacinos they drink a year. Yet they’ll bite their nose off to spite their face for another few thousand on their real estate. Never mind how much more they’ll make on the upside of what they’re acquiring. The question I ask them? Tell me about that extra $15,000 grand in 10 years — how much difference did it make in their lives? They not only can’t say, the so called loss, over time, literally became irrelevant when compared to the benefits of the change they made. Not selling for a so called ‘loss’ can cost investors six figures and more in a decade. Food for thought.

It’ll be interesting to hear the impressions of those who attended the NAR convention (Realtors®). From what I’ve read so far, their spin is wandering into the silly range. Do those guys ever learn?

Is it just me, or are owners of very old small unit properties in San Diego beginning to sniff the possibility of a better location for their equity? Maybe it’s the brutally honest moment they had, when they admitted to themselves they wouldn’t buy their own rentals at 80% of today’s value. Here’s something to ponder: In 10 years will you be better off keeping your old, high equity units, or trading them to a growth region where almost all investment factors are superior to San Diego?

Did you know — if you invested $100,000 today, and averaged 16.66% a year capital (not appreciation) growth rate for 20 years, you’d end up with just under $2.2 Million? It’s true. Here’s the first five year period’s numbers. Just put the initial $100,000 down on $666,666 of property. (15% down) You’ll have to average about 5% a year in property appreciation. Net proceeds after selling at the end of the five year period, are just over $216,100. You paid 8% to sell it, and the original loan was interest only. If you received roughly 8% yield on your $2.2 Mil, your retirement income would be enhanced by about $176,000 a year. Show of hands who wanna sign up for that program?

Heard the one about the investor who banked the annual tax savings derived from his real estate investments? He had enough every 3-5 years to buy yet another piece of income property. Those who pay attention and do things on purpose — win in the end. You don’t have to get rich quickly. Slow works just as well, and it’s a lot safer.

And finally — ever wonder what would happen if real estate investors stopped trying to make so much money so fast? Grandma used to tell the story of how Einstein learned about the principle of compounding. That principle is what propels the growth of net worth — whether it’s real estate, stocks, or just in a bank CD. Anyway, it didn’t take but a minute or so for the genius to comment. He said (loosely paraphrasing) compounding, “…should be called the eighth wonder of the world.”

Indeed.

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2. 401(k)’s IRA’s And Some Food For Thought
3. Random Thougts On A Weekend
4. Random Thoughts On A Sunday
5. How To Retire Well And Sooner Than You Thought Possible — The Flywheel Principle