AskDong

For the last 2 years, I’ve been looking at real estate listings.  I’ve been looking both for a place to live, and also a pure investment play.   I would say for most of these two years, I’ve looked at the listings, took note, and quickly moved on.  The list prices have been too high, and the properties not that appealing.  Recently I’ve expanded my search towards multi families both as a pure investment play and a partially occupied property.

While most listings are still overpriced in my opinion, occasionally I see listing that catches my eye.   These listings tend to go quickly, very quickly.  This is especially true of the multifamily investment properties that I’ve begun to look at in lower Allston, a potentially up and coming neighborhood of Boston.   These properties tend not be owner occuppied and usually owned purely as a investment.  Below are some sample listings.

1. 799K 3 Family (3 Three Bedroom), 9034 Annual Taxes
2. 635K 2 Family (2 Bedroom + 4 Bedroom), 4997 Annual Taxes
3. 879K 2 Family (3 Bedroom + 4 Bedroom), 5133 Annual Taxes
4. 679K 3 Family (3 2 Bedrooms), 6456 Annual Taxes
5. 599K 3 Family (3 2 Bedrooms), 6137 Annual Taxes
6. 679K 3 Family (3 2 Bedrooms), 6619 Annual Taxes
   

Can you guess which properties sold? 

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I’ll be the first to admit that I’m not an adept bond investor. I’ve limited my purchases to treasuries and one municipal bond. Generally speaking I think for most individuals, they are better off investing in a bond fund rather individually crafting a portfolio of bonds. This is true for a number of reasons:

• Bonds trade in larger denominations (Thousands), making it harder to diversify a smaller amount of money
• Researching Bonds can be more difficult
• Trading costs associated with bonds are both higher and less transparent (Brokerages in the past have embedded the cost of the trade in the price of the bond making it less clear what you were actually paying just to buy or sell a bond)

Charles Schwab is making a little easier for its clients at least on the last point. According to a Wall Street Journal Article yesterday, Schwab will only be charging $1 per Bond. They already don’t charge for treasury securities brought at auction making them competitive with the Government’s own service, TreasuryDirect. The lower bond fees follows a tactic that Fidelity embarked upon in 2004 of charging between .50 cents and 2.50 per bond.   Fidelity and Schwab are slugging it out for the same set of customers - customers who want a few more bell and whistle than the Zeccos (who offers free trades) of the world can offer. Of course there is still a minimum transaction cost $10 making it wasteful to trade anything less than 10 bonds. In the past I never considered bringing my business to Charles Schwab. As far as online discount brokerages, they were lapped in terms of cost by the other brokerages. However in the recent years, Schwab has aggressively cut prices making them competitive. This is especially true if you have invest-able assets over $1 million with them.

Lower trading costs are always a good thing. The question still remains does individual bond investing makes sense for most people? While I still think not, for some they might. On reason to invest in Bonds is they are often  are a superior investment in comparison to other time deposits such as CDs. If you’re investing in CDs, there’s no reason not to invest in at least U.S. Government treasuries. Municipal bonds also offer a very attractive alternative to CDs for tax reasons especially if you can’t find an appropriate municipal bond fund for your particular state. The nice thing about investments such as CDs and Bonds is that they allow you match a maturity with known liquidity needs. For instance if I know I will have to pay off a loan in exactly two years, it makes a ton of sense to buy a bond that matures in two years. In this way I can lock in the potentially higher rate of a two year maturity, and not worry about how interest rates might move between now and then.

Alternatively bond investments offer another opportunity to speculate. As the last week and this week has shown, interest rates can move quite a bit, taking bond prices with them. As interest rates move up, bond prices move down, and vice versa. A speculative investor can take advantage (or be taken advantage) by these movements to buy and sell bonds for capital gains instead of just the interest payments.

I started lending money on Prosper about 2 months ago. So far I have 14 Loans outstanding with a weighted average interest rate of 13.96, and a credit rating of A-. Given that I’ve only been at it for about 2 months, I don’t have any defaults as you can see by the chart provided by lendingstats.com

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I spent this past weekend away at Bachelor party.   Like most Bachelor parties, gambling was involved.   While at time I wish it weren’t true, I enjoy gambling.  I don’t do it often, and never more than what I consider “fun” money.  Yet, I often wonder why I play these games of chance.  The odds are assuredly stacked in the houses favor.  Over the long run, I know I’m effectively paying the house $1 to get 90 cents in return.   But to quote Maynard Keynes, in the long run, “we’re all dead.”   In that regard I’m willing for whatever reason to effectively pay the house it’s cut for the potential elation of winning.  At the same time when I lose, I grumble and ask myself why I play this game of chance.   I’m not sure if the joy winning outweighs the disgust of losing.  

I believe I will probably continue to gamble in the limited quantities that I do today, but what I will do from now on is to actually track my wins and losses (as was suggested by a friend).   Gambling is really just another hobby, and I should know how much it costs me.  I should also be tracking it for tax purposes just in case.  Gambling losses are not deductible against anything other gambling losses, but net winnings are always taxable.  In general I’ve never worried about my take in any given year, because I’ve always assumed that for the year I’ve lost money gambling.  The main benefit of tracking the expense is to better to determine if gambling is worth the cost.  If I end up looking at my balance, and find that the cost has outweighed whatever perceived benefits then it becomes so much easier to give it up.

So my first entry: +$300

The other day I had some time to kill at the bookstore. I picked up the recent copy of Smartmoney and perused it. One article caught my eye. It was a strategy guide to becoming a Pentamillionaire. I don’t subscribe to Smartmoney as I only have the budget for one personal finance magazine and as a result didn’t get a chance to finish the article which is excerpted on the website. Kiplinger’s as an FYI is the one magazine I subscribe to based to my own informal review personal finance magazines.

The article raised two solid points. The first is implied by the title. A Million dollars is not what it used to be. 5 million is the new Million. The 2nd and main point was that becoming a Pentamillionaire is not as “easy” and straightforward as becoming the “Millionaire Next Door.” It’s one thing to save money for comfortable life and a carefree retirement, it’s another to make it big. The article in Smartmoney is about making it BIG! 5 million is really at the bottom of that scale.

I like many of other people who write about personal finances preach the slow and steady approach to propserity. J.D. does not write a blog called getrichquick, it’s getrichslowly. We are disciples of the Millionaire Next Door rather than Tom Vu’s late night television ads. As assuredly as living below your means, and putting it steadily into the equity market is proven way to prosperity, it’s decidely not the only way. The fact is if you want to be REALLY rich, you have to take risk.

Most Pentamillionaires as the Smartmoney article reports are entrepreneurs, or other folk who got in early with someone entrepreneurial. Starting your own business is risky even if the market is ripe and your skills perfect. There are some who would argue that being employed these days is as risky. Lifetime employment is a thing of the past. I agree to a degree, but the risks startup of any kind faces in terms acquiring and retaining clients is significant. Without clients no business can survive. Even if the risk for small business is overstated, psychologically for most individuals it’s a level risk that is hard to surmount. Setting off on your own is difficult course to embark on. According to one study, a startup that has employees has a 9% chance of surviving ten years. Those are slim odds.

I imagine those 9% who do survive often find success to be quite profitable. The question for most people who want to start a business is do they believe they will be in that lucky 9%. Obviously if you don’t believe that then it wouldn’t make sense to try to start business. Of course that 81% that fail obviously didn’t think they would fail but they did. So what does it take? One problem with the Smartmoney article is that it doesn’t really study people who failed. It says successful people have a “swell attitude”, “friendly”, and “eager for new experiences.” While I personally believe these are actual ingredients for business success, I wonder do people who fail in their business ventures also have these attitudes? It’s a question not asked by the article as it’s skewed to profiling success rather than failure.

So let me pose this question. If you knew for certain that you could work slow and steady to an accumulated wealth of $3 million in 20 years, or you could take some chances and either have a 10% probability of having 20 million, and 90% chance only having 1.1 million in 20 years, what course would you chart?  From a risk neutral perspecive,  the expected value is the same $3 million.