Are You Domino Pizza? III

With the “Power of Leveraging”, Peter is glad that he only used $100 as an up front payment 15 years back and today it appreciates to $5000 ($250*20 toys). He predicts his net worth will be $12,500 for another 15 years when he finishes all the installments. Remember besides $100 up front payment, he needs to touch up $7.51 every month to serve the installment even he receives $5 rental every month. Thus, his total investment would be $100 + $7.51*12 months*30 years, which is $2803.60.
For the sake of easy calculation, we omit several factors such as Peter might lose out his rental for certain period because people who rent Mickey Mouse come and go. When this happens, it generates another costs which eat up his total return because in the process of searching for new people to rent the toy, it involves several costs such as broker fee, admin fee….etc to secure the tenant. The higher turnover rate, the more costs he needs to bear. Furthermore, 30 years is a long period. From time to time, Peter got to pay some maintenance fee to maintain toys usage life. Insurance charge, local council assessment fee and so forth are other hidden costs.

People might argue that the rental could be raised from time to time. True, but its increment would depend on the demand. When the demand is weak, not only Peter cannot raise its rental but he might lower the rental in order to attract the tenant. If not doing so, he needs to find ways to earn more in order to serve the installments. The monthly installments are sure thing while the rental from tenants is depends to the market condition.

While leveraging sometimes is needed in doing business as well as investment, it must be deal with EXTRA CARE. It’s like a knife: if use it wisely, it helps you a lot; if you use it without care, it can hurt or even kill you. It’s true that for majority of us, it’s impossible to purchase real estate for cash and we need to leverage with housing loan. The advice is for those who dreams for becoming rich in the shortest time by OVER LEVERAGING. He may buy 2, 3, 5, 10 or even 20 real estates with the money he has for 1 real estate. This type of “investment” is not a prudent and rational investment. Think of it: along the expressway where the maximum limit is 110km/h, will you drive until 120, 130, 150 or even 200km/h? How about if you are driving during heavy rain night time? People who drive exceed the limit in such conditions know well about the risks but for some reasons, they ignore it. If the journey is short, he might lucky enough to reach his destination. Life is a long journey. It’s never a 100m race but marathon. People who “run out of time” to over leveraging in real estate or any investments will only have 1 outcome: FAIL. When you can choose to drive safely with 90, 100 or 110km/h during sunny day, why choose to drive over 110km/h at night with heavy rain?

Remember the story of camel loaded with full load? When 1 little straw put on it, it collapses. When you over stretching your financial, only 1 small occurrence could fail you entirely. Domino Effect is devastating.

Are You Domino Pizza?

Are You Domino Pizza? II

Peter with the most toys proclaimed himself as the richest among his peers because he possess 20 toys compared to Helen, 10 toys, Lisa, 5 toys and so forth. Best of all, Peter received $5 every month for the rental (20 toys * 25 cents). Everyone admires of his brilliant “investment”. This is what appears in front of the public. On the other hand, $5 rental Peter receives not all goes into his pocket. He needs to pay back the installments plus interest to his financier, Tom. As the contract signed between them, there will be 360 monthly installments to be served by Peter where the interest rate fixed at 6.9% per annum, the up front payment is $100. There is no admin fee and other charges imposed. The monthly installment that Peter needs to serve is $6.26. OOOOpssssssss……..how to serve $6.26 when Peter only receives $5 rental per month? He got to find ways to earn extra in order to touch up the difference of $1.26 every month. At the same time, he reassures himself that the “investment” is a good investment because the limited edition Mickey Mouse price will only goes north because of its scarcity. While it is painful to serve the installment over 30 years period, it is still worth because after the period, he will own 20 limited edition toys which will worth more by then. This is his belief and he puts his faith on it.

30 years is a long period, you never know what will happen in between the period. Something good or bad might happens along the way. True, limited edition Mickey Mouse soars its price from $100 (when Peter first bought it) to $250 after 15 years. Peter is so happy that he made a smart choice because his “investment” appreciates more than double in 15 years. He predicts that the same trend will continue for the next 15 years, that’s when he finishes serving all the installments. At that time, he assumes the price of the toys will be $625 ($250 + ($250*150%)). With 20 toys on hand, he net worth will be $12,500 by then.

Technorati Tags: Investment, Mickey Mouse, NeverLand

Are You Domino Pizza? I

It’s a story telling time:

John has $100. With this money, he could buy 1 limited edition Mickey Mouse toy. This is a straight forward business: you buy from the seller with the money you have, nothing special. Since the objective of the seller, Harry is to sell buyer more, so he could earn more, he stretch his head day and night to find out a way to increase his sales. One day, he pops up with a great idea: by installment payment scheme, sure the sales could be increase since it creates an illusion to the buyer that his affordability is increase. On the next day, he promotes his idea to his buyer, Ken that by only laying $100, he could get 2 limited edition Mickey Mouse toys instead of 1. Enticed by this temptation and without hesitate, Ken buys 2 toys with the same amount as John did yesterday. But, how Harry could sell 2 toys with the total price of $200 by only accepting $100 from Ken? It’s an arrangement Harry made for Ken with Tom, who is a financier of the deal. Of course, in business, every cent counts. In order to finance Ken, Ken has to repay back $100 plus interest charge.

Since the scheme gets an overwhelming response from the buyers, Harry promotes similar scheme to his buyers: with less money, you could get more. Besides that, he also promotes another scheme: the buyers who willing to rent out their toys will be paid and this is known as rental. The rental paid would be 25 cents per month. Due to this attraction, Lisa buys 5 toys, Helen 10 toys, Peter 20 toys, all with same amount: $100. Best of all, every buyers could rent out their toys to receive rental. Everyone gets what he/she wants, everyone happy. It seems in a happy ending NeverLand.

Technorati Tags: Domino Pizza, NeverLand

Investing as a career I

Investing is not a rocket science. You need not high IQ in order to invest. The only 2 criteria needed to ensure a successful investment are Firm Character and Knowledge, the sequence is important – without first criteria, second criteria only destroy you.

As Martin Whitman says:” "Many people on Wall Street know the price of everything but the value of nothing,", I would like to make some changes, “Many people in the market know the price of everything but the value of nothing.” The market mentioned here could be equities, real estate, commodities and so forth. In the era where the information is easily accessible, as long as you wish, you could get the Real Time pricing of any, being it an equity price that fluctuate minutes by minutes, commodities future or option that change every single minute, real estate price that change month by month. But, people should not forget that information is NOT knowledge as data is not information. The well sort and analyze data become information. While knowledge only obtained by the combination of information and Real Life experience that you learnt by hard. This experience is as precious as a rare diamond. People tend to think that as long as he is equipped with sufficient information, he could be success in investment. This mentality is totally wrong. If it is a case, a librarian would be a greatest investor for last century and a person who works in Google or Yahoo would be most successful investor in the world in this new century because they are surrounded by ton of information. But, in reality, this is not the case.

Be prepare that you will make many mistakes for the coming investment decisions. This is unavoidable. Warren Buffett did quite of number of mistakes, so did I. Though making those stupid mistakes, we learnt, we learnt by hard. One must not misinterpret that I am encouraging that we must make a lot of mistakes in order to be succeed in investment. As I mentioned, making mistakes is unavoidable, but one must make sure that the mistake that he made would not failed him forever. History already showed a harsh reality where the investors of Long Term Capital Management (LTCM) lost billions of dollars as well as Japanese real estate investors who also suffered same fate as his counterparts in LTCM. Reason? Over leverage.

Is Real Estate a Good Investment? VI

Correction: Years from base date for Japan should be 1980 and not 1985.

From the graph, it showed that house price in Japan soared 100% from 1980 to 1990. After the bubble burst, Japan suffered from a massive economic depression which lasted 15 years until 2005 which we saw there is a sign of economic recovery. Still, house price in Japan does not recover from its peak. In 2005, it signifies the depression of nearly 40%, this means if you bought a house for $ 200,000 in 1990, your house is worth $ 120,000 in 2005. This is a scenario if you bought with hard core cash. How about the one who highly leverage with housing loan? The consequence is more drastic, the real estate that they invested still in a group of “Negative Equity”, meaning that even you sold off the house, you are still in debt and need to repay back the balance to the bank. That’s the impact of leverage, in contrast to the one who always persuade you for the “Power of Leverage”. They are right in one point: Leveraging could shorten your investment return IF the market is booming; when the market burst, you not only lose all your investment but you would be in debt as well.

While in Australia, Britain and US, the average house price since 1995 registered a handsome return of nearly 150%. If you laid the investment since the beginning of 1995 and bought the house which priced $ 100,000, your investment worth almost $ 250,000 in 2005. The return could be higher if you are buying with highly leverage housing loan. While the house price for the past 10 years gave the investor of that time a handsome return, do you think it will do the same for the next 10 years, or it will show the same trend as Japanese backed to 1990? The answer? Only God knows…

“Any indication for you?”

Is Real Estate a Good Investment? I

Often we hear somebody proclaim:” Real estate value is always going up. It’s a good investment.”, “Real estate is a vehicle to hedge against inflation.”, “By leveraging others people money (OPM), we can achieve a retirement plan earlier.”, “As long as the rental could generate a positive cash flow, it’s a good investment.”

Let us examine the conventional wisdom one by one:

1) “As long as the rental could generate a positive cash flow, it’s a good investment.”

Case 1: By purchasing a condo priced at $ 200,000 and putting 10% down payment ($ 20,000) with the interest rate at 6.65% per annum for 30 years duration, the monthly installment translates into $ 1,155.54. While the rental collected every month is $ 1,000, this means you have a NEGATIVE cash flow of ($ 155.54). This calculation does not include the monthly management fee of $ 180, insurance charge, municipal assessment fee, broker fee for finding a tenant...etc.

People might argue that after 30 years, the condo is owned by the investor and the tenant is paying partial installment on behalf for the investor. This sounds good superficially for the investor, but when analyze deeply, the case seems reversed in the situation.

Assuming A is an investor and B is a tenant, let see what’s the impact for both persons:

| A | B
Down payment ($) | 20,000 | 0
Monthly installment / Rental ($) | 1,155.54 |1,000
Miscellaneous fees / charges ($) | 350 |0
Cash flow ($) | (505.54) |0

It is clear that B could save $ 20,000 for the down payment and at the same time, he could save roughly $ 6,060 yearly. When multiply for the duration of 30 years, B could save $ 181,800 + $ 20,000 = $ 201,800.

Although this is a simplified case where rental tends to increase, bear in mind the investor also feels the same burden that he needs to bear the hike of interest rate, broker fee, monthly management fee and so forth which in tandem with the current situation. By saving $ 20,000 for the initial year and $ 6,060 yearly, B could place this amount to other investment vehicle which could generate more handsome rewards to him over the years. Or else, if he can use this amount to fulfill his desire like buying HDTV, fancy car, travel around the world plan…etc. (Note: We do not recommend using savings for the unnecessary desires.)

Disclaimer: We do not recommend “Sell”, “Hold” or “Buy” for the investment in the article. Our objective for placing this article is to “Open Mind” for the investor by not becoming prey for the interested parties. Readers should exercise EXTRA care when dealing with their money for the investment.