Wednesday, August 10, 2005

Readers questions

Primer on my investment outlook

> OK both stocks dont pay dividends. But how do you
> find out leverage and debt
> figures? Financial statements I suppose?

Financial statements. Also the Yahoo Finance or Morningstar page on the stock. Look for Debt (Short Term + Long Term) and look for Retained Equity or just Equity.

> I also read the part on housing bubble. 2 questions
> when you have time...
> - In my case, I bought my house in Wilmington before
> the bubble. From a
> couple of perspectives the investment makes sense.
> Income (rent) is >> than
> expense (mortgage, taxes, insurance etc.). And the
> rents are rising. They
> have risen more than 20% in last 2 years. The price
> to rent ratio (with the
> price I paid) and other factors cited in several
> real estate publications
> also look good. Another 6-7 years of rentals and my
> investment is paid for.
> So it makes sense to keep it.
> Antithesis to that is.. I am up a good 20-30% on the
> price (which is not the
> investment... investment is only what I have paid so
> far, by that standard I
> am up almost 70-80%) and thats not counting the fact
> that I lived in the
> place for 3 years + rented 1-2 rooms most of the
> time, so count that income
> in as well. Also the fact that for the next 1.5
> years this capital gains
> upto $250K are tax free so makes sense to sell. And
> the risk is that the
> beach towns in the Atlantic are hurricane prone so I
> am 1 hurricane away
> from losing just about all my gains (Insurance
> covers my house structure
> cost well).

I am negative on Housing, but at the moment there is momentum going for it. Also, you are cash flow positive so it makes sense to keep it. Perhaps you could keep the end of the tax-free period as an outer limit to keeping the house. If any of these events happens before the 1.5 yr period
a. Yield Curve Inversion - The yield on the 10 yr bond is lower than the yield on the 2 yr bond.
b. Higher 30 yr rates - The yield on the 30 yr bond goes above 7% and stays there for about a month.

These are just crude techniques to game the housing market, try to discover the top of the market and exit. Read about yield curve inversion and the correlation between mortgage rates with 30 yr bond rates.
Realistically, we are about 2 months away from a. or b. occuring.

> - Now the city I am living in now. An argument can
> be made on buying a small
> house because I am sending money down the drain for
> rent which is guaranteed
> a 'zero' return, except I have a place to live. If I
> am to buy a smaller
> house say, I more than breakeven on the rent vs.
> (interest-tax deduction)
> part. If I am able to rent out a room (at much below
> the market rate) I more
> than make up for most other expenses. The real
> estate has boomed here as
> well but not as much compared to say DC or Chicago
> or other large metros. So
> there is a small probability ... maybe even a very
> small one that I will
> make good on my investment when the bubble bursts.
> If I am to move out of
> this city and rent the whole place tomorrow I can
> get my expenses back in
> rents... even using the most conservative numbers.
> Again about 10 years of
> living (rental or me) I get everything back. Should
> I buy?

:-) There was an argument made to buy Amazon at 400$ a share and a number of dot coms in 2005. In Japan, prices in Tokyo are DOWN 70% over a period of 15 years... Can you afford that happening ? You have made a great investment. Think about exiting when you have it good.
Many investors did not exit when the stock market crashed in 2000 and saw their gains wiped out..
Housing may not crash like the stock market, but prices can moderate and fall..
On the hand, if you have a secure job, buying a smaller house makes sense..Perhaps after you take out tax free gains on your previous house..And be wary of buying condos..


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