4 ms·

My Secret Non-Software-Developer Life

25 points by jsonmez 13y ago

seldo 13y ago
There's a very important lesson in here about investing, but not the one the author intended. From the article: "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." And then, later: "Now suppose you find a house that you think is a good deal for $100k. ... suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily." Leverage, i.e. a multiplication of your investment by borrowing money, is quite frowned upon when investing in stocks[1] but is not frowned upon, in fact positively encouraged, when investing in real estate. This is because "owning a home" has a sentimental value attached to it by policy makers that equity investing does not. It is a weird market distortion caused by bad policy, particularly in the US. Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money. Real estate is not as volatile as equities, but as the financial crisis of 2007 showed, large numbers of retail investors going into real estate solely as a speculative investment can lose them huge amounts of money. In all investing, the size of your return is related to the risk you are taking on. If you can get a 30% return investing in housing, as the author suggests, and only 6-7% investing in mutual funds, that's because housing is 4-5x more risky than a mutual fund. Higher returns are not just sitting around waiting for you to notice how much more money you can make. So by all means leverage away if you've got capital and want to take on more risk for the chance of higher reward, but don't go into it thinking it's an "almost guaranteed way" to make money, as the author has concluded. [1] Unless you are a large bank, but that's a whole other story.
- eterm 13y ago
  Indeed, the OP made money in a market which governments are desperate to prop up and make sure keeps rising and seems to think "that was easy, anyone can do it!" which is a terribly takeaway message. Also, it all builds toward plugging a book which raises my sceptical eye just a little.
  - seldo 13y ago
    Good point. Especially since his Amazon affiliate code is tacked onto the end of the URL.
  - anonymous 13y ago
    > Also, it all builds toward plugging a book Ah, so it's not just investment advice, but also a practical example of good marketing.
- guard-of-terra 13y ago
  Why is all real estaste risky? A good apartment in a historic stone buikding in SF will be worth a lot no matter what, even if the whole USA crash and burn USSR-style. Because the supply is limited. A house in suburbia? Not so sure. That's your main take-away from economic disasters.
- 001sky 13y ago
  Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money NB>Its frowned upon because the lenders can lose money.
- crystaln 13y ago
  > "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Actually, pretty much any brokerage will allow you to purchase with "25% down" on a margin account. It is extremely risky as at that point, any drop will force a sale and a 25% drop would completely wipe out your capital and leave you with nothing. It's certainly not difficult to borrow money to purchase equities. > This is because "owning a home" has a sentimental value attached to it by policy makers While it's true policy makers unnecessarily encourage home ownership and related credit, that is not primary reason credit is more widely available for real estate. Equities are extremely risky - companies can and do go bankrupt overnight, wiping out shareholders. Real estate, particularly expensive real estate, always retains some value and can always recover in value. Real estate very rarely collapses into worthlessness, whereas almost all equities eventually will. > the size of your return is related to the risk you are taking on Not true. Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. Finding a good investment opportunity, by definition, is finding an investment with lower risk and higher return. Purchasing real estate in 2008 was low risk, high return. This was a market distortion caused by credit contraction and irrational panic. In addition, real estate has higher return because it requires work and adding value by maintaining buildings, finding and managing tenants, etc - these are not related to risk/return. Anyway, sorry - this is just too much information not to challenge.
  - javert 13y ago
    > Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. This rings very true. It's like the old joke: An economist is told that there is a dollar bill that has been dropped onto the ground, and it's his if he picks it up. "Nonsense," he replies. "If there has been a dollar bill there, someone would have already picked it up!"
- 616c 13y ago
  > "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Excuse me, but my history lessons escape me. This is called buying on margin, no? Just this time it is with a bank? I just want to know if I remembered correctly, because I thought this was responsible for something called the Great Depression in a very significant way. Haha.
- Tichy 13y ago
  I would have thought banks prefer to lend money for buying houses because they get the house as a security (if the lender can't pay up, the bank gets the house). Presumably the notion that houses are relatively stable investments lies behind that notion, but still, I don't think it is just a whim of policies. In any case it seems easier to judge the value of a house than the value of some random stock, which might also be something banks like.
- jsonmez 13y ago
  Good point... for speculative investing. But investing in real estate for the long term where your leverage is not too great and the asset produces enough income to easily cover dept service is very low risk.
informatimago 13y ago
Now consider this: If you rent, to a human landlord (let's avoid a corporate landlord), the the money you give each month is used by a human person, probably for good things, like buying products you or your brother are making. on the other hand, if you borrow money from a bank to buy, you're giving money (at least the interests, but they may make up an significant part of the price for long term borrowing), to a BANK, which will use this money to further enslave you and other human being, provoking ecnonomic crisis, and gaining political and ecnonomic control everywhere. This is a prisoner dilema; renting is harder, but it is better for the humans as a whole.
- TheZenPsycho 13y ago
  If you rent from a human landlord, there is a pretty good chance that rent is going directly into the interest of a loan. I.E. a bank. And not the good stuff you or your brother are making.
- javert 13y ago
  Real power is backed by force. Economic "power" is not real power. "But what about the poor guy who has no choices and HAS to take that shitty job and can only get an account from that one shitty bank (BoA, for example) that abuses its customers?" That just doesn't happen in a healthy, developed free market. There ARE lots of choices. What we have is very far from that. A few big banks function as government bureaus. Ultimately, they DO have force backing them.
chetanahuja 13y ago
It's scarcely believable that the author (who is also the submitter) is making statements like the following: "Now suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily." "So you end up making a profit of let’s say $110k – $100k = $10k on your $10k investment. Cha-ching $10k became $20k, a 100% return on investment." less than 5 years after the worst financial crash since the great depression caused exactly by that exact line of reasoning by millions of people. This is a guy who claims to have learned "a lot about .... investing." More than likely it's all affiliate/SEO spam for the book he's flogging in the post. And we've all (including myself) made it worse by commenting on the post here I'm sure.
- 001sky 13y ago
  Unfortunately, the math is true. Its the same for student loans. Who is going to lend an 18 year old 150,000 to buy a lottery ticket? Nobody. If somebody is going to lend you 150k to buy a lottery ticket should you buy it? Interesting question. All lottery tickets are negagtive NPV. But they sell well to poor people. So, if you need 150K for college, your probabably pre-disposed to buy negative NPV lottery tickets. And thus, the availability of capital distorts asset values.
  - vinceguidry 13y ago
    If I had $150K to invest in only lottery tickets, I'd buy wholesale and resell at a discount. That's how you make money in the lottery.
    - 001sky 13y ago
      Like the abstract approach. But if you get 'wholesale pricing', the ticket is worth more to own, no? you'd then lose money on the sale. AFIK lottery tickets are only sold on comission, for this reason. If you could get the govt to sell you the tickets at a discount (lobbying.ribels), that would be an interesting investment fund, indeed.
madcat123 13y ago
It's great that the author is successful in his choice of investments, but I think the post makes the whole thing look much less risky than it is. Real estate prices only go up, right? WRONG [1]. And if you're leveraged 1:10, when prices drop the whole pyramid comes tumbling down painfully fast. Buying one property per year doesn't seem to be too much, but 5-6 years into it you're way more leveraged than you should be; it's easy to get carried away by imagining potential future rewards and ignore the actual risks involved. [1] http://www.arizonarealestatenotebook.com/wp-content/uploads/2013/01/2013_01_30_Case-Shiller_Phoenix.png http://www.arizonarealestatenotebook.com/wp-content/uploads/...
- jsonmez 13y ago
  I survived the real estate crash easily, because all my loans with 30 year fixed loans and a leverage amount of 10% down was sufficient enough to allow for rent to cover the service of the 90% dept on the property. This is very different than speculative investing where you are counting on real estate prices to go it. Sure, I'd like prices to go up, but I'm perfectly happy having a renter pay my mortgage for 30 years as well.
gmays 13y ago
I did something similar, but I bought the homes cash instead of financing. I bought most properties as short sales and a cash buyer seemed to have an advantage (maybe I was wrong?) so I always offered cash. I always had to put out a few bids at a time since even the most promising bids seemed to have a ~25% success rate. To buy at least one every year I had to take out a low interest HELOC on the first investment purchase to help finance the new ones. Thankfully I was able to pay the prior HELOC amount back in full prior to buying a new one and just keep using the same credit line since there's a 5-year draw period. I live and buy here in southern CA so the prices have risen to the point where I don't feel comfortable buying anymore, but thankfully so have the property values of the homes I do own. I never looked into getting my real estate license, but we have a great agent now who we've bought our last four homes through (including the one we live in). She also recommended an excellent property manager that we now use exclusively (our last one was worthless). A good property manager makes all the difference. I actually spend more time sorting the taxes for the properties than I spend doing anything else for them, and that's one a couple hours a year. I think real estate is a great industry for hackers. I've always been good with money, but I had no background in real estate when I started. I could have done a lot of things better and I probably got lucky, but it's still a goo industry for us. Investing in equities is too information-centric and it's hard to compete or gain a legal competitive advantage. But in real estate the market is so fragmented, varies by region, and realtors are so old-fashioned that it's easy to gain an advantage if you think differently. I suspect that anyone who can run a startup as a single founder (i.e. they have a wide range of skills) could dominate the real estate market in most non-major cities within five years if they wanted to. If they document and systematize their process, realtors would pay tens of thousands for it a pop. Real estate agents tend to always be looking for shortcuts, are unfazed by loud and spammy advertisements, and want new quick ways to get leads than most other markets and have a lot of money to spend doing it, especially here in southern California where a commission can be over $100,000. If I weren't set on running my company for the next 10+ years I'd probably go into real estate to see if I could do what I suggested above. Anyway, a few closing tips: find a good lender if you borrow, find a reliable and reputable inspector before you decide, thoroughly research the area (historical prices, industry, jobs, schools, crime, future major builds plans, etc.), and condos are easier to manage than single family homes since the HOA covers everything, plus your margins are higher.

25 points by jsonmez 13y ago

seldo 13y ago

There's a very important lesson in here about investing, but not the one the author intended. From the article: "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." And then, later: "Now suppose you find a house that you think is a good deal for $100k. ... suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily." Leverage, i.e. a multiplication of your investment by borrowing money, is quite frowned upon when investing in stocks[1] but is not frowned upon, in fact positively encouraged, when investing in real estate. This is because "owning a home" has a sentimental value attached to it by policy makers that equity investing does not. It is a weird market distortion caused by bad policy, particularly in the US. Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money. Real estate is not as volatile as equities, but as the financial crisis of 2007 showed, large numbers of retail investors going into real estate solely as a speculative investment can lose them huge amounts of money. In all investing, the size of your return is related to the risk you are taking on. If you can get a 30% return investing in housing, as the author suggests, and only 6-7% investing in mutual funds, that's because housing is 4-5x more risky than a mutual fund. Higher returns are not just sitting around waiting for you to notice how much more money you can make. So by all means leverage away if you've got capital and want to take on more risk for the chance of higher reward, but don't go into it thinking it's an "almost guaranteed way" to make money, as the author has concluded. [1] Unless you are a large bank, but that's a whole other story.

eterm 13y ago
Indeed, the OP made money in a market which governments are desperate to prop up and make sure keeps rising and seems to think "that was easy, anyone can do it!" which is a terribly takeaway message. Also, it all builds toward plugging a book which raises my sceptical eye just a little.
- seldo 13y ago
  Good point. Especially since his Amazon affiliate code is tacked onto the end of the URL.
- anonymous 13y ago
  > Also, it all builds toward plugging a book Ah, so it's not just investment advice, but also a practical example of good marketing.
guard-of-terra 13y ago
Why is all real estaste risky? A good apartment in a historic stone buikding in SF will be worth a lot no matter what, even if the whole USA crash and burn USSR-style. Because the supply is limited. A house in suburbia? Not so sure. That's your main take-away from economic disasters.
001sky 13y ago
Leverage by retail investors is frowned upon because they can get badly burned and lose a ton of money NB>Its frowned upon because the lenders can lose money.
crystaln 13y ago
> "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Actually, pretty much any brokerage will allow you to purchase with "25% down" on a margin account. It is extremely risky as at that point, any drop will force a sale and a 25% drop would completely wipe out your capital and leave you with nothing. It's certainly not difficult to borrow money to purchase equities. > This is because "owning a home" has a sentimental value attached to it by policy makers While it's true policy makers unnecessarily encourage home ownership and related credit, that is not primary reason credit is more widely available for real estate. Equities are extremely risky - companies can and do go bankrupt overnight, wiping out shareholders. Real estate, particularly expensive real estate, always retains some value and can always recover in value. Real estate very rarely collapses into worthlessness, whereas almost all equities eventually will. > the size of your return is related to the risk you are taking on Not true. Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. Finding a good investment opportunity, by definition, is finding an investment with lower risk and higher return. Purchasing real estate in 2008 was low risk, high return. This was a market distortion caused by credit contraction and irrational panic. In addition, real estate has higher return because it requires work and adding value by maintaining buildings, finding and managing tenants, etc - these are not related to risk/return. Anyway, sorry - this is just too much information not to challenge.
- javert 13y ago
  > Markets are not that efficient, and information, understanding, and wisdom are not equal, and credit and cash availability varies widely for different people and assets. This rings very true. It's like the old joke: An economist is told that there is a dollar bill that has been dropped onto the ground, and it's his if he picks it up. "Nonsense," he replies. "If there has been a dollar bill there, someone would have already picked it up!"
616c 13y ago
> "Suppose you find a stock that you know will increase in value. You go to the bank and say, “hey, can I borrow $90k to buy this stock? I’ll put down a down payment of $10k.” You’ll be laughed right out of there." Excuse me, but my history lessons escape me. This is called buying on margin, no? Just this time it is with a bank? I just want to know if I remembered correctly, because I thought this was responsible for something called the Great Depression in a very significant way. Haha.
Tichy 13y ago
I would have thought banks prefer to lend money for buying houses because they get the house as a security (if the lender can't pay up, the bank gets the house). Presumably the notion that houses are relatively stable investments lies behind that notion, but still, I don't think it is just a whim of policies. In any case it seems easier to judge the value of a house than the value of some random stock, which might also be something banks like.
jsonmez 13y ago
Good point... for speculative investing. But investing in real estate for the long term where your leverage is not too great and the asset produces enough income to easily cover dept service is very low risk.

informatimago 13y ago

Now consider this: If you rent, to a human landlord (let's avoid a corporate landlord), the the money you give each month is used by a human person, probably for good things, like buying products you or your brother are making. on the other hand, if you borrow money from a bank to buy, you're giving money (at least the interests, but they may make up an significant part of the price for long term borrowing), to a BANK, which will use this money to further enslave you and other human being, provoking ecnonomic crisis, and gaining political and ecnonomic control everywhere. This is a prisoner dilema; renting is harder, but it is better for the humans as a whole.

TheZenPsycho 13y ago
If you rent from a human landlord, there is a pretty good chance that rent is going directly into the interest of a loan. I.E. a bank. And not the good stuff you or your brother are making.
javert 13y ago
Real power is backed by force. Economic "power" is not real power. "But what about the poor guy who has no choices and HAS to take that shitty job and can only get an account from that one shitty bank (BoA, for example) that abuses its customers?" That just doesn't happen in a healthy, developed free market. There ARE lots of choices. What we have is very far from that. A few big banks function as government bureaus. Ultimately, they DO have force backing them.

chetanahuja 13y ago

It's scarcely believable that the author (who is also the submitter) is making statements like the following: "Now suppose you go into the bank and say “hey, can I borrow $90k to buy this house, and I’ll put down $10k?” If you have decent credit, you’ll get the loan easily." "So you end up making a profit of let’s say $110k – $100k = $10k on your $10k investment. Cha-ching $10k became $20k, a 100% return on investment." less than 5 years after the worst financial crash since the great depression caused exactly by that exact line of reasoning by millions of people. This is a guy who claims to have learned "a lot about .... investing." More than likely it's all affiliate/SEO spam for the book he's flogging in the post. And we've all (including myself) made it worse by commenting on the post here I'm sure.

001sky 13y ago
Unfortunately, the math is true. Its the same for student loans. Who is going to lend an 18 year old 150,000 to buy a lottery ticket? Nobody. If somebody is going to lend you 150k to buy a lottery ticket should you buy it? Interesting question. All lottery tickets are negagtive NPV. But they sell well to poor people. So, if you need 150K for college, your probabably pre-disposed to buy negative NPV lottery tickets. And thus, the availability of capital distorts asset values.
- vinceguidry 13y ago
  If I had $150K to invest in only lottery tickets, I'd buy wholesale and resell at a discount. That's how you make money in the lottery.
  - 001sky 13y ago
    Like the abstract approach. But if you get 'wholesale pricing', the ticket is worth more to own, no? you'd then lose money on the sale. AFIK lottery tickets are only sold on comission, for this reason. If you could get the govt to sell you the tickets at a discount (lobbying.ribels), that would be an interesting investment fund, indeed.

madcat123 13y ago

It's great that the author is successful in his choice of investments, but I think the post makes the whole thing look much less risky than it is. Real estate prices only go up, right? WRONG [1]. And if you're leveraged 1:10, when prices drop the whole pyramid comes tumbling down painfully fast. Buying one property per year doesn't seem to be too much, but 5-6 years into it you're way more leveraged than you should be; it's easy to get carried away by imagining potential future rewards and ignore the actual risks involved. [1] http://www.arizonarealestatenotebook.com/wp-content/uploads/2013/01/2013_01_30_Case-Shiller_Phoenix.png http://www.arizonarealestatenotebook.com/wp-content/uploads/...

jsonmez 13y ago
I survived the real estate crash easily, because all my loans with 30 year fixed loans and a leverage amount of 10% down was sufficient enough to allow for rent to cover the service of the 90% dept on the property. This is very different than speculative investing where you are counting on real estate prices to go it. Sure, I'd like prices to go up, but I'm perfectly happy having a renter pay my mortgage for 30 years as well.

gmays 13y ago

I did something similar, but I bought the homes cash instead of financing. I bought most properties as short sales and a cash buyer seemed to have an advantage (maybe I was wrong?) so I always offered cash. I always had to put out a few bids at a time since even the most promising bids seemed to have a ~25% success rate. To buy at least one every year I had to take out a low interest HELOC on the first investment purchase to help finance the new ones. Thankfully I was able to pay the prior HELOC amount back in full prior to buying a new one and just keep using the same credit line since there's a 5-year draw period. I live and buy here in southern CA so the prices have risen to the point where I don't feel comfortable buying anymore, but thankfully so have the property values of the homes I do own. I never looked into getting my real estate license, but we have a great agent now who we've bought our last four homes through (including the one we live in). She also recommended an excellent property manager that we now use exclusively (our last one was worthless). A good property manager makes all the difference. I actually spend more time sorting the taxes for the properties than I spend doing anything else for them, and that's one a couple hours a year. I think real estate is a great industry for hackers. I've always been good with money, but I had no background in real estate when I started. I could have done a lot of things better and I probably got lucky, but it's still a goo industry for us. Investing in equities is too information-centric and it's hard to compete or gain a legal competitive advantage. But in real estate the market is so fragmented, varies by region, and realtors are so old-fashioned that it's easy to gain an advantage if you think differently. I suspect that anyone who can run a startup as a single founder (i.e. they have a wide range of skills) could dominate the real estate market in most non-major cities within five years if they wanted to. If they document and systematize their process, realtors would pay tens of thousands for it a pop. Real estate agents tend to always be looking for shortcuts, are unfazed by loud and spammy advertisements, and want new quick ways to get leads than most other markets and have a lot of money to spend doing it, especially here in southern California where a commission can be over $100,000. If I weren't set on running my company for the next 10+ years I'd probably go into real estate to see if I could do what I suggested above. Anyway, a few closing tips: find a good lender if you borrow, find a reliable and reputable inspector before you decide, thoroughly research the area (historical prices, industry, jobs, schools, crime, future major builds plans, etc.), and condos are easier to manage than single family homes since the HOA covers everything, plus your margins are higher.