Ever think you could make money by investing in mutual funds?
Well , how’s that been working for mutual fund investors lately? They are paying out about 1% to 2% a year and have a return for the last ten years of zero. The only way that game could go on and on without some sort of investor revolt is that thousands of fund managers making $100 billion a year in fees and commissions are brainwashing their clients into thinking they can’t do better on their own. In fact, without any education at all, you can learn to do this on your own.Here are your options as I see them.
You need to do some thorough research on the fund(s) you pick. While history is no guarantee of the future, you need to at minimal think about what cycle the market is in and list what funds have done well in that cycle. You also need to not think of mutual funds as a “set it and forget it” type investment. Many people think that mutual fundds are a relatively safe investment, but they are like a lot of stocks. They go up and down depending on their philosophy. You need to know what that philosophy is and how thier track record is. You are going to have to watch it and be prepared to pull out when things aren’t going well. Personally, I don’t believe in dollar cost averaging – it’s a method to try to cover your bad investments to me. If you think about it like Warren Buffet that’s a different story, but remember he is talking about individual stocks, not mutual funds. Most people don’t even know the securities that are held in a fund.
You can replace mutual funds with ‘no fee’ Exchange Traded Funds (ETFs). There is a fee but its almost zero. Just eliminating the fee can have a possitive effect on a long term investment, all things being equal. Invest $1000 a year from age 20 to age 65 in a mutual fund with a 2% fee and an 8% average return and you’ll have $200,000 to retire on. Make the exact same investment without the fee in a market indexed ETF (like SPY, for example) with an 8% return and you’ll have $400,000.
So if you are thinking of mutual funds, just remember they are not set it and forget it, and that you need to “know thy funds”.
The current real estate market causes most investors to think twice before buying a piece of property, regardless of how great a deal it might be. While it’s prudent to use caution, this is a great time to look for great deals. There are two areas in real estate that can be areas for great deals: short sales and REO properties, but there are some cautions.
A short sale is when a property is in default or foreclosure and the lender agrees to consider offers below the amount owed on the property.
An REO property is a home or other piece of real estate where foreclosure has been legally completed and is now owned by the mortgage lender, typically a bank or other financial institution. REO stands for “Real Estate Owned.”
Whether you are new or an experienced real estate investor, be sure to include short sales and REO properties in your list of possibilities of how to make money when looking at potential acquisitions. Here are five things to remember in your search:
Specialization – Real estate investment is best done with the assistance of a Broker/Agent. Do your homework and choose someone with the appropriate qualifications to help you navigate the twists and turns of short sales and REO properties. Having good help and sound advice can make or break your chance of long term income potential from a property. An experienced agent knows what to do to not waste your time (more about that below). They also know what’s realistic and what’s not. Many people think they can get these properties for pennies on the dollar, and while you can get a great deal, banks aren’t stupid (most of the time!) and they aren’t giving these away. If you are expecting savings more than 20% off current market value, be prepared to right a lot of offers and get a lot of rejections.
Inventory – The increase in foreclosures means an increase in REO properties. Banks are inundated with empty homes and vacant businesses, giving the buyer the advantage in negotiating an offer below market value. Obviously the lower the price when you buy, the higher your potential rate of return.
P/E Ratios (Price/Earnings) – As property prices go down, mortgage payments shrink and in many markets rents are going up as more people move from owner to renter, increasing profit potential for rental properties. Research the rental rates for the area and compare with the price of the considered property to maximize your return on the investment. You need to know how much your mortgage payment is going to be, what your vacancy rate is, what your expected maintenance is and how much rent you can charge. Then you can work backward into how much you can finance to break even or get cash flow.
Good Questions = Better Answers – Short sales may give you the deal of a lifetime if you know what questions to ask. There are a lot of nuances when dealing with short sales, and getting the right information can help you decide if you want to make an offer. Two crucial things to ask are, “Has the short sale package been submitted to the lender?” and “Has the bank done a BPO (bank price opinion)?” This will tell you what the bank thinks the house if worth.
Patience – When making an offer on a short sale, expect to wait on a reply from the lender. Every lender is different and you don’t know what their policy is and what thieer portfolio looks like, so you really can’t know what to expect, even from the same bank as these things change. I’ve seen banks so crazy things, like refuse a 10% price reduction on a pre-foreclosure only to sell it after they forclosed on it for 30% less the original price. I’ve also seen them let offers expire many times without making a decision. Sometimes that wait will extend for months. In the meantime, circumstances may change and bring the market value lower or higher depending on the news. My experience shows that they tend to drag their feet and solicit other offers playing the first one to get better offers. One of the problems is that they are a 3rd party and somewhat outside the transaction, so you are writing an offer to someone that doesn’t leggally have the right to sell it. So technically you don’t really have a contract until the bank approves it. There’s no guarantee that any lender will accept a short sale offer, so be prepared to walk away if the lender rejects it or counters with a price outside your budget. There are a lot of other factors, so if you have questions a good resource is www.homesolutionsrealyllc.com where you can always call for advice.
So in your quest how to make money, you decided that you are going to invest in stocks. Now lets suppose you were going to invest in Real Estate (stick with me here), and you came to me and said I have $400,000 to invest and I’m going to pay cash for a house that costs $400,000. I would probably tell you (in most cases) that you should think about leveraging and using someone elses money. That is, put some down and finance the rest. You would in effect be able to control the entire $400,000 worth of RE and get the capital gains or full market rent even if you don’t own the entire thing. Then you would be free to invest the rest of your money somewhere else – like another house! But, you’re buying stock. Well, you can do the same type of thing with options. This of course depends on your investment philosophy. If you are buy and hold for at least 20 years and you don’t care about the ups and downs, this may not be for you. But, if you think that you are say buying at a historic low and you feel strongly that the stock will go up say within the next year, options is a great way how to make more money on that stock. You may not want to put all your eggs into this, but you should consider at least a portion.
Heres how it works. With an option you are buying the right to purchase a stock at a certain price within a certain period. This is a right, not an obligation. This means the most you can loose (excluding going naked and margining) is your initial investment, but you certainly don’t have to ride it all the way down, and I never would do that. So lets say that xyz stock is trading at $10 today in Aug. You think it’s going to go up so you can buy the Jan. calls for $15. These calls may cost you say $5. Options trade in multiples of 100 called lots, so you buy one lot for $500. You know have upside and control over 100 shares of stock for $500 that would normally cost you $100. Now here’s the exciting part! Options moves are usually exponential to the market move! So lets say it’s Oct. and the stock is at $13.50. The opton may now be trading for $7. That’s a 30% gain.