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Author: StewedSquirrel Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1130  
Subject: Re: What's up?? Date: 10/24/2005 12:26 PM
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I am a firm believer in diversification. And no, an index fund isn't diversified in my opinion, nor is a combination of index funds and stocks. I simply HATE the idea of having all of my money tied to the fickle stock market, as I don't trust the wisdom of all the "gurus" in the world who seem to have an odd psychological control over the market.

I put a percentage of my salary into a 401k (about 5% of my salary which is the most they will match 50%). With that matching money, this is quite an investment and I have most of it in an S&P500 index fund.

I have also invested and own a 12.5% share in a local startup business that shows promising national growth potential, have actually tried my hand at investing in mobile homes as a passive partner (this has turned one deal with a 48% cash-on-cash annual return for 5 years and one deal that broke even) and I am in the process of closing on my first "real" rental property, which is a 1 bedroom condo in a high-growth suburban area.

As for the argument that you don't want to fix leaky faucets as an investor, I understand that, but I'm willing to do it for the short term if i can get such substantially better returns. Given historically probably 5% appreciation annually, that return goes to around 30% cash-on-cash.

Even assuming ZERO appreciation, my after tax cash-on-cash return on this rental should be around 15% (tax writeoffs make up a substantial portion of this) the first year and increasing each year after that (rents increase with inflation, mortgage payments do not). In 1-2 years it should cash flow enough to hire a management company for 7% of gross rents to manage the property and then it's a completely passive investment as far as I'm concerned... One that still turn better than 12% annually AFTER TAX with very little possiblity of decreasing - again, rents are indexed for inflation, fixed-rate mortgages are not). Worst case, there is a maintinance emergency, but living in a well-funded condo complex reduces the obligations on "big" objects like new roofs and cracked foundations. The HOA has a $200,000 cash reserve on hand for things like this and just *reduced* the HOA fees to only $99/mo now (that includes all utilities).


In addition, for the early 20s crowd, this is a piece of advice from me.

I think it is silly to invest in the market until you own your housing. Renting is, in my mind, very much a means of being financially subserviant to your landlord and ultimately costs you MUCH more than owning a comparable place. I understand rentals if you are a short-timer and plan to move in 6-12 months, but if you're staying more than 12-18 months, it's worthwhile to buy in most markets. Even if you move to another part of town, you can rent out the property and usually at least break even while still being able to reap the benefits of appreciation and inflation-indexed rent payments.

This is PROVIDED you don't live in an area where maintaining rentals is impossible (such as suburban Los Angeles or San Fransicso). In those places, there is a real estate "bubble" for precicely the reason that rent payments will not and can not even come close to making the obscene mortgage payments required to purchase real estate in those locations. Anywhere that rental income cannot come close to covering mortgage payments, the market is bound to collapse in my opinion.


Regardless, in most markets, diversification, to me, involves the stock market, real estate market, business market and perhaps other things like commodities or local interests. In this way, you can benefit in any market. When stocks dive, rental markets tend to climb. Even in times of stock market stagnation, well founded private businesses can grow by triple digits. Real estate appreciation can be maintained even in poor economic conditions by other factors such as limited supply or population migration.

A truely diversified portfolio requires more than just publically traded stocks. It's more than government securities, more than just real estate and more than just privately held business. I believe that anyone who tells you otherwise is not seeing the whole picture.

Eric
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