Arbitrage, Profiting from the Spread: Sunday Morning Thoughts 19 May 2013

Arbitrage The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.  http://www.investopedia.com/video/play/arbitrage/

 

Understand when you look up the word arbitrage, you will find many varied references to the stock market, for this post the term will be applied to real estate investing.

In real estate as a private lender arbitrage will be the spread between the costs of monies.  If you borrow $100,000 at 3% interest then loan the same money at 6% interest then you would have 3% interest as a gain.  Many private lenders and real estate investors have taken advantage of arbitrage.

Flipping houses is also a form of arbitrage.  The method is slightly different today but it is still the buy low/ borrow low and loan/sell at a high rate and the difference will be the profit.

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Stock Market 11,000

Image via Wikipedia

We are well on the way to a Dow Jones Industrial Average 11,000.  Although this past week it has not been looking very good for the stock market, the DOW’s dip thongs have proven to be a roller coaster ride of holding ones breath before a sudden drop then the exhilaration of a pull up hill to yield better returns.

 

But will it stick?

 

Once before we experienced the DOW above 11,000, the market had rallied so well.  The bull market had kept the bear away and everyone reaped the benefit of an over valued stock market.

 

Well, today we flirted with the DOW 11,000 but by the end of the day will we be saying it was an anomaly, or a foreshadowing of the weeks to come?

When Bad News is Good News: Sunday Morning Thoughts 26 September 2010

What do these stocks have in common?

The Washington Post, Coca-Cola, and Geico.

In two words, Warren Buffett.

The aforementioned stocks, their price once fell on the heels of bad news.  One person’s sell is another person’s buy.  As for these stocks, Warren Buffett was able to purchase them on the heels of bad news, when their prices fell.

These once producing stocks, turned into an undervalued bonanza due to bad news, turned and became highly producing once again.

Warren Buffett uses specific criteria to indicate whether a stock will perform well or not.  One of his criteria is specific to how businesses run and if they are monopolies in the consumer market.  They either have to have a specific service or product geared towards consumers.

Profitable real estate investing in undervalued properties is very similar to how Warren Buffett picks his undervalued stocks.

In real estate investing, there is more to it than mere location.  There are a number of factors when picking a profitable investment property.

The location for rental property is best in a lower middle to mid- middle class area.  This type of area will always have rental properties and rental communities which tend to have lower vacancies.

A note on vacancies, if a property is mismanaged in a profitable area, the vacancy for that particular property would be high for the area.  Most people regardless of socioeconomic class like living in a nice place.

No one wants to live in an apartment community or a rental house if things never seem to be in working order.  If the kitchen sink leaks and it takes the management 3 months to fix it, then that would be a poorly managed rental.

If the bath tub does not drain properly, well the tenants will probably move because people expect things for personal hygiene and food preparation to be in working order.

Delayed fixing and a do not care attitude can take a once profitable investment and turn it into a money pit.

The Bad News is your investment is tanking.

The Good News for a savvier investor is the investment is not turning a profit but with better management can become very profitable.

Picking a once profitable rental investment which has now become another person’s money pit, can prove to be lucrative if you have a plan to change it from mismanaged to renter/ people friendly.

There will always be diligence on the part of the investor regardless of type of investment.  When a person invests with Immaculate Enterprises, we ensure an investment property will be properly managed for our renters.

Green Light Stock Market: Sunday Morning Thoughts 19 September 2010

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Well as told in the blog last month, September is proving to be as predicted, a positive ending month.  With even more data coming next week it looks like smoother waters ahead.

But wait, we are not out of the deep end just yet.

Our current cycle is much like the cycle of the 1929 stock market, the market at that time zig zagged often.  Stability was much sought after but was not happening fast enough for the majority of the world.

Now with September being the green light month one could only wonder will the remainder of the year be as promising or even better.

The real estate market, even with some areas having false positive signs of growth, housing is slowly beginning a somewhat luke-warm rebound.  But the best strategy for now would be to invest in commercial property and hold for at least five years.

The single family residence market, with prices half or even less than half of what they were selling for five years ago, will eventually become hot again.  Short sales are the new “it” thing to do at this time, but instead of selling the property, a hold strategy would be best for future appreciation.

Undervalued and Appreciating: Sunday Morning Thoughts 12 Sep 2010

With stocks poised to make a few volatile moves this month, investors will be possibly moving their investments around, again.  This movement may cause the stock market to become volatile, again.

But this jumping in and out of stocks is to be expected at this time.  The Jack Rabbits are into all types of investments, with a diverse portfolio of overvalued under producers.

No one actually has to jump in and out of the stock market.  They could do what Warren Buffett does, according to the book Buffettology, he looks for undervalued stocks or even waits for promising stocks to have bad news, causing a massive sell off, if the news is bad enough; thus making the stock an undervalued investment.

Which brings us to the current real estate market, undervalued investments abound.

Many investors and would be buyers have been sitting on the fence waiting for the residential and commercial markets to reestablish themselves.  This is actually a contrary practice, why wait for the property to become higher priced when you can invest at a lower price thereby reaping the benefits of appreciation.

The History Lesson of the Stock Market Crash

Prior to the crash people were receiving higher incomes. With more income average people invested in the stock market driving prices up.  With an unbelievable amount of prosperity there looming in the background, was the thought of a stock market crash.

Then it happened.

Economist had warned of a crash, a bubble bursting, but it fell on deaf ears.  So then the tragedy began, the bottom fell out and everyone scrambled to keep from losing everything.

The world was succumbing to a global economical crash and a wide spread fear of a faulty recovery.

The banks began failing one by one, occasionally four or more at a time.

And don’t get me started on the whole immigration thing.

When reading this article please keep in mind the title, the history lesson of the stock market crash.

If history has taught us nothing but one thing, in time everything repeats its cycle.

The previous stated lesson is from the crash of the 1920’s the last quarter of 1929, October 24^th to be exact.

Back then a group of bankers pooled their money to buy stocks to convince others to stop selling their stocks, while in this century we experienced the Goldman- Sachs scandal, a legal pump and dump.

An Unethical confidence game.

Although there were rumors the bankers were secretly selling their stocks after the pooling and buying.  This would still be a legal pump and dump.

Unethical.

In the stock market crash of 1929 the bottom was not finally felt until July 8, 1932, an approximate time period of two years, nine months, and two weeks and two days.

Even today economist are looking at the stock market crash of 1929, comparing it with our current economy.  The global economy at that time was bleak, but not too long after, the healing did begin.

We started a new cycle of growth.

Our new cycle of growth is going to be small hops (as stated in a previous post) which will total one big leap when we look back a year from now.

A recovery is not an overnight fix.

At this time we should take advantage of the downturn before the upswing and invest in the one tangible asset that will appreciate in the very near future.

Commercial real estate is seeing more foreclosures and is due for even more, making the prices unbelievably low.  This low will not last more than two to two and half years.

The residential housing industry is also going to experience another down turn before its appreciation upswing.

As far as the stock market, well picking stocks like Warren Buffett is better than Jack Rabbit investing any day.  The Jack Rabbits seem to go broke while Warren is still making gains.

So think about where you would like to be in five years.

Would you like to be thinking about how you shoulda, woulda, coulda (sown) invested to (reap) profit, or will you be thinking about all that you are reaping because you realized it was time to invest.

Jack Rabbit Investing: Sunday Morning Thoughts 29 August2010

The current stock market reaction is looking less like investing and more like “Jack Rabbiting”.   Investors’ are quickly pulling money from one place to another, and then moving their money to some other investment. 

Please do not confuse the term Jack Rabbit investing with moving investments strategically for a better return on investment.  The latter is a calculated move based on data about a potential investment. 

Jack Rabbit investing occurs when you have a stock market like the one we have now, a very bear market with even the best of companies lacking good profits. 

Risk is greater with our new down economy many people are looking to jump into an investment to make a quick buck, but this is not the type of market to do that easily. 

We now have a stock market with undervalued stocks set at much lower prices.  Buying the stocks now will enable a savvy investor to buy more of the undervalued stock and wait for appreciation.  One of Warren Buffett’s strategies is to buy stock in a company which meets his checks and balances.  He then holds the stock for at least five years. 

This same principle can be applied to buying real estate.  Instead of doing Jack Rabbit investing such as quick flips, buy an undervalued piece of real estate and hold for appreciation.  

It’s as simple as that, buy low, hold, and possibly sell high in the future.  

There are many quotes throughout the years about how real estate is dead.  Bu it never fails, real estate roars to the foreground and becomes the corner-stone of an economy. 

This is one of those times we are in now, real estate is undervalued in many appreciating areas and in areas down now but will appreciate again. 

You can either wait on the sidelines for the real estate market to rocket back, or you can capitalize on a market that will soon appreciate once again. 

 The Option is Yours.