Category Archives: Investing

Estimating Intrinsic Value Like A Boss

The main idea of this post is really simple.

Just keep in mind that if you receive a payment of $100 at the end of each year for the next ten years, those payments are not worth the same in today’s dollars. A $100 payment one year from now is worth maybe $95 in today’s money, while a $100 payment ten years from now may only be worth $60 right now. The total of those payments in today’s dollars is the present value.

Okay, onward…

Every publicly traded stock has more than one value. There is what other people (i.e. the market) say it’s worth at the moment, and there is what you think it’s worth if you were to buy and hold it indefinitely – its intrinsic value.
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Warren Buffett’s Words of Wisdom

Warren Buffett, CEO of Berkshire Hathaway and the world’s most successful investor, writes a much anticipated annual letter to shareholders. He has done so each year since 1965. His letter about the company’s 2013 performance (published March 2014), provides enlightening insight through two successful real estate investments he made.

One is a farm in Nebraska he purchased in 1986 for one of his sons to operate. The other is a retail property in New York City he purchased in 1993 as part of a partnership. He has been to the farm twice, and has never been to the NYC property.

The gist of his advice is to buy investments at a discount to their intrinsic value. And by intrinsic value he means value based on what it is expected to earn or produce over the coming years. Those with steady earnings, low potential downside and high potential upside are solid investments. Once those aspects have been evaluated, with emphasis on future productivity or earnings relative to today, then it comes down to purchasing them at attractive prices.
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REITs May Be The Single Easiest Way to Invest In Real Estate

Real Estate Investment Trusts (REITs) invest in a variety of real estate and related asset-backed securities.

Office space is one type of commercial property that REITs invest in.

While buying real estate can be a great investment, there are also ways to invest in it without actually directly acquiring property. It’s a little easier than buying property, renting it out and managing tenants.

In this case I’m talking about a vehicle called a Real Estate Investment Trust (REIT). REITs are akin to partnerships, and were created as a result of legislation in the 1960s to provide investors with additional opportunities to invest in real estate, and receive advantageous tax treatment compared with how they would be taxed as shareholders of a corporation.

REITs buy and operate real estate in a variety of sectors, with some specializing in office space, warehouses, shopping centers or apartments. Others, known as mortgage REITs (mREITs) invest primarily in securities backed by pools of mortgages. Some REITs are publicly traded just like conventional stocks.

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One Way to Get A Mortgage Without A Bank

Hard money lenders and private lenders will lend on a handyman special or a fixer-upper when banks won't. The numbers just have to make sense.

Most banks won’t lend on a “handyman special” but hard money lenders will

Fannie Mae and Freddie Mac, quasi-government entities that primarily buy and securitize mortgages originated by banks, help provide financing for traditional “steady state” situations. These are relatively low risk, long term term residential loans of up to 30 years in duration.

That form of lending is what most banks offer. Their underwriting criteria are based in large part on the borrower’s income and creditworthiness. However, those types of loans don’t work for certain situations such as when a vacant, dilapidated house needs to be completely rehabbed. These “transient” situations are where non-traditional, private lenders come in.

Often referred to as hard money lenders, they operate toward the opposite end of the risk/reward spectrum, and do so for shorter periods of time, often six to 12 months. Faced with far fewer rules and requirements, private lenders typically base their loans on the value of the property used as collateral rather than the buyer’s qualifications.

Because of this loans can be approved very quickly instead of reviewing a mountain of documents about the borrower’s creditworthiness, such as tax returns and personal financial statements. The main thing they want to know is are they going to get their capital back, and are they going to earn the desired returns? These are the key questions they will ask:

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The Two Most Powerful Formulas In Finance

Time is money

Photo courtesy David Niblack

As a 19 year old college student caught somewhere between the fog of textbooks that explained nothing clearly and professors who did little better, whether they had English proficiency or not, I found myself in a lecture hall for something called Engineering Economy. The purpose of this course was to prepare engineers, of which it was quite uncertain at the time if I would later be counted as one, to analyze and allocate resources. In other words, how to spend money better and why.

Until then my real-world financial experience consisted largely of making quick judgments in the grocery store about which size and brand of mac-and-cheese was a better deal. This class had real-world relevance, and it turned out to be worth more than all four years of tuition.

I immediately recognized its value and could put what I learned to use in contrast to say, boiling off a pot of water to determine the molecular weight of salt. Since then I’ve continued to benefit from variations of two formulas referred to as “A given P” and “F given P”.

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Let Your Cash Hit the Road

Successful investing requires vision and strategy for the long road ahead

Develop your investment strategy for the long haul – Photo courtesy Chance Buell

Investments are like passenger seats in which to passively park money while receiving a solid return, more so than a place to actively drive it on a day-to-day basis like a business or occupation. Of course no investment is completely passive, but the idea is that it should only require a small degree of time and attention relative to the return.
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How I Started Investing In Real Estate

Real estate investment: From fixer upper to rental home.

A former handyman special after receiving lots of TLC

Two of my friends had bought a few houses and rented them out. Then they tried to buy another but needed an additional guarantor to qualify for another mortgage. This was 2008. The economy had tanked and the housing party was over. The media painted a pretty bleak picture, and I wasn’t sure the world wasn’t on the brink of economic collapse.

At the time I owned the house I lived in and knew little else about real estate. I just had the same common misconceptions that many people have (including those in media) about what a pain it is to own rental property. I didn’t want anything to do with it but I agreed to go in as a silent partner.
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The Way of the Sports Car

1991 Toyota MR2 hardtop sports car.

1991 Toyota MR2 hardtop

Sitting at my desk on a cold winter morning, having traded the warm Florida sunshine for a snow covered northern suburb, may not at first glance seem ideal. But the reality is I took an excursion from the cube farm to meander along the metaphoric open road, which just happens to wind through winter, and to share this drive with those who can appreciate it.

Our desires deserve discovery, expression and reward. For some it’s surfing the perfect wave or perfecting their golf swing. For us the rewards can be found driving a machine tailor made for twisty roads. This is our outlet.

For a long time I’ve immersed myself in thrilling drives, executing a perfect downshift after deftly apexing a curve, admiring fabulous sports cars, and unlocking financially sound ways to experience them. This is the four-wheeled equivalent of the hero’s journey, one that provides not only an escape, a respite from the mundane, but which also yields far reaching benefits.

It’s about more than what some may view as frivolity.  Embracing the dream of the open road and attaining meaningful and useful skills will enrich the tapestry of one’s life. Whether we’re talking about sports cars and performance cars, great investments, or any other endeavor, it all comes down to a few common threads:

  • Discovering and embracing what we love
  • Developing our skills and expertise
  • Connecting with those with similar interests

Choosing appropriate challenges, cultivating the ability to meet them, and connecting with like-minded people is tremendously rewarding.  Being able to share that with you in my own voice is what Sports Car Investor is about.  My goal is that we will both continue to grow and enjoy the mastery of the skills we seek.

Thank you for joining me on this epic automotive adventure.