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Jake - What are your plans for these lots once you acquire them? Do you plan to develop them or sell them?

 

As a caveat, you can find good investment grade property through a broker. You may not get a single family home because the market is priced differently, but investment property which is valued by income vs comps can be found through a broker.

 

They're right by one of the proposed MLS soccer stadium sites in Cincinnati so if that comes to pass I can park cars on them.  I'll probably just sell though to get out while I'm ahead.  In theory you can make a lot more money selling spec houses in a hot city neighborhood rather then unimproved land, but I have zero construction experience and doubt I could qualify for a pair of $350k construction loans to build the $500k+ houses you need to build in order to double what you'd get selling the unimproved land.

 

The big problem with real estate speculation is that you need to time the market perfectly twice in order to maximize gains.  There's no way you actually nail it both times (if you do you're more lucky than good) and so while you might walk away with a lot of money in your pocket, you will always regret that you could have made a lot more.  I personally know a couple who bought about ten vacant lots and vacant buildings in Over-the-Rhine back in 2011-2012 when everything was dirt cheap.  They sold two of the lots for $30k apiece around 2014 but now they're worth $100k+. 

 

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^ No offense but there are wayyyyyyyyyy to many assumptions in your post that I don't even know where to start.  But first of all, is I paid $18k for a new car, which I wouldn't, I would sure as heck keep it longer than 5 years.  You can easily find great quality used cars in the $6k - $8k range.  Your assumption of nearly 19k for a car begins with a premise that proves my assumptions accurate.

 

1) I looked at a 5 year-window because that is how long a typical finance loan takes to pay off.  At year 60, the loan is paid off, you have the same asset, etc. so you have the same exact scenario from year 60-end of useful life of the car.

 

2) I picked $18.6 because that's the cost of a new average car - certainly some cheaper options and then some "luxury" options above as well.

 

3) We can re-run using a $7k cost of a car.  On a used car, options are available for financing at 3%.  Over a 3-year period, that's a $204 monthly payment.  Let's also assume $400/month in discretionary spending, the remaining $196/month gets invested.  At 4% annual returns, that builds up to ~$7,518.  You're done paying the car off after 36 months, and end up with, call it a ~$5k asset.  In addition, the $7k purchase price you've kept in conservative investments over the 36 months, which has built up to ~$7,900.  So you started with $7k, and over 36 months have built up a net worth to $20,418.

 

If you, instead, paid the $7k in cash up front and then put the $400/month in discretionary spending back into your emergency fund until you built it back up, you wouldn't have the $400/month to invest until month 18.  $400/month from there in the same 4% fund would net you ~$7,650 in returns.  Assuming you invested the emergency fund contributions in the same 4% mix, you'd have built up ~$7200 plus your additional investments.  At the end of 36 months, you'd have about $20,100 in net worth.

 

It's really quite a wash.  Paying in cash, if you use an emergency fund, leaves you depleted until you build your fund back up.  So it's a personal preference - financing allows you to keep your emergency fund in tact, while paying in cash leaves you more of a monthly cash flow to invest or spend elsewhere.  If you stick with purely conservative investments across the board, you come out ahead a few hundred dollars ahead by financing.  If your non-emergency fund investments are more aggressive and average 7%, then you still come out slightly ahead by financing.

 

(Again, like I said, this is all dependent on the fact that you actually invest consistently and stay disciplined)


Very Stable Genius

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If you are averaging 7% returns then the investments have some volatility.  I would never borrow money to invest in a volatile return.  Used cars cannot usually be financed with super low interest financing either.  Vehicles with loans must also be fully insured which is an added expense.  I prefer to carry liability only and self insure against everything else.  I also drive less than 7,000 miles per year. 

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If you are averaging 7% returns then the investments have some volatility.  I would never borrow money to invest in a volatile return.  Used cars cannot usually be financed with super low interest financing either.  Vehicles with loans must also be fully insured which is an added expense.  I prefer to carry liability only and self insure against everything else.  I also drive less than 7,000 miles per year.

 

I just picked 7% if you prefer more aggressive investments.  It's not borrowing money to invest in a volatile return though - in these scenarios, I'm keeping the down payment you would have paid on the car in a very conservative fund.  Heck, the VWINX mutual fund referenced has only had one three-year rolling average below 2% - most of the three-year averages are 5-6% or more.  If you have $7k in cash, yet choose to finance, and then keep the $7k in a conservative portfolio, you're not "borrowing to invest" - you could pay off the balance of the loan at any time (this probably is not true for most people financing a $20K+ car).

 

https://www.capitalone.com/auto-financing/rates/ - Capital One, you can get rates ~4% or slightly less for used cars.

 

http://www.bankrate.com/auto.aspx - Various options here in the 3-4% range.

 

Like I've said, this is all dependent on a steady income over the life of the loan, actually investing your excess monthly income, and choosing a conservative portfolio wisely.  My personal preference would be to not deplete my emergency fund by $7K - I'd rather keep the $7K for actual emergencies, knowing full well if I lose my job tomorrow, I could pay off the loan if need be.


Very Stable Genius

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Would you take out a loan at 4% to invest in the market?  The answer to this question should be the same as whether you would borrow to buy a car. 

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In sort-of related news, Bitcoin has come back from the dead and more than doubled in value during the month of April.  I wasn't paying attention and missed all of the excitement.  I don't know if it's related to the appearance of Etherium or not. 

 

It might not be Etherium but it or something similar really has the potential to lift all boats worldwide like early accounting software and UPC bar codes back in the 70s and early 80s.  Right now banks and everything else are weighed down by vast IT staffs working endlessly on ID theft and security.  Block chains could potentially make most of that a thing of the past.  If I understand it correctly, Etherium will enable apps to be integrated with blockchain billing and greatly simplify everything (no more verification steps, etc.). 

 

One dark side of this that if this really takes off and all sorts of speculation starts taking place with cryptocurrency outside the purview of the SEC (no settlement periods) or county auditors (land sales) we could see crazy spikes and crashes.  Real estate has always been slow and will always be slow as long as title research and county recorders keep properties from being flipped within 30 days.  The SEC requires a 3-day settlement for security sales.  This stuff happening out in block chain land will reduce or eliminate floats but enable spikes and crashes that last just seconds. 

 

 

 

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Would you take out a loan at 4% to invest in the market?  The answer to this question should be the same as whether you would borrow to buy a car.

 

I just laid out a clear example of how it nets to basically the same thing.  Note that not all of the investments would go into "the market" - it would be a mix of stocks and bonds.  I even gave a real mutual fund you could invest in "conservatively" and its worst 3- and 5-year performance.  I also gave examples of new cars with interest rates at 0.0% or 0.9% over 48-72 month loans.

 

You would prefer to deplete your emergency fund by $6-$8k for something that isn't an emergency?  That was your suggested alternative, no?

 

Anyway, I already went through a couple examples...by the end of the loan, you come out in virtually the same position EXCEPT through financing you get to keep your emergency fund in tact.


Very Stable Genius

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https://finance.yahoo.com/news/u-pending-home-sales-drop-140000871.html

 

U.S. pending home sales drop for second straight month

 

"Sales activity, however, remains constrained by tight inventories, which are driving up home prices. Housing inventory has dropped for 23 straight months on a year-on-year basis."


Very Stable Genius

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I asked for a guaranteed 4% return.  I'll wait for that mythical investment.

 

In other words, I can invest $8,000 in a guaranteed investment with a 4% return with no risk.  Or invest the same $8,000 in an investment that may gain or lose money but will possibly yield a 4% with no guarantee and some risk.

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I asked for a guaranteed 4% return.  I'll wait for that mythical investment.

 

In other words, I can invest $8,000 in a guaranteed investment with a 4% return with no risk.  Or invest the same $8,000 in an investment that may gain or lose money but will possibly yield a 4% with no guarantee and some risk.

 

In the other scenario, you draw down your emergency fund for a non-emergency because you don't want to pay $200-$300 in interest.  I'll pay that little extra to keep my cash/emergency fund there for when I really need it.

 

You're not guaranteed 7% for retirement, so why do it?  There's risk in all investments.  I've mentioned VWINX, which isn't guaranteed, but it's only had one five-year rolling return below 4% annual returns (2008 - 5 year return was 3.36%).  This is just one example, but one out of 30+ years below 4% annual returns...that's a risk I'm willing to take.

 

It's just a personal preference and how much risk you're willing to assume.  If you can get greater than 4% over the life of your loan, you've lost out.  If you get less than 4% annual returns, then buying in cash upfront was right.


Very Stable Genius

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I asked for a guaranteed 4% return.  I'll wait for that mythical investment.

 

In other words, I can invest $8,000 in a guaranteed investment with a 4% return with no risk.  Or invest the same $8,000 in an investment that may gain or lose money but will possibly yield a 4% with no guarantee and some risk.

 

$8,000 is generally the maximum I'd spend on a car which is a tiny fraction of my net worth.  (that is not intended as a brag just a fact) If someone had a CD paying 4% per year for 3 years i would definitely put that money there.  By not taking out a loan at 4% (actually closer to 5% for used cars) it is the same thing.  The last car i bought was very low mileage with no rust but 8 years old.  Most lenders will not lend with favorable terms on cars this old. Further, I do not favor collision and comprehensive coverage but assume that risk myself.  I cannot do this with a loan on the vehicle.  Having that level of coverage is IMO an unnecessary expense.  But different strokes for different folks.  we will agree to disagree.

In the other scenario, you draw down your emergency fund for a non-emergency because you don't want to pay $200-$300 in interest.  I'll pay that little extra to keep my cash/emergency fund there for when I really need it.

 

You're not guaranteed 7% for retirement, so why do it?  There's risk in all investments.  I've mentioned VWINX, which isn't guaranteed, but it's only had one five-year rolling return below 4% annual returns (2008 - 5 year return was 3.36%).  This is just one example, but one out of 30+ years below 4% annual returns...that's a risk I'm willing to take.

 

It's just a personal preference and how much risk you're willing to assume.  If you can get greater than 4% over the life of your loan, you've lost out.  If you get less than 4% annual returns, then buying in cash upfront was right.

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Jake - What are your plans for these lots once you acquire them? Do you plan to develop them or sell them?

 

As a caveat, you can find good investment grade property through a broker. You may not get a single family home because the market is priced differently, but investment property which is valued by income vs comps can be found through a broker.

 

They're right by one of the proposed MLS soccer stadium sites in Cincinnati so if that comes to pass I can park cars on them.  I'll probably just sell though to get out while I'm ahead.  In theory you can make a lot more money selling spec houses in a hot city neighborhood rather then unimproved land, but I have zero construction experience and doubt I could qualify for a pair of $350k construction loans to build the $500k+ houses you need to build in order to double what you'd get selling the unimproved land.

 

The big problem with real estate speculation is that you need to time the market perfectly twice in order to maximize gains.  There's no way you actually nail it both times (if you do you're more lucky than good) and so while you might walk away with a lot of money in your pocket, you will always regret that you could have made a lot more.  I personally know a couple who bought about ten vacant lots and vacant buildings in Over-the-Rhine back in 2011-2012 when everything was dirt cheap.  They sold two of the lots for $30k apiece around 2014 but now they're worth $100k+. 

 

 

Jake, if you are looking to develop those properties, I may know of a few developers who may be able to help you, depending on the type of product they build.

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Jake, if you are looking to develop those properties, I may know of a few developers who may be able to help you, depending on the type of product they build.

 

Yeah I'll seek out advice from everyone I know if things start heating up in that area.  Condos are happening and the soccer stadium might happen but no new single-family homes are happening there yet.  The horrors of the 2008-09 collapse are still fresh in my mind so I'm pretty risk-averse. 

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https://www.cnbc.com/2017/10/30/congressional-scrooges-want-to-cut-401k-contribution-limit.html

 

This may be more appropriate in Current Events, but part of the tax reform plan proposed by Republicans has them reducing the 401(k) contribution limit down to $2,400.  Or not touching it at all.  Or upping it.  No one knows for sure, but it's clear that the 401(k) plan has been considered in the tax reform process.

 

https://www.cnbc.com/2017/10/24/suze-orman-says-70-is-the-new-retirement-age.html

 

Suze Orman says 70 (and not a day before) is the new retirement age.  I guess if you're a habitual spender?

 

https://finance.yahoo.com/news/wall-street-set-open-higher-earnings-strong-jobs-131106709--finance.html

 

Stocks heading to new all-time highs.  Again.


Very Stable Genius

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^And ironically enough reducing the 401k limit would actually be a progressive tax reform.  And now Democrats are proposing higher 401k limits.  Strange times.

 

If I were the Democrats I would demand that any additional tax revenue collected by reducing the 401k limit be directly applied to increased social security payments for poorer retirees.

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^ don't see that happening either. Dems don't care about that, what Dems want is to increase the social security threshold to apply to high earners too. That is a higher priority to them than distributing it to the poor.

 

 

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^To be fair, it's a high priority to the Dems because they view it as the best way to make SS solvent for the long term.  And they're completely right in my view.  If the wealthy are going to get these giant tax cuts every time a Republican is President the least they can do is pay a little bit more is SS tax to keep our elderly from eating cat food to survive.

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That's why the Right might have a real lock on middle agers currently but loses a lot of them as they become Seniors.

 

I'm not so sure about that.  Every other commercial on Fox News or Rush Limbaugh is for a reverse mortgage, adult diapers or a walk-in bathtub.  Or maybe just that's their ENTIRE demo....

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What I don't like about 401k/IRA and other tax-advantaged accounts (health, school) is that they encourage investing that borders on the speculative.  Traditional pension funds were usually forced by law to keep roughly 50% in government or high-grade corporate bonds.  The rest was a mix of real estate and blue chip stocks. 

 

Plus, many employer 401k's charge scandalous fees.  Even if you switch everything over to low-fee Vanguard index funds, the 401k can still charge a higher fee than you will get in an independent IRA for the same investment. 

 

 

 

 

 

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What I don't like about 401k/IRA and other tax-advantaged accounts (health, school) is that they encourage investing that borders on the speculative.  Traditional pension funds were usually forced by law to keep roughly 50% in government or high-grade corporate bonds.  The rest was a mix of real estate and blue chip stocks. 

 

 

 

 

 

ALL EQUITIES, bro! Don't you want growth?

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What I don't like about 401k/IRA and other tax-advantaged accounts (health, school) is that they encourage investing that borders on the speculative.  Traditional pension funds were usually forced by law to keep roughly 50% in government or high-grade corporate bonds.  The rest was a mix of real estate and blue chip stocks. 

 

Plus, many employer 401k's charge scandalous fees.  Even if you switch everything over to low-fee Vanguard index funds, the 401k can still charge a higher fee than you will get in an independent IRA for the same investment. 

 

There is nothing speculative about buying stocks and holding them until retirement age. Speculation would be betting on short-term market increases and decreases, and that's not the same thing at all as growth investing, which is betting on long-term, 8-12% / year REAL growth over a long period of time. Furthermore, you can put your 401(k) money in any investment you want, and the tax benefits are the same - 401(k)s do not incentivize stock investments over any other type of investment, only prospective returns do that. Financial illiteracy among the public is a problem with 401(k)s vs. pensions, sure. And wage stagnation is a problem as well, but I don't see any problem with how 401(k)s are set up in the internal revenue code.

 

You are correct about the scandalous fees, and anyone who works for a company with a bad 401(k) plan should complain about it until those places are put out of business. They are robbers who benefit off of the public's aforementioned financial illiteracy.

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What I don't like about 401k/IRA and other tax-advantaged accounts (health, school) is that they encourage investing that borders on the speculative.  Traditional pension funds were usually forced by law to keep roughly 50% in government or high-grade corporate bonds.  The rest was a mix of real estate and blue chip stocks. 

 

Plus, many employer 401k's charge scandalous fees.  Even if you switch everything over to low-fee Vanguard index funds, the 401k can still charge a higher fee than you will get in an independent IRA for the same investment. 

 

 

 

Jake - What about defined benefit pension funds? Where do you think that money comes from? It is invested in many of the same equities that your 401k is invested in.

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No pension fund is 100% stocks, nor should they be.  But many people have 401k/IRAs that are not just 100% stocks but 100% growth stocks. 

 

We are about 10 years into an unprecedented period of low interest rates.  That partly explains why the stock market keeps ticking higher. 

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There is nothing speculative about buying stocks and holding them until retirement age. Speculation would be betting on short-term market increases and decreases, and that's not the same thing at all as growth investing, which is betting on long-term, 8-12% / year REAL growth over a long period of time.

 

The little old ladies who squirreled away stock certificates when their husband died and 40 years later were worth $18 million were just lucky. 

 

 

 

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many people have 401k/IRAs that are not just 100% stocks but 100% growth stocks.

 

It depends on the person's age, but I don't view 100% stocks (diversified index funds, not individual stocks or penny stocks or anything) to be problematic, at least for people in their 30s and even early 40s. Once they hit their later 40s and 50s it might be time to add in some bonds to smooth out the ride and protect against bad timing. But for young people 100% equity just makes sense once you take emotion out of it.

 

Pension funds need to invest in a certain amount of less volatile investments because they have constant cash-flow needs so they also need to smooth out their ride. Otherwise, they should also invest in stocks as much as possible.

 

The stock market always goes up over time, technology always advances and the economy always grows over time. It's not even 'risky' when you look at the long run. You are only trying to avoid bad timing. Societal collapses notwithstanding.

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That's true in today's investing environment. But sustained low interest rates over the past 15-20 years are what forced that. People in their 20s and 30s used to be able to diversify which made publicly traded companies less sociopathic and less full of futurist BS.

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The stock market always goes up over time, technology always advances and the economy always grows over time. It's not even 'risky' when you look at the long run. You are only trying to avoid bad timing. Societal collapses notwithstanding.

 

Well even the worst bonds have beaten Japan's stock market since it peaked back in 1989:

http://www.macrotrends.net/2593/nikkei-225-index-historical-chart-data

 

 

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That's true in today's investing environment. But sustained low interest rates over the past 15-20 years are what forced that. People in their 20s and 30s used to be able to diversify which made publicly traded companies less sociopathic and less full of futurist BS.

 

People with moderate incomes who live in Ohio can diversify with real estate.  Like actual physical rental properties, not REIT's.  What is scary though is how much medical bills can devour more in a month than a paid-off rental house can generate in rent.  This month (October 2017) I had $1,500 in medical bills and collected $650 in rent. 

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Interesting (and kind of scary) factoid about the Japanese stock market. I guess the whole "gray dawn" aging of society thing could be bringing us to uncharted territory. Still I would argue that Japan's economy will eventually surpass 1989, but if the boom-and-bust cycles are lasting entire lifetimes, that's a huge problem. Though, I'm not sure that pension funds with some allocation to bonds would offer much protection - if you are Japan, you're pretty much screwed.

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I'm not claiming to be any expert on the Japanese economy but I would bet that a lot of foreign investment (including a bunch from the United States) fueled its meteoric rise in the 1980s.  In the 90s their stocks corrected down to the actual value of the companies, not future growth that anticipated a continuation of trend lines. 

 

Japan's population is declining and its refusal to welcome immigrants is hurting its potential (seemingly no tech companies have come out of Japan whereas medicine, science, and tech in the United States are largely comprised of Indian and Asian immigrants) and starving its mature domestic companies of their domestic market.  Meanwhile, open doors to the United States means our overall population continues to tack upwards even as the native population has relatively few offspring. 

 

For our stock market to decline and stay down for 20 years we would need immigration to stop and for foreign investment to dry up.  Unlikely, but it's also inconceivable that the bull market will continue at its current steady pace for the next 20. 

 

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That's true in today's investing environment. But sustained low interest rates over the past 15-20 years are what forced that. People in their 20s and 30s used to be able to diversify which made publicly traded companies less sociopathic and less full of futurist BS.

 

People with moderate incomes who live in Ohio can diversify with real estate.  Like actual physical rental properties, not REIT's.  What is scary though is how much medical bills can devour more in a month than a paid-off rental house can generate in rent.  This month (October 2017) I had $1,500 in medical bills and collected $650 in rent. 

 

A mention in the UO Cleveland business development thread got me interested in a company called Fund That Flip. They provide relatively short-term bridge loans to developers to finance rebuild-and-resell deals, i.e. "house flipping". Then they sell to investors notes in $5,000 multiples backed by the loan. They promise interest up to 10%.  It's an appealing idea. The only problem is to participate you have to be a qualified investor, which leaves out the little guy. 

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