forex fire

I invite you to take the next few minutes to learn the truth about the real estate market, how it compares to other methods of building assets and why it is such a lucrative form of investing. Many potential investors will say, ‘I need to get into the Florida Investment Property market’, especially taking into account current stock market fluctuations and the HOT market for investment properties, but simply don’t know the facts about Orlando property investing and how to use sale and leaseback method of property management.

When is the last time your financial advisor or stockbroker tried to convince you that moving a portion of your assets into the Florida Investment Property market might be a good idea? Never Right? The ‘why’ is simple. They don’t earn commissions when you buy Florida Investment Property. It is also likely that you have probably never had an ‘apples to apples’ comparison of stocks versus Florida Investment Property quite like the one you will see here.

Reason 1:

Leverage: Banks will not typically loan money to buy stocks. Banks will however, compete fiercely to loan money to buy Florida Investment Property. Your first question should be, ‘why is that’? It has to do with risk management, which we will discuss later. The fact that banks want to loan you money to buy Florida Investment Property creates a situation which we will call LEVERAGE.

Let’s assume that you have $10,000 to put into some type of investment. If you choose to buy $10,000 worth of stocks, you will own exactly $10,000 worth of stocks. Pretty straight-forward. However, suppose you choose to invest that $10,000 into Florida Investment Property using a 90% mortgage (which in many cases can go up to 95-100% mortgages in today’s market), you will own $100,000 worth of Florida Investment Property. If both of your investments were to appreciate by 10%, your actual gain with your stocks would be $1000 where your actual gain with Florida Investment Property would be $10,000. That equates to an actual 10% return on investment vs. a 100% return on investment. That’s what we call leverage.

Leverage: Florida Real Estate vs. Stocks

The traditional argument against Florida Investment Property Investing (mainly from Stock Brokers) has always been ‘I can get an average of 10% from stocks with little effort so why would I invest in Orlando Investment Property that only appreciates 6-7% per year’? This point-of-view is not taking leverage into account.

If you take the above statement to be true and compare the REAL numbers, the stock investment gained 10% of the initial $10,000 value (or $1000) and the Orlando Investment Property investment gained 6% of the initial $100,000 value (or $6000). That is still an actual return of 10% versus 60%. It is not hard to see which investment provides a greater immediate return on investment. Additionally. these numbers do not take into account any income from your property during the course of the year, or the substantial tax advantages to owning property, which we will discuss later.

Reason 2:

Value: As we mentioned previously, if you invest $10,000 into purchasing stocks, you own $10,000 worth of stocks (a fairly obvious point). If you invest $10,000 into purchasing Orlando Investment Property using the leverage of a 90% mortgage, you own $100,000 worth of Orlando Investment Property right? Well, only if you paid retail for your property. Any savvy investor will tell you that there are excellent deals to be had in Orlando Investment Property, you just have to find them.

What if you purchased a $100,000 property that happened to be worth $110,000 the day you bought it? Does it happen? The answer is yes, all the time. If you have your eyes open and are willing to ‘go through the numbers’ to find good deals, they are all around you. You may be asking yourself, why would anybody sell a $110,000 property for $100,000?

Value: Making money when you buy.

The reasons are endless as to why a quick sale is desired, but just to name a few: job relocation, divorce, an estate is being settled or maybe a current appraisal on the property simply wasn’t done prior to selling. By ‘finding this deal’ you have accomplished two things.

You have added $10,000 to your asset column in the form of equity.

You have created additional LEVERAGE for yourself as the value of your property increases (a 6-10% gain on $110,000 is better than a 6-10% gain on $100,000!) Remember, you make money in Orlando Investment Property when you buy, not when you sell.

Reason 3:

Control: Let’s take our assumption one step further. When you buy your $10,000 worth of stocks, what can you do to increase its value? If we follow the previous assumption, you have invested $10,000 using a 90% mortgage to purchase a $100,000 property that has an actual value of $110,000 because you ‘found a good deal’. So what can you do to further increase the value of your new $110,000 property?

It is amazing what a cleanup, a little landscaping and a paint job can do to increase the value of a property. Only a few hundred dollars well spent can result in huge value gains in Orlando Investment Property. Your $110,000 property with a little effort could easily be worth $115,000, $120,000 or more virtually overnight! Do you have to do any of this work yourself? Absolutely not! If you like to do that sort of thing then have at it, but if not, simply hire it done and accept a little lower net gain.

Reason 4:

Superior Tax Position: The tax code in the United States is geared to reward Investors who make housing and other property available to the population. When you invest in stocks, you are taxed at some of the highest rates in the tax code. When you invest in Orlando Investment Property, you put yourself in one of the best tax positions in the business world. Remember the wealthy that hold substantial portions of their assets in Orlando Investment Property? Tax advantages are one of the main reasons this is true.

Continuing with the above example, let’s say that you have completed your ‘deal’ with the $10,000 invested with a 90% mortgage to purchase the $100,000 property that appraised for $110,000 (because you ‘found a good deal’), which you improved to say, $115,000 by spending another $1000 on cleanup etc. Assume that one year passes and the Orlando Investment Property market grew by 6%, your property would now be worth $122,000. So far, so good right? If you are like most people, you may want to spend some of your hard earned money.

Let’s do the numbers. You have a mortgage at current rates that started at $90,000 and after a year worth of payments (the majority of which are tax deductible) you still owe approximately $89,000. However, your property is now worth approximately $122,000. If you were to refinance at 90% once again, you would take out a new mortgage of approximately $110,000. This will leave you with approximately $21,000 in cash in your pocket. Now, the BIG question; do you have to pay tax on that money? Absolutely Not! You have not sold the property or realized a ‘capital gain’. You have simply borrowed money from yourself. You are able to do what you wish with that money, free from any tax whatsoever. Obviously, a good strategy might be to purchase two more properties just like your first deal!

Also, we have not taken into account the fact that ALL of your interest payments on this property are tax deductible. In addition, you are also able to depreciate the property itself and all of its contents for additional tax advantages if you choose to do so.

Let’s be fair and compare the Orlando Investment Property tax position with the stock scenario. Assume that the $10,000 initial stock investment grew by 10% in the first year, creating a gain of $1000 and you wish to access it. If you draw it out, you will pay from 20-28% (or higher) in capital gains tax in order to have access to this money. This reduces your net gain to $800 (actual 8%) or less, depending on your tax situation. Compare that to Orlando Investment Property and you are beginning to get the picture.

Reason 5:

Limit Your Exposure To Risk

Risk Management: Do you remember at the top when we said that banks would compete fiercely to loan you money on Orlando Investment Property? The answer to the ‘why’ is very simple. Low Risk. Banks incur little if any risk when loaning money on Orlando Investment Property due to the steady, solid growth rate of the property market, as well as the fact that if you default on your payments they will simply sell the property to somebody else. This is in direct contrast to the volatile stock market, which can vary daily with sharp increases and decreases in value. Furthermore, banks realize that a property isn’t going anywhere, whereas many investors know all too well about .com and other types of companies that were there yesterday and gone today.

This is all not to say that Orlando Investment Property markets don’t go down from time to time, however the dips are much less dramatic than that which can take place in the stock market, proven out by the banks’ willingness to loan money on property.

Reason 6:

Protecting your peace of mind.

Finally, Now that we understand the value of leverage and risk management we realize that a 6% Orlando Investment Property gain ‘beats the pants off’ a 10% stock gain in actual return on investment by a wide margin (approximately 50%, not taking into account several factors that can increase this number such as tax advantages, income on property etc.) Owning good, solid Orlando Investment Property allows you to sleep at night, or go on an extended vacation without worrying about your asset column. This is directly opposed to holding a substantial percentage of your assets in stocks.

Lisa Carson
http://www.biminibayresortinvestment.com
lcarson@biminibayresortinvestment.com

The launch of the US Oil Fund (ticker: USO) gave investors an easy way to invest in the hottest commodity of the day: oil. Still reeling from the post-Katrina boom that has kept gas prices over $2.00 a gallon, investors bought over five million shares in the ETF’s first day.

The concept is an easy sell: it’s a fund that invests in oil contracts with the purpose of mirroring the value of West Texas Intermediate (WTI) light, sweet crude oil at a ratio of one barrel contract per share. One share, one barrel.

Easy, right?

Riiiiiiiight…

The Well-Known Risks of Commodities

Everyone knows about the risks of investing in commodities, but it is worth repeating the main points.

Commodities prices fluctuate quickly and widely. An announcement from any OPEC country could send oil prices up or down 10% within minutes. With every word spoken by the prime minister of Iran oil pushes upward.

Oil investments are also subject to operational risks: environmental hazards such as oil spills, leaks, fires and discharges of toxic chemicals.

This is not rational long-term investing. This is short-term, profit-taking trading, and it should be treated as such.

Commodities have long been considered a hedge against market fluctuations, not a primary holding. Now they are suddenly an investment strategy. Any commodity — oil, gold, pork bellies — should be considered a hedge against a bond or equity market downturn.

Like gold and other commodities, oil futures have enjoyed a long bull market in the post 9-11 world, but commodities and hard assets tend toward modest gains over the long term. And they are all subject to sudden, harsh corrections.

Specific Risks of the Oil ETF (USOF)

Though any commodity investment involves certain general risks, the US OIL Fund (USOF) ETF has specific risks that make it particularly unstable.

1. Price Risk - This is the risk that the NAV of the fund will not equal the price of WTI light, sweet crude, as the fund intends. The fund’s prospectus outlines three reasons why this could happen:
2. Market Risk - The trading price per share of the ETF may not correlate with the value of the NAV, which is calculated by dividing the total value of the fund’s assets by the number of shares. The ETF, then, could trade at a premium (more than the underlying assets are worth) or a discount (less than the value of the underlying assets).
3. Management Risk - The NAV may not match the value of the benchmark oil contract. The underlying assets of the fund, then, could stray from the value of the contracts the fund trades.
4. Futures Arbitrage Risk - The price of the benchmark does not closely correlate with the price of WTI light, sweet crude. In this case, futures contracts may differ in price from the underlying asset (barrels).Any one of these risks would be enough to make USOF a questionable investment, but there’s more…
5. Strategy Risk - Rather than profit from speculative short-term futures trading, the USOF tries to track the price of the underlying assets (oil), using futures contracts. This is all to be carried out by the General Partner (manager), Victoria Bay Asset Management, described in the prospectus as “lean staffed,” which “relies heavily on key personnel to manage trading.” As the prospectus notes, “there is no assurance that the General Partner will successfully implement this investment strategy.” Like stocks, futures contracts can be over- or undervalued with respect to their underlying assets. Further, the fund can be manipulated by short-term trading tactics (i.e. short selling). This fund’s reliance on a “lean-staffed” manager which does not actively manage the fund’s assets, but rather attempts to track an index price, does not bode well for the fund.

Legal Risks

Aside from the organizational risks, the USOF has two outstanding legal claims to contend with.

1. NYMEX - The New York Mercantile Exchange (NYMEX) is the exchange through which WTI light, sweet crude is traded. As the publisher of the price of that asset, NYMEX is challenging USOF’s use of the price as a benchmark. NYMEX is seeking a licensing agreement with the fund, or threatening legal action to prevent the fund from using it as a benchmark. According to the prospectus, “USOF is unable to determine what the outcome from this matter will be…This may adversely affect USOF’s ability to achieve its investment objective.”
2. Goldman Sachs - One of the world’s largest investment banks, Goldman Sachs, has two patents pending which may be infringed upon by the fund’s methodology. Both patents define a means for creating a pooled fund that trades futures contracts and issues the equity interest of the fund to investors through publicly traded shares. Should the patents be granted, USOF may be held liable for patent infringement, if it were to “operate as currently contemplated after the patents were issued.” If either of these patants is granted, the fund may be liable for royalties, which would come from the fund’s assets.

These are complicated matters for attorneys in the specialized areas of Intellectual Property and Finance, and this author is unqualified to make a determination as to the merits of the claims made. As investors, however, we are all qualified to say, “nope, too much risk for me.” Pure oil contracts are less risky than this fund. Should USOF be held liable for either of these claims, any damages or royalties will be taken directly from the fund’s investors, which could negatively affect performance by 4-5 basis points (0.4%-0.5% annually, which can negate any positive performance or exacerbate the losses of a hedging investment).

Conflicts of Interest

The fund makes no bones about it: a whole section of its prospectus is entitled, “The General Partner Has Conflicts of Interest.” The management of this fund has other investment interests that may be of more importance (to them) than this fund. “For example,” it states, “a conflict may arise because the General Partner and its principal and affiliates may trade for themselves.”

Essentially, this is an open invitation for the management to prioritize their own holdings (and holdings they have a vested interest in) over the USOF holdings.

Better Options Abound

Usually there are better options around, no matter what you’re looking at. But when it comes to USOF, there are few worse options.

The management has not proven itself as a consistent performer. The underlying commodity is near an all-time high. The strategy is subject to pending legal decisions.

There are better options in mutual funds that specialize in commodities producers. And even these funds should not comprise more than 5% of an individual’s portfolio.

If you still feel the need to invest in the “pure oil play” that’s getting all the press these days, please read The Prospectus before investing.

B. Patrick Regan is a freelance writer and a staff writer at StocksAndMutualFunds.com. He had no vested interest in any securities discussed in this article at the time of publication.