Category: Business / Investing

Should You Invest in the Stock Market?

I haven’t invested in the stock market because of its volatility and because no one I know seems to know what they are doing or have made lots of money doing it. Maybe I’m around the wrong people. I invest in real estate for the reasons listed here. If we look at a graph of house prices in the US, their values have always gone up despite occasional dips. That’s the kind of graph you want to see.

House price index for California from 1975 to 2021

Though you can make a lot of money investing in real estate, you can make even more if you invest early in certain stocks. The problem is in knowing which stocks to invest in.

DISCLAIMER: I am not a professional stock market investor. At the time of this writing, the only stocks I own are the ones given to me by my employer. This article is just my personal opinion at the time of this writing.

Investing in Index Funds

Warren Buffett, known as the “Oracle of Omaha,” is an American businessman and philanthropist, widely considered the most successful investor of the 20th century. He has amassed a personal fortune of more than $60 billion by defying prevailing investment trends. Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.” … “I just think that the best thing to do is buy 90% in S&P 500 index fund.” He specifically identifies Vanguard’s S&P 500 index fund. Vanguard offers both a mutual fund (VFIAX) and ETF (VOO) version of this fund. He recommends the other 10% of the portfolio go to a low-cost index fund that invests in U.S. short-term government bonds. Below are stock charts for VFIAX and VOO.

VFIAX
VOO

As you can see, both have an overall consistent upward trend. If you invested in each one 10 years ago, in 2012, you could have quadrupled your investment. Twelve years ago, one share of each was about $100. And now, each is around $400. But, if you only bought 1 share, then you would have only made $300 in 12 years. What if you invest $10,000 at the time. Then, you would have made $30,000 in 12 years. Or, instead of putting 20% down on a $400K house, you put $100K in one of these funds. Then in 12 years, you would have made $300K. Though that’s not bad, you would make more in real estate, especially if you include rental income, but then again, owning rental properties is not 100% passive. Nevertheless, if you don’t want to or can’t invest in real estate, then investing in one of these funds over the long term appears to be a safe bet.

Stock Picking

If you want to pick stocks, you obviously want to pick ones that have the potential to grow fast. Tech companies seem to get more publicity for many reasons such as everyone’s familiarity with them and their potential to change the way we live. For example, there was a ton of publicity before and during Facebook’s IPO. Everyone knew what Facebook was at the time. Facebook went public on May 18, 2012, and shares closed the first day of trading at $38.23. Now, the value is $228. That’s a 6x increase in 10 years. When you invest in stocks, the general advice is you shouldn’t invest more than you can feel comfortable losing. At the time, I probably wouldn’t have minded losing $1000. Had I invested $1K in FB, the investment would be worth about $6K now (10 years later) for a $5K profit. That’s still a very petty profit. If I had $50K, which is about the cost of a down payment on a $250K house at the time, then the investment would be worth $300K now for a $250K profit. While that is a good profit, there’s no way I would have invested $50K in FB at the time because I would not have felt comfortable losing it all. With real estate investing, however, it’s so much safer and predictable that one need not worry about their losing their investment. Plus, had I invested $50K in real estate instead of FB, I would still have made a profit of $250K or more in the same period.

Following are stock price graphs of some of the biggest and most popular tech companies along with how much you could have made if 10 years ago you had invested $1000 in each.

FACEBOOK (FB)
  • IPO date: May 18, 2012
  • Opening price: $38
  • Price in 2012: ~38
  • Price in 2022: ~ $300
  • Price increase factor: 7.9x
  • Profit from $1K investment: $6900
Microsoft (MSFT)
  • IPO date: March 13, 1986
  • Opening price: $21
  • Price in 2012: ~50
  • Price in 2022: ~ $320
  • Price increase factor: 6.4x
  • Profit from $1K investment: $6400
Apple (AAPL)
  • IPO date: December 12, 1980
  • Opening price: $22
  • Price in 2012: ~25
  • Price in 2022: ~ $155
  • Price increase factor: 6.2x
  • Profit from $1K investment: $6200
Amazon (AMZN)
  • IPO date: May 15, 1997
  • Opening price: $18
  • Price in 2012: ~200
  • Price in 2022: ~ $3200
  • Price increase factor: 16x
  • Profit from $1K investment: $15000
Alphabet (GOOG)
  • IPO date: May 15, 1997
  • Opening price: $18
  • Price in 2012: ~200
  • Price in 2022: ~ $3200
  • Price increase factor: 16x
  • Profit from $1K investment: $15000
Alibaba (BABA)
  • IPO date: Sept. 14, 2014
  • Opening price: $68
  • Price in 2022: ~ $125
  • Price increase factor: 1.8x
  • Profit from $1K investment: $800
Netflix (NFLX)
  • IPO date: May 23, 2002
  • Opening price: $15
  • Price in 2012: ~15
  • Price in 2022: ~ $400
  • Price increase factor: 26x
  • Profit from $1K investment: $25000

Disruptive Technologies

Disruptive technologies also have a large potential for a huge gain. Everyone has heard of Tesla, the automaker that has proven that electric vehicles can replace gas vehicles. Then there’s Bitcoin which revolutionizes money.

Tesla (TSLA)
  • IPO date: June 29, 2010
  • Opening price: $3.84
  • Price in 2012: ~6
  • Price in 2022: ~ $1000
  • Price increase factor: 166x
  • Profit from $1K investment: $165000
Bitcoin (BTC)
  • Price in 2012: ~$320
  • Price in 2022: ~ $43000
  • Price increase factor: 134x
  • Profit from $1K investment: $132000

Conclusion

Based on the analysis above, if you are going to hold on to popular tech stocks for the long term, e.g. 10 years, then you’re probably safe in that you won’t lose money and will likely profit. Of course, how much you profit will depend a lot on how much you invest and luck. One pattern to note is the performance of disruptive tech (electric cars, cryptocurrency) which realized the biggest gains. Considering the above, I think a safe and good investment diversification strategy, if you are comfortable managing rental properties, is

  • 75% real estate
  • 5% S&P 500 index fund – mutual fund (VFIAX) and/or ETF (VOO)
  • 15% disruptive tech
  • 5% big tech

Choosing Keywords to Improve Search Engine Ranking

If you have a website or are publishing an article online, you can increase your chances of people finding it by carefully choosing keywords to use both in the domain, folder path, and page content. One tool to help with this is Google Adword’s Keyword Planner. As a trivial example, let’s say you are building a dictionary website. You could buy a domain name that has the word “dictionary” in it or you could use the word “dictionary” in your page content. Or, you could use a synonym like “lexicon”. If you enter both words in the Keyword Planner, you’ll see the average monthly search volume for those words. In addition, Google will offer keyword ideas. As you can see in the screenshot below, many more people search using the term “dictionary” than they do the term “lexicon”. You can also see the competition level in the Competition column. However, that’s for if you want to pay Google to place your link at the top of search results. In the example below, the competition is low for both keywords.

Now, since “dictionary” is a popular term, you can expect more competition with respect to organic (not paid) search results. As you can see below, there are 4.32 billion results for the term “dictionary” and 3.05 billion for “lexicon”.

Of course, you’re not going to just write “dictionary” in your website content. You’ll probably write something like “Chinese – English dictionary” or “Spanish – English dictionary” which will have different average monthly searches and search results.

Should Real Estate Investors Leave Equity in Their Properties?

If you are a real estate investor and have one or more rentals you’ve accumulated over time, there’s a good chance you have a good amount of equity in at least one of your properties – maybe even your primary residence. You might feel happy that you have a lot of equity but from an investment point of view, you could be making more money — potentially A LOT more — if you pull out some of that equity to re-invest it rather than leave it in the form of equity for an existing property. Compare the following two scenarios.

Scenario 1

Let’s say you have 3 properties. One is your primary residence which you live in and are not renting out. The other two are rentals.

Current ValueEquityRental Income
(monthly)
Primary Residence$1,000,000$600,000$0
Rental 1 (townhouse)$750,000$650,000$2,500
Rental 2 (triplex)$590,000$100,000$4,820

Appreciation

Now, let’s estimate the value + appreciation on each property per year over 10 years. The average annual appreciation rate in California is 6.77%. We can easily calculate the appreciation using the calculator at

https://www.ddginc-usa.com/cgi-bin/apprec.php

In the last row, we see the total appreciation over 10 years.

YearPrimary ResidenceRental 1Rental 2
1$1,067,700$800,775$629,943
2$1,139,983$854,987$672,590
3$1,217,160$912,870$718,124
4$1,299,562$974,671$766,742
5$1,387,542$1,040,657$818,650
6$1,481,479$1,111,109$874,073
7$1,581,775$1,186,331$933,247
8$1,688,861$1,266,646$996,428
9$1,803,197$1,352,398$1,063,886
10$1,925,273$1,443,955$1,135,911
Diff$925,273$693,955$545,911

Rental Income

Now, let’s estimate the annual gross rental income and per year over 10 years. For simplicity, and to be conservative, we’ll keep the monthly rent fixed (we’ll never increase the rent), although in reality, in California you can legally increase the rent by at least 5% per year. In the last row, we see the total gross rental income over 10 years. Of course, you’ll have expenses like debt service (paying your mortgage), taxes, operational costs, etc which will reduce this total rental income.

YearPrimary ResidenceRental 1Rental 2
100$0
20$30,000$57,840
30$30,000$57,840
40$30,000$57,840
50$30,000$57,840
60$30,000$57,840
70$30,000$57,840
80$30,000$57,840
90$30,000$57,840
100$30,000$57,840
Total0$270,000 $520,560

Total Return on Investment

Now, if we add the appreciation and rental income minus expenses over 10 years, we’d get our total return on investment (ROI). But, since expenses vary from one property to another, to be conservative and keep things simple, we’ll just look at the total appreciation.

Over 10 years, our investments will have appreciated by $2,165,140.

Now, let’s compare this to another scenario where we do cash-out refinance and reinvest the money in more rental properties.

Scenario 2

In this scenario, we decide whether to do cash-out refinance for each existing property.

Primary residence

For the primary residence, we won’t refinance it and take cash out because doing so would increase the mortgage and since it’s not a rental, you’d have to pay for that increase yourself. Of course, if you can afford it, you could also do a cash-out refinance on that property as well, but it’s not a good idea to spread yourself too thin.

Rental #1

For rental #1, we do a cash-out refinance to pull out 75% of the equity. In doing so, our monthly mortgage pay for that property will go up but if you plan it correctly, your income will cover your new expenses, especially if your previous loan would be paid off in, say, 10 years, and you refinance to 30 years which would lower your monthly payments despite having borrowed more money.

Rental #2

For rental #2, there isn’t enough equity in the property so we can’t refinance it.

Current ValueCurrent EquityCash-out refi
75% of value		New Equity
Primary Residence$1,000,000$600,000No refi$600,000
Rental 1$750,000$650,000$562,500$100,000
Rental 2$590,000$100,000No refi$100,000
Total$562,500

According to the table above, we’re able to pull out $562,500 from Rental #1 which we’ll use as a down payment to purchase more rental properties. Let’s say we buy 4 duplexes at $500,000 each and we put down 25% (standard for investment properties) which is $125,000 for each. That leaves us with $62,500 for closing costs and some home improvement. We’ll estimate the rental income for each duplex is $3500 per month.

Current ValueEquityRental Income
(monthly)
Rental 3 (duplex)$500,000$125,000$3,500
Rental 4 (duplex)$500,000$125,000$3,500
Rental 5 (duplex)$500,000$125,000$3,500
Rental 6 (duplex)$500,000$125,000$3,500

Appreciation

Now, like in scenario 1, let’s estimate the appreciation over 10 years.

YearRental 3Rental 4Rental 5Rental 6
1$533,850$533,850$533,850$533,850
2$569,992$569,992$569,992$569,992
3$608,580$608,580$608,580$608,580
4$649,781$649,781$649,781$649,781
5$693,771$693,771$693,771$693,771
6$740,739$740,739$740,739$740,739
7$790,887$790,887$790,887$790,887
8$844,431$844,431$844,431$844,431
9$901,599$901,599$901,599$901,599
10$962,637$962,637$962,637$962,637
Diff$428,787$428,787$428,787$428,787

Rental Income

Now, like in scenario 1, let’s estimate the annual gross rental income and per year over 10 years.

YearRental 3Rental 4Rental 5Rental 6
1$42,000$42,000$42,000$42,000
2$42,000$42,000$42,000$42,000
3$42,000$42,000$42,000$42,000
4$42,000$42,000$42,000$42,000
5$42,000$42,000$42,000$42,000
6$42,000$42,000$42,000$42,000
7$42,000$42,000$42,000$42,000
8$42,000$42,000$42,000$42,000
9$42,000$42,000$42,000$42,000
10$42,000$42,000$42,000$42,000
Total $420,000 $420,000 $420,000 $420,000

Total Return on Investment

Now, let’s calculate the total ROI. Again, to be conservative and for simplicity, we’ll just consider total appreciation even though we know the total ROI will be much more than that since every month for 10 years we’ll be paying down the mortgage using the rental income which increases our equity in each property.

The total appreciation over 10 years in scenarios 1 and 2 are

  • Scenario 1: $2,165,140.
  • Scenario 2: $2,165,140. + $1,715,147 = $3,880,287.

Therefore, using a very conservative estimate, we could make an additional $1,715,147 over 10 years if we refinanced and reinvested the equity in our existing properties.

What to do after 10 years

Let’s say you hold on to the properties for 10 years. You’ll most likely have a mortgage on all or some of properties. At that point, you could choose to sell some of the properties to pay off all of your mortgages and live mortgage free! You’ll still be getting rental income from the remaining rental properties which may even amount to as much or more as your work income from a day job in which case you could choose to just retire and travel the world.

Measuring Water Usage in a Multifamily Building

If you own a multifamily investment property which you are renting out to 2 or more tenants, you’ll probably be disappointed to find out that there’s only one water meter (provided by the city) to the entire building located underground under the sidewalk. Following are some scenarios on how water pipes reach each unit and how to possibly measure each unit’s water usage.

Separate cold water pipes

Even though there’s only one water meter under the sidewalk, it’s possible that the downstream water pipe after the meter branches into multiple pipes, one for each unit, thereby creating multiple cold water networks If this is the case, then you’re in luck and you can install a water meter, e.g. Badger Model 25 or Neptune T-10 at each branching water pipe.

Shared cold water pipes, separate hot water pipes

If the cold water pipes from the city’s water meter go to all units in a shared manner, then it would be very difficult to measure water usage by unit. However, if each unit has its own hot water pipes that are not shared with other units, which would be the case if each unit has its own hot water heater, then you can measure hot water usage by installing a water meter at the cold water inlet to or the hot water outlet from the water heater.

Billing each unit for water

Usually there will be one water bill for a multifamily property. Since there are multiple tenants, you’d need to fairly split the bill among them based on each unit’s water usage.

Based on headcount

If both hot and cold water are shared among all units, then one common method is to bill each unit proportionally based on headcount (number of occupants). If one unit has twice as many people living in it as another, then that unit would pay twice as much for water. Of course, headcount can change over time so this would need to be updated whenever there is a change.

Based on hot water usage

If cold water is shared but hot water is separate, then you can split the water bill proportionally based on hot water usage. This would be more accurate that going based on headcount.

Water meters

Following are some popular water meters for residential use.

Badger Model 25

This meter has plastic threads and costs about $100.

Buy online – RC Worst

Buy online – QC Supply

Neptune T-10

This meter has metal threads and costs about $100.

Buy online

Smart Water Meters

The water meters above are manual read meters. To measure water usage remotely and see usage over time, you can buy a smart water meter. One of the best ones is Flume 2.

Flume 2 Smart Home Water Monitor

This smart water meter does not require plumbing as it is just attached or strapped around a compatible water meter. It costs $200.

Buy online

The Flume water monitor just straps onto an inline water meter. It reads the magnetic field generated by your water meter, which the company says can detect any water usage all the way down to one one-hundredth of a gallon — i.e. a slowly dripping faucet.

Recessions, Home Prices, Unemployment and Inflation

When an economic recession occurs, one thing that happens for sure is the unemployment rate goes up. You can see a graph of the California unemployment rate since 1967 on the St. Louis Federal Reserve Bank’s website. Below is a copy of that graph until 2019-01-01.

The shaded areas indicate a recession. As you can see, the unemployment rate has jumped up during each recession. Logically, as unemployment goes up, incomes go down since fewer people are working. Following is the graph of real median household income in California over the years.

So how do you know when a recession will occur. It turns out that the best indicator of a recession is when the Treasury Yield Curve inverts.

Continue reading Recessions, Home Prices, Unemployment and Inflation

How to Price Work in Other Countries

I occasionally use Upwork (formerly eLance) to hire contract workers in other countries to work on some projects. Considering that I live in the San Francisco Bay Area, which happens to be one of the most expensive places to live, I have to constantly remind myself to price my projects according to the economy and cost-of-living where I hire workers overseas. Here’s an example cost analysis.

US Cost
Let’s say that, based on the type of work you need done, a fair US wage would be $10 per hour. Let’s also say that you expect the work should be done in no more than 17.5 hours. Therefore, the total project cost in the US would be $175.

Target Country
Let’s say you hire someone in Egypt to do the work. You’ll need a way to fairly and reasonably convert wages in the US to wages in Egypt. One way to do this is by comparing each countries GPD per capita, which is an estimate of the average salary in a particular country.

GDP Per Capita
According to the World Bank, as of July 6, 2018, the GDP per capitas of the US and Egypt are:

  • 2018 US GDP per capita = ~ $60,000
  • 2018 Egypt GDP per capita = ~ $3,000

https://goo.gl/wG6AAd

In other words, the average annual salary in the US and Egypt are $60k and $3K, respectively.

Continue reading How to Price Work in Other Countries

Invest in Real Estate or Stock Market

Average rate of return:

ROI based on own money or borrowed money:

  • If you invest $100,000 in stocks, with a 10% ROI, you’ll get $10,000 at the end of year 1.
  • If you invest $100,000 in real estate (20% of a $500,000 house), with a 10% ROI, you get $50,000. Your ROI is based on a lot of money you’ve borrowed from the bank, not just the initial deposit.

Of course, you can also borrow $500,000 and dump it all into buying stocks but

  1. no one will lend you $500,000 to invest in stocks
  2. stocks are volatile and investing in them is more risky
Continue reading Invest in Real Estate or Stock Market

How to Find and Research (Pre) Foreclosure Houses / Properties

This information applies to properties in California (specifically, Alameda County).

When a bank begins the foreclosure process, they must file a Notice of Default with the county clerk. You can search for all notices of default within a time period in a county by going the county clerk’s website. For Alameda county, that would be

http://www.co.alameda.ca.us/auditor/clerk/propertysearch.htm

clerk1
Continue reading How to Find and Research (Pre) Foreclosure Houses / Properties

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