Investment arbitrage opportunities is one of the best ways to make millions of dollars. This post will highlight some missed investment arbitrage opportunities and new investment arbitrage opportunities to take advantage of right now.
After all, if you want to accumulate the ideal net worth of $10 million for retirement, it takes investing in winners to help you get there!
Thinking About Investment Arbitrage Opportunities
Ever since publishing my post on getting rich by predicting the future, I've been trying to think of more money making ideas. After all, it's much better making tons of money from an investment than working for a living. This way, you can relax, avoid rush hour traffic, spend time with your kids, travel, exercise, buy anything you want, and live a longer and happier life!
Despite the post receiving 50,000+ pageviews, only a handful of you actually offered any predictions and ways to profit from them. What's up with that?
The one solution I've found to coming up with more investment ideas is to look at all our missed opportunities. I'll then discuss why we didn't pull the trigger. Let me share two such investment arbitrage opportunities that cost me over $1,000,000.
Missed Investment Arbitrage Opportunities
One of my largest financial regrets was not buying Seattle and Portland area property between 2001 – 2012, while I was working in finance. I had been consistently visiting both cities every quarter to see clients from 2001 – 2011 and marveled at how much cheaper their real estate prices were compared to San Francisco's.
One client relocated to Portland with a different company and made the same amount. He was able to buy a mansion for $400,000 after only being able to afford renting a one bedroom in SF.
Seattle and Portland are quite similar to San Francisco in terms of topography, weather, diversity, and lifestyle, yet their property prices were trading at a 70%+ discount. It seemed unsustainable.
I knew in my heart of hearts that buying Seattle and Portland property was a no brainer because I foresaw capital flight out of the expensive Bay Area into those cities.
It was only logical that regular SF Bay Area homeowners would eventually cash in on their million dollar shacks and retire in a much lower cost area with great similarities. Further, technology made working in a specific location less necessary.
Over the past 10 years, Seattle and Portland property prices have exploded. They have consistently lead the nation in rising property prices due to the reasons I stated.
It's also helped tremendously that Amazon, Nike, Starbucks, and a bunch of other smaller companies based in those areas have seen their market caps grow immensely as well.
Related: What Is Risk Arbitrage Investing?
Why I Didn't Invest
Unfortunately, I didn't invest because the idea of being an absentee landlord of a $400,000 property felt like too much work, even though I believed $400,000 could turn into $800,000 within 10 years! Totally illogical for me not to do anything.
Coming up with a $80,000 downpayment and carrying a $320,000 mortgage for $1,400 a month was totally doable for me at the time. But I was uncomfortable buying something for $400,000 I wasn't 100% completely familiar with.
I should have just tacked on several days after a business trip to check out as many properties as possible. The $80,000 downpayment would be worth $500,000+ today if I had just made the move.
How I'm Investing In Real Estate Now
Today when I look up a real estate deal on CrowdStreet, my favorite real estate crowdfunding platform for individual deals, they've got pages and pages of information about every investment laid out. You can get an Overview, Financials, Property, Market Summary, Management, and Documents.
I can check out all the pictures of the investment. Google easily shows what the surrounding area looks like. I can do more research online and talk to friends who live in the area.
You should also check Fundrise, the best private real estate platform for all investors with only a $10 minimum. It is the creator of the private eREIT asset class. For most people, investing in a diversified eREIT is probably the best way to go to gain real estate exposure. It is less volatile than publicly-traded REITs and pays a steady dividend. In an inflationary environment, real estate is my favorite asset class.
Finally, I don't have to invest $400,000 cash in a project or go through all the paperwork of getting a loan. I can just invest $5K – $25K to gain exposure on an investment opportunity that is already pre-vetted. They won't just except any type of deal on their platform because they have a reputation to care about.
Returns Would Have Still Been Great
Real estate crowdsourcing has made investing in other areas of the country so much easier now. I wish it existed back in 2003 when I seriously started considering investing in Portland and Seattle.
I may not have made a 6X return due to the lack of leverage, but I would have wisely allocated capital in an investment I felt strongly would increase in value.
REITS are a good way to get overall real estate exposure and real estate crowdsourcing is a way to surgically press on areas that may have the most upside. See: REITs or Real Estate Crowdfunding
I'm sure there are neighboring cities or states that are benefitting from another city or state's robustness. This is part of the reason why I invested $10,000 in the Conshy, Pennsylvania commercial real estate deal. The Philly area seems to be doing well based on all my research.
Investing $1 Million
Here's how I might structure a $1,000,000 investment portfolio as a 40-year-old man with three dependents and a stable job paying $250,000 a year.
$600,000 stocks (DVY, VTSAX, EEM)
$200,000 bonds (TLT, IEF, MUB)
$150,000 REITS (VNQ, O)
$50,000 RE crowdsourcing (Alabama multi-family property, Nashville retail property)
Within each category one can decide on the various types of investments. But overall, this portfolio is a classic 60/40 portfolio equities/fixed income portfolio.
In the past, there wouldn't be this reasonably small 5% allocation in real estate crowdsourcing. But now that the industry is gaining momentum, I can see hundreds of millions of new investment dollars being allocated towards the space.
Arbitrage opportunity:
The ability to mobilize capital much more freely is the reason why historically undervalued areas of the country may start to catch up with real estate prices in more expensive coastal cities, especially as coastal city property prices take a breather.
The key is to invest in those undervalued markets that may attract the most amount of new capital. I'm willing to do the work to potentially earn a higher return given I don't see as much opportunity in the S&P 500 anymore.
Investment Arbitrage Opportunities Are Everywhere
Buying property in Golden Gate Heights was a specific arbitrage opportunity because it was trading at a 40% discount to the eastern and northern part of San Francisco.
Buying like-for-like Seattle or Portland property was an arbitrage opportunity due to their 70%+ discount to San Francisco. But what other arbitrage opportunities are there?
Arbitrage Opportunity In Stocks
There is an investment category called merger arbitrage where an investor tries to capture the spread differential between where a company says they will takeover a company and where the company is trading before, but usually after the announcement.
For example, let's say Disney announces they will buy Twitter for $26 a share, a ridiculous $6B, ~50% premium to its current share price. TWTR will immediately pop to probably ~$24 a share, but not $26 a share. Why? Because things fall through all the time! You might have an ego war between Twitter CEO Jack Dorsey and Disney CEO Bob Iger about roles after the merger that may delay closing.
You might see the government ban the acquisition due to anti-trust reasons. Or, you might have material information that comes out after the takeover announcement that may hurt Twitter's valuation. If you can correctly forecast everything going through, you would buy Twitter stock all day long at $24 and make a 7.7% return once the deal is done.
But even the most sophisticated merger arbitrage investors will look to hedge their positions by shorting a derivative security. In this example, shorting Salesforce, one of the rumored suitors, would have been a profitable trade.
Twitter is still a core holding today as it remains independent.
Merger Arbitrage Fund Performance
Here's a table showing the overall performance of a basket of 36 merger arbitrage funds since 2012. 2015 was a good year, but not so much for the rest. There are even merger arbitrage ETFs such as MNA, MRGR, and CSMA. Merger arbitrage is a harder space to successfully outperform.
Career And Pay Arbitrage Opportunities
Too many people are too scared to earn what the market is willing to pay. They aren't willing to jump ship out of loyalty or fear of confrontation. No are they willing to relocate because relocating is a PITA.
In addition, they aren't willing to spend hours doing research to see what other people with similar careers earn to ask for a raise. As a result of these fears, arbitrage opportunities emerge!
I'm a good example of not optimizing my career before I left. I only worked for two firms after college. I lasted for two years at the first one in NYC. Then, I took an opportunity to make more money with a higher title in San Francisco.
That turned out to be a good move because 75% of my class in NYC no longer had jobs after the dotcom bust. But then I stuck around for 11 years at my last firm!
Despite knowing that I probably wasn't going to last much longer than 10 years during my ninth year at the firm, I didn't take a golden opportunity to make a guaranteed 50% more for two years.
Should Have Taken The Job
In 2010, a Chinese investment bank was looking to build out their team in America. I met with the CEO for a four hour interview. He was incredibly respectful and made me feel like I was part of his family. He was also the eldest son of the ex-Premier of China!
I was the perfect candidate for him because I'm bi-lingual in Mandarin and English. Further, I had more than a decade of experience under my belt. Even though he gave me so much love and respect, I still couldn't pull the trigger. Leaving my job to go to NYC was too tough.
I was afraid of change. I felt bad abandoning my firm. And I was worried I wouldn't live up to their expectations at my new firm. This is despite the two-year guarantee pay package.
In the end, things didn't end badly since I was able to negotiate a severance. I wouldn't have been able to negotiate one if I left the new firm after only two years. But still, if I just sucked it up and took the job, I may have ben better off by $500,000.
My career and not investing in Pacific Northwest real estate is how I left over $1,000,000 on the table.
Entrepreneurship Arbitrage Opportunity
Entrepreneurship is all about arbitrage! An entrepreneur sees an opportunity where a business is too inefficient or charges too much and exploits the hell out of it.
A good example is hybrid robo-advisor, Personal Capital, which charges at most a 0.89% fee versus a 1% – 3% fee by traditional advisors like Raymond James, Merrill Lynch, etc.
The two areas that are most ripe to get obliterated are real estate and online payments.
I've already argued how it's absurd it still costs 5% or more to sell a home today. It's also nuts Paypal charges me a 2.8% fee every time I receive a payment. I'll happily wait a couple of days to receive a $10,000 check in the mail rather than pay $280 in fees.
Entrepreneurs out there, please lower the cost in these two important fields.
Blogging Arbitrage
One of the reasons why I started Financial Samurai in 2009 was because I felt strongly independent publishing would grow to be a major field. Traditional media was getting hollowed out because nobody wanted to just read the news anymore.
Instead, they want to read the news written by someone with some subject expertise, get an opinion, and interact with the author. That's good blogging in a nutshell. The arbitrage was capturing an increasingly disinterested mass media audience who didn't care for “ivory tower” authors anymore.
There were various opportunities to sell Financial Samurai over the past seven years, but I never seriously entertained them because you don't sell a growing cash cow in a declining / low interest rate environment. Instead, you hug it tightly before you go to bed every night!
Margins in the online media business are massive if operated properly. Once you build a brand you can scale like a champion climber up Mt. Everest. If I sold Financial Samurai, I would be trying to kick my face today.
Private Growth Company / Venture Capital Arbitrage
I've realized there is an investment arbitrage in venture capital. If you invest in a traditional venture capital fund, you need to first commit capital. Once you commit capital, you hope and expect the general partners find promising private growth company investments. It's a total leap of faith based.
Now you can invest in a private growth fund called the Fundrise Innovation Fund AFTER seeing what the fund has invested in. Click the link and you can see its 20+ portfolio holdings. From there, you can decide whether to invest and how much. The investment minimum is only $10 versus $250,000+ for traditional VC funds.
The Innovation Fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
Everything Gets Commoditized
Investment arbitrage opportunities are everywhere. Once you find an investment arbitrage opportunity, exploit it to the maximum! Eventually gets commoditized. Therefore, you've got to take advantage of the spread before everything becomes the same.
Building a brand will help lower the rate of commoditization, but eventually everything conforms to The Borg.
Let's go back to real estate. A $1.75 million house in San Francisco only costs about $250,000 in Nashville. A 7X price differential is aggressive since folks who live in Nashville can still breathe the same air, watch the same football games on TV, work remotely for Google, create a startup, and still live free as folks do in San Francisco.
Those of us who live in expensive coastal cities have become delusional into believing our cities are so much greater than other cities. We've become accustomed to traffic jams, long brunch waits, and $4 gas.
It's like paying $200 for a meal when a $30 meal tastes just as good. To not feel like an idiot, of course we're going to tell everyone and ourselves it was the best meal we've ever had! This is an investment arbitrage opportunity of buying real estate in lower cost areas of the country.
To make more money, actively think about arbitrage opportunities. Everybody can immediately do some salary analysis and achieve higher pay. Most probably won't be successful merger arbitrage investors. But I think many of us can research real estate arbitrage opportunities at zero cost through real estate crowdfunding.
The long term investment trend is to invest in the heartland of America. One way to do so is through Fundrise where they have plenty of eREITs for non-accredited investors.
Technology has made it easier than ever to take advantage of arbitrage opportunities. I've personally invested $810,000 in real estate crowdfunding as of 2019.
Stay On Top Of Your Money
In order to optimize your finances, you've first got to track your finances. I recommend signing up for Empower's free financial tools so you can track your net worth. The tool enables you to analyze your investment portfolios for excessive fees. Further, you can run your financials through their fantastic Retirement Planning Calculator.
Those who are on top of their finances build much greater wealth longer term than those who don't. I've used. Empower since 2012. It's the best free financial app out there to manage your money.
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Make Millions With Investment Arbitrage Opportunities is a FS original post.
I have several nieces and nephews that are college bound. The cost is insane and room and board can be realy high, even in less pricy areas (like Portland).
In one case it might be worth buying a house, letting them live off campus, get college roommates and then contrinue that after 4 years.
Since you have to pay the room and board to the school anyway its like a 100% cpst reduction on the home you buy and college towns tend to be more stable although pf course there are other challenges. Can always sell after the 4 years… if only someone would solve the 5% transaction cost :).
Sam,
We all have been there in terms of investments we missed out on. Just keep looking out for the next one, they are always there. I have two very random suggestions but they are based on my personal expertise.
In regards to the first: I went to UW in Seattle and am a real estate investor as well. I monitor a few markets I know relatively well and saw that this area had been undervalued for a while but was surprised at the speed of the uptick. Since this market has already increased so much may I suggest another market much closer to you. The Sacramento area did unbelievably well before the crisis but the prices increased faster than the employment and the pay, contributing to a painful downturn. However there are a few lagging factors that affect home prices there that will push up prices in 2017 and 2018. These are the spillover effect of the Bay Area similar to what you mentioned for Portland and Seattle, and the effect of government employment. The state has crawled out of it’s own financial issues and is humming along well, employment in the area is expected to pick up for that reason. (Disclaimer: I own 2 homes there)
My other area of expertise is the Latin American financial sector. Currently one of the dominant banks in the world is trading at a P/E of 8 with a strong balance sheet and an appreciating currency. This is Itau Unibanco of Brazil. The economic situation on the ground there is already improving and the story has yet to reach the outside world. The stock trades on the NYSE and will experience growth in the coming years due to increasing profits and an appreciating currency.
So there you have my contributions on ideas for the next few years.
Every income property is someone else’s outgo property. There is much angst in Seattle and Portland today among rent serfs facing three-digit monthly rent increases, displacement, wholesale evictions, overcrowding, and in-your-face homelessness.
Welcome to Two Americas, the land of extractors and extractees.
I actually think Tacoma (specifically north Tacoma) is ripe for house price appreciation. Rents have been skyrocketing -there’s limited supply, growing population, an attractive historic downtown and surrounded by the puget sound waters. 40 min commute to seattle if you speed. And yet it’s 1/3 the price of Seattle. All it needs is a catalyst – maybe a couple tech companies put offices there.
The Economist runs regular articles about how the price appreciation has historically been and continues to be significantly higher in big metropolis urban areas than the non-urban areas. In the world estimated to be urbanizing fast and where talent will continue to conglomerate into specific geographic areas, your buck will continue go farther in a bigger/more established urban area than a less urban one. Good news for you San Francisco home owners!
Have you compared the ROI on your San Francisco investments to the comparable Seattle investments in real-estate? Are they really higher in Seattle over the last 10 years? I doubt it. The only problem is that it is harder and more capital intensive to break-in in the more expensive/already established areas.
The charts look very similar between Portland, Seattle, and San Francisco. But I had already invested in San Francisco real estate and wanted to diversify into Portland and Seattle real estate, but I failed to pull the trigger. $300,000-$400,000 couldnt buy anything San Francisco back then. But it could buy me an amazing house in Portland. I could’ve deployed capital but I waited for several more years to Rio Kimili capital to buy another place in San Francisco and early 2014 after the previous purchase in early 2005 and 2007.
The urbanization of America is definitely true. But within smaller cities, there is relative urbanization as well.
I truly think if more people spent time thinking about ways to better invest their money, they will generate much greater wealth over time. Just imagine instead of spending eight hours working for an hourly wage or at your day job, you spend eight hours researching various arbitrage opportunities and pulling the trigger. More people need to think about how to better invest their savings.
Good point. So, although the growth rates of the two areas are similar, there is the opportunity cost, as you will have to wait longer in the cheaper/fast growing area, than in the more expensive/equally fast growing area. Yes, even within urban areas there is variance and opportunities for some areas to urbanize more. But with higher variance comes higher risk.
Apart from the theorizing: house prices and rents in San Diego have been shooting up, and anecdotally, firms and employees are moving down from the bay-area for close-enough geography but cheaper housing. Niche industries such as wireless and bio-tech, new industries include Drones, and multi-billion dollar commitment by the Federal Government to invest in a Naval/Navy Seals training facility in the area. The Seattle area still seems to be growing and becoming the next major technology hub. But I do not see how Alabama, Kentucky, Tennessee, or any of those places in the mid-west you wrote about can ever catch up. It is not delusional, life IS truly better in the more expensive parts of the country in all respects (and hence they are more expensive), and many of us would never ever move to some parts, and thus more expensive areas will remain more expensive and faster growing.
Finally: I actually prefer the intellectual nature of my daily job than thinking about opportunities to make money all day long, but I may be in the lucky minority. Regardless, I am your reader because I value financial independence as well, but via a very different road! :-) All too often those focused on money-making presume that that is everyone’s primary goal in life, but you have to acknowledge everyone’s utility function is different.
I have a hard time looking back on lost opportunities because while you see what was lost, you never know the reality of it. For example trying to be a home owner when I was first married and saw some great opportunities would have led to a lot more stress than my husband and I could handle right then.
In your case, if you had moved back to NY you would have made different decisions wrt your other investments. You don’t know what investments you would have made or how you would have handled them. Once hired your new boss could have been a terror and made your life miserable. Take a lesson from your decisions so you recognize opportunities in the future, but don’t put a price tag on them as though you’re $X poorer because you don’t know the whole story of how that reality would have panned out.
That’s true. I like to quantify my lost opportunities because it helps motivate me to minimize future mistakes and try harder. If I just say that not buying Pacific Northwest property and taking the job offer was a missed opportunity, but doesn’t really motivate me into doing deeper analysis for real estate or find better consulting or full-time job opportunities. But if I qualify the loss as $1 million, it sure helps!
One of the few years of not going to the new firm was that the two-year guarantee might not ever happen because some people who didn’t get to your guarantees never got their second year paid out. So in a fact, there is a discount rate even though the second your guarantee is in the contract. But I had nothing to lose if I was really going to walk away from the industry after two years. I could’ve stuck it to them and made them Pay their promise or else take a more litigious route since I would not be returning to the industry. But that scenario sucks, and I could not properly forecast my future two years out.
The practice of learning from our mistakes is very important. It’s hard to get better if we do not take in feedback and find areas of improvement.
hey Sam, was loyalty the main reason for you not taking that job with the Chinese bank?
You’ve lived in NYC before so moving back wouldn’t have been that hard. Or did you just want to stay in SF? And as you know companies have no qualms about firing or laying off people.
Maybe the extra $ wasn’t worth the hassle, but 1/2 million sure is alot to turn down! I don’t think I could do that.
I believe that they best way for someone to build wealth is to focus their investment efforts. I think that when people spread their money across too many different investment vehicles, they do not realize the same returns as they would have if they had focused all of their money and effort into one asset class that they know works for them.
For example, I like to invest in small cash flow multifamily properties. I don’t bother with single family homes or shopping centers. I have a game plan to build wealth through multifamily property and that is where I focus my money and my efforts. It would be silly for me to start putting money into stocks or bonds or any other asset class.
Stick to something that is working well for you and direct all of you efforts and capital there. I see too many people go after the shine object and wonder if the grass is greener on the other side. In my opinion, don’t waste your time going after a little bit of everything.
Andrew Carnegie once famously quoted “The way to become rich is to put all of your eggs in one basket and then watch that basket.”
I agree and disagree. One of the major rule of investment is diversification. Therefore do not put all your eggs in one basket.
I do also agree that in order to perform better than the general market, you need added value. In your case it is the time you put into knowing your market, the effort you invested in developing your network of manager, contractors, handyman, realtors. By knowing the local market a little better than the masses, and having a system to cut cost, it is conceivable you will out perform the masses by 3-5%. In the long run you will get extremely rich.
One family I know only buys single family houses $300-$400K range. They rent or flip them. They have relationships with banks so they get first dip on foreclosures. they have 3 teams of contractors to help flipping the houses. They started with 1 house 20 years ago, and now circulates 100-200 houses and they are worth easily over $20 million. They don’t buy stocks or bonds because their expertise allow them to return at least 3-5% better than the market.
To clarify, this is no longer investing, this is a business. So, when investing you DIVERSIFY. But if you have a BUSINESS model that you believe in, yes, put all your eggs in one basket.
I use Venmo app to send and receive money from my tenants and pay my handyman no fees for anyone.
Yeah, I’m definitely going to start using Venmo more. One issue I heard was having a transfer limit? Can you send $4,000+ or $9,000+ per transaction via Venmo w/ no fees?
Hi Sam, I think you visited Japan once (a few times?) and I’d be curious to hear your view on the country/lifestyle/culture.
I liked your post on China and you’ve mentioned Singapore, other SE asian countries in your travels but Japan is an interesting nugget (perceived stagnant, insular, consensus bearish vs. China/other asian economies representing growth, albeit tempered)
Apologies if this is wrong post to comment (though happy to hear your take on Tokyo real estate ) but as I’ve been living here this past year (after 4 years in SF) wanted to draw some parallels or wisdom if possible :)
Thanks,
B
I have to disagree with your reasoning on the career & pay part, but everything else is good. Too many people aren’t scared, but rather lazy, complacent, or unwilling to outwork others. Unless someone is one of the lucky few born with silver spoon, with special connections to wealthy and influential people in society, or some genius science skills which will change the world, they have to outwork others by increasing their market value by constantly learning new skills and building a network. Most people become content with their middle class to upper middle class lifestyle and just coast or do slightly better work than their peers in order not to be fired. Or some are just happy to their assigned work and then leave at 5pm for home. That’s why I see professionals who haven’t moved up in an organization stay with the same company for 10 plus years. There isn’t anything wrong with this lifestyle choice, but large companies have figured out a way to eventually let go of these employees and replace them with cheaper people who are hungrier.
Now, Sam, don’t get everyone all hopped up to invest in seaside properties in Oregon and Washington. I’ve got big plans to buy a cheap oceanfront plot, preferably in Oregon, and build my dream house for retirement. I’ve still got about 13 years to go, so if I get priced out of there in the meantime, I’ll smack you. :D
Ha ha! You need to make a move within the next three years or else be priced out forever!
S
Almost exactly 3 years later…..YUP! Nailed it. Hope he ponied up and bot property 3 years ago, and if used leveraged lowered his rate.
You talked about PayPal fees…and I agree. Awful.
A few years ago I heard about dwolla.com and have been singing their praises ever since. The are a better, more modern version of ACH transfers, with the difference being that you do NOT have to give you routing number, or checking account number to other people (yes, you do have to give it to dwolla).
They started off charging only $0.25 per xfer, but have been fee free for 1.5 years now.
You can do commercial/business accounts and pay people/request money also for no fee.
I’ve gotten my pre-school to use it, my homeowners’ assocation (Condo HOA), and even got my contractor to use it here in SF while remodeling last year.
Not an invester, just a very happy user…who hates paying fees.
The opportunities I was thinking of relate to the election. With Bush, investing in oil was a good idea, since he is an oil man. Obama was healthcare. If Trump is elected, stocks may dip across the board and offer an opportunity to snap things up at a discount. If Hillary is elected, I am not sure which companies benefit the most. Perhaps banks? Healthcare again?
More long-term arbitrage, I would look for companies automating routine tasks or being able to take advantage of automation technology. Driverless trucks is an example. Big logistics players could save a bundle when this technology becomes mainstream. Mining companies could cut costs with driverless construction equipment. That’s my two cents.
Always love your writing style. “Instead, you hug it tightly before you go to bed every night!” Never would have thought to see it that way.
You’re a classic example of “be so good that they can’t ignore you.” I don’t know personally of many people who was offered a 500k guaranteed salary for working 2 years. I know you didn’t take it but wow, that’s incredible. Motivates me to try harder at my current job!
Now imagine if you rented all those years since 2012. Not only would you have missed out on those games but you would’ve also paid ever rising rental rates. It’s true that there is so much more optimization we can do with our money.
The appreciation in the coastal cities are tempting. Even with the housing crash back in 2008, NYC hasn’t been affected too much. I don’t have the cash to invest in this area…heck, I don’t even think I have enough to buy a primary residence. I do own a small co-op in Queens. With a growing family, I sometimes consider renting at some point but would be upset if I missed out on more appreciation. As to real estate investing, I bought a property in Kansas City, Missouri…Google picked it as the first city where it would provide Google Fiber. I’ve read that that area is also known as “Silicon Prairie”…basically Silicon Valley of the Midwest. And there were some other factor which made me consider that location. Also since you mentioned Nashville, I read this article which you might find interest:
https://www.wsj.com/articles/aol-co-founder-steve-case-on-the-rise-of-second-cities-1477060404
I think Seattle area is still a pretty good buy. The economy should be able to support these housing prices. There are a lot of good paying jobs there. Portland is another story. The price is lower than Seattle, but there are not a lot of good jobs here. More software people are working remotely from Portland now. However, there are not many main offices here. Once we get a recession, I predict the remote jobs will decrease and the housing price will drop quite a bit. I don’t know, though. It could be different now.
I’m going to try RealtyShares next year! :)
I know that my friend who is a patent attorney in a big East Coast city is looking forward to her firm allowing full-time remote work. The firm won’t have to maintain as many offices and she and her wife can move to the area in the state they’d prefer to live. Slightly cheaper, but mainly better life quality.
My business is location independent as long as I have a access to mail. We’ll see what happens in my girlfriend’s next career move. We both need cities with public transportation until self-driving cars are viable. After that, I could see us going further inland. The Twin Cities still seem like affordable places to live.
As a 24 year old tech worker looking for his first home in the Seattle area, I can say it is a very frustrating time. It feels like I’m being squeezed out of the market very quickly. I have to keep setting my sights lower and lower (smaller, further away, fixer upper, condo rather than house).
I feel for those who aren’t tech workers and are trying to find a place to live in this area without driving 2 hours to/from their job every day. I don’t know how they do it anymore. I’m on the fence as to whether I should settle for something now or wait for this craziness to end.
The problem with real estate recently is that it has been appreciating at a faster pace than median income. It’s unsustainable in the long run, so I wouldn’t be aggressively chasing now after 7 years of recovery. You have to pick your opportunities much more carefully, which is why I’m investing less money in much lower priced parts of the country with higher rates of return through real estate crowdsourcing. I’m also AGGRESSIVELY saving cash to wait for potential bigger opportunities.
Seattle could very well keep on going w/ Vancouver implementing its 10% foreign tax and so many companies doing so well there. But it’s clear SF, which appreciated first, is slowing. And I think it’s best to take it easy on coastal city RE for the next couple of years.
Related: Buy Real Estate As Young As You Possibly Can
Thank you, I really appreciate your time taken to respond.
The SF and Vancouver models definitely are what scares me about Seattle. It seems foreign investors are still very interested in U.S. real estate and pushing prices higher. I am also concerned that if interest rates rise, it will keep inventories low for a while country-wide because of “rate lock-in” with people who bought homes at lower rates.
Maybe I should save for a down payment a while longer and see what next Spring brings to the real estate market. At least inventory levels will be higher then.
I haven’t put it up yet but I’m about to publish a post on Emerging Markets Stocks. They have done poorly vs the S&P 500 for 5 years and particularly the last three. Now the difference in valuations is hard to ignore. I aggressively shifted out of US stocks (60% of my NW to now 20%) in late 2015/early 2016 and moved the money to an emerging markets index (doubling my investment there). I also placed smaller specific investments in Brazil (this one is up nearly 100% for me) and Poland. The investment is paying off so far although I realize the timing has been pure luck. I made the bet based on the likelihood of the next 10 year investment returns in the US vs Emerging Markets. Despite the run-up this year, emerging markets still have very attractive valuations for long-term investors at this point.
Just like your coast vs non-coast cost differences, there are significant developed vs developing economy differences that will close over time (faster and faster every year with increased mobility and the internet). There is a lot that other countries can do to improve productivity, which ultimately drives earnings and stock prices. People in other countries are just as driven to improve their lives as anyone else…..it’s just a matter of how fast everything shifts and what bumps happen along the way.
Investing in emerging markets was my career from 1999 – 2012. It was a good time with so much explosive growth! Any particular countries/sectors/companies you are looking at?
I live in the Seattle area but 5 years ago decided to buy a rental in a midwestern city I used to lived in. The main reason was that I could cash flow there with 20% down and could not in Seattle plus I could tie up less cash as real estate is cheaper in the midwest.
I missed out on great price appreciation in Seattle but also avoided the headache of negative cash flow and laws unfriendly to landlords.
Realtyshares sounds like a great way to diversify my real estate investment but I also lose the direct control of my investment and tax write offs.
How much has your Midwest property appreciated over the past five years?
Negative cash flow is quite common in coastal cities w/ 20% down for the first two years. But then the cash flow breaks even and starts to get pretty good by the 5th year.
I really like to buy property to live in and then rent out 2+ years later for income.
Appreciation is a steady 2-3% per year which is not much. It rarely goes through booms and busts. Seattle would have been much better over the same time period but back in 2010 I was looking for safe and steady after feeling burned by the recession.
I’d love for the real estate market to take a nosedive. Prices where I live are insane. I was walking around a nearby neighborhood the other day and looking at some of the houses. Very nice houses, but ultimately just regular houses, some of them only one story. But I’ve seen them go for $800,000 to 1.5 million! Again, very nice houses, but anybody who pays THATmuch for these houses is insane. Unless there’s two sub basements worth of pirate treasure and a spigot in the backyard that provides literal cash flow, I just don’t understand how prices could possibly have gotten this high……and how people are so willing to pay. The value just isn’t there; I don’t care what neighborhood or city the house is in.
I really love the idea of using RealtyShares to invest in properties in cheaper cities. Sounds better than landlording to me.
Sincerely,
ARB–Angry Retail Banker
As if the Internet needed to ram this point home, I just stumbled upon a website dedicated to buying private islands. Had to share it on Twitter. And, I’m not making this up, some of these islands are cheaper than regular houses in my area.
Most likely because most of them are expected to be under water (literally) in the next decade or two as the polar ice caps melt and the sea rises thanks to global warming.
If it looks too good to be true, it probably is – and that’s the rub for all those small private islands barely above water today.
Eh, just turn it into a marina, then. Sink a couple of boats nearby for an artificial reef and offer snorkeling/scuba packages. ;)
Global Warming? LOL Thats silly. I saw a website selling Islands years ago and it turns out there are tons of them up in Canada in the many lakes there which are very affordable. We’re talking a quarter to half a million and these have nice houses on them with docks. Just depends on if you want to travel that far and be in the cold eh? Its like private islands online or something. I used to spend hours looking at that site just for fun!
That’s the site I was looking at! Hasn’t changed. Buy a private island near Nova Scotia for $300,000. There’s gotta be a catch. $300,000 in my city will get you a tiny house in a low income neighborhood.
I don’t know – I think the low prices are just a result of the low demand because these places are in such remote locations. How many people can handle living that far from civilization? And any repairs or new items you need must by definition be brought in by boat which is very expensive. But hey, I’m still interested. If nothing else I find it immensely entertaining to look at the website. Maybe I’ll write a post about it!
Hmm is it really arbitrage when dealing with Real Estate? I guess technically it isn’t since its not tradable in a different market. But I get what you are saying and agree that crowdfunding basically increases the demand for properties in depressed areas greatly. There seems to be more and more out of state investors who are willing to buy in a market they are not familiar with and where they may not have visited.
All the more reason to use a property manager if you aren’t going to be in town to oversee things. I like the idea of buying partial share in deals to get the exposure but keep the smaller scale. However, I would generally choose investing in the Stock Market to that.
What are some arbitrage opportunities you’re looking at in the stock market? Thanks
Maybe I am being too narrow in my definition of arbitrage – I’m thinking it really means that you take advantage of a price difference for a commodity-type item that presents itself in two different markets simultaneously. Like say that steel prices spiked in Southeast Asia but dropped massively in North America. But the price of oil also dropped and shipping companies were experiencing an oversupply of vessels. Shipping might be cheap enough to profitably arbitrage the price of steel by buying in North America and selling in Southeast Asia.
I know YOU know this and therefore am not insulting your intelligence – you could probably explain this better than me but I thought it would be of interest to illustrate my narrow definition and be interesting to some of the comment readers.
So in the stock market right now I’m not seeing any arbitrage opportunities or merger premium/discount (is that different? I am thinking it is) opportunities. I did notice what KT said about LNKD and Microsoft and see that is more of an M&A premium opportunity but see how that is really arbitrage at the end of the day.
Some folks are into quantitative assessment of options contracts and find pricing issues there that are like arbitrage but who has the time?
I was saying – instead of worrying about arbitrage why not invest in a plain vanilla long-term index ETF position in stocks? 8-12% return and if you don’t sell you pay no taxes. BAM – that is a good investment. My 2 cents.
Thanks for your comment. It actually is very insightful in the way I’m thinking about writing in the future. I’m not sure if the general audience is interested in things such as arbitrage opportunities and try to exploit inefficiencies and price gaps.
I’m thinking I really should start writing more about plain-vanilla index fund investing, budgeting, saving and basic finance stuff. It would help connect more with all audiences, instead of a niche audience. I think I can just get other people to write about the basics under the Financial Samurai brand while I work on writing about other stuff that interest me.
Let me know any specific topics you be interested in reading about as a formulate my editorial calendar for 2017. Thanks!
I vote for continuing to serve your niche readers. Perhaps you won’t reach the greatest possible number, but you can help the ones you do reach have a bigger impact on the economy and their own lives.
There are a lot of personal finance bloggers, but few get into more sophisticated strategies that are are relevant for high earners and mature balance sheets. Keep writing about what you are personally interested in, and your niche audience will be sticky and make your job more satisfying.
Hi Jon,
Thanks for sharing your opinion. It is interesting that the largest personal finance sites also write about the most basic topics. I think there’s a good balance in there where I or a staff writer can write more basic topics to grow the audience, while also touching upon more nuanced topics to make more money. I’m not sure there are sites out there that do both.
S
Sam,
I think a mix of both is appreciated. Your topics do cover a wide spectrum – so there is really something for everyone. I like that I can click on a topic or keyword in the sidebar and search through dozens of articles you’ve written which touch on the subject.
I think the secret sauce here is your whit and writing style. There is also at least one “A HAH!” moment per article which makes me rethink the way I approach things. Looking forward to your take on the “simple” stuff.
Hi Sam,
I’d love if you wrote about your criteria for buying and selling individual stocks.
Thanks, Bill
I do enjoy reading about some complex strategies (condors stock option spreads for example) but generally have found that since I already have a full-time job, I don’t have the time or energy to pour into that. Additionally, I have had the most success in buying and holding leveraged ETF investments.
In any case – I think dollar cost averaging, investing in index funds, how to choose an online broker, margin accounts, and college savings accounts would probably have a broad audience. I’m currently thinking about writing something about the thrift savings plans offered to the Armed Forces and believe there is a large audience interested in that topic as well.
One big topic, perhaps the elephant in the room, is that many many people have removed their money from the stock market. Some Millennials don’t invest in the stock market. I think that is a horrible idea and worth some emphasis! Have a good one.
Thanks so much for all your hard work and information, funny this article is exactly what we did back in 87′. Left the Bay (couldn’t afford a home on our income) hubby is a therapist and was just finished w/ his Masters degree.. and we moved to Monteray Ca if you can believe it.. because we could afford a small bungalow and could work there and enjoy all the benefits of living on the coast.. fast forward, couldn’t afford a home in Carmel Village ( we were aghast at the 135k for a bungalow downtown (this was when Clint Eastwood was mayor!) and looked out in Carmel Valley where we had an offer to buy a home for 110k on nearly an acre! – but the drive was brutal – nearly 10miles of windy road back into town.. Boy we often laugh at how naive we were. So we moved to Seattle- skimped, scraped and built a custom home over on the peninsula side ( near Gig Harbor) remember at that time the rates were so crazy nearly 10% interest and we had a contractor that owned the property outright- and our deal was that if the interest rate went up to 10% before we closed, that he would carry the loan for up to 2yrs.. WELL it did and he did..but the house was >1800s/f and 85k we lived there for nearly 3yrs and sold it for 135 with a $12 add in the newspaper – my husband was now working as a therapist w/ a large start up EAP firm with contracts all over the country- and we were dying to return to Cali one day. We had our 1st child (and only) and he was still licensed to practice in Cali.
We were lucky enough to have an offer for him to return to Cali in 91″ (right after the .com bust!) where we bought our next home up in the Oakland Hills for 305k -this was also hard times in the Bay.. but since we’ve always worked in Health Care.. we were ok.. but it had cost us >3x as much to return to the Bay- prices were flat in the Bay for nearly 5yrs.. sold that house for >460k (the bidding wars) in 2000 and moved to Sac where housing was booming and 1/2 the price. It’s great to be an investor ( we ended up buying 2 homes in Sac- but lost it all during the 06′ downturn-and now have relocated to Chapel Hill NC (Love, it) have many stories about the past 8yrs but so, so glad we relocated. Love the Bay , were both 3rd gen Cali natives, but the energy there has changed so dramatically much to add but boy if you can do it to build your wealth there is so much to the upside if you can take the risk.
We wish we could have bought 20 properties during this last downturn- but in our 60’s and having lost everything right when our daughter was starting college was painful in so many ways. Now living and loving NC.. no way we could have had this home in the Bay.. or the lifestyle. Now we’re on >acre in a gated golf community in Chapel Hill, but are looking at oppty’s out in Charlotte ( way cool city!) since our daughter is now looking to buy. There’s so much out there and we hope to be able to expand our investment for positive income in the next few years.
First of all, thanks to you pointing out crowdfunding sources such as Fundrise and Realtyshares, I’ve now invested exactly $250k in various deals offered on these signs. This comprises 20% of my total liquid net worth, or asset allocation.
Here’s an arbitrage for you, buy LNKD! It’s trading at $189 per share and MSFT is closing their purchase this quarter. It’s a 99% sure deal because #1 MSFT would have to pay $240 million to walk away, and #2 MSFT issued $30 billion in corporate notes to fund the purchase.
Such a great idea LNKD. Take out price is $196/share, so there definitely is an arb there.
I’m impressed you were able to find so many deals and invest so much so quickly in RE crowdsourcing. I’m a snail when it comes to allocating new capital, but I do plan to get to those levels by end of 2017.
Realtor fees are really absurd! With the amount of information online today, the realtor doesn’t come close to earning their 5% fee unless maybe it’s a very expensive or unique home. In my hometown, Kansas City, a new company called Keyzio is charging a flat rate where you get everything from professional pictures to an exclusive agent to work with. I have a feeling we’ll start to see more and more companies like this pop up and the traditional model will eventually become extinct.
I think as the workforce becomes more mobile and untethered to the traditional office that more people will try to locate to place with low property taxes, income taxes and sales taxes. I think this spells bad news for states like Illinois, New York, and Massachusetts.
Just like Detroit has started to decline, these cities with their cold weather, high tax rates and high regulatory envirnments will eventually push residents out.
I think states like Florida, Texas and North Carolina will flourish as result and you’ll continue to see an increase in population in these states.
Plus on top of that with retiring baby boomers coming of age. Who wants to be cold and taxed a lot? These snowbirds are going to continue to the trend towards the sun :)
Good thinking on the 7 no income taxes states. Nevada and Washington may benefit too.
Related: The Best States for Retirement
Northern Nevada has a lot of SF refugees as well. Reno is about a 4 hour drive from the Bay Area which has led to quite a bit of craziness in the market. I should have bought a condo when i was living there. I would have sold it right before the market cratered. But then again it would have been a headache so it’s entirely possible that I’m better off without it.
Australia is an interesting case because something like 95% of the population lives on the coast. This means that real estate in coastal cities is ridiculously expensive. I always thought that technology would be a great leveller, and some of the lifestyle communities on the coast would become way more attractive as permanent places of residence compared to some of the cities.
As an investment thesis it has worked out ok so far. As remote working and telecommuting becomes more accepted (and I think this requires time, rather than some sort of proclamation) I would think that living within travelling distance of major cities (say, an hour to an hour and half) rather than in cities will become more and more attractive. You no longer need to live in cities permanently to have access to all the stuff cities provide, thanks to the internet.
In terms of arbitrage? Maybe not strictly arbitrage as defined, but Europe looks much more investable from an equities point of view than the US. Might be a good time to tackle some international diversification!
Arbitrage.
Funny you wrote this. With so many crowd sourcing startups offering inexpensive money, it’s the perfect time to use the money to pay off other high interest debts.
Then, once ready, folks can feed the hungry bears. Use the same crowdfunding opportunities to invest in real estate for the long haul, or buy low enough to make a profit when selling to someone who is looking to invest for the long haul.
Sam,
I always get happy when I see Seattle home prices surge–my sister and my mother both own homes on the east side of the Seattle area! My sister bought a house with her boyfriend a few years ago and it’s appreciated nicely over that time period.
The house my mom owns was purchased in the early 90s, so it has been a good investment aside from it being a primary residence! It’s in a great area and the local public high school is one of the best in the state. The cool thing about it is that the property sits on a pretty big lot there’s probably expansion opportunities in the future.
I think the Seattle property market is positioned to do well even for the next decade or so. There are just so many blue chip employers in the area so that unemployment is very low (aside from the companies you already mentioned): Microsoft, Google, Nintendo, Expedia (who just bought a huge building in DT Seattle), Boeing, Costco, and so many more that I’m probably forgetting! Plus a lot of Chinese investors have been scooping up properties as well.
One of my biggest investing regrets is Netflix back in 2011 when they announced the ill-fated price increase. The stock absolutely cratered! I had done the research and was very tempted to buy it….but valuation held me back. Boy do I wish I could go back in time and reverse that decision now! I wish I had cojones like Carl Icahn!
The question for you and everyone is: what’s next?
Congrats on your family riding the way. I could have bought Netflix at $10/share in 2006 when Reed Hastings spoke at my Berkeley MBA commencement address. Oops. But got to focus on future opportunities.
Here is a hypothesis; The baby boomer generation is in the middle of retiring out of the workforce, yet we as Americans have a propensity to not save and it was only 8 years ago that most people’s portfolios took 30-40% hits. There are a lot of 55-65 people with scant savings, in a 1st world medical-industrial complex that will keep these people living longer than ever before. There will be tremdous opportunities in businesses that operate retirement homes and assisted living facilities AND our American culture will need to shift back to multi-generational living due to the expense of real estate and longer term care for older parents. Developers that understand this and design their homes accordingly (in law suites, 2 kitchens, private entrances, etc) will find their projects in demand
I’m not sure I understand the difference between investing in RealtyShares vs a REIT. I get that in a REIT Im investing into a corporation that owns individual real estate, but I’m not sure what the benefits of the former are. Thanks.
The former allows you to invest in a specific type of property in a specific location. REITs, although more and more specialized, consist of a large basket of different types of property all over the country.
Think buying the S&P 500 index and then adding positions in specific stocks you think will do well or outperform the index over the long-term. Same thing.
Your comment about harsher climates in the South driving a discount raised an eye brow. In terms of weather I’d dare say the north east has a bit of a leg down on the south for weather. Thats why places like North Carolina are growing in bounds. Speaking of North Carolina, I’d probably be looking to purchase property in somewhere like the research triangle if I was looking for an opportunity. We’ve looked at relocating there from the mid Atlantic multiple times, and probably will at some point. Cheaper and plentiful higher end jobs. While where I live doesn’t compare in price to NYC or SF, its still on the low end of high.
I never considered buying out of state property because it just seemed too overwhelming and stressful to manage. I suppose if I had a really good property management company it might not be so bad, but I feel like there would still probably be issues that’d crop up and not being able to easily access the property would give me a lot of anxiety. I really like the concept of REITs and RealtyShares though cuz that makes it so easy to gain exposure to different types of properties all over the place without dealing with the stress of managing and maintaining them.
I’m sure you probably are bummed that you missed out on Seattle/Portland properties before they ramped up, but don’t let it get you down. You’ve done really well for yourself without them!
I wish it was easy to invest in “mini reits.” I visit Seattle frequently, but can’t imagine owning property remotely. However, I’d like the opportunity to invest in a slice of rental homes in specific areas in Seattle, like Capitol Hill or Wallingford.
For example, a landlord could own 10 owns worth $5M. I’d like to buy 10% of that for $500k. The landlord would get investment and a management fee and I’d get a chance to own property in a growing area.
I live in DT Bellevue, WA. Amazon, Salesforce, Hulu, and many other tech companies are moving into the Bellevue- Seattle Areas. Due to Vancouver raising tax rates on chinese investors to purchase real estate. They have decided to purchase in the Seattle-Bellevue area now. With the Job openings, the new light rail that is currently being built, and chinese investors. I can say that Seattle – Bellevue is a good investment opportunity.
I like that granularity! You are right. As Canada regulates their housing market after letting everybody else but their own people own their land, money from China should clearly shift towards other West Coast cities. It just feels bad buying now when I could have bought 10 years ago.
I’d say Tacoma just for the huge price decrease in relation to the commute which will just get shorter with the light rail.
Am actively looking to move from San Jose to Tacoma now. Want to cash in my equity and get out while the getting is good.
Dependng on your length of time in San Jose, moving to Tacoma will be like traveling back in time. Tacoma is in some ways, Seattle’s San Jose. In other ways it’s the Oakland. In either case, it’s about to explode down here (I think/hope!).