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 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.
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.
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.
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 Personal Capital’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 Personal Capital 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 :).
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.
Terry Pratt says
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.
Financial Samurai says
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.
Financial Samurai says
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.