Thursday, November 29, 2007

The Way to Make Money

I found a quote by JD Rockefeller a couple of years ago that may have some application today. He said "The way to make money is to buy when blood is running in the streets." I have been working with a number of builders and developers that are willing to sell portions or all of their land holdings to reduce their expenses. One developer let me know they would sell finished residential lots for 46% of their cost. If you apply standard metrics for the ratio of lot price to home price you get a finished home and lot price of $220,000. If you apply the standard mortgage to income ratio of 28% the minimum income necessary to purchase the home is $60k (assuming 30 years at 6.5%). What I like about the previous calculation is it shows prices are starting to reach affordable levels for most people. The problem is there are many homes in the area of the afore mentioned subdivision that are being listed for $150k. Until those homes get off the market the ones for $220k will be at a significant disadvantage. I consume a lot of financial information during a typical week. This blog's content is a reflection of my constant search for information. I am seeing some signs indicating this summer (2008 that is) could be the apex of the "blood running in the streets". Only time will tell, and I have been wrong before. I know this is going to sound corny but a lot of my investment decisions are based at least in part on my gut feeling. My gut feeling is directly related to the information I consume over the previous 6 months or so. What I am getting at is my gut does not tell me to jump in with both feet yet. I feel cautious. A lot of people do. With that said, I remember when you could buy lots here in SW Florida for 5-10k just a few years ago. The prices were depressed because everyone thought "who would want one of those?". A broker once told me to avoid lots in a "bad" neighborhood even though the lots were selling for $500. This may not be sound investing advice but anytime you can buy something as tangible as lot for less than a used car you should at least ask yourself "why not?". Just because it looks like no one is buying or there is a lot of something does not mean it is not worth consideration. There are only two downsides I see to buying a cheap lot and they are opportunity cost (what else could I invest in that would provide a better return) and the carry costs such as taxes and interest payments. That is it for now. I hope all that read this blog had a good Thanksgiving. I will write again soon. If you have any questions, feel free to email me or post it on the board. Dave

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