Forums General Questions Opportunity cost

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  • yackov banash Newbie
    Post count: 4

    Hey what’s up preston and stig first I want to start off with a big thanks for your website books and YouTube podcast and videos it’s amazing . now here is something about me my name is yakov I’m 18 I live in Brooklyn ny like I said I listen to your podcast and watched all your videos and I came up with an idea and I want to know what you think of this and please dont laugh if this is really stupid lol . Now as I heard you saying over and over again talking about opportunity cost and how the economy [stock markets] reflect on intrest rates I came up with this idea. if I have now x amount of money y should I only look on opportunity cost in the stock market and bonds y not look around in other investments like example real estate and after thinking more about I came up with situations when it can actually be better then bonds and stocks for example If the interest rates are low that usually means the stocks are high and vise versu now I came to think it’s TRUE but reality you have to split it in 3 actually becouse when the intrest rates are low the economy will get better until it will crash or intrest rates get higher so when the economy is pretty good and the interest rates are pretty low then your opportunity cost will in both be not good or bad but in real estate becouse the interest rates are pretty low you can borrow money for pretty cheap so y not then take out a loan and use your money for a down payment so now not only do you have a better opportunity cost option but your also getting pretty much.a fixed income which will help you have money to reinvest when the economy gets bad I hope you understood what I said and please please get back back to me with and answer thank you so much and again I really appreciate and love the work you put in to help ppl like me have a good day

    massive4000massive4000 Senior Member
    Post count: 44

    Hi Yackov,

    I got a little confused from reading what you were trying to say. But this is what I got out of it, let me know if this is correct.

    “Hi Stig & Preston,

    Thanks for all the hard work you put into the videos & podcast! You’ve often cited stocks & bonds as being tied to interest rates.

    In a low interest environment where stocks are at all time highs and bonds pay next to nothing, would it be better to deploy cash in another asset class such as real estate where I can convert it into a rental property allowing me to receive income which can later be used to deploy back into the market during a crash?”

    I believe Sitg has mentioned investing in real estate in one of the recent podcasts.

    If you do plan on renting out there is a few things you probably should consider. As a lanlord you have to tend to the needs of a tenant, i.e. broken plumbing, city regulations. If it’s a house, then you would have to worry about neighbors protesting you turning it into a rental. Suppose you get a bad tenant who ends up missing rents, you would have to chase them down for it. The law is on the renter’s side, you can’t just kick them out.

    Once they leave you would also have to factor in any damages they may have caused which you would have to pay to repair in order to rent it out again. Lastly if the economy is in bad shape, and people are losing jobs, you may not have a tenant to rent out to which means you would still have to pay for the property tax.

    it takes time to make money, give yourself "time"

    yackov banash Newbie
    Post count: 4

    Thanks for replying so it does answer my question alitle

    but I think you didnt understand 1 part let me try to explain with an example .

    let’s say on average over 10 years if you invest in stocks you will receive 10% on your money and real estate 7% on the lowest Circumstance even if you dont have a tenet for like 1 or 2 months if you take out a loan that on average you pay 5%. and bonds 5% .

    now when the economy is good and stocks are over priced let’s say the intrinsic value will be 7% and interest rates are low as well let’s say at 1.5 % now becouse the interest rates are so low you can take out a loan on a house and pay about 3% instead of the 5% average and your return will be 9% instead of 7% like Usual .

    So in total for this day you have 4 opportunities

    1 stocks and you will receive 7%

    2 bonds and you will receive 1.5 % and it will be less worth when the intrest rates go up

    3 real estate and becouse the interest rates are so low you will receive 9%

    4 hold in a cash position until a better opportunity

    I’m asking this becouse I tried making alitle research and found that their are big millionaires that do real estate and dont know and invest nothing in stocks and vise versu that dosent invest in real estate I was just wondering wouldn’t it be amazing if 1 person Looked at opportunity cost not only in bonds and stocks but in example bonds stocks real estate and even hard money loans it will almost guarantee him that he will out perform any general market

    Note

    I’m sorry it’s so long just please lmk which of the 4 options you would of picked and y if possible have a great day and thanks again

    massive4000massive4000 Senior Member
    Post count: 44

    Hi Yackov,

    I guess I’m a little more confused.

    It sounds like what you are saying is

    You would like to borrow at 3% and buy a bond at 5% to mitigate the 3%, while taking in rent at 7%, bringing your return at 9%?

    If that is the case then

    Since you said you’re from brooklyn, I’m going to assume you want to buy around that area. According to Zillow the average home in brooklyn is around 700-800k.
    https://www.zillow.com/brooklyn-new-york-ny/home-values/

    So you would have to borrow 700k at a fixed rate of 3% and then somehow find a risk free bond at 5%.
    So your your only getting 2%. Because this bond has to pay for it’s own borrowing cost.

    You still haven’t bought the house yet, so you would have to borrow an additional 700k at a fixed rate of 3%, for a total of 1.4million $700kx2. Assuming you have an amazing credit score.

    The bond is still not enough to cover the 3%, unless you find a 6% bond.

    The average rent in brooklyn is around $2600 according to this. Which Equals out to about 4.45%
    https://www.rentcafe.com/average-rent-market-trends/us/ny/brooklyn/

    Since you borrowed at 3% -2% from bond, -1% from rent leaving your remaining return at 3.45%.

    Those are just really rough numbers and still doesn’t account for maintenance cost and taxes.

    it takes time to make money, give yourself "time"

    yackov banash Newbie
    Post count: 4

    No how did you get that I wanted to buy bonds what I said is that I’ll take out a mortgage for about 3% and because the average interest on a mortgage is 5% and I can get it now for 3% I can. Add 2% more to the average return which is 7% and 7%+2%=9%

    massive4000massive4000 Senior Member
    Post count: 44

    If you are taking out a mortgage you are borrowing from the bank, so the 3% is interest you have to pay them on the borrowed amount.

    So 7%-3%=4%, oppose to 7%-5% average=2%.

    it takes time to make money, give yourself "time"

    yackov banash Newbie
    Post count: 4

    Ok it feels like me or you are not understanding something here lol.

    When I said that on average real estate you can expect to receive a 7% on your money I ment for example that if you bought a house for 100k and put down and downpayment of 30k and took out a 30 year mortgage for 70k on a 5% interest I’ll pay a monthly payment of 375$ and let’s say the property tax and maintenance cost 2000$ a year and I can receive rent 8600$ a year that’s a 7% return on my 30000$ investment

    I put in 30000$

    Mortgage 4500$
    and property tax maintenance 2000$
    _________________total 6500$

    Income rent is 8600$

    Net income 2100$

    30000+7%=32100.

    Now if you make the same calculation just with a intrest rate of 3%

    Mortgage 3550$

    Property tax and maintenance 2000$

    _______________total 5550$

    Income rent 8600$

    Net income 3050$

    30000+10%=3300 so if you see whith this example becouse the interest rate went down with 2% I got in return 10.1% rather then 7%

    Note. dont quote me on the numbers it’s just an example

    Zahidul Riyan Moderator
    Post count: 49

    Hi Yackov,

    It’s great to have you here in the forum. I would like to provide a brief answer to your query here –

    An opportunity cost is a cost of not choosing other alternatives when you make a choice. Here in this case, your earnings yield would go down as you make every single payment towards your full mortgage payment. The real pain is in not being able to sell/flip the asset when you are getting less than your expected yield since real estate is not as liquid as many other financial assets. It is also important to understand that when the interest rate goes down/QE (Quantitative Easing) takes place almost all financial assets go up in price (since liquidity is pushed into the economy because there is slack in the economy and central bank starts buying financial assets). There are other things you might need to consider with a real estate investment which I won’t get into much details here but I would strongly recommend you to watch this video (https://bit.ly/1e3JNnz) by Ray Dalio to have a better understanding of macro level in an economy.

    Have a wonderful day.

    Many regards,
    Riyan

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