Friday, August 29, 1997
The Quick Buck
Spurned
by
[email protected]
I promise, the following is a true story.
I'd like you to meet my friend Julie, a 40-year-old single parent who has been, in my mind, a fabulous success story: a native of Britain, she was abandoned 12 years ago in North Carolina by her American husband, left to fend for herself and her two very young children. She went to work as a secretary, and supplemented her income with highly leveraged no-down-payment-type real estate schemes, eventually managing to have income-producing properties and a beautiful home of her own in one of the best neighborhoods in this affluent part of North Carolina. She has risen in her company to an excellent salary with management responsibilities.
She is also in debt up to her eyeballs.
Me? I'm a computer-programming, single parent who lives in a smaller house in a low-prestige neighborhood, and manages a debt-free (barring mortgage), living-within-my-means existence.
And Julie is offering me "a quick $25,000". She has secured a loan on a $350,000. house on an exclusive beach with a $270,000 mortgage plus a $30,000 short-term note. Rental on the house has paid for the mortgage and expenses, and then some, so far this summer. But the note is due, and she wants me to sign half of a $300,000 mortgage so she won't have to lose this prize (her debt ratio precludes her getting this mortgage on her own). My investment cost? Nada.
I said, "no."
At Jumbo loan rates, my obligation for my half of the loan plus taxes, insurance, dues, and maintenance will be around $1,600 per month. The first long vacancy will have me coughing up a few hundred bucks -- or more -- out of pocket. When I suggest she (or we) just flip the property, she looks at me as though I had suggested she auction one of her children. Lose the future value of this house? Am I crazy?
Why can't I see the opportunity? Because I worry about this major increase to my monthly nut, and what would happen if the house suffers some catastrophic damage or has lesser problems that make it unrentable? And what about the "lean times" during the (1/3 of a year) off-season? I won't be able to sleep at night.
Julie wants to know how I can be so closed minded when it comes to real estate investing, when I am otherwise willing to "gamble" in the stock market.
I answer her Foolishly, that I can plan and follow strategies with stocks, and know that if I am wrong, or if a catastrophe happens to the market, I lose what I put at risk, and I understand the risks. To mitigate the risk, I have a portfolio with large, well-known, industry-leading stocks (i.e., BTD), and an unemotional investment strategy I learned about here at the Motley Fool, with some diversification. I never lose sleep worrying about the world of stock equities.
Julie is suffering through what amounts to a real estate margin call. While the quick money she finds so attractive may be something I will never experience, I will also never lose any sleep worrying about the safety of my investments.
Ken Kellerman