The basic model inputs are:

• Home Value
• Loan Amount
• Interest Rate
• Monthly Rent
• Monthly Maintenance
• Annual Taxes

Tweaking those values within a reasonable range doesn’t produce a positive cash-flow company.  The real way to make this work out is to lower the home value (and loan amount) to below market prices for my target markets.  So, this puts me in the position of trying to find properties in this price range.  There are none in my neighborhood for sale (bank-owned or otherwise), nor in the neighborhood next to mine.  I don’t think any of my valuations are outside the range of believability.

This leads me to several conclusions:

• Home values can still drop a long way.  If properties aren’t rented for what the market rental rates are, then something needs to give.  Also, if I am a tenant and pay less than my landlord pays, I should really start to worry.  If I’m that person, I might think twice when renewing my lease.  The landlord is now worse-off because a vacant property produces no income.
• Current investment properties are not going to change hands soon.  There’s no reason to futz with any house that is generating net positive income.  If someone is doing this with a recent purchase, good for them.  House values have fallen enough that it doesn’t make sense for investors to sell, and as long as rent checks continue coming in, there’s no reason to take drastic steps.
• Rental companies like Post Properties (NYSE: PPS) may see an increase in rentals.  If the only practical way to generate rental income is to own the entire supply chain (from property acquisition, through construction,  to rental), then only major companies who have access to the necessary capital markets will be successful.

I’m sure someone has figured out how to do this other than light night television marketers.  I don’t think I made a bonehead mistake in my financial model, but I can’t figure out how to make this profitable.  Even if I factor in the depreciation of the house, it continues to go negative.  Am I missing something, or is it becoming impossible for the individual investor to make money by buying and renting homes?

Note: I picked up a copy of The Intelligent Investor a couple of days ago.  I am slowly working my way through the book and hope to become more intelligent at investing.  Any stock transactions I make today are really just “speculation” in the eyes of those that practice value investing.  I’m comfortable reading through a company’s financial statements thanks to my MBA program, and I’m good at thinking through business logic, but I still see the stock market as this other entity and I struggle to make sound financial transactions.  I’m at the point where I know how much I don’t know and need to educate myself further.

Having useful data lets you talk to customers and sell them more of what you have.  If the truism holds that, “the best customer is an existing customer,” then every interaction with a customer is an opportunity to sell them something else.  By using data about your customers and performing real-time analysis of the data, companies can offer new products and services to customers with greater success at lower cost.  (Don’t take this as an opportunity to sell them junk.  If what you sell stops being useful, then you’re not going to have a customer for much longer.  You shouldn’t leave a customer with buyer’s remorse.)

There are lots of opportunities to look at data on your customers.  It’s possible to determine the benefit of advertising campaigns or conversion of prospects to sales.  Google’s Adsense and Google Analytics harness data and make them free to potential advertisers.  Their view is that the more effective your advertising becomes, the more money you’ll spend getting ads in front of the right prospects.  (For those that use ad blocking software, Google also states that the better the ads and the more relevant to your search, the less likely you are to block the ads in the first place.)

www.makehellaofficial.blogspot.com

I see an arms race developing in the tech community for the first person to claim title of having a “Hella-big disk drive.”

For now, I’m sticking with my 1 Terra-byte drive, sufficiently pleased that it is 12,500 times bigger than my first hard drive 20 years ago.

You shouldn’t feel bad about it, and you shouldn’t feel guilty. The lenders would do the same to you—in a heartbeat. You need to put yourself and your family’s finances first.

It’s interesting.  From the bank’s perspective (macro-economically): Except for the short-term cash flow issues that result from you walking away from your debt obligation, banks don’t care that you do it.  You entered into a secured debt agreement (the best kind for the bank!) and the bank charged you 5% for money that cost 0.5%, at most.

Sure, it’s a pain that you walk away from your debt because now the bank has to deal with your property (it’s the asset and they don’t want it to lose value through neglect or abuse).  It’s also going to be harder for you to get a loan in the future, but that should (and will) be the case in the future because of an upcoming change in accounting laws.

Banks that sell mortgage-backed securities and were forced to “mark-to-market” when they tried to sell that debt will need to start doing that annually.  International accounting laws that the US plans to adopt in 2013/14 requires all assets to be priced at market price.  This is a double-edged sword because the value of the assets now fluctuate.  As a percentage of the investment value, the income generated by mortgage-backed securities will fluctuate.  This isn’t something that most investors like, so I expect greater restraint in the derivatives market with respect to mortgage-backed securities.  I wouldn’t be surprised if more mortgages were purchased and securitized by private investment capital companies who don’t need to comply with international regulations.

Investment insurance (very common in big business finance, though you don’t often hear about it) will also be harder to get for companies that want to invest in mortgage-backed securities.   This played a crucial role in AIG’s collapse.  They insured investments and then had a hard time paying out when the investments they made with their clients money also lost value and nobody wanted to buy them.

This insurance costs less than 10% of the value of the derivative (based on the Black-Scholes model), but it’s essentially money that you get back at the end.  Warren Buffet’s insurance companies, like General Re, are very good at making a lot of money by getting insurance payments and investing them in cash-generating products and companies.  They do it by also carefully picking the deals they insure and the investments they make with the money they hold.

So, not paying your monthly balance is also your right and option under your purchase contract.  There’s no requirement to pay.  In fact, the bank anticipates this and asks you to sign away your right to a jury trial in the event that you don’t pay.  (Arbitration is less costly for the bank, and there’s nothing necessarily bad about it.  Judges are usually smarter than juries, too.)

If morality entered into the collective consciousness of the financial world, they would have stopped adjusting interest rates, realizing that the deals they made were bad when they wrote the loans and that some money indefinitely is better than no money right now.

US Economic policy supports the American ideal of entrepreneurship and of risk-taking.  Our country encouraged settlers to expand to the west coast in the 1800s.  Donald Trump may be the epitome of this: Go Big and Go Bankrupt if you fail.  Bankruptcy laws in the US are some of the most forgiving.  It’s our policy that people take extreme risk with money.  Maybe that’s changing, but it hasn’t so far.

A prime example of no morality or sense of collective good are the institutions who made deals that exhibited lack of “fair dealing.”  Banks wanted money and home ownership was the government-sponsored gateway drug to separate people from their money.  And if banks and other financial institutions play be a different set of rules than you and I do, why should we adhere to the same moral code that you and I do in our daily lives?

It’s darn hard, if not impossible, for those without power to enforce their moral code upon those with power.  As long as the banks pursue money at any (human) cost, then the only power we have on a daily basis is to live within the walls of the contract and stop paying if it makes sense to stop.  If you want to live in a house for 30 years, then keep paying your mortgage and you’ll have a great asset when you’re done.  If you don’t want to, then it really is a financial decision.  The decreased home values are the result of banks making it harder for people to get mortgages and continue paying their mortgages, not because there was a significant change in where you live.

Continuing this example, imagine that you have half the space of your competitor.  Let’s also say that you know you make $1 profit on each item you sell.  (Knowing the profit in the product you sell isn’t easy.)  Suppose you also have historical sales data that tells you a particular store sells 100 of your product each month, but that they run out.  All these data are hard to get, but each piece of data gives you power when making a decision.

What would it take to double your sales?  Twice the shelf space?  More frequent restocking?  Prominent placement?  Experiment.  Tell the store manager that you will split the profit 50/50 for every item he sells over the 100 you sell today.  Now, you need to sell 300 units to double your profit, but the manager also makes $100.  The manager will work hard to help you sell. You build brand awareness for a few hundred dollars over a few months.

Then, stop splitting the profits.  What happens to sales?  Hopefully customers really want what *you* are selling and now you make $300 profit on sales of 300 units.  You built demand that brings people to the store.

If they don’t, experiment.  It is your data, useful to you.  Maybe get on the Internet.  $10 for a website and PayPal make it easy to do business.  Or maybe find another store for what you sell.

Data makes decisions.  Everything else is a guess.

It gives you a path to find future opportunity.

I attribute this to a lack of imagination and a history of poor management that caused people to dismiss rail in the US.  With my limited experiences on Amtrak, I’d agree with those who say that high speed rail is no replacement for air travel.  However, if a company brought shinkansen-style travel to the US, I know people would be impressed.

Trains travel at roughly the same speed that they did for much of the last century.  Airplanes travel significantly faster than cars or trains and still beat both for regional travel.  Travel in the US hasn’t really advanced since the advent of modern jet aircraft.

Comparing the advancement of travel to semiconductors (two industries which have no relationship with any basis of comparison, except for the mental exercise):

In 1978, a commercial flight between New York and Paris cost about $900 and took seven hours.  If the principles of Moore’s Law had been applied to the airline industry the way they have to the semiconductor industry since 1978, that flight would now cost about a penny and take less than one second. — via Upgrade: Travel Better

We continue to cling to our historical view of travel.  Aviation is public transportation.  It uses common resources to transport people.  It’s not a bus traveling on roads, but a plane traveling in the air.  The concept remains sound.  The US government committed massive resources to improve air travel: better air traffic control technology, more runways, larger airports (majority owned by governments), yet we don’t draw a parallel between that investment and the investment in other modes of public transportation.  I agree that air travel is a different case: the same runway that I use when I fly to Japan can be used to fly to Paris or to Charlotte.

A euphemism in aviation is that a mile of road takes you one mile but a mile of runway takes you anywhere.  A mile of railroad track is a less useful investment than a mile of road because a mile of road can at least get me to the grocery store.  Imagine, though, 250 miles of rail linking Atlanta to Charlotte.  The 4 hour drive becomes a 1.5 hour train trip.  With limited stops, a 200 MPH bullet train replaces air travel on the route for people going to either city for a day for business.  This rail line excites economic growth in both cities.

Extending the line to Greensboro and Raleigh links some of the largest cities in the Deep South.  Once there, it’s not hard to imagine connecting to Richmond and Washington, DC.  In a little over 4 hours on a bullet train, you can travel from downtown Atlanta to downtown Washington, DC.  Sure, you can do that on an airplane today in about the same amount of time, but you don’t have the option of stopping in 3 other major cities along the way to conduct business.  The same trip using more expensive maglev technology would take less than 2 hours.

JR Central is marketing two types of trains in the U.S.: the shinkansen, which travels as fast as 330 kilometers per hour [200 MPH]; and the magnetic-levitation, or maglev, train, which can run up to 581 kph [350 MPH], but is more expensive and in only limited use so far. JR Central has already spent more than $1 billion developing the technology behind it. — via The Wall Street Journal

And now a replacement exists for regional air travel, allowing airlines to focus on the more profitable long haul and international travel routes.  It also requires we invest less in aviation because fewer resources are required to keep the National Airspace System operational.  Yes, it’s a change in technology.  But so was the jet engine.

Whether or not it is classified as one, this financial collapse is a de facto bankruptcy. Perhaps the only thing that is delaying a formal filing is the continued pressure from the UAE government to delay a hasty decision by creditors seeking repayment. It’s not surprising that these events are unfolding now, halfway through the announced 6 month payment delay that Dubai World instituted. Investors are getting anxious that much of their capital is tied up in a company and in a country that hasn’t solidified plans for repayment. According to reports, neither the company nor the country has offered concrete restructuring plans for this debt.

With economic uncertainty in this friendly Middle Eastern economy and growing uncertainty of future prosperity in other Middle Eastern countries, Western investors struggle to find new opportunities. US Intelligence estimates that Iran has almost developed an atomic bomb. This report should convince even the most optimistic investors that the soundest investment strategy for the Middle East is via the US military-industrial complex.

I’m postulating that the anti-Western sentiments in parts of the Middle East come from a sense of geo-political inferiority. What else but recognition as a “big kid on the block” would cause President Mahmoud Ahmadinejad to announce that Iran is almost a nuclear power? Not to trivialize such a significant shift in world perception, but is a box of chocolates and a dozen roses all that it will take to prevent World War III? Middle Eastern nations need a significant win, a positive achievement worthy of global recognition. But for a bunch of dinosaurs dying there instead of here do we care to recognize Middle Eastern contributions to the global economy.

Western investors should be concerned about future investment in this region, rampant with uncertainty. I think this suggests that the strategy for future investment in the Middle East is the same as in the past: continued investment in energy. But, instead of focusing on building larger pipelines and developing new oil fields, focus on building renewable sources of energy. In a region dominated by sun and wind, leverage those resources. Use fewer of the limited fossil resources and focus on making them available for Western and Asian countries who continue to consume crude oil at alarming rates. Generating additional revenue by increasing exports and developing an industry focused on renewable energy. Middle Eastern countries can develop the practical knowledge on wind and solar power generation and quickly surpass the capabilities of Western and Asian companies.

Once Middle Eastern countries gain experience in the design and manufacture of sustainable energy, use the manufacturing capabilities developed for the oil industry to instead build wind turbines and solar panels. Use the shipping channels developed for oil to export this new generation of energy to Western and Asian countries that are slow to commit to renewable energy. The potential exists to further the expansion for these goods into northern Africa. The Green Economy is seen as distinctly American, but Dubai and the rest of the Middle East may recognize that reality sooner than we do.

The allure of “free” money is strong when faced with budget shortfalls, double-digit or more for some countries. At some point, though, the money needs to be paid back. Concern about the ability for countries to pay back their debt put pressure on the Euro, at its lowest level in some time against the US Dollar. This suggests that investors see greater strength in current US economic policy.

What does this mean to Asian exports, and computers in particular? With the Chinese Yuan fixed against the US dollar, the cost of goods from China is going up for Europeans. Over the last quarter, the cost of goods from China has increased by 7% (ignoring the effect of currency hedging). Looking at computer companies like Dell and HP, this fluctuation can virtually eliminate their profit. (Both companies have a comprehensive currency hedge program.)

So, this financial pressure in Europe should drive up the cost of Chinese goods. Computers, predominantly made in China, should be more expensive. The longer that Euro-zone countries allow the economic uncertainty to persist, the more expensive computers will get in Europe. Such timing is bad for computer companies looking to grow European business. The increased volatility in the bond markets at the end of a global economic slowdown can make it harder for companies to sell new computers in Europe.

Major companies purchase new computers every 3 years, on average. That means that most systems in the enterprise were purchased in 2007 during the peak of business activity. With the credit crisis of 2008 effecting many major capital expenditures, some companies may have delayed their refresh, meaning users have computers that are 4, 5, or even 6 years old. Computers that old impact a company’s ability to conduct business. How can new software be rolled out to make the enterprise more efficient when half the workforce doesn’t have a computer platform capable of running the application?

Perhaps we can expect to see, then, creative financing with large balloon payments in the second or third year. If companies and manufacturers agree that the current circumstances are temporary in nature, then costs will go down in the future and sales and profit will increase. If computers are needed today to grow business, then both buyer and seller can agree that transactions executed today and financed for future payment are necessary.

With a credit crisis in 2008, a global economic recession in 2009, and uncertainty in Europe in 2010, is this a great gamble? Maybe when pigs fly.