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Sunday, January 21, 2018

Real Estate Investing, Energy Trading and Red Paper Clips

Today I want to talk about several different things.

#1. Kyle MacDonald, aka the guy who traded a Red Paper Clip until he eventually got a house. See the video below:

Kyle MacDonald became noteworthy years ago for starting with a red paper clip and trading it for a pen, which he traded for bigger and better things until he eventually ended up owning a house in Canada.

In a way this idea of trading things for something bigger and better is a bit like how the stock market works. You trade cash for stocks when they have a lower value, you sell it for a higher value, then you buy different stocks for a lower value which you then sell for a higher value... then maybe you buy gold at a time when gold prices are soaring, then you sell the gold and buy other stocks which are showing growth... and you repeat this process again and again until you have a multiplied the amount of money you started off with many times over.

That is the theory at least. The problem is how do you guarantee the things you invest in go up in value?

#2. Energy Trading, which involves trading electricity with other regions in order to provide electricity to customers at a cheaper rate.

Energy trading can also relate to oil and natural gas, selling it or buying it. So for natural gas, commonly used in residential home heating, it again comes back to the idea of trying to save money and pass those savings unto the customers who are buying the natural gas. With oil it is going to refineries and later made in gasoline, diesel, petrochemicals, and even plastics. So that translates into different prices at the gas pumps and also effecting the petrochemical / plastics industries.

In Ontario, Canada our electricity grid has to produce a surplus of 10% more power constantly in order to prevent brown outs / shortages of electricity. (I learned this during a brief stint of working for an electricity / natural gas distributor in Toronto.)

Ontario then sell that surplus of electricity to New York State, Michigan, Quebec and other neighbouring regions. In the USA they use a similar system of trading electricity between various states, allowing each region to produce surplus electricity, but also to be able to sell their surplus electricity at a discount to neighbouring regions. This way no region suffers brownouts and ultimately the various regions can save money on the cost of electricity.

See the video below in which Gustavo Luna from Bismarck, North Dakota explains how energy trading works.

Energy Trading should not be confused with Commodities Trading - which focuses on buying oil for example at a lower price and selling it for a profit. With Energy Trading, the goal is to buy surplus electricity at a cheaper rate and then pass off those savings to consumers. So you are not making a profit, you are simply saving money for consumers.

Or at least that is my understanding of it. Gustavo Luna would probably be disappointed by my simplistic explanation.

#3. Real Estate Investment / Flipping Properties - which is really my primary topic today. (You are probably wondering what the above two ideas have to do with the third, but don't worry I am getting. I just have to make sure the readers are aware of everything before I get to my idea.)

There are a number of ways people can invest in real estate.
  • Buy a property for the investment, rent it out for years, sell it later for a profit when the real estate prices in the region skyrocket.
  • Buy a property, renovate the property in ways that will boost its resale value, then sell it ASAP for a profit. At which point you buy another property, renovate it, and sell it again.
  • Invest your money with a company that invests in real estate (office buildings, etc) and churns a profit from the rentals and later sales of properties. That company collects their percentage and you get a percentage while they do all the work, but you are the one taking the risk.
  • Buy mortgage securities on the stock market from banks and sell them later for a profit. The trick to this is that if you are aware of what happened during the Financial Crisis of 2007-08, you could be buying AAA rated mortgage securities that are actually full of junk mortgages (eg. sub prime mortgages). The problem with the mortgage security industry is that they tend to bundle together junk mortgages and give them together an AAA rating, even though it is junk. It is truly a care of buyer beware.
  • Finance the mortgage of a family member - this is quite good because a family member is pretty much guaranteed to pay you back. You can be lenient with the payment schedule, the interest rate, etc if needed, but otherwise it works out quite well. Even if the family member does somehow default on the home, you foreclose on them, keep the money they already paid you and then sell the home for a profit. That is a Win-Win financially for you if they fail to live up to their side of the mortgage agreement. It creates an incentive for the family member to not burn bridges because they know that if they do, you foreclose on the home and make a tonne of money anyway. (The only way you could potentially lose money in this scenario is if the real estate market collapses.)
So what do these things have to do with each other?

Well, that is where we get into the fun part.

I think there is a future in "real estate trading and investing", wherein people could invest in say "Renovating and Flipping Properties" for example.

Idea #1.

Lets say you have 10 investors who invest $100,000 each in buying and renovating a house. They do none of the work as part of their investment pays for a contractor who renovated the house. Upon completion they then sell the house for 20% more than what they paid for the property, the taxes, the cost of renovations, etc.

Those 10 investors then have $120,000 each, which they could then use to buy and renovate two smaller houses for $600,000 each, which they later sell after the renovations for $720,000 or more each... So each investor then has $144,000 or more.

Now if they managed to do all of this is the space of 1 year, that is a 44% increase from their investment.

A person could do this individually... and even do the renovation work themselves, and hope they follow the building code. But it actually makes more legal sense to have a contractor do it, have it all in writing in a contract, with liability insurance and everything in case anything goes wrong. But that would require the person who is funding this whole thing to come up with all the money by themselves.

In contrast, if people only had to invest one tenth the needed amount, there is more security in numbers as a shared enterprise... and it allows the group to buy larger properties or multiple properties, thus diversifying their investment.

Kyle MacDonald for example when he got the house eventually could have renovated himself - or hired a contractor - and later sold the larger house for a profit. Then he takes the money he made, buys a different house, renovates it, sells for a bigger profit... and keeps repeating. He in theory could have gone down that road, but is probably pretty amazed at what he managed to accomplish with just a red paper clip as is.

Idea #2.

Another way to do this "Read Estate Trading and Investing" idea is to buy up properties that make good rentals (properties that don't need a lot of maintenance costs are ideal), and then rent them out for a profit. Industrial properties are pretty good for this.

So for example 10 people buy a warehouse which they then lease out to a company for storage, which allows them to make a tidy income every month on their investment.

Individual investors could sell their one tenth share to other people if they later wish to do so, take whatever profit from that sale and then invest in a different property the same way.

Idea #3.

10 family members finance the mortgage of an eleventh family member. This way each of the 10 family members only have to pay one tenth of the total cost of the home, which they then gain money back + interest each month until the mortgage is paid off. The benefit of this is that there is even more familial pressure on the 11th family member to pay off the mortgage... and failure to do so means the family forecloses, sells the property and collects their profits.

Oddly enough something similar to this is already done by Mennonites when buying up farmland for their children. The whole community of Mennonites will pitch in, buy a property for a newlywed husband and wife, have a barn raising, renovate the house, and the property is later paid off.

And because Mennonites don't pay taxes they are laughing all the way to the bank. (What you might not know about Mennonites is that because they don't pay taxes, are very industrious and don't spend their money on cars/food/rent/university tuition/etc they end up saving lots of money and ultimately tend to be quite well off financially. They have so little expenses compared to the rest of us and money that goes into the Mennonite community rarely comes back out.)

Idea #4.

Crowdfunding Property Investment

Imagine if 50,000 people each invested $200 each. That is $10,000,000 and they use it to buy up multiple properties which they then:
  • Renovate.
  • Rent out.
  • Sell.
Following the same principle as #1, they could make perhaps a 44% increase in value in a single year by buying, renovating and selling properties in this manner.

Those people could also sell or trade their share(s) to someone else and invest in other properties instead. They could decide whether they want to invest in small properties, large properties, residential, industrial, rental properties, and more.

And they could do all of this via a website which manages it.

Idea #5.

Website? Why not also an app? A real estate investment and trading app.

Move over Bitcoin, you are basically worthless and eventually people are going to realize that Bitcoin is worthless.

Real estate however. There is a reason why it is called "Real Estate". It is tangible property.

So just imagine this revolutionary way of investing in real estate. One part Kyle MacDonald's Red Paper Clip, one part a bit like energy trading or commodity trading as explained by Gustavo Luna - except this is the buying, selling and trading of real estate.

That to me is an interesting and exciting app someone should make.

So yeah.

There is my idea for an app someone should make. I should start a crowdfunding enterprise just to create the app, with the first people who invest getting both a share of the app and a share of the first property that we invest it.

Now you might think, how does one make money off an app like that?

Well, easy. You charge 0.1% fee off every sale transaction. So if someone invests $200 and later sells their share for $300, the app takes 30 cents. So 10 cents off each $100. It isn't a lot really, but if you get 50,000 people to invest in the first year, and they later sell off their shares for $250 or more then you are still looking at 25 cents x 50,000.


If the app grows in popularity and millions of people start investing in real estate this way, that 10 cents per $100 isn't pocket change any more. It is millions.

So what is wrong with this idea?

Well, I am pretty sure there are some laws from the USA that would say that this kind of investing is illegal - because the government also wants their share. The USA would want to tax any transactions and profits happening within the USA.

And it would target any real estate assets being bought, renovated and sold in the USA.

So any kind of investment in the USA through the app would mean American citizens would be taxed on each transaction, and investing in the USA would be problematic. The app would make more sense in countries which allow this sort of investing and aren't so worried about taxing people who want to invest their money this way.

The USA has similar problems with offshore gambling websites. People can buy virtual chips/etc overseas, gamble, possibly win (although most likely they lose it all), and then cash out their chips and never have to pay anything in taxes.

Similarly, the USA has other problems with Bitcoin and other crypto-currencies. They are hard to track and it becomes unclear if people made a profit by buying and selling things using Bitcoin.

So the app and company that runs it would need to be based in the Bahamas, Panama, Ireland or some similar tax haven.

And this is where I hit a brick wall in terms of motivation to make this happen myself. It seems like too much work and I have other issues to deal with, rent, bills to pay and a baby to feed.

So I am not saying "go ahead and steal this idea". Honestly, I feel like this is definitely my idea and I would be upset if someone stole it and made a profit off it. But I would be willing to sell my idea or become an intellectual property rights partner with someone else if they want to do the leg work on this idea.

I currently cannot be bothered to do it all myself.

One more idea...

I would love to buy a farm, buy horses and open an archery range / horse riding school. I think that is a business worth investing in. I have already done the math on what it would require in terms of investment, how much to charge students, how much to pay the riding instructors, and how much money could be made within the first year. It would be one of the very few places in North America where people could do equestrian archery. (Seriously, go try to find such places and you will find they are few and far between.)

One last idea, I swear this is the last one.

Start a charity that deals with buying properties for mustang horse sanctuaries. People donate to buy the property, the property is renovated with fences to keep in the horses, and the mustangs are then transported to the property where they can roam freely. This would solve a problem in the American West where mustangs are a problem due to overpopulation and the government culling them because they get on to the properties of ranchers, ruining crops, etc. The people who donate get a voucher they can use on their income taxes, but really it is mostly about giving the mustangs a safe place where they roam without being killed by ranchers or by the government.

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